Cadence Design Systems, Inc. Form 10-Q 9/29/01

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H97pjkPFKEAn7OifuTB8FEbK1d90EJCNml6mbNTjWE0Rg8hUXmjAFNB3p6go1xrV Z/dr585y8ydlo8sD3yXbZQ== 0000891618-01-502132.txt : 20020410 0000891618-01-502132.hdr.sgml : 20020410 ACCESSION NUMBER: 0000891618-01-502132 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010929 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CADENCE DESIGN SYSTEMS INC CENTRAL INDEX KEY: 0000813672 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770148231 STATE OF INCORPORATION: DE FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10606 FILM NUMBER: 1783204 BUSINESS ADDRESS: STREET 1: 2655 SEELY ROAD BLDG 5 CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089431234 MAIL ADDRESS: STREET 1: 555 RIVER OAKS PARKWAY CITY: SAN JOSE STATE: CA ZIP: 95134 FORMER COMPANY: FORMER CONFORMED NAME: ECAD INC /DE/ DATE OF NAME CHANGE: 19880609 10-Q 1 f76986e10-q.htm FORM 10-Q Cadence Design Systems, Inc. Form 10-Q 9/29/01

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2001

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-10606

CADENCE DESIGN SYSTEMS, INC.

(Exact name of Registrant as Specified in Its Charter)






Delaware (State or Other Jurisdiction of Incorporation or Organization)		77-0148231 (I.R.S. Employer Identification No.)






2655 Seely Avenue, Building 5, San Jose, California (Address of Principal Executive Offices)		95134 (Zip Code)

(408) 943-1234

Registrant’s Telephone Number, including Area Code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No o

At November 3, 2001, there were 244,512,305 shares of the registrant’s common stock, $0.01 par value, outstanding.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
EXHIBIT 10.59
EXHIBIT 10.60
EXHIBIT 10.61

CADENCE DESIGN SYSTEMS, INC.

INDEX


			Page





PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements:




		Condensed Consolidated Balance Sheets: September 29, 2001 and December 30, 2000		3




		Condensed Consolidated Statements of Operations: Three and Nine Months Ended September 29, 2001 and September 30, 2000		4




		Condensed Consolidated Statements of Cash Flows: Nine Months Ended September 29, 2001 and September 30, 2000		5




		Notes to Condensed Consolidated Financial Statements		6




	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17




	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		37




PART II. OTHER INFORMATION




	Item 1.	Legal Proceedings		41




	Item 2.	Changes in Securities and Use of Proceeds		43




	Item 3.	Defaults Upon Senior Securities		44




	Item 4.	Submission of Matters to a Vote of Security Holders		44




	Item 5.	Other Information		44




	Item 6.	Exhibits and Reports on Form 8-K		44




Signatures				45

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS


			September 29,			December 30,
			2001			2000

			(Unaudited)




Current Assets:




	Cash and cash equivalents		$	155,864		$	85,220




	Short-term investments			20,029			51,749




	Receivables, net			262,202			289,468




	Inventories, net			14,076			20,149




	Prepaid expenses and other			60,413			110,262

		Total current assets		512,584			556,848




Property, plant, and equipment, net				406,725			368,879




Software development costs, net				11,638			10,738




Acquired intangibles, net				333,972			326,518




Installment contract receivables				39,122			38,420




Other assets				205,021			175,918

			$	1,509,062		$	1,477,321





LIABILITIES AND STOCKHOLDERS’ EQUITY




Current Liabilities:




	Notes payable and current portion of capital leases		$	1,636		$	2,212




	Accounts payable and accrued liabilities			227,495			273,594




	Income taxes payable			33,950			—




	Deferred revenue			216,980			215,768

		Total current liabilities		480,061			491,574

Long-term Liabilities:




	Capital leases			1,700			3,298




	Minority interest			—			11,612




	Other long-term liabilities			62,716			61,372

		Total long-term liabilities		64,416			76,282

Stockholders’ Equity:




	Common stock and capital in excess of par value			766,430			847,099




	Treasury stock at cost			(250,557	)		(256,260	)




	Deferred compensation			(39,106	)		(60,978	)




	Retained earnings			496,583			394,224




	Accumulated other comprehensive loss			(8,765	)		(14,620	)

		Total stockholders’ equity		964,585			909,465

			$	1,509,062		$	1,477,321

The accompanying notes are an integral part of these condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



				Three Months Ended					Nine Months Ended

				September 29,			September 30,		September 29,			September 30,
				2001			2000		2001			2000

Revenue:




	Product			$	217,408		$	165,341	$	588,831		$	411,256




	Services				57,992			87,320		211,810			243,312




	Maintenance				84,608			79,800		251,599			234,068

		Total revenue			360,008			332,461		1,052,240			888,636

Costs and Expenses:




	Cost of product				19,161			22,931		62,644			63,910




	Cost of services				48,652			55,991		151,133			157,174




	Cost of maintenance				16,849			17,183		49,725			46,701




	Marketing and sales				96,593			97,845		286,243			279,043




	Research and development				74,247			66,614		219,129			194,959




	General and administrative				27,640			24,121		85,849			70,404




	Amortization of acquired intangibles				23,995			20,648		71,915			60,182




	Amortization of deferred stock compensation⁽¹⁾				2,480			5,164		15,595			5,164




	Restructuring, asset impairment, and unusual items				(154,818	)		4,937		(70,030	)		4,937

		Total costs and expenses			154,799			315,434		872,203			882,474

			Income from operations		205,209			17,027		180,037			6,162




Other income, net					277			1,573		435			4,026

			Income before provision for income taxes		205,486			18,600		180,472			10,188




Provision for income taxes					78,061			4,929		78,114			2,700

			Net income	$	127,425		$	13,671	$	102,358		$	7,488

Basic net income per share

$0.52

$0.06

$0.41

$0.03

Diluted net income per share

$0.50

$0.05

$0.40

$0.03

Weighted average common shares

246,487

244,597

246,864

244,543

outstanding

Weighted average common and

256,978

262,823

258,700

261,803

potential common shares outstanding-

assuming dilution


⁽¹⁾	Amortization of deferred stock compensation would be classified as follows:






Cost of services	$	712	$	1,448	$	3,758	$	1,448




Marketing and sales		172		1,029		2,958		1,029




Research and development		365		244		2,443		244




General and administrative		1,231		2,443		6,436		2,443

	$	2,480	$	5,164	$	15,595	$	5,164

The accompanying notes are an integral part of these condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



					Nine Months Ended

					September 29,			September 30,
					2001			2000

Cash and Cash Equivalents at Beginning of Period					$	85,220		$	111,401

Cash Flows from Operating Activities:




	Net income					102,358			7,488




	Adjustments to reconcile net income to net cash provided by operating activities:




		Depreciation and amortization				177,060			150,414




		Net investment gain on sale, equity gain, and write-downs				(2,736	)		(7,645	)




		Minority interest (income) expense				(1,959	)		12,209




		Fair market value of options issued to consultants				(690	)		—




		Deferred income taxes				2,737			(10,075	)




		Write-off of acquired in-process technology				13,100			—




		Write-off of goodwill				25,834			—




		Non-cash restructuring and other related charges				31,178			—




		Tax benefit on stock option exercise				6,055			1,773




		Provisions for losses on trade accounts receivable				18,554			1,443




		Changes in operating assets and liabilities, net of effect of acquired and disposed businesses:




			Receivables			(123,273	)		(134,588	)




			Inventories			(12,190	)		(2,875	)




			Prepaid expenses and other			28,919			(27,151	)




			Installment contract receivables			(23,344	)		79,190




			Accounts payable and accrued liabilities			(12,019	)		21,102




			Deferred revenue			(897	)		42,480




			Other long-term liabilities			35,269			8,508

				Net cash provided by operating activities		263,956			142,273

Cash Flows from Investing Activities:




	Maturities of short-term investments-held-to-maturity					—			999




	Maturities of short-term investments-available-for-sale					71,372			2,621




	Purchases of short-term investments-available-for-sale					(39,651	)		—




	Purchases of property, plant, and equipment					(120,142	)		(78,575	)




	Capitalization of software development costs					(22,589	)		(21,428	)




	Increase in acquired intangibles and other assets					(28,135	)		(45,586	)




	Investment in venture capital partnership and equity investments					(7,957	)		4,543




	Cash effect of business acquisitions					(2,188	)		(4,503	)




	Sale of put warrants					14,934			30,163




	Purchase of call options					(14,934	)		(30,163	)

				Net cash used for investing activities		(149,290	)		(141,929	)

Cash Flows from Financing Activities:




	Proceeds from long-term debt and capital leases					222,900			38,000




	Principal payments on long-term debt and capital leases					(224,857	)		(60,821	)




	Proceeds from issuance of common stock					48,077			72,298




	Purchases of treasury stock					(241,408	)		(158,396	)




	Repurchase of minority interest					(11,958	)		—




	Proceeds from repayment of notes receivable					10,523			—




	Proceeds from transfer of financial assets in exchange for cash					155,252			124,303

				Net cash (used for) provided by financing activities		(41,471	)		15,384

Effect of exchange rate changes on cash						(2,551	)		(4,939	)

Net increase in cash and cash equivalents						70,644			10,789

Cash and Cash Equivalents at End of Period					$	155,864		$	122,190

The accompanying notes are an integral part of these condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Basis of Presentation

The condensed consolidated financial statements included herein have been prepared by Cadence, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, Cadence believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Cadence’s Annual Report on Form 10-K for the fiscal year ended December 30, 2000.

The unaudited condensed consolidated financial statements included herein reflect all adjustments (which include only normal, recurring adjustments) that are, in the opinion of management, necessary to state fairly the results for the periods presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year.

The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain amounts in the consolidated financial statements as of December 30, 2000 and for the three and nine months ended September 30, 2000 have been reclassified to conform with the September 29, 2001 presentation.

Acquisitions

In the three months ended June 30, 2001, Cadence acquired substantially all of the assets of two companies for an aggregate price of $10.5 million, net of acquisition costs, of which $4.4 million was cash and $6.1 million was shares of Cadence common stock, plus future contingent payments. Each acquisition was accounted for as a purchase. Upon consummation of the acquisitions, Cadence immediately charged to expense $1 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use.

In February 2001, Cadence acquired CadMOS Design Technology, Inc., a privately-held design tools firm headquartered in San Jose. CadMOS provides solutions to the noise problems experienced in ultra-deep submicron processes. Its noise-analysis solutions are targeted at both digital and mixed signal designers working on microprocessors, dynamic random access memory, mixed-signal System-on-a-Chip, and application-specific integrated circuits. Cadence acquired all of the outstanding stock of CadMOS and assumed all outstanding stock options and warrants. The purchase price was $92.7 million and the acquisition was accounted for as a purchase. The purchase price could increase up to an additional $12.6 million, representing up to 488,970 shares, if certain predetermined performance factors are achieved over the next three years. Of the $12.6 million, $1.7 million is contingent on continued employment of certain CadMOS employees. The $12.6 million is based on the share price of Cadence’s common stock at the time of the acquisition. In connection with the acquisition, Cadence acquired goodwill of $58.3 million, which is being amortized over 5 years, and technology and workforce intangibles of $12.9 million, which are being amortized over 3 to 5 years. The results of operations of CadMOS and the estimated fair value of the assets acquired and liabilities assumed are included in Cadence’s consolidated financial statements from the date of acquisition.

alternative future use. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Unusual Items.” The value assigned to acquired in-process technology was determined by identifying research projects in areas for which technological feasibility has not been established. The value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the acquired in-process technology. The in-process technology is expected to be commercially viable in 2002. As of September 29, 2001, expenditures to complete the in-process technology have totaled $0.7 million and expenditures to complete the remaining in-process technology are expected to total approximately $1.2 million. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. Additionally, these projects will require additional research and development after they have reached a state of technological and commercial feasibility.

Comparative pro forma financial information for all acquisitions has not been presented because the results of operations were not material to Cadence’s consolidated financial statements.

Tality Corporation

On July 17, 2000, Cadence announced its plan to separate its electronics design services group into a new company named Tality Corporation, or Tality. Tality’s separation from Cadence was substantially completed on October 4, 2000, and the electronic design services business operated as a subsidiary of Cadence. Tality filed a registration statement with the Securities and Exchange Commission for Tality’s initial public offering, or IPO. As a result of the separation in the third quarter of 2000, Cadence has recorded deferred stock compensation resulting from Tality option grants and restricted stock sales. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Unusual Items.” On October 9, 2000, Cadence announced the postponement of Tality’s IPO due to unfavorable market conditions. As a result of the postponement of the Tality IPO, Cadence wrote off $2.8 million of IPO related expenses in the first quarter of 2001. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Unusual Items.” On April 17, 2001, Cadence announced the withdrawal of the Tality IPO registration statement. The financial statements and financial information in this Quarterly Report on Form 10-Q do not give effect to the IPO. As a result of a reorganization of the Tality entities during the second and third quarter of 2001, Tality is currently an indirect wholly-owned subsidiary of Cadence.

Restructuring and Asset Impairment

In the third quarter of 2001, Cadence recorded $170 million of the $195 million criminal restitution award from Avant! Corporation, less costs associated with the restitution. Avant! paid the remaining $25 million plus interest on October 3, 2001. See “Subsequent Events”.

In the second quarter of 2001, Cadence announced a worldwide restructuring and asset impairment plan targeted at reducing workforce and consolidating facilities and assets.

Cadence recorded $32.7 million of restructuring charges classified as unusual operating expenses associated with the worldwide restructuring plan. Cadence’s restructuring plan and associated costs consisted of $11.3 million for reduction in personnel and $21.4 million to downsize and close excess facilities. The restructuring plan was initiated primarily due to the severe downturn in the economic environment in the electronics industry, particularly in the U.S. The restructuring was primarily aimed at reducing excess personnel and capacity costs within its Tality subsidiary. Management estimates that the restructuring resulted in annualized cost reductions of approximately $30.8 million in salary and benefit costs and $35.1 million in facility costs.

from the restructuring included severance benefits, notice pay, and out-placement services. Approximately $5.3 million of these costs resulted from the payments to certain participants in Cadence’s employee stock purchase plan prior to Tality’s separation from Cadence in October 2000. All terminations and termination benefits were communicated to the affected employees prior to June 30, 2001. All severance benefits will be paid out by the end of 2001.

Facilities consolidation charges of $21.4 million were incurred in connection with the downsizing and closing of 16 sites. Closure and downsizing costs included payments required under lease contracts, less any applicable sublease income after the properties were abandoned, lease buyout costs, restoration costs associated with certain lease arrangements, and costs to maintain facilities during the period after abandonment. To determine the lease loss, which is the loss after Cadence’s cost recovery efforts from subleasing a building, certain assumptions were made related to the: (1) time period over which the relevant building would remain vacant, (2) sublease terms, and (3) sublease rates, including common area charges. The lease loss is an estimate under Statement of Financial Accounting Standards No. 5 Accounting for Contingencies and represents the low end of the range, $10.8 million, which will be adjusted in the future upon triggering events (change in estimate of time to sublease, actual sublease rates, etc.). Cadence has estimated that the high end of the lease loss could be $50.4 million if facilities operating lease rental rates continue to decrease in the applicable markets or if it takes longer than expected to find a suitable tenant to sublease the facility. Asset-related costs that were expensed consisted of leasehold improvements for facilities that were abandoned and whose estimated fair market value is zero. As of September 29, 2001, seven sites had been vacated and seven sites had been downsized.

Cadence expects to record restructuring charges in the fourth quarter of 2001, estimated between $25 million and $30 million. These restructuring efforts are targeted at workforce and infrastructure reductions and facilities and asset consolidations within Tality and Cadence. See Subsequent Events.

In relation to the wireless communications business downsizing within its Tality subsidiary and current decline in business conditions generally, Cadence restructured certain of its businesses and realigned resources to reduce costs. As a result, Cadence recorded a charge of $25.8 million related to the impairment of goodwill and acquired intangibles associated with the acquisition of Diablo Research Company LLC, or Diablo. Key factors in this write-off were significant downsizing or reassignment of personnel directly related to these assets and abandonment of most of this line of business. The charge was determined as the amount by which the carrying value of the goodwill and intangible assets associated with Diablo’s acquisition exceeded the fair value of those assets.

The following table summarizes Cadence’s restructuring activity for the nine months ended September 29, 2001:



		For the Nine Months Ended September 29, 2001

		Severance			Excess
		And Benefits			Facilities			Assets			Total


		(In thousands)




Balance, December 30, 2000		$	2,319		$	4,938		$	280		$	7,537




	2001 restructuring charges		12,105			10,264			11,100			33,469




	Non-cash charges		28			(2,399	)		(8,978	)		(11,349	)




	Cash charges		(12,714	)		(5,834	)		(843	)		(19,391	)




	Reclassifications		—			525			—			525

Balance, September 29, 2001		$	1,738		$	7,494		$	1,559		$	10,791

In the three and nine months ended September 29, 2001, approximately $2.6 million and $3.7 million, respectively, of the restructuring reserve balance at December 30, 2000 was offset to the 2001 restructuring plan.

Inventories

Cadence’s inventories include high technology parts and components for complex computer systems that emulate the performance and operation of computer chips and electronic systems.

In the third quarter of 2001, Cadence recorded a $12.9 million reserve against inventory, which is included in restructuring, asset impairment, and unusual items in the Condensed Consolidated Statements of Operations. The $12.9 million reserve was related to excess inventory from revised sales forecasts.

In the second quarter of 2001, Cadence recorded a $5.8 million reserve against inventory, which is included in restructuring, asset impairment, and unusual items in the Condensed Consolidated Statements of Operations. Of the $5.8 million, $3.7 million related to two discontinued product lines as part of Cadence’s restructuring and $2.1 million related to excess inventory of emulation products. The $3.7 million related to inventory and other related costs for two product lines Cadence will no longer sell.

In both cases, Cadence examined the business and determined that these products would not result in future revenue growth. The excess inventory charges were due to a sudden and significant decrease in forecasted revenue for emulation products and was calculated in accordance with Cadence’s policy, which is based on inventory in excess of 12-month demand. Inventory purchases and commitments are based on future sales forecasts. Cadence typically buys and builds inventory levels for certain key components to mitigate component supply constraints. Based on Cadence’s current 12-month demand forecast, Cadence does not anticipate that the excess inventory subject to these reserves will be used at a later date.

A summary of inventories follows:


		September 29,		December 30,
		2001		2000


		(In thousands)




Raw materials		$	12,151	$	17,897




Work in process			1,925		2,252

	Total inventories, net	$	14,076	$	20,149

Credit Facility

On September 29, 2000, Cadence entered into two syndicated senior unsecured credit facilities that allowed Cadence to borrow up to $350 million, referred to as the 2000 Facilities. The 2000 Facilities replaced a prior $355 million revolving credit facility consisting of a $177.5 million two-year revolving credit facility, which was terminated on September 27, 2000, and a $177.5 million 364-day revolving credit facility, which was terminated immediately prior to consummation of the 2000 Facilities. One of the new 2000 Facilities is a $100 million three-year revolving credit facility, referred to as the Three-Year Facility. The other 2000 Facility was a $250 million 364-day revolving credit facility convertible into a two-year term loan, referred to as the 364-Day Facility. The Three-Year Facility terminates on September 29, 2003. The 364-Day Facility was extended and increased on September 28, 2001. On September 28, 2001, the 364-Day Facility was increased to $260 million and will terminate on September 27, 2002, at which time the 364-Day Facility may be converted to a one-year term loan with a maturity date of September 29, 2003, or, at the request of Cadence and with the consent of members of the bank group that wish to do so, the termination date of the 364-Day Facility may be extended for one additional 364-day period with respect to the portion of the 364-Day Facility that a consenting bank holds. For both of the 2000 Facilities, Cadence has the option to pay interest based on LIBOR plus a spread of between 1.25% and 1.50%, based on a pricing grid tied to a financial covenant, or the higher of (i) the Federal Funds Rate plus 0.50% or (ii) the prime rate. As a result, Cadence’s interest expenses associated with this borrowing will vary with market rates. In addition, commitment fees are payable on the unused portion of the Three-Year Facility at rates between 0.25% and 0.34% based on a pricing grid tied to a financial covenant and on the unused portion of the 364-Day Facility at a fixed rate of 0.225%. A utilization fee of 0.25% is payable on amounts borrowed under the 364-Day Facility whenever combined

borrowings under the two 2000 facilities exceed $118.8 million. Cadence may not borrow under the 364-Day Facility at any time that any portion of the Three-Year Facility remains unused. The 2000 Facilities contain certain financial and other covenants. At September 29, 2001, Cadence was in compliance with the covenants to the 2000 Facilities and there were no borrowings outstanding.

Comprehensive Income (Loss)

Comprehensive income (loss) includes foreign currency translation gains and losses and other unrealized gains and losses that have been previously excluded from net income and reflected instead in stockholders’ equity. A summary of comprehensive income (loss) follows:



		Three Months Ended					Nine Months Ended

		September 29,		September 30,			September 29,			September 30,
		2001		2000			2001			2000


		(In thousands)




Net income		$	127,425	$	13,671		$	102,358		$	7,488




Unrealized income (loss) on investments			7,910		5,413			8,242			(22,190	)




Translation income (loss)			1,329		(2,924	)		(2,387	)		(4,591	)

	Comprehensive income (loss)	$	136,664	$	16,160		$	108,213		$	(19,293	)

Net Income Per Share

The following is a reconciliation of the weighted average common shares used to calculate basic net income per share to the weighted average common and potential common shares used to calculate diluted net income per share:



		Three Months Ended				Nine Months Ended

		September 29,		September 30,		September 29,		September 30,
		2001		2000		2001		2000


		(In thousands)




Weighted average common shares used to calculate basic net income per share			246,487		244,597		246,864		244,543




	Options		9,330		17,662		11,079		16,143




	Warrants and other contingent shares		154		537		190		583




	Puts		1,007		27		567		534

Weighted average common and potential common shares used to calculate diluted net income per share			256,978		262,823		258,700		261,803

Options to purchase 14,579,911 and 10,192,215 shares of common stock were outstanding for the three and nine months ended September 29, 2001, respectively, but were not included in the computation of diluted net income per share because their effect would be antidilutive. These options expire at various dates through 2011. Put warrants to purchase 13,297 and 562,235 shares of common stock were outstanding for the three and nine months ended September 29, 2001, respectively, but were not included in the computation of diluted net income per share because their effect would be antidilutive. The put warrants outstanding during the three and nine months ended September 29, 2001 expire on various dates through May 2002.

Options to purchase 7,055,484 shares of common stock were outstanding for the three and nine months ended September 30, 2000, but were not included in the computation of diluted net income per share because their effect would be antidilutive. These options expire at various dates through 2010. Put warrants to purchase 2,490,710 shares of common stock were outstanding for the three and nine months ended September 30, 2000, but were not included in the computation of diluted net loss per share because their effect would be antidilutive. The put warrants outstanding during the three and nine months ended September 30, 2000 expired on various dates through May 2001.

Contingencies

Refer to Part II, Item 1 for a description of legal proceedings.

Put Warrants and Call Options

On August 1, 2001, Cadence authorized a share repurchase program under which repurchased shares with a value of up to $500 million will be used for general corporate purposes, including the share issuance requirements of Cadence’s employee stock option and purchase plans and acquisitions.

Cadence had also authorized three seasoned systematic stock repurchase programs under which it repurchased common stock to satisfy estimated requirements for shares to be issued under its employee stock option and purchase plans.

As part of its authorized stock repurchase program, Cadence has sold put warrants through private placements. At September 29, 2001, there were 4.6 million put warrants outstanding that entitle the holder to sell one share of common stock to Cadence on a specified date and at a specified price ranging from $15.50 to $26.90 per share. Additionally, during this same period, Cadence purchased call options that entitle Cadence to buy one share of common stock at a specified price to satisfy anticipated stock repurchase requirements under Cadence’s systematic stock repurchase programs. At September 29, 2001, Cadence had 3.5 million call options outstanding at prices ranging from $15.75 to $27.15 per share. The put warrants and call options outstanding at September 29, 2001 expire on various dates through May 2002 and Cadence has the contractual ability to settle the options prior to their maturity. At September 29, 2001, the estimated fair value of the call options was approximately $4.3 million and the estimated fair value of the put warrants was approximately $33.5 million.

If exercised, Cadence has the right to settle the put warrants with common stock equal to the difference between the exercise price and the fair value of the common stock at the date of exercise. Settlement of the put warrants with common stock could cause Cadence to issue a substantial number of shares, depending on the exercise price of the put warrants and the per share fair value of Cadence’s common stock at the time of exercise. In addition, settlement of put warrants in common stock could lead to the disposition by put warrant holders of shares of Cadence’s common stock that such holders may have accumulated in anticipation of the exercise of the put warrants or call options, which may adversely affect the price of Cadence’s common stock. At September 29, 2001, Cadence had the ability to settle these put warrants with common stock and, therefore, no amount was classified out of stockholders’ equity in the condensed consolidated balance sheets.

Minority Interest

In relation to the postponement of the Tality IPO, Cadence and Tality began to redeem the minority interest in Tality. As of September 29, 2001, Cadence had repurchased all the minority interest shares outstanding. In conjunction with the transaction, Cadence reacquired 1,740,000 restricted Tality shares from certain Cadence executives and key employees who then repaid their related notes payable to Cadence. Tality repurchased 220,000 restricted shares from three of its directors. The purchase price was $6.10, the fair market value of Tality stock at the time of repurchase. This transaction was accounted for as a purchase and resulted in $2.3 million of goodwill, which is being amortized over 3 years.

Statement of Cash Flows

The supplemental cash-flow information for the nine months ended September 29, 2001 and September 30, 2000 follows:



		For the Nine Months Ended

		September 29,		September 30,
		2001		2000


		(In thousands)




Cash Paid During the Period For:




	Interest	$	1,951	$	2,180

	Income taxes (including foreign withholding tax)	$	16,064	$	11,404

Non-Cash Investing and Financing Activities:




	Common stock and options issued for acquisitions	$	100,452	$	—

	Transfer of Non-Qualified Deferred Compensation investment to Cadence	$	3,908	$	—

	Capital lease obligations incurred for equipment	$	153	$	689

	Transfer of inventory to fixed assets	$	—	$	5,462

	Equity investment by transfer of equipment or software	$	—	$	8,140

Segment Reporting

Cadence’s chief operating decision making group is the Executive Staff, which includes Cadence’s President and Chief Executive Officer and Cadence’s other senior management. Cadence’s Executive Staff reviews the Cadence consolidated results within three segments: Product, Services, and Maintenance, and also reviews Tality’s results separately as a stand-alone entity.

The Product segment includes revenue and associated costs to design and license to customers a variety of electronic design automation products. The Services segment includes revenue and associated costs to offer methodology and design services either to assist companies in developing electronic designs or to assume responsibility for the design effort when customers wish to outsource this work. The Maintenance segment includes revenue and associated costs primarily for a technical support organization, and maintenance agreements are offered to customers either as part of Cadence’s product license agreements or separately. Within the Cadence consolidated results, Tality revenue, excluding inter-company revenue, is included in the Services segment, associated Tality cost of goods sold is reflected in each of the three segments, consistent with the benefit derived by the respective segments from those services, and Tality operating expenses are included in the other items.

Segment income from operations is defined as gross margin under generally accepted accounting principles and excludes amortization of acquired intangibles, inventory write-down and other, operating expenses (marketing and sales, research and development, and general and administrative), unusual items, other income, net, and income taxes. Profitability information about Cadence’s segments is available only to the extent of gross margin by segment, and operating expenses and other income and expense items are managed on a functional basis. There are no differences between the accounting policies used to measure profit and loss for segments and those used on a consolidated basis. Revenue is defined as revenue from external customers with no inter-segment revenue. Tality revenue includes inter-company revenue of $3.7 million and $5.7 million for the three and nine months ended September 29, 2001, respectively. There was no inter-company revenue in 2000.

Cadence’s management does not identify or allocate its assets, including capital expenditures, by operating segment. Accordingly, assets are not being reported by segment because the information is not available by segment and is not reviewed by Cadence’s Executive Staff to make decisions about resources to

be allocated among the segments or to assess their performance. Depreciation and amortization of purchased software is allocated among the segments in order to determine each segment’s gross margin.

The following tables present information about reported segments for the three months ended September 29, 2001 and September 30, 2000:



		For the Three Months Ended September 29, 2001

		Product		Services		Maintenance		Other			Total			Tality


		(In thousands)




Revenue		$	217,408	$	57,992	$	84,608	$	—		$	360,008		$	37,880




Cost of revenue			19,161		48,652		16,849		—			84,662			28,174




Amortization of acquired intangibles			—		—		—		23,995			23,995			—




Inventory write-down and other			—		—		—		12,868			12,868			—

	Gross margin		198,247		9,340		67,759		(36,863	)		238,483			9,706




Marketing and sales			—		—		—		(96,593	)		(96,593	)		(5,495	)




Research and development			—		—		—		(74,247	)		(74,247	)		(5,815	)




General and administrative			—		—		—		(27,640	)		(27,640	)		(9,256	)




Amortization of acquired intangibles			—		—		—		—			—			(1,858	)




Amortization of deferred stock compensation			—		—		—		(2,480	)		(2,480	)		(2,135	)




Restructuring, asset impairment, and unusual items			—		—		—		167,686			167,686			(815	)




Other income (expense), net			—		—		—		277			277			(209	)

Income (loss) before provision (benefit) for income taxes		$	198,247	$	9,340	$	67,759	$	(69,860	)	$	205,486		$	(15,877	)



		For the Three Months Ended September 30, 2000

		Product		Services		Maintenance		Other			Total			Tality


		(In thousands)




Revenue		$	165,341	$	87,320	$	79,800	$	—		$	332,461		$	52,033




Cost of revenue			22,931		55,991		17,183		—			96,105			39,650




Amortization of acquired intangibles			—		—		—		20,648			20,648			—

	Gross margin		142,410		31,329		62,617		(20,648	)		215,708			12,383




Marketing and sales			—		—		—		(97,845	)		(97,845	)		(9,274	)




Research and development			—		—		—		(66,614	)		(66,614	)		(2,871	)




General and administrative			—		—		—		(24,121	)		(24,121	)		(8,214	)




Amortization of acquired intangibles			—		—		—		—			—			(4,074	)




Amortization of deferred stock compensation			—		—		—		(5,164	)		(5,164	)		(3,099	)




Restructuring, asset impairment, and unusual items			—		—		—		(4,937	)		(4,937	)		(2,251	)




Other income, net			—		—		—		1,573			1,573			411

Income (loss) before provision (benefit) for income taxes		$	142,410	$	31,329	$	62,617	$	(217,756	)	$	18,600		$	(16,989	)

The following tables present information about reported segments for the nine months ended September 29, 2001 and September 30, 2000:



		For the Nine Months Ended September 29, 2001

		Product		Services		Maintenance		Other			Total			Tality


		(In thousands)




Revenue		$	588,831	$	211,810	$	251,599	$	—		$	1,052,240		$	127,326




Cost of revenue			62,644		151,133		49,725		—			263,502			99,092




Amortization of acquired intangibles			—		—		—		71,915			71,915			—




Inventory write-down and other			—		—		—		19,812			19,812			1,148

	Gross margin		526,187		60,677		201,874		(91,727	)		697,011			27,086




Marketing and sales			—		—		—		(286,243	)		(286,243	)		(22,160	)




Research and development			—		—		—		(219,129	)		(219,129	)		(18,217	)




General and administrative			—		—		—		(85,849	)		(85,849	)		(33,687	)




Amortization of acquired intangibles			—		—		—		—			—			(9,884	)




Amortization of deferred stock compensation			—		—		—		(15,595	)		(15,595	)		(8,878	)




Restructuring, asset impairment, and unusual items			—		—		—		89,842			89,842			(47,033	)




Other income (expense), net			—		—		—		435			435			(888	)

Income (loss) before provision (benefit) for income taxes		$	526,187	$	60,677	$	201,874	$	(608,266	)	$	180,472		$	(113,661	)



		For the Nine Months Ended September 30, 2000

		Product		Services		Maintenance		Other			Total			Tality


		(In thousands)




Revenue		$	411,256	$	243,312	$	234,068	$	—		$	888,636		$	142,317




Cost of revenue			63,910		157,174		46,701		—			267,785			109,828




Amortization of acquired intangibles			—		—		—		60,182			60,182			—

	Gross margin		347,346		86,138		187,367		(60,182	)		560,669			32,489




Marketing and sales			—		—		—		(279,043	)		(279,043	)		(25,943	)




Research and development			—		—		—		(194,959	)		(194,959	)		(8,668	)




General and administrative			—		—		—		(70,404	)		(70,404	)		(23,893	)




Amortization of acquired intangibles			—		—		—		—			—			(12,167	)




Amortization of deferred stock compensation			—		—		—		(5,164	)		(5,164	)		(3,099	)




Restructuring, asset impairment, and unusual items			—		—		—		(4,937	)		(4,937	)		(2,992	)




Other income, net			—		—		—		4,026			4,026			943

Income (loss) before provision (benefit) for income taxes		$	347,346	$	86,138	$	187,367	$	(610,663	)	$	10,188		$	(43,330	)

Internationally, excluding Japan, Cadence markets and supports its products and services primarily through its subsidiaries and various distributors. Cadence licenses its products in Japan through Innotech Corporation, in which Cadence is an approximately 15% stockholder. Cadence markets its methodology services in Japan through a wholly-owned subsidiary.

Revenues are attributed to geographic areas based on the country in which the customer is domiciled. In the three months ended September 29, 2001, there was one customer that accounted for 14% and one customer that accounted for 11% of total revenue. In the nine months ended September 29, 2001, and the

three and nine months ended September 30, 2000, no one customer accounted for more than 10% of total revenues. Long-lived assets are attributed to geographic areas based on the country where the assets are located.

The following table presents a summary of revenues by geographic region for the three months ended September 29, 2001 and September 30, 2000:



				For the Three Months Ended

				September 29,		September 30,
				2001		2000

North America:




	United States			$	172,091	$	193,246




	Other				6,698		11,742

		Total North America		$	178,789	$	204,988

Europe:




	United Kingdom			$	34,709	$	33,990




	France				28,117		4,512




	Italy				23,892		2,672




	Germany				10,428		10,218




	Other				21,151		16,365

		Total Europe		$	118,297	$	67,757

Japan and Asia:




	Japan			$	30,053	$	37,984




	Asia				32,869		21,732

		Total Japan and Asia			62,922		59,716

			Total	$	360,008	$	332,461

The following table presents a summary of revenues by geographic region for the nine months ended September 29, 2001 and September 30, 2000:



				For the Nine Months Ended

				September 29,		September 30,
				2001		2000

North America:




	United States			$	571,040	$	505,817




	Other				25,453		25,833

		Total North America		$	596,493	$	531,650

Europe:




	United Kingdom			$	65,704	$	77,980




	Germany				59,389		41,974




	Other				138,840		69,858

		Total Europe		$	263,933	$	189,812

Japan and Asia:




	Japan			$	122,440	$	121,325




	Asia				69,374		45,849

		Total Japan and Asia			191,814		167,174

			Total	$	1,052,240	$	888,636

The following table presents a summary of long-lived assets by geographic region for the periods ended September 29, 2001 and December 30, 2000:


				September 29,		December 30,
				2001		2000

North America:




	United States			$	354,062	$	316,091




	Other				2,518		3,344

		Total North America		$	356,580	$	319,435

Europe:




	United Kingdom			$	34,540	$	35,729




	France				1,834		1,383




	Germany				1,267		924




	Italy				361		395




	Other				1,846		1,070

		Total Europe		$	39,848	$	39,501

Japan and Asia:




	Japan			$	3,592	$	4,702




	Asia				6,705		5,241

		Total Japan and Asia			10,297		9,943

			Total	$	406,725	$	368,879

Subsequent Events

On November 8, 2001, Cadence announced it has signed a definitive agreement to acquire Silicon Perspective Corporation, or SPC, a privately-held design technology firm headquartered in Santa Clara, California. SPC provides electronic design tools that bridge the gap between front-end logic designers and the back-end physical realm. The financial terms of the agreement were not disclosed and Cadence expects the acquisition to be completed in December 2001.

On July 25, 2001, Avant! Corporation was ordered to pay Cadence $195 million in criminal restitution after Avant! entered a plea of no contest and was found guilty by the Superior Court of the State of California of conspiracy to take and use Cadence’s trade secrets. As of September 29, 2001, Cadence had received $169 million, plus $1 million of interest. The remaining $26 million, plus nominal interest was paid on October 3, 2001. Cadence is accounting for this transaction on a cash basis and no contingent gain was recorded due to the uncertainty on collectibility.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this quarterly report on Form 10-Q. Except for historical information, the following discussion contains forward-looking statements based on current expectations that involve certain risks and uncertainties. Cadence’s actual results could differ materially from those discussed herein. Factors that could cause actual results or performance to differ materially or contribute to such differences include, but are not limited to, those discussed below in “Results of Operations,” “Liquidity and Capital Resources,” “Factors That May Affect Future Results,” and “Disclosures about Market Risk.”

Overview

Cadence provides comprehensive software and other technology and offers design and methodology services for the product development requirements of the world’s leading electronics companies. Cadence licenses its leading-edge electronic design automation, or EDA, software and hardware technology and provides a range of services to its customers throughout the world to help them optimize their product development processes. Cadence is a supplier of end-to-end products and services that are used to design and develop complex chips and electronic systems including semiconductors, computer systems and peripherals, telecommunications and networking equipment, mobile and wireless devices, automotive electronics, consumer products, and other advanced electronics.

In late 2000, both the U.S. economy in general and the electronics industry in particular began to experience a slowdown, the severity of which has increased throughout 2001. The electronics industry slowdown, especially in the semiconductor industry, may reduce Cadence’s revenue and harm its results of operations.

connection with the acquisition, Cadence acquired goodwill of $58.3 million, which is being amortized over 5 years, and technology and workforce intangibles of $12.9 million, which are being amortized over 3 to 5 years. The results of operations of CadMOS and the estimated fair value of the assets acquired and liabilities assumed are included in Cadence’s consolidated financial statements from the date of acquisition.

On July 17, 2000, Cadence announced its plan to separate its electronics design services group into a new company named Tality Corporation, or Tality. Tality’s separation from Cadence was substantially completed on October 4, 2000, and the electronic design services business operated as a subsidiary of Cadence. Tality filed a registration statement with the Securities and Exchange Commission for Tality’s initial public offering, or IPO. As a result of the separation in the third quarter of 2000, Cadence has recorded deferred stock compensation resulting from Tality option grants and restricted stock sales. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Unusual Items.” On October 9, 2000, Cadence announced the postponement of Tality’s IPO due to unfavorable market conditions. As a result of the postponement of the Tality IPO Cadence wrote off $2.8 million of IPO related expenses in the first quarter of 2001. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Unusual Items.” On April 17, 2001, Cadence announced the withdrawal of the Tality IPO registration statement. The financial statements and financial information in this Quarterly Report on Form 10-Q do not give effect to the IPO. As a result of a reorganization of the Tality entities during the second and third quarter of 2001, Tality is currently an indirect wholly-owned subsidiary of Cadence.

In the fourth quarter of 2001, Cadence expects to record restructuring charges estimated between $25 million and $30 million. These restructuring efforts are targeted at workforce and infrastructure reductions and facilities and asset consolidations within Tality and Cadence.

In the third quarter of 2001, Cadence recorded a $12.9 reserve against inventory related to its Quickturn subsidiary, which is included in restructuring, asset impairment, and unusual items in the Condensed Consolidated Statements of Operations. The $12.9 million reserve was related to excess inventory related to revised sales forecasts.

In the second quarter of 2001, Cadence announced a worldwide restructuring and asset impairment plan targeted at reducing workforce and consolidating facilities and assets. Cadence recorded $32.7 million of restructuring charges classified as unusual operating expenses associated with the worldwide restructuring plan. The restructuring plan will result in the reduction of approximately 325 employees. While employee reductions are across all business functions, operating units, and geographic regions, Cadence’s wireless communications-related areas within its Tality subsidiary are affected more than other areas. In addition, the number of temporary and contract workers employed by Cadence is being reduced. Facilities consolidation charges of $21.4 million were incurred in connection with the downsizing and closing of 16 sites.

Results of Operations



		Three Months Ended							Nine Months Ended

		September 29,		September 30,					September 29,		September 30,
		2001		2000		% Change			2001		2000		% Change


*Revenue*		(In millions, except percentages)




Product		$	217.4	$	165.3		31	%	$	588.8	$	411.2		43	%




Services			58.0		87.4		(34	)%		211.8		243.3		(13	)%




Maintenance			84.6		79.8		6	%		251.6		234.1		7	%

	Total revenue	$	360.0	$	332.5		8	%	$	1,052.2	$	888.6		18	%

*Sources of Revenue as a Percent of Total Revenue*




Product			60%		50%					56%		46%




Services			16%		26%					20%		27%




Maintenance			24%		24%					24%		26%

Product revenue increased $52.1 million and $177.6 million in the three and nine months ended September 29, 2001, respectively, when compared to the same periods in 2000, primarily due to an increase in the value of license renewals with major customers as well as an increase in new sales of Cadence’s software products to new customers. The increase in sales volume in the three and nine months ended September 29, 2001 was primarily due to an increase in sales volume of Cadence’s integrated circuit implementation products, partially offset by a decrease in sales volume of intellectual property creation products, including emulation, and printed circuit board-related products. In the three and nine months ended September 29, 2001, about one third of software revenue came from Cadence’s ratable software license arrangements. In the three and nine months ended September 30, 2000, approximately 19% of software revenue came from Cadence’s ratable software license arrangements. The percentage of ratable revenue will vary, in any given quarter, depending on the actual mix of revenue generated from Cadence’s various licensing models.

Services revenue decreased $29.3 million and $31.5 million in the three and nine months ended September 29, 2001, respectively, when compared to the same periods in 2000, primarily due to customers’ tactical spending cuts for services engagements. Tality’s revenue declined $17.9 million and $20.7 million in the three and nine months ended September 29, 2001, respectively, when compared to the same periods in 2000, primarily due to fewer active engagements and decreased total client service hours billed. Tality’s revenue is expected to continue to be affected by the slowdown in the economy and electronics industry specifically, with revenue expected to decline in the fourth quarter of 2001. Methodology Services revenue declined $11.4 million and $10.8 million in the three and nine months ended September 29, 2001, respectively, when compared to the same periods in 2000, primarily due to a general weakness in short-term consulting.

Maintenance revenue increased $4.8 million and $17.5 million in the three and nine months ended September 29, 2001, respectively, when compared to the same periods in 2000, primarily due to the growth of the installed customer base and the renewal of maintenance and support contracts.



		Three Months Ended							Nine Months Ended

		September 29,		September 30,					September 29,		September 30,
		2001		2000		% Change			2001		2000		% Change


		(In millions, except percentages)
*Revenue by Geography*




Domestic		$	172.1	$	193.3		(11	)%	$	571.0	$	505.8		13	%




International			187.9		139.2		35	%		481.2		382.8		26	%

	Total revenue	$	360.0	$	332.5		8	%	$	1,052.2	$	888.6		18	%

*Revenue by Geography as a Percent of Total Revenue*




Domestic			48%		58%					54%		57%




International			52%		42%					46%		43%

International revenue increased $48.7 million and $98.4 million in the three and nine months ended September 29, 2001, respectively, when compared to the same periods in 2000. The increase in the three and nine months ended September 29, 2001 was primarily due to increases in product revenue in all regions and

maintenance revenue in Europe, Asia, and Canada, partially offset by decreases in service revenue in all regions and maintenance revenue in Japan.

Differences in the rate of revenue growth over the periods presented and as compared geographically are primarily due to fluctuations in sales volume of integrated circuit implementation and intellectual property creation products and for Cadence’s design and methodology services offerings.

Foreign currency exchange rates negatively affected revenue by $3.7 million and $13.5 million during the three and nine months ended September 29, 2001, respectively, when compared to the same periods in 2000, primarily due to the weakening of the Japanese yen in relation to the U.S. dollar.



	Three Months Ended							Nine Months Ended

	September 29,		September 30,					September 29,		September 30,
	2001		2000		% Change			2001		2000		% Change


*Cost of Revenue*	(In millions, except percentages)




Product	$	19.2	$	22.9		(16	)%	$	62.6	$	63.9		(2	)%




Services	$	48.7	$	56.0		(13	)%	$	151.1	$	157.2		(4	)%




Maintenance	$	16.8	$	17.2		(2	)%	$	49.7	$	46.7		6	%
*Cost of Revenue as a Percent of Related Revenue*




Product		9%		14%					11%		16%




Services		84%		64%					71%		65%




Maintenance		20%		22%					20%		20%

Cost of product revenue includes costs of production personnel, packaging and documentation, royalties, and amortization of capitalized software development costs for software products. Manufacturing costs associated with hardware emulation system products include materials, labor, and overhead.

Cost of product revenue decreased $3.8 million and $1.3 million for the three and nine months ended September 29, 2001, respectively, when compared to the same period in 2000, primarily due to a decrease in manufacturing expenses associated with emulation system product, partially offset by an increase in third-party royalty costs and amortization of software development costs.

Because the majority of Cadence’s cost of software product revenue does not vary significantly with changes in revenue, product gross margin increased in the three and nine months ended September 29, 2001, when compared to the same period in 2000, primarily due to an increase in volume of license renewals with major customers.

Cost of services revenue includes costs associated with providing services to customers, primarily salaries and costs to recruit, develop, and retain personnel, and costs to maintain the infrastructure necessary to manage a services organization. Cost of services revenue decreased $7.3 million and $6.1 million in the three and nine months ended September 29, 2001, respectively, when compared to the same period in 2000, primarily due to a decrease in salaries and benefits resulting from Cadence’s reduction of services professionals in connection with the restructuring plan initiated during the second quarter of 2001, partially offset by an increase in salaries and benefits resulting from Cadence’s addition of services professionals that occurred during the three months ended March 31, 2001.

Services gross margin decreased for the three and nine months ended September 29, 2001, when compared to the same periods in 2000, primarily due to the slowdown in the economy generally and in the electronics systems industry in particular resulting in revenues declining faster than costs. In addition, services gross margin has been, and may continue to be reduced by, Cadence’s inability to fully utilize its services resources.

Cost of maintenance revenue includes the cost of customer services, such as hot-line and on-site support, production personnel, packaging, and documentation of maintenance updates. Cost of maintenance revenue remained flat and increased $3 million for the three and nine months ended September 29, 2001, respectively,

when compared to the same periods in 2000. The increase for the nine months ended September 29, 2001 was primarily due to an increase in salaries and benefits resulting from an increase in employee headcount.



	Three Months Ended							Nine Months Ended

	September 29,		September 30,					September 29,		September 30,
	2001		2000		% Change			2001		2000		% Change


	(In millions, except percentages)
*Operating Expenses*




Marketing and sales	$	96.6	$	97.8		(1	)%	$	286.2	$	279.0		3	%




Research and development	$	74.2	$	66.6		11	%	$	219.1	$	195.0		12	%




General and administrative	$	27.6	$	24.1		15	%	$	85.8	$	70.4		22	%
*Expenses as a Percent of Total Revenue*




Marketing and sales		27%		29%					27%		31%




Research and development		21%		20%					21%		22%




General and administrative		8%		7%					8%		8%

Marketing and sales expenses decreased $1.2 million in the three months ended September 29, 2001, when compared to the same period of last year, primarily due to a decrease in outside consulting and services costs. Marketing and sales expenses increased $7.2 million in the nine months ended September 29, 2001, when compared to the same periods in 2000, primarily due to an increase in salaries and benefits resulting from an increase in employee headcounts.

Research and development expenses, prior to the reduction for capitalization of software development costs, were $81.5 million, representing 23% of total revenue, in the three months ended September 29, 2001, and $73.3 million, representing 22% of total revenue, for the three months ended September 30, 2000. For the three and nine months ended September 29, 2001, Cadence capitalized software development costs of $7.3 million and $22.6 million, respectively, representing 9% of total research and development expenditures. For the three and nine months ended September 30, 2000, Cadence capitalized software development costs of $6.7 million and $21.4 million, respectively, representing 9% and 10% of total research and development expenditures, respectively. The increase in capitalized software development costs for the three and nine months ended September 29, 2001, resulted primarily from increases in new product development projects that have reached technological feasibility. In any given period, the amount of capitalized software development costs may vary depending on the exact nature of the development performed.

The increase in net research and development expenses of $7.6 million and $24.2 million for the three and nine months ended September 29, 2001, respectively, when compared to the same periods in 2000, was primarily due to an increase in salaries and benefits resulting from an increase in employee headcount and increased investment in research and development projects.

General and administrative expenses increased $3.5 million in the three months ended September 29,2001, when compare to the same period in 2000, primarily due to an increase in salaries and benefits resulting from an increase in employee headcount. General and administrative expenses increased $15.4 million in the nine months ended September 29, 2001, when compared to the same period in 2000, primarily due to an increased use of outside consulting services, salaries and benefits resulting from an increase in employee headcount, and increases in bad debt expense, primarily attributable to Tality operations.

Foreign currency exchange rates positively affected operating expenses by $2.6 million and $8.4 million for the three and nine months ended September 29, 2001, respectively, when compared to the same periods in 2000, primarily due to the weakening of the Japanese yen and the British pound in relation to the U.S. dollar.



	Three Months Ended				Nine Months Ended

	September 29,		September 30,		September 29,		September 30,
	2001		2000		2001		2000


	(In millions)
*Amortization of Acquired Intangibles*




Amortization of acquired intangibles	$	24.0	$	20.7	$	71.9	$	60.2
Amortization of Acquired Intangibles as a Percent of Total Revenue




Amortization of acquired intangibles		7%		6%		7%		7%

Amortization of acquired intangibles increased $3.3 million and $11.7 million in the three and nine months ended September 29, 2001, respectively, when compared with the same periods in 2000, primarily due to the 2001 acquisition of CadMOS, partially offset by the reduction of Diablo amortization related to the write-off in the second quarter of 2001. See “Unusual Items – Goodwill Write-Off”.



	Three Months Ended				Nine Months Ended

	September 29,		September 30,		September 29,		September 30,
	2001		2000		2001		2000


	(In millions)
*Amortization of Deferred Stock Compensation*




Amortization of deferred stock compensation	$	2.5	$	5.2	$	15.6	$	5.2
Amortization of Deferred Stock Compensation as a Percent of Total Revenue




Amortization of deferred stock compensation		1%		2%		1%		1%

Cadence records deferred stock compensation resulting from Tality option grants for Tality stock, Tality restricted stock sales, and Cadence’s acquisition of CadMOS. Deferred stock compensation from Tality option grants and restricted stock sales represents the difference between the exercise price of stock option grants to Tality employees and directors, and restricted stock sales to certain Cadence executives and key employees, and the deemed fair market value of Tality’s common stock at the time of those grants and sales. Deferred stock compensation from the CadMOS acquisition represents the difference between the exercise price of stock option grants to CadMOS employees and the fair market value of Cadence’s common stock at the time of acquisition. Cadence is amortizing the deferred stock compensation to expense over the period during which the stock options and restricted stock vest. In the third quarter of 2001, Cadence reacquired 1,740,000 restricted Tality shares from certain Cadence executives and key employees who then repaid their related notes payable to Cadence. Tality repurchased 220,000 restricted shares from three of its directors. The purchase price was $6.10, the fair market value of Tality stock at the time of repurchase. This transaction was accounted for as a purchase and resulted in $2.4 million of goodwill, which is being amortized over 3 years. Amortization of deferred stock compensation decreased $2.7 million in the three months ended September 29, 2001, when compared to the same period in 2000, primarily due to Cadence reacquiring the Tality stock and a reduction in the number of outstanding Tality option grants. Amortization of deferred stock compensation increased $10.4 million in the nine months ended September 29, 2001, when compared to the same period in 2000, primarily due to no similar costs in the first six months of 2000.

Restructuring, Asset Impairment, and Unusual Items

The following table presents information regarding unusual items for the three and nine months ended September 29, 2001 and September 30, 2000:



		Three Months Ended					Nine Months Ended

		September 29,			September 30,		September 29,			September 30,
		2001			2000		2001			2000


		(In millions)




Avant! criminal restitution, net of related costs		$	(168.5	)	$	—	$	(168.5	)	$	—




Restructuring charges			0.8			—		35.0			—




Inventory write-off and other			12.9			—		19.8			—




Goodwill write-off			—			—		25.8			—




Separation costs			—			4.9		4.8			4.9




Write-off of acquired in-process technology			—			—		13.1			—

	Total restructuring, asset impairment, and unusual items	$	(154.8	)	$	4.9	$	(70.0	)	$	4.9

Avant! Criminal Restitution

Restructuring

In the second quarter of 2001, Cadence announced a worldwide restructuring and asset impairment plan targeted at reducing workforce and consolidating facilities and assets.

Cadence recorded $32.7 million of restructuring charges classified as unusual operating expenses associated with the worldwide restructuring plan. Cadence’s restructuring plan and associated costs consisted of $11.3 million for reduction in personnel and $21.4 million to downsize and close excess facilities. The restructuring plan was initiated due to the severe downturn in the economic environment in the electronics industry, particularly in the U.S. The restructuring was primarily aimed at reducing excess personnel and capacity costs within its Tality subsidiary. Management estimates that the restructuring will result in annualized cost reductions of approximately $30.8 million in salary and benefit costs and $35.1 million in facility costs.

The restructuring plan will result in the reduction of approximately 325 employees. While employee reductions are across all business functions, operating units, and geographic regions, Cadence’s wireless communications-related areas within its Tality subsidiary are affected more than other areas. In addition, the number of temporary and contract workers employed by Cadence is being reduced. Severance costs resulting from the restructuring included severance benefits, notice pay, and out-placement services. Approximately $5.3 million of these costs resulted from the payments to certain participants in Cadence’s employee stock purchase plan prior to Tality’s separation from Cadence in October 2000. All terminations and termination benefits were communicated to the affected employees prior to June 30, 2001. All severance benefits will be paid out by the end of 2001.

Facilities consolidation charges of $21.4 million were incurred in connection with the downsizing and closing of 16 sites. Closure and downsizing costs included payments required under lease contracts, less any applicable sublease income after the properties were abandoned, lease buyout costs, restoration costs associated with certain lease arrangements, and costs to maintain facilities during the period after abandonment. To determine the lease loss, which is the loss after Cadence’s cost recovery efforts from subleasing a building, certain assumptions were made related to the (1) time period over which the relevant building would remain vacant, (2) sublease terms, and (3) sublease rates, including common area charges. The lease loss is an estimate under Statement of Financial Accounting Standards No. 5 Accounting for Contingencies and represents the low end of the range, $10.8 million, which will be adjusted in the future upon triggering events (change in estimate of time to sublease, actual sublease rates, etc.). Cadence has estimated that the high end of the lease loss could be $50.4 million if facilities operating lease rental rates continue to decrease in the applicable markets or if it takes longer than expected to find a suitable tenant to sublease the facility. Asset-related costs that were expensed consisted of leasehold improvements for facilities that were abandoned and whose estimated fair market value is zero. As of September 29, 2001, seven sites had been vacated and seven sites had been downsized.

In the first quarter of 2001, Cadence recorded $1.5 million of restructuring expenses incurred in connection with its research and development process.

Inventory Write-Off and Other

In connection with its announced restructuring, Cadence recorded a $5.8 million reserve against inventory in the second quarter of 2001. Of the $5.8 million, $3.7 million related to two discontinued product lines as part of Cadence’s restructuring and $2.1 million related to excess inventory of emulation products. The $3.7 million related to inventory and other related costs for two product lines Cadence will no longer sell. As part of the restructuring, Cadence examined the business and determined that these products would not result in future revenue growth. The excess inventory charge of $2.1 million was due to a sudden and significant decrease in forecasted revenue for emulation products and was calculated in accordance with Cadence’s policy, which is based on inventory in excess of 12-month demand. Inventory purchases and commitments are based on future sales forecasts. Cadence typically buys and builds inventory levels for certain key components to mitigate component supply constraints. Based on Cadence’s current 12-month demand forecast, Cadence does not anticipate that the excess inventory subject to these reserves will be used at a later date.

Also in connection with its announced restructuring, certain additional costs have been incurred in order to fulfill Tality contracts. As a result, a loss provision of $1.1 million was placed against these contracts.

Goodwill Write-Off

In relation to the wireless communications business downsizing within its Tality subsidiary and current decline in business conditions generally, Cadence restructured certain of its businesses and realigned resources to reduce costs. As a result, in the second quarter of 2001, Cadence recorded a charge of $25.8 million related to the impairment of goodwill and acquired intangibles associated with the acquisition of Diablo Research Company LLC, or Diablo. Key factors in this write-off were significant downsizing or reassignment of personnel directly related to these assets and abandonment most of this line of business. The charge was determined as the amount by which the carrying value of the goodwill and intangible assets associated with Diablo’s acquisition exceeded the fair value of those assets.

Tality IPO-Related Expense and Separation Costs

In the three months ended June 30, 2001, Cadence recorded $1.3 million of Tality separation costs primarily related to legal and consulting fees.

In the first quarter of 2001, Cadence wrote off $2.8 million of Tality IPO-related expense as a result of the postponement of the Tality IPO on October 9, 2000. These expenses consisted of legal and accounting services and registration statement printing and filing fees and were incurred primarily during 2000. In addition, Cadence recorded $0.7 million of Tality separation costs in the first quarter of 2001, related primarily to information systems separation.

Acquisitions and In-Process Technology

In the three months ended June 30, 2001, Cadence acquired substantially all of the assets of two companies for an aggregate price of $10.5 million, net of acquisition costs, of which $4.4 million was cash and $6.1 million was shares of Cadence common stock, plus future contingent payments. The acquisitions were accounted for as a purchase. Upon consummation of the acquisitions, Cadence immediately charged to expense $1 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use.

Upon consummation of the CadMOS acquisition, Cadence immediately charged to expense $12.1 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. The value assigned to acquired in-process technology was determined by identifying research projects in areas for which technological feasibility has not been established. The value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the acquired in-process technology. The in-process technology is expected to be commercially viable in 2002. As of September 29, 2001, expenditures to complete the in-process technology have totaled $0.7 million and expenditures to complete the remaining in-process technology are expected to total approximately $1.2 million. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. Additionally, these projects will require additional research and development after they have reached a state of technological and commercial feasibility.

At the time of its acquisition by Cadence, CadMOS’ in-process research and development projects were related to the development of a static timing analysis tool, the development of advanced fixing capabilities in the noise analysis area, and in the mixed signal area, the development of a flow to integrate with Cadence tools and a tool to analyze large application-specific integrated circuit designs for substrate noise. The nature of the efforts to complete these projects related, in varying degrees, to the completion of all planning, designing, prototyping, verification, and testing activities necessary to establish that the proposed technologies meet their design specifications including functional, technical, and economic performance requirements.

The net cash flows resulting from the projects underway at CadMOS used to value the purchased research and development were based on management’s estimates of revenue, cost of revenue, research and

development costs, selling, general and administrative costs, and income taxes from such projects. The revenue projections were based on the potential market size that the projects address, Cadence’s ability to gain market acceptance in these segments, and the life cycle of this in-process technology.

Estimated total revenue from the acquired in-process technology is expected to peak in 2004 and decline rapidly thereafter as other new products are expected to enter the market. In addition, a portion of the anticipated revenue had been attributed to enhancements of the base technology under development, and has been excluded from net cash flow calculations. Existing technology was valued at $3.6 million. The net cash flows generated from the acquired in-process technology were expected to reflect earnings before interest, taxes, and depreciation of approximately 50% of the revenue generated from in-process technology. However, there can be no assurance that these assumptions will prove accurate, or that Cadence will realize the anticipated benefit of the acquisition.

The discount of the net cash flows to their present value was based on the weighted average cost of capital, or WACC. The WACC calculation produces the average required rate of return of an investment in an operating enterprise, based on the required rates of return from investments in various areas of the enterprise. The rate used to discount the net cash flows from purchased in-process technology was 28%. The discount rate is sometimes higher than the WACC due to the inherent uncertainties in the estimates, including the uncertainty surrounding the successful development of the acquired in-process technology, the useful life of such technology, the profitability levels of such technology, if any, and the uncertainty of technological advances, all of which were unknown at that time.

Other Income and Income Taxes

Other income decreased $1.3 million in the three months ended September 29, 2001, when compared to the same periods in 2000, primarily due to decreases in minority interest income and foreign exchange gains, partially offset by an increase in interest income. Other income decreased $3.6 million in the nine months ended September 29, 2001, when compared to the same periods in 2000, primarily due to a decrease in foreign exchange gains and minority interest gains, partially offset by an increase in interest income and a reduction in investment losses.

Cadence’s estimated effective tax rate for the three and nine months ended September 29, 2001 was 26.5%, excluding the effect of amortization of acquired intangibles, amortization of deferred stock compensation, and unusual items. Cadence will provide for taxes on the Avant! restitution award at a rate of 40%. The effective tax rate for the three and nine months ended September 30, 2000 was 26.5%.

Liquidity and Capital Resources

At September 29, 2001, Cadence’s principal sources of liquidity consisted of $175.9 million of cash and cash equivalents and short-term investments, compared to $137 million at December 30, 2000, and two syndicated senior unsecured credit facilities totaling $360 million. As of September 29, 2001, Cadence had no outstanding borrowings under these credit facilities.

Cash provided by operating activities increased $121.7 million to $264 million for the nine months ended September 29, 2001, when compared to the nine months ended September 30, 2000. The increase was due to higher net income before depreciation and amortization and unusual items.

At September 29, 2001, Cadence had net working capital of $32.5 million compared with $65.3 million at December 30, 2000. The working capital decrease was driven primarily by decreases in prepaid expenses and other of $49.8 million, receivables of $27.3 million, and an increase in income tax payable of $34 million, partially offset by a decrease in accounts payable and accrued liabilities of $46.1 million.

In addition to its short-term investments, Cadence’s primary investing activities consisted of acquisitions, purchases of property, plant, and equipment, capitalization of software development costs, and venture capital partnership investments, which combined represented $181 million and $145.5 million of cash used for investing activities in the nine months ended September 29, 2001 and September 30, 2000, respectively.

Cadence sells put warrants and purchases call options through private placements. See “Notes to Consolidated Financial Statements – Put Warrants and Call Options.” At September 29, 2001, Cadence had a maximum potential obligation related to put warrants to buy back 4.6 million shares of its common stock at an aggregate price of approximately $105.7 million. The put warrants will expire on various dates through May 2002, and Cadence has the contractual ability to settle the put warrants prior to their maturity. Cadence has the ability to settle these put warrants with stock and, therefore, no amount was classified out of stockholders’ equity in the condensed consolidated balance sheets.

As part of its overall investment strategy, Cadence is a limited partner in a venture capital fund and is committed to invest up to $100 million. As of September 29, 2001, Cadence had contributed approximately $76.9 million to this partnership, which is reflected in other assets in the accompanying condensed consolidated balance sheets.

Cadence anticipates that current cash and short-term investment balances, cash flows from operations, and its $360 million revolving credit facilities will be sufficient to meet its working capital and capital requirements on a short-and long-term basis.

New Accounting Standards

In August 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement establishes a single accounting model, based on the framework established in Statement 121, for long-lived assets to be disposed of by sale. This Statement will be effective for fiscal years beginning after December 15, 2001. Cadence has not yet determined the effect SFAS No. 144 will have on its consolidated financial position, results of operations, or cash flows.

In August 2001, the FASB, issued SFAS, No. 143, “Accounting for Obligations Associated with the Retirement of Long-Lived Assets.” SFAS No. 143 addresses financial accounting and reporting for the retirement obligation of an asset. This statement states that companies should recognize the asset retirement

cost, at their fair value, as part of the cost of the asset and classify the accrued amount as a liability in the condensed consolidated balance sheet. The asset retirement liability is then accreted to the ultimate payout as interest expense. The initial measurement of the liability would be subsequently updated for revised estimates of the discounted cash outflows. The Statement will be effective for fiscal years beginning after June 15, 2002. Cadence has not yet determined the effect SFAS No. 143 will have on its consolidated financial position, results of operations, or cash flows.

In June 2001, the FASB issued SFAS No. 141, “Business Combinations.” SFAS No. 141 addresses financial accounting and reporting for business combinations and it requires business combinations in the scope of this Statement to be accounted for using one method, the purchase method. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. The adoption of this Statement will not have a material effect of Cadence’s consolidated financial position, results of operations, or cash flows.

In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other acquired assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. With the adoption of this Statement, goodwill is no longer subject to amortization over its estimated useful life. Goodwill will be assessed for impairment each year using the fair-value-based test. This Statement becomes effective January 1, 2002. Cadence is currently assessing the impact of the discontinued amortization of goodwill and, while Cadence is not aware of any impairment charges, an analysis will have to be done upon adoption of this Statement to determine if an impairment charge is necessary. Cadence has not yet determined the effect SFAS No. 142 will have on its consolidated financial position, results of operations, or cash flows.

In September 2000, the Emerging Issues Task Force, or EITF, published their consensus on EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” which was taken up to address implementation of the EITF’s March 2000 final consensus of EITF Issue No. 00-7, “Application of EITF Issue No. 96-13 to Equity Derivative Instruments That Contain Certain Provisions That Require Net Cash Settlement If Certain Events Outside the Control of the Issuer Occur.” The final consensus in Issue No. 00-7 generally stated that equity derivative contracts that contain provisions that implicitly or explicitly require net cash settlement outside of the control of the company must be treated as assets and liabilities and carried at fair value with changes in fair value recognized in earnings rather than equity instruments carried at original cost and reported as part of permanent equity. This interpretation became effective June 30, 2001 and did not have a material effect on Cadence’s consolidated financial position, results of operations, or cash flows.

Factors That May Affect Future Results

The following risk factors and other information included in this Quarterly Report on Form 10-Q should be carefully considered. The risks and uncertainties described below are not the only ones Cadence faces. Additional risks and uncertainties not currently known to Cadence or that Cadence currently deem immaterial also may impair Cadence’s business operations. If any of the following risks actually occur, Cadence’s business, operating results, and financial condition could be materially harmed. Unless specifically noted, references to Cadence in the discussion below are references to Cadence and its subsidiaries, including Tality Corporation and its subsidiaries.

Cadence is subject to the cyclical nature of the integrated circuit industry and the electronics systems industry, and the current downturn or any future downturns may reduce its revenue

Purchases of Cadence’s products and services are highly dependent upon the commencement of new design projects by integrated circuit manufacturers and electronics systems companies. The integrated circuit industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles, and wide fluctuations in product supply and demand. The integrated circuit and electronics systems industries have experienced significant

downturns, often connected with, or in anticipation of, maturing product cycles of both these companies’ and their customers’ products and a decline in general economic conditions. These downturns have been characterized by diminished product demand, production over capacity, high inventory levels and accelerated erosion of average selling prices. During these downturns, the number of new design projects may decrease. A number of integrated circuit manufacturers and electronics systems companies have announced significant slowdowns of demand and production, inventory write-offs and/or reductions in spending on research and development. Cadence expects continued weakness in the communications businesses of the electronics systems industry for the foreseeable future. The current slowdown and any future downturns may reduce Cadence’s revenue and harm its results of operations.

Cadence has reorganized its design services group as a separate company, which may impact its financial results

Since 1995, Cadence has operated an electronics design services group. On July 17, 2000, Cadence announced its plan to separate its design services group into a separate company named Tality Corporation focused on providing design solutions and proprietary technology to electronics product companies and integrated circuit manufacturers, and announced the planned initial public offering of the separate company. The separation was substantially completed on October 4, 2000. On October 9, 2000, Cadence announced that it had postponed Tality’s initial public offering due to unfavorable market conditions. On April 17, 2001, Tality withdrew the registration statement for its initial public offering. Cadence currently intends to consider undertaking an initial public offering for Tality when market conditions become favorable. As a result of a reorganization of the Tality entities during the end of the second quarter and beginning of the third quarter of 2001, Tality now operates as an indirect wholly-owned subsidiary of Cadence. Cadence’s expenses in the design services business increased substantially in connection with Tality’s separation from Cadence and Tality’s reorganization, and its expenses may continue to increase. Tality’s revenue over prior periods has declined in 2001, and may not increase in the near term, or at all, and its separation and reorganization may prove more expensive than Cadence anticipates. If Tality fails to increase its revenue to offset its expenses, or if Tality cannot reduce its expenses sufficiently, Tality will continue to experience losses.

Cadence has agreed to grant certain rights and provide certain services to Tality on terms that are more favorable to Tality than terms that would be offered to an unrelated party

In connection with the separation of Tality, Cadence entered into a number of agreements governing its business relationships with Tality and Cadence’s provision of certain services to Tality, including provision of certain facilities, and accounting, finance, legal, human resources, and other administrative services, on terms that are more favorable to Tality than terms that would be offered to an unrelated entity. As a result, Cadence is obligated to provide certain services to Tality for the periods defined in the various agreements, some of which have long or unspecified terms. Continued provision of such services after Tality’s separation and after a potential future initial public offering may impact Cadence’s financial results.

Cadence has historically suffered losses in its electronics design and methodology services business and may continue to do so in the future

The market for electronics design and methodology services is relatively new and rapidly evolving. Cadence has historically suffered losses in its services business. Cadence’s or Tality’s failure to succeed in these electronics design and methodology services businesses may seriously harm Cadence’s business, operating results, and financial condition.

The success of Cadence’s electronic design and methodology services businesses depend on many factors that are beyond its control

In order to be successful with its electronics design and methodology services, Cadence must overcome several factors that are beyond its control, including the following:

• Cadence’s cost of services personnel is high and reduces gross margin. Gross margin represents the difference between the amount of revenue from the sale of services and Cadence’s cost of providing those services. Cadence must pay high salaries to attract and retain professional services personnel.

This results in a lower gross margin than the gross margin in Cadence’s software business. In addition, the high cost of training new services personnel or not fully utilizing these personnel can significantly lower gross margin.

• A substantial portion of these services contracts are fixed-price contracts. This means that the customer pays a fixed price that is agreed upon at the time of contract execution, regardless of how much time or how many resources Cadence must actually devote to successfully complete the contract. Although Cadence is moving towards more time-based contracts, there can be no guarantee that this shift will occur. If Cadence’s cost in performing the services consistently and significantly exceeds the amount the customer has agreed to pay, it could seriously harm Cadence’s business, operating results, and financial condition.

Cadence’s failure to respond quickly to technological developments could make its products uncompetitive and obsolete

The industries in which Cadence competes experience rapid technology developments, changes in industry standards, changes in customer requirements and frequent new product introductions and improvements. Currently, the electronics design industry is experiencing several revolutionary trends:

• The size of features such as wires, transistors, and contacts on chips is shrinking due to advances in semiconductor manufacturing processes. Process feature sizes refer to the width of the transistors and the width and spacing of the interconnect on the chip. Feature size is normally identified by the headline transistor length, which is shrinking from 0.25 microns to 0.13 microns and smaller. This is commonly referred to in the semiconductor industry as the migration to deep submicron and it represents a major challenge for all levels of the semiconductor industry from chip design and design automation to design of manufacturing equipment and the manufacturing process itself. Shrinkage of transistor length to such infinitesimal proportions (for reference, the diameter of the period at the end of this sentence is approximately 400 microns) is challenging fundamental laws of physics and chemistry.

• The ability to design very large chips, in particular integration of entire electronic systems onto a single chip instead of a circuit board (a process that is referred to in the industry as “system-on-a-chip”), increases the complexity of managing a design that at the lowest level is represented by billions of shapes on the fabrication mask. In addition, systems typically incorporate microprocessors and digital signal processors that are programmed with software, requiring simultaneous design of the silicon chip and the related embedded software on the chip.

If Cadence is unable to respond quickly and successfully to these developments and changes, Cadence may lose its competitive position and its products or technologies may become uncompetitive or obsolete. In order to compete successfully, Cadence must develop or acquire new products and improve its existing products and processes on a schedule that keeps pace with technological developments in its industries. Cadence must also be able to support a range of changing computer software, hardware platforms and customer preferences. There is no guarantee that Cadence will be successful in this regard.

Cadence’s failure to obtain software or other intellectual property licenses or adequately protect its proprietary rights could seriously harm its business

Cadence’s success depends, in part, upon its proprietary technology. Many of Cadence’s products include software or other intellectual property licensed from third parties, and Cadence may have to seek new or renew existing licenses for this software and other intellectual property in the future. Cadence’s design services business also requires it to license software or other intellectual property from third parties. Cadence’s failure to obtain for its use software or other intellectual property licenses or other intellectual property rights on favorable terms, or the need to engage in litigation over these licenses or rights, could seriously harm Cadence’s business, operating results, and financial condition.

Also, Cadence generally relies on patents, copyrights, trademarks and trade secret laws to establish and protect its proprietary rights in technology and products. Despite precautions Cadence may take to protect its intellectual property, Cadence cannot assure you that third parties will not try to challenge, invalidate, or

circumvent these patents. Cadence also cannot assure you that the rights granted under its patents will provide it with any competitive advantages, patents will be issued on any of its pending applications, or future patents will be sufficiently broad to protect Cadence’s technology. Furthermore, the laws of foreign countries may not protect Cadence’s proprietary rights in those countries to the same extent as U.S. law protects these rights in the United States.

Cadence cannot assure you that its reliance on licenses from or to third parties, or that patent, copyright, trademark, and trade secret protections, will be enough to be successful and profitable in the industries in which Cadence competes.

Intellectual property infringement by or against Cadence could seriously harm its business

There are numerous patents in the electronics design automation, or EDA, industry and new patents are being issued at a rapid rate. It is not always economically practicable to determine in advance whether a product or any of its components infringes the patent rights of others. As a result, from time to time, Cadence may be forced to respond to or prosecute intellectual property infringement claims to protect its rights or defend a customer’s rights. These claims, regardless of merit, could consume valuable management time, result in costly litigation, or cause product shipment delays, all of which could seriously harm Cadence’s business, operating results, and financial condition. In settling these claims, Cadence may be required to enter into royalty or licensing agreements with the third parties claiming infringement. These royalty or licensing agreements, if available, may not have terms acceptable to Cadence. Being forced to enter into a license agreement with unfavorable terms could seriously harm Cadence’s business, operating results, and financial condition. Any potential intellectual property litigation could force us to do one or more of the following:

• Pay damages to the party claiming infringement;

• Stop licensing, or providing services that use, the challenged intellectual property;

• Obtain a license from the owner of the infringed intellectual property to sell or technology, which license may use the relevant not be available on reasonable terms, or at all; or

• Redesign the challenged technology, which could be time-consuming and costly.

If Cadence was forced to take any of these actions, it’s business and results of operations may be harmed.

Cadence obtains key components for its hardware products from a limited number of suppliers

Cadence depends on several suppliers for certain key components and board assemblies used in its hardware-based verification products. Cadence’s inability to develop alternative sources or to obtain sufficient quantities of these components or board assemblies could result in delays or reductions in product shipments. In particular, Cadence currently relies on Taiwan Semiconductor Manufacturing Corporation for the supply of key integrated circuits and on IBM for the hardware components for Cadence’s COBALT™ and MERCURYPLUS™ products. Other disruptions in supply may also occur. If there were such a reduction or interruption, Cadence’s results of operations would be seriously harmed. Even if Cadence can eventually obtain these components from alternative sources, a significant delay in Cadence’s ability to deliver products would result.

Fluctuations in quarterly results of operations could hurt Cadence’s business and the market price of its stock

Cadence has experienced, and may continue to experience, varied quarterly operating results. Various factors affect Cadence’s quarterly operating results and some of them are not within Cadence’s control, including the mix of products and services sold, the mix of licenses used to sell products and the timing of significant orders for its software products and services by customers. Quarterly operating results are affected by the mix of products and services sold because there are significant differences in margins from the sale of hardware and software products and services. For example, based on a three-year average through 2000, Cadence had realized gross margins on software product sales of approximately 90% but realized gross margins of approximately 67% on hardware product sales and approximately 33% on its performance of services. In the third quarter of 2001, realized gross margins increased to approximately 93% for software products, decreased to approximately 58% for hardware products, and decreased to approximately 16% for services. In addition, Cadence’s quarterly operating results are affected by the mix of licenses entered into in

connection with the sale of software products. Cadence has three basic licensing models: perpetual, fixed-term, and subscription. Perpetual and fixed-term licenses recognize a larger portion of the revenue at the beginning of the license period and subscription licenses recognize revenue ratably over each quarter of the term of the license. As Cadence customers purchase more software products pursuant to subscription agreements, future operating results may be lower than that of comparable quarters in which perpetual and fixed-term licenses were in greater use for software product transactions. Finally, Cadence’s quarterly operating results are affected by the timing of significant orders for its software products because a significant number of contracts for software products are in excess of $5 million. The failure to close a contract for the sale of one or more orders of Cadence’s software products could seriously harm its quarterly operating results.

Sales of Cadence’s hardware products depend, in significant part, upon the decision of the prospective customer to commence a project for the design and development of complex computer chips and systems. These projects often require significant commitments of time and capital. Cadence’s hardware sales may be delayed if customers delay commencement of projects. Cadence has experienced greater delays during 2001 than in the past and such increase in delays may continue. Lengthy hardware sales cycles subject Cadence to a number of significant risks over which Cadence has little or no control, including insufficient, excess or obsolescent inventory, variations in inventory valuation and fluctuations in quarterly operating results.

In addition, Cadence bases its expense budgets partially on its expectations of future revenue. However, it is difficult to predict revenue levels or growth. Revenue levels that are below Cadence’s expectations could seriously hurt Cadence’s business, operating results, and financial condition. If revenue or operating results fall short of the levels expected by public market analysts and investors, the trading price of Cadence common stock could decline dramatically. Also, because of the timing of large orders and its customers’ buying patterns, Cadence may not learn of revenue shortfalls, earnings shortfalls or other failures to meet market expectations until late in a fiscal quarter, which could cause even more immediate and serious harm to the trading price of Cadence common stock.

Cadence believes that quarter-to-quarter comparisons of the results of operations of its services business segments may not be meaningful. Therefore, stockholders should not view Cadence’s historical results of operations as reliable indicators of its future performance. In addition, many of Cadence’s services engagements are terminable with little or no advance notice and without penalty. Since a significant portion of Cadence’s costs is fixed, it may not be able to reduce its costs in a timely manner in connection with the unanticipated revenue loss when one or more projects is terminated.

The lengthy sales cycle of Cadence’s products and services makes the timing of its revenue difficult to predict and may cause its operating results to fluctuate unexpectedly

Cadence has a lengthy sales cycle that generally extends at least three to six months. The length of Cadence sales cycle may cause it’s revenue and operating results to vary unexpectedly from quarter to quarter. The complexity and expense associated with Cadence business generally requires a lengthy customer education and approval process. Consequently, Cadence may incur substantial expenses and devote significant management effort and expense to develop potential relationships that do not result in agreements or revenue and may prevent it from pursuing other opportunities.

In addition, sales of Cadence’s products and services may be delayed if customers delay approval or commencement of projects because of:

• Customers’ budgetary constraints and internal acceptance review procedures;

• The timing of customers’ budget cycles; and

• The timing of customers’ competitive evaluation processes.

If customers experience delays in their approval or project commencement activities, Cadence may not learn of, and therefore would not be able to communicate to the public, revenue or earnings shortfalls until late in a fiscal quarter.

Cadence has recently completed acquisitions, expects to acquire other companies or businesses, and may not successfully integrate them

Cadence has acquired other businesses before and is likely to do so again. While Cadence expects to analyze carefully all potential transactions before committing to them, Cadence cannot assure you that any transaction that is completed will result in long-term benefits to Cadence or its stockholders, or that Cadence’s management will be able to manage the acquired businesses effectively. In addition, growth through acquisition involves a number of risks. If any of the following events occurs after Cadence acquires another business, it could seriously harm Cadence’s business, operating results, and financial condition:

• Difficulties in combining previously separate businesses into a single unit;

• The substantial diversion of management’s attention from day-to-day business when negotiating these transactions and then integrating an acquired business;

• The discovery after the acquisition has been completed of liabilities assumed from the acquired business;

• The failure to realize anticipated benefits such as cost savings and revenue enhancements;

• The failure to retain key personnel of the acquired business;

• Difficulties related to assimilating the products of an acquired business in, for example, distribution, engineering, and customer support areas;

• Unanticipated costs;

• Adverse effects on existing relationships with suppliers and customers; and

• Failure to understand and compete effectively in markets in which Cadence have limited previous experience.

Cadence’s international operations may seriously harm its financial condition because of several weak foreign economies and the effect of foreign exchange rate fluctuations

Cadence has significant operations outside the United States. Cadence’s revenue from international operations as a percentage of total revenue was approximately 52% and 42% for the three months ended September 29, 2001 and September 30, 2000, respectively. Cadence’s revenue from international operations as a percentage of total revenue was approximately 46% and 43% for the nine months ended September 29, 2001 and September 30, 2000, respectively. Cadence also transacts business in various foreign currencies. Fluctuations in the rate of exchange between the U.S. dollar and the currencies of countries other than the United States in which Cadence conducts business could seriously harm its business, operating results, and financial condition. For example, if there is an increase in the rate at which a foreign currency exchanges into U.S. dollars, it will take more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. If Cadence prices its products and services in the foreign currency, it will receive less in U.S. dollars than it did before the rate increase went into effect. If Cadence prices its products and services in U.S. dollars, an increase in the exchange rate will result in an increase in the price for Cadence’s products and services compared to those products of its competitors that are priced in local currency. This could result in Cadence’s prices being uncompetitive in markets where business is transacted in the local currency.

Exposure to foreign currency transaction risk can arise when transactions are conducted in a currency different from the functional currency of a Cadence subsidiary. A subsidiary’s functional currency is the currency in which it primarily conducts its operations, including product pricing, expenses and borrowings. Cadence uses foreign currency forward exchange contracts and purchases foreign currency put options to help protect against currency exchange risks. These forward contracts and put options allow Cadence to buy or sell specific foreign currencies at specific prices on specific dates. Increases or decreases in the value of Cadence’s foreign currency transactions are partially offset by gains and losses on these forward contracts and put options. Although Cadence attempts to reduce the impact of foreign currency fluctuations, significant exchange rate movements may hurt Cadence’s results of operations as expressed in U.S. dollars.

Foreign currency exchange risk occurs for some of Cadence’s foreign operations whose functional currency is the local currency. The primary effect of foreign currency translation on Cadence’s results of operations is a reduction in revenue from a strengthening U.S. dollar, offset by a smaller reduction in expenses.

Exchange rate gains and losses on the translation into U.S. dollars of amounts denominated in foreign currencies are included as a separate component of stockholders’ equity.

Cadence expects that revenue from its international operations will continue to account for a significant portion of its total revenue.

Cadence’s international operations are subject to a number of risks

A significant portion of Cadence’s total revenue is derived from its international operations. Cadence’s international operations may be subject to a number of risks, including:

• The adoption and expansion of government trade restrictions;

• Volatile foreign exchange rates and currency conversion risks;

• Limitations on repatriation of earnings;

• Reduced protection of intellectual property rights in some countries;

• Recessions in foreign economies;

• Longer receivables collection periods and greater difficulty in collecting accounts receivable;

• Difficulties in managing foreign operations;

• Political and economic instability, including civil strife and war;

• Retaliation for U.S. government economic policies and military actions internationally;

• Unexpected changes in regulatory requirements;

• Tariffs and other trade barriers; and

• U.S. government licensing requirements for export which make licenses difficult to obtain.

If any of these risks were to materially reduce the revenues generated by Cadence’s international operations, it could harm Cadence’s business, operating results, and financial conditions.

Failure to obtain export licenses could harm Cadence’s business

Cadence must comply with U.S. Department of Commerce regulations in shipping its software products and other technologies outside the U.S. The U.S. Department of Commerce may enforce these regulations more strictly or scrutinize applications for licenses more strictly subsequent to the September 11, 2001 terrorist attacks on the United States. Although Cadence has not had any significant difficulty complying with these regulations so far, any significant future difficulty in complying could harm Cadence’s business, operating results, and financial condition.

Cadence’s inability to compete in its industries could seriously harm its business

The EDA market and the commercial electronics design and methodology services industries are highly competitive. If Cadence is unable to compete successfully in these industries, it could seriously harm Cadence’s business, operating results, and financial condition. To compete in these industries, Cadence must identify and develop innovative and cost competitive electronic design automation software products and market them in a timely manner. It must also gain industry acceptance for its design and methodology services and offer better strategic concepts, technical solutions, prices and response time, or a combination of these factors, than those of other design companies and the internal design departments of electronics manufacturers. Cadence cannot assure you that it will be able to compete successfully in these industries. Factors that could affect Cadence’s ability to succeed include:

• The development of competitive EDA products and design and methodology services could result in a shift of customer preferences away from Cadence’s products and services and significantly decrease revenue;

• The electronics design and methodology services industries are relatively new and electronics design companies and manufacturers are only beginning to purchase these services from outside vendors;

• The pace of the technology change demands continuous technological development to meet the requirements of next-generation design challenges; and

• There are a significant number of current and potential competitors in the EDA industry and the cost of entry is low.

In the EDA products industry, Cadence currently competes with three large companies, Avant! Corporation, Mentor Graphics Corporation, and Synopsys, Inc., and many smaller companies. Cadence also competes with manufacturers of electronic devices that have developed or have the capability to develop their own EDA products. Many manufacturers of electronic devices may be reluctant to purchase services from independent vendors such as Cadence because they wish to promote their own internal design departments. In the electronics design and methodology services industries, Cadence competes with numerous electronic design and consulting companies as well as with the internal design capabilities of electronics manufacturers. Other electronics companies and management consulting firms continue to enter the electronic design and methodology services industries.

Cadence’s failure to attract, train, motivate, and retain key employees may harm its business

Competition for highly skilled employees is very intense. Cadence’s business depends on the efforts and abilities of its senior management, its research and development staff, and a number of other key management, sales, support, technical, and services personnel. The high cost of training new personnel, not fully utilizing these personnel, or losing trained personnel to competing employers could reduce Cadence’s gross margins and harm it’s business and operating results. Competition for these personnel is intense, particularly in geographic areas recognized as high technology centers such as the Silicon Valley area, where Cadence principal offices are located, and the other locations where Cadence maintain facilities. To attract and retain individuals with the requisite expertise, Cadence may be required to grant large numbers of stock options or other stock-based incentive awards, which may be dilutive to existing stockholders. Cadence may also be required to pay significant base salaries and cash bonuses, which could harm it’s operating results. Cadence employs a significant number of non-U.S. citizens. Since the terrorist attacks of September 11, 2001, it may be more difficult for potential employees who are not U.S. citizens to obtain work visas or for current employees who are not U.S. citizens to obtain renewals or extensions of their current visas. If Cadence do not succeed in hiring and retaining candidates with appropriate qualifications, it will not be able to grow it’s business and it’s operating results will suffer. Cadence’s failure to attract, train, motivate, and retain key employees would impair its development of new products, its ability to provide design and methodology services and the management of its businesses. This would seriously harm Cadence’s business, operating results, and financial condition.

If Cadence becomes subject to unfair hiring claims, Cadence could be prevented from hiring needed personnel, incur liability for damages and incur substantial costs in defending itself

Companies in Cadence’s industry whose employees accept positions with competitors frequently claim that these competitors have engaged in unfair hiring practices or that the employment of these persons would involve the disclosure or use of trade secrets. These claims could prevent us from hiring personnel or cause us to incur liability for damages. Cadence could also incur substantial costs in defending itself or its employees against these claims, regardless of their merits. Defending Cadence from these claims could also divert the attention of Cadence’s management away from its operations.

Errors or defects in Cadence designs could expose it to liability and harm its reputation

Cadence’s customers use its products and services in designing and developing products that involve a high degree of technological complexity, each of which has its own specifications and is based on various industry standards. Because of the complexity of the systems and products with which Cadence works, some of its products and designs can be adequately tested only when put to full use in the marketplace. As a result, its customers or their end users may discover errors or defects in Cadence’s software or the systems Cadence designs, or the products or systems incorporating its design and intellectual property may not operate as expected. Errors or defects could result in:

• Loss of current customers and loss of, or delay in, revenue and loss of market share;

• Failure to attract new customers or achieve market acceptance;

• Diversion of development resources to resolving the problem;

• Increased service costs; and

• Liability for damages.

Cadence relies on a continuous power supply to conduct its operations, and California’s current energy crisis could disrupt Cadence’s operations and increase its expenses.

California is in the midst of an energy crisis that could disrupt Cadence’s operations and increase its expenses. In the event of an acute power shortage, that is, when power reserves for the State of California fall below 1.5%, California has on some occasions implemented, and may in the future continue to implement, rolling blackouts throughout California. Cadence currently has backup generators or alternate sources of power for critical operations in the event of a blackout. If, however, blackouts interrupt Cadence’s power supply, or the power supply of its service providers, Cadence may be temporarily unable to continue operations at its facilities. Any such interruption in Cadence’s ability to continue operations at its facilities could damage its reputation, harm its ability to retain existing customers and to obtain new customers, and could result in lost revenue, any of which could substantially harm Cadence’s business and results of operations. Cadence’s current insurance does not provide coverage for any damages Cadence incurs or its customers may suffer as a result of any interruption in Cadence’s power supply.

Anti-takeover defenses in Cadence’s charter, by-laws, and under Delaware law could prevent an acquisition of Cadence or limit the price that investors might be willing to pay for Cadence common stock

Provisions of the Delaware General Corporation Law that apply to Cadence and its Certificate of Incorporation could make it difficult for another company to acquire control of Cadence. For example:

• Section 203 of the Delaware General Corporation Law generally prohibits a Delaware corporation from engaging in any business combination with a person owning 15% or more of its voting stock, or who is affiliated with the corporation and owned 15% or more of its voting stock at any time within three years prior to the proposed business combination, for a period of three years from the date the person became a 15% owner, unless specified conditions are met.

• Cadence’s Certificate of Incorporation allows Cadence’s Board of Directors to issue, at any time and without stockholder approval, preferred stock with such terms as it may determine. No shares of preferred stock are currently outstanding. However, the rights of holders of any Cadence preferred stock that may be issued in the future may be superior to the rights of holders of its common stock.

• Cadence has a rights plan, commonly known as a “poison pill,” which would make it difficult for someone to acquire Cadence without the approval of Cadence’s Board of Directors.

All or any one of these factors could limit the price that certain investors would be willing to pay for shares of Cadence common stock and could delay, prevent or allow Cadence’s Board of Directors to resist an acquisition of Cadence, even if the proposed transaction was favored by a majority of Cadence’s independent stockholders.

Cadence’s inability to deal effectively with the conversion to the euro may negatively impact its marketing and pricing strategies

On January 1, 1999, 11 member countries of the European Union adopted the euro as their common legal currency and established fixed conversion rates between their sovereign currencies and the euro. Transactions can be made in either the sovereign currencies or the euro until January 1, 2002, when the euro must be used exclusively. Currently, only electronic transactions may be conducted using the euro. Cadence is in the process of upgrading its internal systems and believes that its financial institution vendors are capable of handling the euro conversion and Cadence is in the process of examining current marketing and pricing policies and strategies that may be affected by conversion to the euro. The cost of this effort is not expected to materially harm Cadence’s results of operations or financial condition. However, Cadence cannot assure you that all issues related to the euro conversion have been identified and that any additional issues would not materially harm Cadence’s results of operations or financial condition. For example, the conversion to the euro may have competitive implications on Cadence’s pricing and marketing strategies and Cadence may be at risk to the extent its principal European suppliers and customers are unable to deal effectively with the impact of the euro conversion.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Disclosures about Market Risk

Interest Rate Risk

Cadence’s exposure to market risk for changes in interest rates relates primarily to its investment portfolio and long-term debt obligations. While Cadence is exposed with respect to interest rate fluctuations in many of the world’s leading industrialized countries, Cadence’s interest income and expense is most sensitive to fluctuations in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on Cadence’s cash and cash equivalents, short-term and long-term investments, and interest paid on its long-term debt obligations as well as costs associated with foreign currency hedges.

Cadence invests in high quality credit issuers and, by policy, limits the amount of its credit exposure to any one issuer. As stated in its policy, Cadence’s first priority is to reduce the risk of principal loss. Consequently, Cadence seeks to preserve its invested funds by limiting default risk, market risk, and reinvestment risk. Cadence mitigates default risk by investing in only high quality credit securities that it believes to be low risk and by positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity.

The table below presents the carrying value and related weighted average interest rates for Cadence’s interest bearing instruments. All highly liquid investments with an original maturity of three months or less at the date of purchase are considered to be cash equivalents; investments with original maturities between three and 12 months are considered to be short-term investments. Investments with original maturities greater than

12 months are considered long-term investments. As of September 29, 2001, all of Cadence’s investments have maturities of less than 12 months. The carrying value approximated fair value at September 29, 2001.


			Carrying		Average
			Value		Interest Rate

			(In millions)




Interest Bearing Instruments:




	Cash – variable rate		$	57.1		3.51%




	Cash equivalents – variable rate			29.8		3.30%




	Short-term investments – fixed rate			20.0		1.04%




	Cash – fixed rate			12.2		1.67%

		Total interest bearing instruments	$	119.1		2.85%

Interest Rate Swap Risk

In October 1998, Cadence entered into a 4.8% fixed interest rate-swap in connection with its accounts receivable financing program to modify the interest rate characteristics of the receivables sold to a financing institution on a non-recourse basis. As of September 29, 2001, the notional amount payable was $2.2 million that will be amortized through October 2001. The estimated fair value at September 29, 2001 was negligible.

Foreign Currency Risk

Cadence’s operations include transactions in foreign currencies and, as such, Cadence benefits from a weaker dollar and is adversely affected by a stronger dollar relative to major currencies worldwide. Accordingly, the primary effect of foreign currency transactions on Cadence’s results of operations is a reduction in revenue from a strengthening U.S. dollar, offset by a smaller reduction in expenses.

Cadence enters into foreign currency forward exchange contracts and purchases foreign currency put options with financial institutions primarily to protect against currency exchange risks associated with existing assets and liabilities and probable but not firmly committed transactions, respectively. Forward contracts are not accounted for as hedges and, therefore, the unrealized gains and losses are recognized in other income, net in advance of the actual foreign currency cash flows with the fair value of these forward contracts being recorded as accrued liabilities.

Cadence purchases put options to hedge the currency exchange risks associated with probable but not firmly committed transactions. Probable but not firmly committed transactions consist of revenue from Cadence’s products and maintenance contracts in a currency other than the functional currency. These transactions are made through Cadence’s subsidiaries in Ireland and Japan. The premium costs of the put options are recorded in other current assets while the gains and losses are deferred and recognized in income in the same period as the hedged transaction. Gains and losses on accounting hedges realized before the settlement date of the related hedged transaction are also generally deferred and recognized in income in the same period as the hedged transaction. Cadence does not use forward contracts and put options for trading purposes. Cadence’s ultimate realized gain or loss with respect to currency fluctuations will depend on the currency exchange rates and other factors in effect as the forward contracts and put options mature.

The table below provides information as of September 29, 2001 about Cadence’s forward contracts. As of September 29, 2001, there were no put options outstanding. The information is provided in U.S. dollar equivalent amounts. The table presents the notional amounts, at contract exchange rates, and the weighted

average contractual foreign currency exchange rates. These forward contracts mature prior to December 13, 2001.


		Notional		Weighted Average
		Amount		Contract Rate

		(In millions)




Forward Contracts:




	Japanese yen	$	41.4		120.9




	Euro		38.8		0.89




	British pound sterling		20.8		1.44




	Swedish krona		8.6		10.43




	Canadian dollars		3.9		1.56




	Hong Kong dollars		1.7		7.80




	Singapore dollars		1.1		1.74

		$	116.3

	Estimated fair value	$	0.03

While Cadence actively manages its foreign currency risks on an ongoing basis, there can be no assurance that Cadence’s foreign currency hedging activities will substantially offset the impact of fluctuations in currency exchange rates on its results of operations, cash flows, and financial position. On a net basis, foreign currency fluctuations did not have a material impact on Cadence’s consolidated results of operations and financial position during the quarter ended September 29, 2001. The realized gain (loss) on the forward contracts as they matured was not material to the consolidated operations of Cadence.

Equity Price Risk

Cadence repurchases shares of its common stock under its stock repurchase program. Repurchased shares will be used for general corporate purposes including the share issuance requirements of Cadence’s employee stock option and purchase plans and acquisitions. As part of these repurchase programs, Cadence has purchased and will purchase call options or has sold and will sell put warrants. The put warrants, if exercised and settled by physical delivery of shares, would entitle the holder to sell shares of Cadence common stock to Cadence at a specified price. Similarly, the call options entitle Cadence to buy shares of Cadence common stock at a specified price. Cadence has the option to elect “net share settlement”, rather than physical settlement, of put warrants that are exercised; that is, Cadence has the right to settle the exercised put warrants with shares of Cadence common stock valued at the difference between the exercise price and the fair value of the stock at the date of exercise. These transactions may result in sales of a large number of shares and consequent decline in the market price of Cadence common stock. Cadence’s stock repurchase program includes the following characteristics:

• Call options allow Cadence to buy shares of its common stock on a specified day at a specified price. If the market price of the stock is greater than the exercise price of a call option, Cadence will typically exercise the option and receive shares of its stock. If the market price of the common stock is less than the exercise price of a call option, Cadence typically will not exercise the option.

• Call option issuers may accumulate a substantial number of shares of Cadence common stock in anticipation of Cadence’s exercising its call option and may dispose of these shares if and when Cadence fails to exercise its call option. This could cause the market price of Cadence common stock to fall.

• Depending on the exercise price of the put warrants and the market price of Cadence common stock at the time of exercise, “net share settlement” of the put warrants with Cadence common stock could cause Cadence to issue a substantial number of shares to the holder of the put warrant. The holder may sell these shares in the open market, which could cause the price of Cadence common stock to fall.

• Put warrant holders may accumulate a substantial number of shares of Cadence common stock in anticipation of exercising their put warrants and may dispose of these shares if and when they exercise their put warrants and Cadence issues shares in settlement of their put warrants. This could also cause the market price of Cadence common stock to fall.

The table below provides information as of September 29, 2001 about Cadence’s outstanding put warrants and call options. The table presents the contract amounts and the weighted average strike prices. The put warrants and call options expire on various dates through May 2002, and Cadence has the contractual ability to settle the options prior to their maturity.


		2001		2002		Estimated
		Maturity		Maturity		Fair Value


(Shares and contract amounts in millions)




Put Warrants:




	Shares		1.7		2.9




	Weighted average strike price	$	26.20	$	21.11




	Contract amount	$	44.5	$	61.2	$	33.5




Call Options:




	Shares		1.3		2.2




	Weighted average strike price	$	26.45	$	21.10




	Contract amount	$	33.1	$	47.5	$	4.3

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time Cadence is involved in various disputes and litigation matters that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, mergers and acquisitions, licensing, contract law, distribution arrangements, and employee relations matters.

Cadence filed a complaint in the U.S. District Court for the Northern District of California on December 6, 1995 against Avant! Corporation and certain of its employees for misappropriation of trade secrets, copyright infringement, conspiracy, and other illegal acts.

On January 16, 1996, Avant! filed various counterclaims against Cadence and Joseph B. Costello, Cadence’s former President and Chief Executive Officer, and with leave of the court, on January 29, 1998, filed a second amended counterclaim. The second amended counterclaim alleges, inter alia, that Cadence and Mr. Costello had cooperated with the Santa Clara County, California, District Attorney and initiated and pursued its complaint against Avant! for anti-competitive reasons, engaged in wrongful activity in an attempt to manipulate Avant!’s stock price, and utilized certain pricing policies and other acts to unfairly compete against Avant! in the marketplace. The second amended counterclaim also alleges that certain Cadence insiders engaged in illegal insider trading with respect to Avant!’s stock. Cadence and Mr. Costello believe that they have meritorious defenses to Avant!’s claims, and each intends to defend such action vigorously. By an order dated July 13, 1996, the court bifurcated Avant!’s counterclaim from Cadence’s complaint and stayed the counterclaim pending resolution of Cadence’s complaint. The counterclaim remains stayed.

In an order issued on December 19, 1997, as modified on January 26, 1998, the District Court entered a preliminary injunction barring Avant! from any further infringement of Cadence’s copyrights in DESIGN FRAMEWORK II® software, or selling, licensing or copying such product derived from DESIGN FRAMEWORK II, including, but not limited to, Avant!’s ArcCell products. On December 7, 1998, the District Court issued a further preliminary injunction, which enjoined Avant! from selling its Aquarius product line. Cadence posted a $10 million bond in connection with the issuance of the preliminary injunction. On July 30, 1999, the U.S. Court of Appeals for the Ninth Circuit affirmed the preliminary injunction.

By an order dated July 22, 1997, the District Court stayed most activity in the case pending in that court and ordered Avant! to post a $5 million bond in light of related criminal proceedings pending against Avant! and several of its executives.

On September 7, 1999, the District Court ruled on the parties’ Motions for Summary Adjudication, and granted in part, and denied in part, each party’s motion regarding the scope of a June 6, 1994 Release Agreement between the parties. The court held that Cadence’s copyright infringement claim against Avant! is not barred by the release and that Cadence may proceed on that claim. The court also held that Cadence’s trade secret claim based on Avant!’s use of Cadence’s DESIGN FRAMEWORK II source code is barred by the release. On May 15, 2001, the Ninth Circuit heard oral arguments by both parties on their appeals from the District Court’s order. On June 11, 2001, the Ninth Circuit certified a question of California law to the California Supreme Court. The trial date was vacated pending a decision on the appeal. On October 31, 2001, the California Supreme Court agreed to accept such certification.

In February 1998, Aptix Corporation and Meta Systems, Inc. filed a lawsuit against Quickturn Design Systems, Inc. in the U.S. District Court for the Northern District of California. In this lawsuit, entitled Aptix Corporation and Meta Systems, Inc. v. Quickturn Design Systems, Civil Action No. C 98-00762, Aptix and Meta Systems alleged that Quickturn infringed a U.S. patent owned by Aptix and licensed to Meta. Quickturn filed a counterclaim requesting the District Court to declare the Aptix patent invalid in view of the prior art and unenforceable based on inequitable conduct during the prosecution of the patent. In June 2000, the District Court entered judgment in favor of Quickturn, dismissing the complaint and declaring the patent unenforceable. The Court also granted summary judgment to Aptix denying Quickturn’s abuse of process counterclaim, and Quickturn filed an appeal brief on June 30, 2000. On September 8, 2000 the Court ordered Aptix to pay $4.2 million to Quickturn as reimbursement to Quickturn of the attorneys’ fees and costs it incurred in the litigation. Aptix has appealed the District’s Court’s judgment and, in the meantime, has agreed

to post a $2 million bond to secure the judgment. On June 8, 2001, the U.S. Court of Appeals for the Federal Circuit affirmed the District Court’s dismissal of Quickturn’s abuse of process counterclaim. On November 5, 2001, the Federal Circuit affirmed the District Court’s dismissal of Aptix’s and Meta’s complaint and the award of attorneys fees and costs, but vacated the District Court’s judgment of unenforceability.

On January 7, 1999, in a suit captioned Mentor Graphics Corporation, et. al. v. Lobo, et. al., Delaware Chancery Court, New Castle County, Civ. Action No. 16843-NC (“Mentor II”), Mentor filed and served an amended complaint asserting claims against Cadence, Quickturn Design Systems, Inc. and the Quickturn Board of Directors for declaratory and injunctive relief for various alleged breaches of fiduciary duty purportedly owned by Quickturn and its Board of Directors to Quickturn’s shareholders in connection with the merger between Quickturn and Cadence. Mentor further alleged that Cadence aided and abetted Quickturn and its Board of Directors in those purported breaches. Mentor has not prosecuted the matter since January 1999. In May 2000, Mentor advised the Delaware Chancery Court of its objection to the settlement of a companion shareholder action brought on behalf of certain Quickturn shareholders, and sought an award of attorneys’ fees related to its prosecution of Mentor II as well as the prior related action, to which Cadence was not a party. In an order dated August 17, 2001, the Chancery Court denied Mentor’s fee application.

On April 30, 1999, Cadence and several of its officers and directors were named as defendants in a lawsuit filed in the U.S. District Court for the Northern District of California, entitled Spett v. Cadence Design Systems, et al., civil action no. C 99-2082. The action was brought on behalf of a class of stockholders who purchased Cadence common stock between November 4, 1998 and April 20, 1999, and alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The lawsuit arises out of Cadence’s announcement of its first quarter 1999 financial results. On September 18, 2000 the District Court granted Cadence’s Motion to Dismiss Plaintiffs’ Claims with leave to amend. To date, no amended complaint has been filed.

In early 1999, Cadence entered into negotiations with Intelect Communications, Inc., and Intelect’s wholly-owned subsidiary, DNA Enterprises, Inc., with respect to a potential purchase of substantially all the assets of DNA. The transaction was not consummated and, in July 1999, Intelect and DNA filed suit against Cadence in a Texas state court alleging breach of contract, fraud, negligent misrepresentation and breach of fiduciary duty, seeking unspecified compensatory and punitive damages. Cadence has answered, denying liability, and discovery has concluded. In February 2001, Cadence filed a motion for partial summary judgment. The Court has taken the motion under submission but has not yet issued a ruling. A trial date has been scheduled for April 2002. Cadence believes that it has defenses to, and it disputes, the allegations made by Intelect and DNA, including the allegation that a purchase contract was entered into, and intends to defend the action vigorously.

On July 21, 1999, Mentor filed suit against Quickturn, which action is pending in the U.S. District Court for the Northern District of California, Civil Action No. C 99-5464. Mentor has alleged that Quickturn’s MERCURY™ and MERCURYPLUS™ hardware emulation systems infringe U.S. Patent Nos. 5,777,489 and 5,790,832, allegedly assigned to Mentor. At Quickturn’s request, Cadence was added as a party defendant. Cadence has filed a counterclaim for declaratory judgment of invalidity of these patents.

On March 24, 2000, Mentor and Meta and several founders of Meta filed suit against Quickturn and Cadence and a former Quickturn employee in the U.S. District Court for the Northern District of California, Civil Action No. C 00-01030. The suit alleges patent infringement of a U.S. Patent allegedly assigned to Mentor, misappropriation of trade secrets and breach of confidence, and seeks unspecified damages, injunctive relief and the assignment to Mentor of a patent previously issued to Quickturn. Cadence intends to vigorously defend itself against these claims, and has filed a counterclaim for declaratory judgment of invalidity of not only U.S. Patent No. 5,754,827 but also of U.S. Patent Nos. 5,999,725 and 6,057,706, allegedly assigned to Mentor. Following a motion by Cadence, the former Quickturn employee was dismissed as a party to the action.

On September 11, 2000, Mentor filed a complaint against Quickturn and Cadence in the U.S. District Court for the Northern District of California, Civil Action No. C-00-03291, accusing Quickturn and Cadence of infringing U.S. Patent No. 5,574,388, purportedly owned by Mentor and seeking unspecified damages and

injunctive relief. Quickturn and Cadence believe the complaint filed by Mentor is without substance. Cadence and Quickturn are vigorously defending the claim, and have filed counterclaims for declaratory judgment of invalidity and non-infringement of these patents. On November 3, 2000, Mentor filed a motion for preliminary injunction, asking the Court to prohibit the sale of Quickturn’s MERCURYPLUS emulation systems prior to trial of this action. The Court denied the motion for preliminary injunction on August 30, 2001. The parties have agreed to consolidate this action with Civil Action Nos. C99-5464 and C 00-01030, described above, for purposes of discovery and pre-trial motions. A trial date has been set for October 7, 2002.

On November 2, 2000, Mentor and Meta filed a complaint for declaratory judgment against Quickturn and Cadence in the U.S. District Court for the District of Oregon (Case No. C-00-1489) seeking a ruling that Mentor’s proposed design verification approach (in which chip designers would use U.S.-based computer terminals to operate SimExpress emulation systems located overseas) will not infringe Quickturn’s patents and will not violate the permanent injunction entered by the Oregon District Court on July 7, 1999 in Civil Action No. C-96-00342. In January 2001, Quickturn and Cadence filed a Motion to Dismiss the action, based on lack of subject matter jurisdiction. On May 1, 2001, the Court provisionally granted Quickturn’s motion to dismiss.

On February 25, 2000, Cadence and several of its officers were named as defendants in a lawsuit filed in the U.S. District Court for the Northern District of California, entitled Maxick v. Cadence Design Systems, Inc., File No. C 00 0658PJH. The action was brought on behalf of a class of shareholders of OrCAD, Inc., and alleges violations of Section 14(d)(7) of the Securities Exchange Act of 1934, as amended, and Rule 14d-10 thereunder. The lawsuit arises out of Cadence’s acquisition of OrCAD, which was completed in August 1999. Cadence’s Motion to Dismiss plaintiffs’ claims was denied. Discovery is continuing and trial is set for April 29, 2002. The defendants believe the complaint is without merit and intend to continue their vigorous defense of the allegations.

On November 22, 2000, a former design services customer, Uniden Corporation, filed an action for fraud, negligent misrepresentation and breach of contract in the State Court of Texas against Cadence and other corporate defendants. Uniden seeks compensatory and punitive damages in an unspecified amount. The suit was filed after Cadence demanded payment of approximately $1 million for design services rendered to Uniden. Cadence since has filed a counterclaim to recover the approximate $1 million owed for services rendered. The parties agreed to dismiss voluntarily the actions pending in the State Court of Texas and to re-file in the State Court of California, County of Orange. Uniden refiled its Complaint on July 2, 2001 in Orange County, California. Cadence filed its answer and counterclaim on September 12, 2001.

On December 28, 2000, a former design services customer, Scanz Communications, filed an action for various causes of action in the Los Angeles Superior Court of California against Cadence and Tality, seeking compensatory and punitive damages in an unspecified amount. The suit was filed after Cadence demanded payment of $4,657,556.17 for design services rendered to Scanz. Following demurrers by Cadence that were sustained in part, Scanz’s remaining causes of action are for fraud, breach of contract, intentional interference with contract, negligent misrepresentation, and unfair business practices. Defendants timely filed their answer to Scanz’s Second Amended Complaint on October 10, 2001.

On June 7, 2001 Cadence filed a cross-complaint against Scanz alleging breach of contract and unjust enrichment, and seeking declaratory relief. On July 12, 2001, Scanz filed an answer to Cadence’s cross-complaint denying all allegations. Cadence intends to vigorously defend the claims alleged by Scanz.

Management believes that the ultimate resolution of the disputes and litigation matters discussed above will not have a material adverse effect on Cadence’s business, operating results or financial condition. However, were an unfavorable ruling to occur in any specific period, there exists the possibility of a material adverse impact on the results of operations for such period.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a) The following exhibits are filed herewith:


Exhibit
Number		Exhibit Title

10.59		Executive Separation, Release and Consulting Agreement, dated as of August 31, 2001 between Cadence Design Systems, Inc., Tality Corporation and Robert P. Wiederhold.
10.60		First Amendment to Credit Agreement, dated September 28, 2001, among Cadence Design Systems, Inc., Bank One, N.A., Key Bank National Association, UBS AG and ABN AMRO Bank N.V.
10.61		Amended and Restated Credit Agreement, dated September 28, 2001, among Cadence Design Systems, Inc., Bank One, N.A., Key Bank National Association, UBS AG and ABN AMRO Bank N.V.

(b) Reports on Form 8-K:

None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CADENCE DESIGN SYSTEMS, INC.

(Registrant)


DATE: November 12, 2001		By: /s/ H. RAYMOND BINGHAM H. Raymond Bingham President, Chief Executive Officer, and Director

DATE: November 12, 2001		By: /s/ WILLIAM PORTER William Porter Senior Vice President and Chief Financial Officer

Index to Exhibits


Exhibit
Number		Exhibit Title

10.59		Executive Separation, Release and Consulting Agreement, dated as of August 31, 2001 between Cadence Design Systems, Inc., Tality Corporation and Robert P. Wiederhold.
10.60		First Amendment to Credit Agreement, dated September 28, 2001, among Cadence Design Systems, Inc., Bank One, N.A., Key Bank National Association, UBS AG and ABN AMRO Bank N.V.
10.61		Amended and Restated Credit Agreement, dated September 28, 2001, among Cadence Design Systems, Inc., Bank One, N.A., Key Bank National Association, UBS AG and ABN AMRO Bank N.V.

EX-10.59 3 f76986ex10-59.txt EXHIBIT 10.59 EXHIBIT 10.59 This offer given to Executive on August 29, 2001 This offer is valid until September 19, 2001 EXECUTIVE SEPARATION, RELEASE AND CONSULTING AGREEMENT This Executive Separation, Release and Consulting Agreement (the "Agreement") is entered into between Robert P. Wiederhold (the "Executive"), on the one hand, and Cadence Design Systems, Inc., a Delaware corporation ("Cadence") and Tality Corporation, a Delaware corporation ("Tality"), on the other hand, (collectively, the "Company"), as of this ___ day of _________, 2001. WHEREAS, the Executive desires to resign his employment as President and Chief Executive Officer of Tality; and WHEREAS, Cadence and Executive entered into that certain Tality Corporation 2000 Equity Incentive Plan Stock Option Agreement with Consent dated as of July 13, 2000 (the "Tality Option Agreement"); and WHEREAS, Cadence and Executive desire to amend the Tality Option Agreement as more particularly set forth herein; and WHEREAS, the Executive and the Company desire to reach an agreement concerning the circumstances under which the Executive's full-time employment relationship with the Company will terminate; and WHEREAS, the Company desires to be relieved of any and all duties, obligations, and/or liabilities, if any exist, with respect to Executive, other than those obligations and duties which are expressly stated in herein; NOW THEREFORE, in consideration of the foregoing recitals, the mutual promises contained herein, and for other good and valuable consideration, the 1 receipt and adequacy of which are hereby acknowledged, the Executive and the Company agree as follows: 1. Full-Time Employment. Executive will cease his full-time employment as President and Chief Executive Officer of Tality on August 31, 2001, at the close of business. 2. Part-Time Employment Period. a. From September 1, 2001 through September 1, 2002, Executive shall continue as a part-time employee of the Company for a one-year term (the "Part-Time Employment Period"). Employee's employment with the Company shall terminate at the end of the Part-Time Employment Period. Executive recognizes that he is committing to remain as a part-time employee with the Company through the end of the Part-Time Employment Period and he agrees not to voluntarily terminate his employment with the Company during the Part-Time Employment Period. Likewise, the Company may not terminate Executive's employment during such period except for cause. Cause shall exist if the Executive: (1) materially breaches this Agreement or the Employee Proprietary Information and Inventions Agreement, which is referenced in Section 11 hereof; (2) fails to perform his duties after receipt of written notice of such failure and a reasonable opportunity to cure; (3) commits any breach of fiduciary duty or act of theft, misappropriation, embezzlement, intentional fraud or other violation of the law or similar conduct involving the Company or any affiliate; (4) receives a conviction or enters a plea of Nolo Contendere or the equivalent in respect of a 2 felony involving an act of dishonesty, moral turpitude, deceit or fraud; or (5) willfully or negligently causes any damage of a material nature to the business or property of the Company or any affiliate. If the Company terminates Executive without cause during the Part-Time Employment Period, or his employment terminates as a result of Executive's death or permanent disability, he (or his estate) shall continue to receive the same pay and benefits as if though his employment had continued through the end of the Part-Time Employment Period. b. During the Part-Time Employment Period, Executive shall be available to consult to the Company, and/or the Board of Directors of Tality or Cadence as necessary. During the Part-Time Employment Period, Executive shall report to Ray Bingham (or his successor(s)) and shall, in addition to providing general advice and consultation to the Company and its Board(s), perform other duties, including but not limited to, facilitating the transfer of customer relationships to members of the management team, participating in creating strategic direction for Tality, assist with litigation, claims, customer and/or supplier issues when requested by the Board or management of the Company to do so, and participate as a member of the Tality Board. Executive's performance of his duties during this period shall not require him to work more than a maximum of twenty (20) hours per week. c. In consideration for such employment, Executive shall be paid a monthly salary of $29,166.66, less taxes and standard withholdings required by law to be withheld, and deductions requested by Executive. 3 Such compensation will be paid in accordance with the Company's normal payroll schedule. d. So long as Executive remains a part-time employee of the Company through September 1, 2002 and does not in any way breach this Agreement, Executive shall receive a bonus in the amount of $167,000, less taxes and withholdings required by law to be withheld, and deductions requested by Executive, on or about September 1, 2002. e. Executive shall continue to receive medical, dental and/or vision insurance coverage which the Executive elected and which the Executive continues to pay for under the Cadence Composition plan through the end of the Part-Time Employment Period, or until he secures such benefits through other means, after which time the Executive will become eligible to continue such coverage pursuant to the terms of COBRA at prevailing rates. All other employee benefits, including but not limited to the Employee Stock Purchase Plan, 401(k) contribution, life, dependent life and disability insurance and Midwest Legal Services likewise will terminate at the end of the Part-Time Employment Period. Executive's funds invested in the Company's Non Qualified Deferred Compensation Plan (the "Plan"), if any shall be treated in accordance with the terms of the Plan. f. Executive's Company stock options that were previously granted to Executive shall continue to vest during the Part-Time Employment Period in accordance with the Stock Option Plan(s) and Stock Option Agreement(s) under which the options were granted, so long as Executive 4 has executed all necessary stock option agreements on or before August 31, 2001. Those options will cease vesting at the end of the Part-Time Employment Period, and Executive will have the period of time following his Termination Date that is provided in the applicable stock option agreement(s) to exercise the vested portions, if any. g. No Acceleration of Tality Options on Change in Control. Executive hereby acknowledges and agrees that Section 11 (b) of the "Plan" (as that term is defined in the Tality Option Agreement) shall not apply to the options granted to Executive under the Tality Option Agreement (the "Tality Options"). For the avoidance of doubt, but without limiting the generality of the foregoing, Executive hereby acknowledges and agrees that the Tality Options shall not vest or accelerate upon a "Change in Control" (as that term is defined in the Plan). h. Executive will be free to accept other employment or consulting engagements during the Part-Time Employment Period, so long as such other employment or consulting engagement does not violate paragraph 12 herein. 3. 2001 Bonus Executive shall receive a bonus in the amount of $250,000, less taxes and withholdings required by law to be withheld, and amounts requested by him to be deducted, on or about February 15, 2002, so long as Executive continues in his part-time employment capacity with the Company through that date and has not in any way breached this Agreement. 4. Computer 5 Executive shall be given all right, title and interest in the IBM Thinkpad, monitor, docking station, keyboard and mouse which was provided to him for business use by the Company during the year 2000.Executive agrees, however, to delete all proprietary and confidential information belonging to the Company from the computer when requested to do so, and agrees to allow a representative of the Company to review the files on the computer upon request to ensure that all such information has been deleted. 5. Business Expense Executive shall be reimbursed for all reasonable and necessary business expenses incurred during his full and part-time employment with the Company. Such expenses must be approved by Ray Bingham, or an individual designated by Mr. Bingham to approve such expenses, and must be submitted for reimbursement with appropriate documentation not more than ninety (90) days following the date on which the expense was incurred, and prior to the termination of his employment with the Company. 6. DSL The Company will continue to pay for the Executive's DSL line at his residence through the end of the Part-Time Employment Period, at which time such payments on behalf of Executive shall cease. 7. Executive acknowledges and agrees that he is not entitled to any of the benefits provided in that Tality Corporation Employment Agreement between he and Tality that was entered into on July 14, 2000, and that this Agreement supercedes the Tality Corporation Employment Agreement. 6 8. During the Part-Time Employment Period, and following his termination of employment, Executive shall fully cooperate with the Company in all matters relating to his employment, the winding up of his pending work on behalf of the Company and the orderly transfer of any such pending work to other employees of the Company as may be designated by the Company. 9. The Executive agrees not to make any statement, written or oral, or otherwise engage in any communication which disparages the Company or any of the Company's employees, directors, or representatives, products, or business practices. 10. General Release by Executive (a) The Executive agrees that the payments and benefits provided herein are in full satisfaction of all obligations of the Company to the Executive arising out of or in connection with the Executive's employment including, without limitation, all salary, bonuses, accrued vacation, sick pay, and two weeks salary as standard termination notice period, and that the benefit of continued stock vesting constitutes consideration for the covenants and releases of the Executive as set forth herein. The Executive acknowledges that the Executive has no claims against the Company based on the Executive's employment by the Company or the Executive's separation therefrom and irrevocably, fully and finally releases the Company, its parent, subsidiaries and affiliates, and its current and former directors, officers, agents, attorneys, and employees ("Releasees") from all causes of action, claims, suits, demands or other obligations or liabilities, whether known or unknown, that Executive ever 7 had, or now has, including but not limited to, any claims that may be alleged to arise out of or in connection with the Executive's employment with the Company, or separation therefrom, including, not by way of limitation, any claims for wages, bonuses, and any claims that any terms of the Executive's employment with the Company or any circumstances of the Executive's separation were wrongful, in breach of any obligation of the Company or in violation of any rights, contractual, statutory or otherwise, of the Executive, including but not limited to rights arising under Title VII of the Civil Rights Act of 1964, as amended, the California Fair Employment and Housing Act, as amended, the California Labor Code, the Age Discrimination in Employment Act of 1967, as amended, the Americans with Disabilities Act, the Equal Pay Act, the Fair Labor Standards Act, as amended, the Executive Retirement Income and Security Act of 1974, as amended, (except for Executive's rights under COBRA and Executive's rights to the money in Executive's 401(k) plan account and deferred compensation plan account(s)), and any other local, state, or federal law, or law of any country, governing discrimination in employment, the payment of wages or benefits, or any other aspect of employment (collectively, "Claims"). IN THIS REGARD THE EXECUTIVE WAIVES ANY RIGHTS CONFERRED BY CALIFORNIA CIVIL CODE SECTION 1542 WHICH PROVIDES AS FOLLOWS: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." 8 (b) The release set forth in section (a) above does not and shall not extend to any obligations of the Company incurred under this Agreement or under the Indemnification Agreement which was signed by Executive on or about July 14, 2001 and is attached hereto as Exhibit A. (c) The Executive acknowledges that he understands that he may take twenty-one (21) days to consider this Agreement and that he has been advised that he should consult with an attorney, if he desires to do so, prior to executing this Agreement. The Executive further acknowledges that he understands that he may revoke this Agreement within seven (7) days of his execution of this document and that the consideration to be paid to the Executive pursuant to this Agreement will be paid only after that seven (7) day revocation period. 11. Executive acknowledges and incorporates herein by reference his continuing obligations under the Employee Proprietary Information and Inventions Agreement executed by Executive on July 14, 2000, a copy of which is attached hereto as Exhibit B. 12. As President and CEO of Tality and as a Senior Executive and Officer of Cadence, Executive has obtained extensive and valuable knowledge and information concerning the business of the Company (including confidential information relating to the Company and its operations, assets, contracts, customers, personnel, plans, marketing plans, research and development plans and prospects). The Executive and the Company agree that it would be virtually impossible for Executive to work as an employee, consultant or advisor to a company in the electronic design automation 9 industry without inevitably disclosing confidential and proprietary information belonging to the Company. Accordingly, the Executive agrees that, during the Part-Time Employment Period he will not, directly or indirectly, provide services on behalf of any competing corporation, limited liability company, partnership, or other competing entity or person, specifically including but not limited to Avant! Corporation, Synopsys Inc., Mentor Graphics Corporation, Simplex Solutions, Inc., Magma Design Automation, Inc., or any subsidiary, affiliate, division, distributor or partial or complete successor thereof, whether as an employee, consultant, independent contractor, agent, sole proprietor, partner, joint venture, corporate officer or director; nor shall Executive acquire by reason of purchase during the term of his employment with the Company the ownership of more than one percent (1%) of the outstanding equity interest in any such competing entity. For purposes of this Section 12, a "competing" entity is one that is engaged in the research, design, development, marketing and/or sale of electronic design automation software and related products, including products containing hardware, software and both hardware and/or software. For purposes of this Section 12 a "competing" entity is also one that derives a substantial portion of its business from design services and/or intellectual property sales and/or licensing relating to semiconductors, systems and/or design methodologies. 13. During the Term of Executive's employment with the Company, Executive agrees that he will not, except with the written advance approval of Ray Bingham (or his successor(s)), voluntarily or 10 involuntarily, for any reason whatsoever, directly or indirectly, individually or on behalf of persons not now parties to this Agreement, or as a partner, stockholder, director, officer, principal, agent, employee or in any other capacity or relationship, for his own account or for the benefit of any other person or entity: (a) encourage, induce, attempt to induce, solicit or attempt to solicit anyone who is employed at that time, or was employed during the previous one (1) year, by the Company or any affiliate to leave his or her employment with the Company or any affiliate; or (b) interfere or attempt to interfere with the relationship or prospective relationship of the Company or any affiliate with any former, present or future client, customer, joint venture partner, or financial backer of the Company or any affiliate; or (c) solicit, divert or accept business, in any line or area of business engaged in by the Company or any affiliate, from any former, present or future client, customer or joint venture partner of the Company or any affiliate (other than on behalf of the Company). This paragraph shall supercede paragraph five (5) of the Employee Proprietary Information and Inventions Agreement executed by Executive on July 14, 2000, a copy of which is attached hereto as Exhibit B. 14. During the six (6) months following Executive's employment with the Company, Executive agrees that he will not, except with the advance written approval of the the Chairman of the Board of Tality, voluntarily or involuntarily, for any reason whatsoever, 11 directly or indirectly, individually or on behalf of persons not now parties to this Agreement, or as a partner, stockholder, director, officer, principal, agent, employee or in any other capacity or relationship, for his own account or for the benefit of any other person or entity: (a) encourage, induce, attempt to induce, solicit or attempt to solicit anyone who is employed at that time, or was employed during the previous one (1) year, by Tality or any affiliate to leave his or her employment with Tality or any affiliate; or (b) interfere or attempt to interfere with the relationship or prospective relationship of Tality or any affiliate with any former, present or future client, customer, joint venture partner, or financial backer of Tality or any affiliate; or (c) solicit, divert or accept business, in any line or area of business engaged in by Tality or any affiliate, from any former, present or future client, customer or joint venture partner of Tality or any affiliate. This paragraph shall supercede paragraph five (5) of the Employee Proprietary Information and Inventions Agreement executed by Executive on July 14, 2000, a copy of which is attached hereto as Exhibit B. 15. Notwithstanding the language in paragraph 24 herein, the parties hereto agree that damages would be an inadequate remedy for the Company in the event of a breach or threatened breach of Section 8, 11, 12, 13, 14 or 19 of this Agreement by Executive, and in the event of any such breach or threatened breach, the Company may, either with or without pursuing any potential damage remedies, obtain and enforce an injunction prohibiting Executive from violating this 12 Agreement and requiring Executive to comply with the terms of this Agreement.16.Executive represents and acknowledges that the Executive's decision to enter into this Agreement has been made voluntarily, knowingly, and without coercion of any kind. 17. Executive represents and warrants that there has been no assignment or other transfer of any interest in any Claim, which Executive may have against the Releasees. 18. Executive agrees that if the Executive hereafter commences, joins in, or in any manner seeks relief through any suit, claim, demand, charge, complaint or otherwise, arising out of, based upon, or relating to any of the Claims released hereunder or in any manner asserts against the Releasees any of the Claims released hereunder, then the Executive will pay to the Releasees, in addition to any other damages caused thereby, all reasonable attorneys' fees incurred by the Releasees in defending or otherwise responding to said suit or Claim. 19. Executive acknowledges that during his employment he has had access to confidential and/or proprietary information of the Company and of third parties and acknowledges the Executive's obligation by agreement and/or at common law to continue to hold such information in confidence and neither disclose and/or use such information, notwithstanding the termination of his employment, and that he has returned to the Company all copies and records in any form of such information to Ron Kirchenbauer, or will do so prior to his termination date. Executive further agrees to return all other property (including but not limited to computers, phones, 13 fax machines, and printers) to Ron Kirchenbauer by September 1, 2001, except for as provided for in paragraph 4. 20. This Agreement shall be governed and enforced in accordance with the laws of the State of California, excluding its conflict of laws rules. 21. In the event that any part of this Agreement is found to be void or unenforceable then (a) such provision or part thereof shall, with respect to such circumstances and in such jurisdiction, be deemed amended to conform to applicable laws so as to be valid and enforceable to the fullest possible extent, (b) the invalidity or unenforceability of such provision or part thereof under such circumstances and in such jurisdiction shall not affect the validity or enforceability of such provision or part thereof under any other circumstances or in any other jurisdiction, and (c) such invalidity or enforceability of such provision or part thereof shall not affect the validity or enforceability of the remainder of such provision or the validity or enforceability of any other provision of this Agreement as each provision is separable from every other provision. If for any reason a court of competent jurisdiction or arbitrator finds any provision of this Agreement to be unenforceable, the provision shall be deemed amended as necessary to conform to applicable laws or regulations, or if it cannot be so amended without materially altering the intention of the parties, the remainder of the Agreement shall continue in full force and effect as if the offending provision were not contained herein. 22. Neither party shall, by mere lapse of time, without giving notice or taking other action hereunder be deemed to have waived any breach by the other 14 party of any of the provisions of this Agreement. Further, the waiver by either party of a particular breach of this Agreement by the other shall neither be construed as, nor constitute, a continuing waiver of such breach or of other breaches by the same or any other provision of this Agreement. 23. The Company shall have the right to assign its rights and obligations under this Agreement to an entity that acquires substantially all of the assets of the Company. The rights and obligations of the Company under this Agreement shall inure to the benefit and shall be binding upon the successors and assigns of the Company. Executive shall not have any right to assign his obligations under this Agreement and shall only be entitled to assign his rights under this Agreement by will or the laws of descent and distribution. 24. The Company and Executive agree that any dispute regarding the interpretation or enforcement of this Agreement or any dispute arising out of Executive's employment or the termination of that employment with the Company, except for disputes regarding the interpretation of those sections referred to in Paragraph 14 and disputes involving the protection of the Company's intellectual property, shall be decided by confidential, final and binding arbitration conducted by Judicial Arbitration and Mediation Services ("JAMS") under the then-existing JAMS rules, rather than by litigation in court, trial by jury, administrative proceeding, or in any other forum. 25. The parties hereto acknowledge that each has read this Agreement, understands it, and agrees to be bound by its terms. The parties further agree that this Agreement, including the agreements referenced herein and attached as Exhibits hereto, constitute the complete and exclusive statement 15 of the agreement between the parties and supersede any and all prior or contemporaneous understandings, agreements, representations, conditions, covenants, proposals, and all other communications between the parties, whether written or oral, relating to the subject matter hereof. 26. This Agreement and the terms and conditions of the matters addressed in this Agreement may only be amended in writing executed both by the Executive and a duly authorized representative of the Company. In witness whereof, the parties hereto have executed this Executive Termination and Release Agreement, effective eight (8) days after the date it is signed by both parties below (the "Effective Date"). ROBERT P. WIEDERHOLD CADENCE DESIGN SYSTEMS, INC. By: By: --------------------------- ------------------------------------ H. Raymond Bingham Date: President & Chief Executive ------------------------- Officer Date: --------------------------------- TALITY CORPORATION Date: --------------------------------- H. Raymond Bingham Chairman of the Board Date: --------------------------------- 16 EX-10.60 4 f76986ex10-60.txt EXHIBIT 10.60 EXHIBIT 10.60 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of September 28, 2001, is made among Cadence Design Systems, Inc., a Delaware corporation (the "Borrower"), the financial institutions listed on the signature pages hereof under the heading "BANKS" (each a "Bank" and, collectively, the "Banks"), Bank One, N.A., KeyBank National Association and UBS AG, Stamford Branch, as co-agents, and ABN AMRO Bank N.V., as administrative agent for the Banks (in such capacity, the "Agent"). The Borrower, the Banks and the Agent are parties to that certain Credit Agreement, dated as of September 29, 2000, (as amended, restated, supplemented and otherwise modified from time to time, the "Credit Agreement"). The Borrower has requested that the Majority Banks agree to certain amendments to the Credit Agreement to permit certain investments in Telos Venture Partners II, L.P., in addition to the investments presently permitted in Telos Venture Partners, L.P. The Majority Banks have agreed to such request, subject to the terms and conditions hereof. Accordingly, the parties hereto agree as follows: SECTION 1 Definitions; Interpretation. (a) Terms Defined in Credit Agreement. All capitalized terms used in this Amendment (including in the Recitals hereof) and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement. (b) Interpretation. The rules of interpretation set forth in Section 1.03 of the Credit Agreement shall be applicable to this Amendment and are incorporated herein by this reference. SECTION 2 Amendments to the Credit Agreement. (a) Amendments. The Credit Agreement shall be amended as follows, effective as of the date of satisfaction of the conditions set forth in Section 3 (the "Effective Date"): (i) The defined term "Tality IPO" in Section 1.01 of the Credit Agreement shall be amended and restated in its entirety as follows: ""Tality IPO" means the initial public offering of the Borrower's design-services operation pursuant to terms and conditions substantially consistent with those disclosed in the Borrower's Form S-1 filed with the Securities Exchange Commission on July 17, 2000 (registration number 333-41552)." (ii) The defined term "Venture Fund" in Section 1.01 of the Credit Agreement shall be amended and restated in its entirety as follows: ""Venture Fund" means, collectively, Telos Venture Partners, L.P. and Telos Venture Partners II, L.P." (iii) Subsection 9.04(e)(vi) of Credit Agreement shall be amended and restated in its entirety as follows: "(vi) investments in the Venture Funds, so long as the aggregate unrecovered investment made therein (not counting recoveries fairly characterized as income) does not exceed $150,000,000." (b) References Within Credit Agreement. Each reference in the Credit Agreement to "this Agreement" and the words "hereof," "herein," "hereunder," or words of like import, shall mean and be a reference to the Credit Agreement as amended by this Amendment. SECTION 3 Conditions of Effectiveness. The effectiveness of this Amendment shall be subject to the satisfaction of each of the following conditions precedent: (a) Executed Amendment. The Agent shall have received an executed counterpart of this Amendment from the Borrower and the Majority Banks. (b) Representations and Warranties; No Default. On the Effective Date, after giving effect to the amendment of the Credit Agreement contemplated hereby: (i) the representations and warranties contained in Section 4 hereof shall be true and correct on and as of the Effective Date as though made on and as of such date; and (ii) no Default shall have occurred and be continuing. (c) Additional Documents. The Agent shall have received, in form and substance satisfactory to it, such additional approvals, opinions, documents and other information as the Agent or any Bank (through the Agent) may reasonably request. SECTION 4 Representations and Warranties of the Borrower. To induce the Majority Banks to enter into this Amendment, the Borrower hereby confirms and restates, as of the date hereof, the representations and warranties made by it in Section 8.01 of the Credit Agreement and in the other Loan Documents. For the purposes of this Section 4, (i) each reference in Section 8.01 of the Credit Agreement to "this Agreement," and the words "hereof," "herein," "hereunder," or words of like import in such Section, shall mean and be a reference to the Credit Agreement as amended by this Amendment, and each reference in such Section to "the Loan Documents" shall mean and be a reference to the Loan Documents as amended as contemplated hereby, (ii) the representation and warranty set forth in Section 8.01(p) of the Credit Agreement shall be deemed instead to refer to the last day of the most recent fiscal quarter and fiscal year for which financial statements have then been delivered, (iii) any representations and warranties which relate solely to an earlier date shall not be deemed confirmed and restated as of the date hereof (provided that such representations and warranties shall be true, correct and complete as of such earlier date), and (iv) the preceding clause (i) shall take into account any amendments to the Schedules and other disclosures made in writing by the Borrower to the Agent and the Banks after the Closing Date and approved by the Agent and the Majority Banks. 2. SECTION 5 Miscellaneous. (a) Notice. The Agent shall notify the Borrower and the Banks of the occurrence of the Effective Date. (b) Credit Agreement Otherwise Not Affected. Except as expressly amended pursuant hereto, the Credit Agreement shall remain unchanged and in full force and effect and is hereby ratified and confirmed in all respects. The Banks' and the Agent's execution and delivery of, or acceptance of, this Amendment and any other documents and instruments in connection herewith (collectively, the "Amendment Documents") shall not be deemed to create a course of dealing or otherwise create any express or implied duty by any of them to provide any other or further amendments, consents or waivers in the future. (c) No Reliance By Borrower. The Borrower hereby acknowledges and confirms to the Agent and the Banks that the Borrower is executing this Amendment and the other Amendment Documents on the basis of its own investigation and for its own reasons without reliance upon any agreement, representation, understanding or communication by or on behalf of any other Person. (d) Costs and Expenses. The Borrower agrees to pay to the Agent on demand the reasonable out-of-pocket costs and expenses of the Agent, and the reasonable fees and disbursements of counsel to the Agent, in connection with the negotiation, preparation, execution and delivery of this Amendment and any other documents to be delivered in connection herewith. (e) Binding Effect. This Amendment shall be binding upon, inure to the benefit of and be enforceable by the Borrower, the Agent and each Bank and their respective successors and assigns. (f) Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA. (g) Complete Agreement; Amendments. This Amendment, together with the other Amendment Documents and the other Loan Documents, contains the entire and exclusive agreement of the parties hereto and thereto with reference to the matters discussed herein and therein. This Amendment supersedes all prior commitments, drafts, communications, discussion and understandings, oral or written, with respect thereto. This Amendment may not be modified, amended or otherwise altered except in accordance with the terms of Section 12.01 of the Credit Agreement. (h) Severability. Whenever possible, each provision of this Amendment shall be interpreted in such manner as to be effective and valid under all applicable laws and regulations. If, however, any provision of this Amendment shall be prohibited by or invalid under any such law or regulation in any jurisdiction, it shall, as to such jurisdiction, be deemed modified to conform to the minimum requirements of such law or regulation, or, if for any reason it is not deemed so modified, it shall be ineffective and invalid only to the extent of such prohibition or 3. invalidity without affecting the remaining provisions of this Amendment, or the validity or effectiveness of such provision in any other jurisdiction. (i) Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. (j) Interpretation. This Amendment and the other Amendment Documents are the result of negotiations between and have been reviewed by counsel to the Agent, the Borrower and other parties, and are the product of all parties hereto. Accordingly, this Amendment and the other Amendment Documents shall not be construed against any of the Banks or the Agent merely because of the Agent's or any Bank's involvement in the preparation thereof. (k) Loan Documents. This Amendment and the other Amendment Documents shall constitute Loan Documents. [SIGNATURE PAGES FOLLOW.] 4. IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment, as of the date first above written. THE BORROWER CADENCE DESIGN SYSTEMS, INC. By -------------------------------------- Name: Title: 5. THE AGENT ABN AMRO BANK N.V., AS AGENT By -------------------------------------- Name: Title: By -------------------------------------- Name: title: 6. THE BANKS ABN AMRO BANK N.V., AS A BANK By -------------------------------------- Name: Title: By -------------------------------------- Name: Title: 7. BANK OF AMERICA, N.A. By -------------------------------------- Name: Title: 8. BANK ONE, N.A. By -------------------------------------- Name: Title: 9. KEYBANK NATIONAL ASSOCIATION By -------------------------------------- Name: Title: 10. UBS AG, STAMFORD BRANCH By -------------------------------------- Name: Title: By -------------------------------------- Name: Title: 11. BARCLAYS BANK PLC By -------------------------------------- Name: Title: 12. THE INDUSTRIAL BANK OF JAPAN, LIMITED By -------------------------------------- Name: Title: 13. FLEET NATIONAL BANK By -------------------------------------- Name: Title: 14. MELLON BANK, N.A. By -------------------------------------- Name: Title: 15. THE BANK OF NOVA SCOTIA By -------------------------------------- Name: Title: 16. BANK HAPOALIM B.M. By -------------------------------------- Name: Title: 17. WELLS FARGO BANK, NATIONAL ASSOCIATION By -------------------------------------- Name: Title: By -------------------------------------- Name: Title: 18. THE FUJI BANK LIMITED By -------------------------------------- Name: Title: 19. EX-10.61 5 f76986ex10-61.txt EXHIBIT 10.61 EXHIBIT 10.61 - -------------------------------------------------------------------------------- CADENCE DESIGN SYSTEMS, INC. --------------------------------- $260,000,000 AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT Dated as of September 28, 2001 --------------------------------- ABN AMRO BANK N.V., as Agent and as Sole Lead Arranger FLEET NATIONAL BANK, as Sole-Syndication Agent, KEYBANK NATIONAL ASSOCIATION, AND UBS AG, STAMFORD BRANCH, as Co-Documentation Agents - -------------------------------------------------------------------------------- TABLE OF CONTENTS

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SCHEDULES ANNEXES Attachment A Permitted Receivables Purchase Facility Annex 1 Pricing Grid Schedule 1 Revolving Commitments and Pro Rata Shares Schedule 2 Borrower's Account; Lending Offices; Addresses for Notices Schedule 8.01(a) Organization and Powers Schedule 8.01(g) Litigation Schedule 8.01(h) Environmental Matters Schedule 8.01(k) Subsidiaries Schedule 9.04(a) Existing Liens Schedule 9.04(e) Existing Investments EXHIBITS Exhibit A Form of Revolving Note Exhibit B Form of Term Note Exhibit C Form of Notice of Borrowing Exhibit D Form of Compliance Certificate Exhibit E Form of Opinion of Counsel to the Borrower Exhibit F Form of Assignment and Acceptance vi. AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT THIS AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT (this "Agreement"), dated as of September 28, 2001, is made among Cadence Design Systems, Inc., a Delaware corporation (the "Borrower"), the financial institutions listed on the signature pages of this Agreement under the heading "BANKS" (each a "Bank" and, collectively, the "Banks"), Fleet National Bank as sole-syndication agent hereunder, KeyBank National Association and UBS AG, Stamford Branch, as co-documentation agents hereunder, and ABN AMRO Bank N.V., as administrative agent for the Banks hereunder (in such capacity, the "Agent"). The Borrower has requested the Banks to make revolving loans to the Borrower in an aggregate principal amount of up to $260,000,000 at any time outstanding. The Banks are severally willing to make such loans to the Borrower upon the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: ARTICLE I DEFINITIONS SECTION 1.01 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "ABN AMRO" means ABN AMRO Bank N.V. "Affiliate" means any Person which, directly or indirectly, controls, is controlled by or is under common control with another Person. For purposes of the foregoing, "control," "controlled by" and "under common control with" with respect to any Person shall mean the possession, directly or indirectly, of the power (i) to vote 10% or more of the securities having ordinary voting power of the election of directors of such Person, or (ii) to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "Agent" has the meaning set forth in the recitals to this Agreement. "Agent's Account" means the account of the Agent set forth on Schedule 2 or such other account as the Agent from time to time shall designate in a written notice to the Borrower and the Banks. "Alchemy" means Alchemy Semiconductor, Inc. "Applicable Fee Amount" means (i) with respect to the commitment fee payable hereunder, the amount set forth opposite the indicated Level below the heading "Commitment Fee" in the pricing grid set forth on Annex I in accordance with the parameters for calculations of such amount also set forth on Annex I; and (ii) with respect to the utilization fee payable hereunder, the amount set forth opposite the indicated Level below the heading "Utilization Fee" 1. in the pricing grid set forth on Annex I in accordance with the parameters for calculations of such amount also set forth on Annex I. "Applicable Margin" means (i) with respect to Base Rate Loans, 0% per annum; and (ii) with respect to Eurodollar Rate Loans, the amount set forth opposite the indicated Level below the heading "Eurodollar Rate Spread" in the pricing grid set forth on Annex I in accordance with the parameters for calculations of such amounts also set forth on Annex I. "Assignment and Acceptance" has the meaning set forth in Section 11.02(a). "Bank" and "Banks" each has the meaning set forth in the recitals to this Agreement. "Bankruptcy Code" means Title 11 of the United States Code entitled "Bankruptcy." "Base Rate" means for any day the higher of: (i) the Federal Funds Rate, plus 1/2 of 1% per annum, and (ii) the prime commercial lending rate of ABN AMRO as announced from time to time at its Chicago, Illinois, office. Each change in the interest rate on the Loans or other Obligations bearing interest at the Base Rate based on a change in the Base Rate shall be effective as of the effective date of such change in the Base Rate. "Base Rate Loan" means a Loan bearing interest at a rate determined by reference to the Base Rate. "Borrower" has the meaning set forth in the recitals to this Agreement. "Borrower's Account" means the account of the Borrower set forth on Schedule 2, or such other account as the Borrower from time to time shall designate in a written notice to the Agent. "Borrowing" means a borrowing consisting of simultaneous Loans made at any one time by the Borrower from the Banks pursuant to Article II. "Business Day" means a day (i) other than Saturday or Sunday, (ii) on which commercial banks are open for business in Chicago, Illinois and New York, New York, and (iii) if the applicable Business Day relates to any Eurodollar Rate Loan, that is a Eurodollar Business Day. "Capital Lease" means, for any Person, any lease of property (whether real, personal or mixed) which, in accordance with GAAP, would, at the time a determination is made, be required to be recorded as a capital lease in respect of which such Person is liable as lessee. "Closing Date" means the date on which all conditions precedent set forth in Section 7.01 are satisfied or waived by all Banks (or, in the case of Section 7.01(a), waived by the Person entitled to receive such payment). 2. "Compliance Certificate" means a certificate of a Responsible Officer of the Borrower, in substantially the form of Exhibit D, with such changes thereto as the Agent or any Bank may from time to time reasonably request. "Consolidated Cash Flow" means, as of any date of determination for the 12-month period ended on such date, Consolidated Net Income for such period plus depreciation expense, amortization expense and other non-cash expenses (including write-offs of acquired in-process research and development costs) which were deducted in determining Consolidated Net Income, of the Borrower and its Subsidiaries on a consolidated basis, as determined in accordance with GAAP. "Consolidated EBITDA" means, as of any date of determination for the 12-month period ended on such date, Consolidated Net Income plus Consolidated Interest Expense plus income tax expense plus depreciation expense, amortization expense and all other non-cash expenses (including write-offs of acquired in-process research and development costs) which were deducted in determining Consolidated Net Income, plus the quarterly increase in product license subscription bookings for any quarter included in such 12 month period ending on or prior to December 30, 2000, to the extent not included or reflected in Consolidated Net Income, in each case, of the Borrower and its Subsidiaries on a consolidated basis, as determined in accordance with GAAP. "Consolidated Interest Expense" means, for any period, interest expense (including that attributable to Capital Leases) of the Borrower and its Subsidiaries on a consolidated basis, including all commissions, discounts and other fees and charges owed with respect to standby letters of credit, as determined in accordance with GAAP. "Consolidated Net Income" means, for any period, the net income of the Borrower and its Subsidiaries on a consolidated basis for such period taken as a single accounting period, as determined in accordance with GAAP. "Consolidated Tangible Net Worth" means, as of any date of determination, Consolidated Total Assets minus Consolidated Total Liabilities; provided, however, that there shall be excluded from Consolidated Total Assets the following: (i) all assets which would be classified as intangible assets in accordance with GAAP, including goodwill, organizational expense, research and development expense, patent applications, patents, trademarks, trade names, brands, copyrights, trade secrets, customer lists, licenses, franchises and covenants not to compete; and (ii) all treasury stock. "Consolidated Total Assets" means, as of any date of determination, the total assets of the Borrower and its Subsidiaries on a consolidated basis, as determined in accordance with GAAP. "Consolidated Total Liabilities" means, as of any date of determination, the total liabilities of the Borrower and its Subsidiaries on a consolidated basis, as determined in accordance with GAAP. "Default" means an Event of Default or an event or condition which with notice or lapse of time or both would constitute an Event of Default. 3. "Departing Bank" means any "Bank" under and as defined in the Existing Credit Agreement that will not continue as a Bank under this Agreement. "Dollars" and the sign "$" each means lawful money of the United States. "Eligible Assignee" means (i) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $5,000,000,000, (ii) a commercial bank organized under the laws of any other country which is a member of the OECD, or a political subdivision of any such country, and having a combined capital and surplus of at least $5,000,000,000, provided that such bank is acting through a branch or agency located in the United States and licensed by the United States or any state thereof; and (iii) a Person that is primarily engaged in the business of commercial banking and that is (a) a Subsidiary of a Bank, (b) a Subsidiary of a Person of which a Bank is a Subsidiary, or (c) a Person of which a Bank is a Subsidiary. "Environmental Laws" means all federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directives, requests, licenses, authorizations and permits of, and agreements with (including consent decrees), any Governmental Authorities, in each case relating to or imposing liability or standards of conduct concerning public health, safety and environmental protection matters, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Clean Air Act, the Federal Water Pollution Control Act of 1972, the Solid Waste Disposal Act, the Federal Resource Conservation and Recovery Act, the Toxic Substances Control Act, the Emergency Planning and Community Right-to-Know Act, the California Hazardous Waste Control Law, the California Solid Waste Management, Resource Recovery and Recycling Act, the California Water Code and the California Health and Safety Code. "ERISA" means the Employee Retirement Income Security Act of 1974, including (unless the context otherwise requires) any rules or regulations promulgated thereunder. "ERISA Affiliate" means any trade or business (whether or not incorporated) which is under common control with the Borrower within the meaning of Section 4001(a)(14) of ERISA and Sections 414(b), (c) and (m) of the Internal Revenue Code. "Eurodollar Business Day" means a Business Day on which dealings in Dollar deposits are carried on in the London interbank market. "Eurodollar Rate" means for each Interest Period for each Eurodollar Rate Loan the rate per annum (rounded upward, if necessary, to the nearest 1/100 of 1%) determined by the Agent pursuant to the following formula: Eurodollar Rate = Interbank Rate ------------------------------------------------ 100% - Eurodollar Reserve Percentage The Eurodollar Rate shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage. 4. "Eurodollar Rate Loan" means a Loan bearing interest at a rate determined by reference to the Eurodollar Rate. "Eurodollar Reference Bank" means ABN AMRO, subject to the provisions of Section 3.06. "Eurodollar Reserve Percentage" means the maximum reserve requirement percentage (including any ordinary, supplemental, marginal and emergency reserves), if any, as determined by the Agent, then applicable under Regulation D in respect of Eurocurrency funding (currently referred to as "Eurocurrency Liabilities") of a member bank in the Federal Reserve System with deposits exceeding $1,000,000,000. "Event of Default" has the meaning set forth in Section 10.01. "Existing Credit Agreement" means that certain $250,000,000 364-Day Credit Agreement, dated as of September 29, 2000, among the Borrower, the lenders party thereto and ABN AMRO, as administrative agent, as amended. "FDIC" means the Federal Deposit Insurance Corporation, or any successor thereto. "Fee Letter" means the fee letter dated September 4, 2001 by and between the Borrower and the Agent. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100 of 1%), as determined by the Agent, equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for any day of determination (or if such day of determination is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "Fixed Charge Coverage Ratio" has the meaning specified in Section 9.02(c). "Funded Debt" of any Person means, without duplication, (a) all interest-bearing Indebtedness of such Person (whether on- or off-balance sheet), (b) all obligations of such Person in respect of any letter of credit, and (c) all obligations of such Person with respect to leases which are or should be capitalized on the balance sheet of such Person in accordance with GAAP. Notwithstanding the foregoing, for purposes of Section 9.02(c) and Section 9.02(e), Funded Debt shall not include (i) any Indebtedness which is subordinated to the Obligations on terms and conditions satisfactory to the Agent and the Majority Banks in their reasonable discretion and for which no principal payment is due before the 366th day after the Term Loan Maturity Date, or (ii) any obligations of such Person under any Permitted Receivables Purchase Facility. "FRB" means the Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions. 5. "GAAP" means generally accepted accounting principles in the U.S. as in effect from time to time. "Governmental Authority" means any federal, state, local or other governmental department, commission, board, bureau, agency, central bank, court, tribunal or other instrumentality or authority, domestic or foreign, exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guaranty Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any Indebtedness, lease, dividend, letter of credit or other obligation (the "primary obligations") of another Person (the "primary obligor"), including any obligation of that Person (i) to purchase, repurchase or otherwise acquire such primary obligations or any property constituting direct or indirect security therefor, or (ii) to advance or provide funds (a) for the payment or discharge of any such primary obligation, or (b) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, or (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, (iv) in connection with any synthetic lease or other similar off balance sheet lease transaction, or (v) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof. "Hazardous Substances" means any toxic or hazardous substances, materials, wastes, contaminants or pollutants, including asbestos, PCBs, petroleum products and byproducts, and any substances defined or listed as "hazardous substances," "hazardous materials," "hazardous wastes" or "toxic substances" (or similarly identified), regulated under or forming the basis for liability under any applicable Environmental Law. "IRS" means the Internal Revenue Service, or any successor thereto. "Indebtedness" means, for any Person: (i) all indebtedness or other obligations of such Person for borrowed money or for the deferred purchase price of property or services; (ii) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (iii) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property); (iv) all obligations under Capital Leases; (v) all reimbursement or other obligations of such Person under or in respect of letters of credit and bankers acceptances, and all net obligations in respect of Rate Contracts; (vi) all reimbursement or other obligations of such Person in respect of any bank guaranties, shipside bonds, surety bonds and similar instruments issued for the account of such Person or as to which such Person is otherwise liable for reimbursement of drawings or payments; (vii) all Guaranty Obligations; (viii) all indebtedness in respect of any synthetic lease or other similar off balance sheet lease transaction; and (ix) all indebtedness of another Person secured by any Lien upon or in property owned by the Person for whom Indebtedness is being determined, whether or not such Person has assumed or become liable for the payment of such indebtedness of such other Person. For all 6. purposes of this Agreement, the Indebtedness of any Person shall include all recourse Indebtedness of any partnership or joint venture or limited liability company in which such Person is a general partner or a joint venturer or a member. "Insolvency Proceeding" means (i) any case, action or proceeding before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (ii) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors, or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors, in each case undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code. "Interbank Rate" means the rate per annum determined by the Agent, on the basis of quotations furnished to it by the Eurodollar Reference Bank, to be the average (rounded upward, if necessary, to the nearest 1/16 of 1%) of the rates at which deposits in Dollars are offered to the Eurodollar Reference Bank by prime banks in the London interbank market at approximately 11:00 A.M. (London time), two Eurodollar Business Days before the first day of such Interest Period, in an amount substantially equal to the proposed Eurodollar Rate Loan to be made, continued or converted by the Eurodollar Reference Bank and for a period of time comparable to such Interest Period. "Interest Payment Date" means a date specified for the payment of interest pursuant to Section 3.01(c). "Interest Period" means, with respect to any Eurodollar Rate Loan, the period determined in accordance with Section 3.01(b) applicable thereto. "Internal Revenue Code" means the Internal Revenue Code of 1986, including (unless the context otherwise requires) any rules or regulations promulgated thereunder. "Lending Office" has the meaning set forth in Section 2.04. "Lien" means any mortgage, deed of trust, pledge, security interest, assignment, deposit arrangement, charge or encumbrance, lien (statutory or other), or other preferential arrangement (including any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing or any agreement to give any security interest). "Loan Documents" means this Agreement, the Notes, the Fee Letter and all other certificates, documents, agreements and instruments delivered to the Agent and the Banks under or in connection with this Agreement. "Loans" means the Revolving Loans and the Term Loans. "Majority Banks" means at any time Banks holding at least 51% of the then aggregate unpaid principal amount of the loans, or, if no such principal amount is then outstanding, Banks having at least 51% of the aggregate Revolving Commitments. 7. "Material Adverse Effect" means any event, matter, condition or circumstance which has or would reasonably be expected to have a material adverse effect on the business, properties, results of operations or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole. "Material Subsidiary" means any Subsidiary the total assets of which constitute 20% or more of Consolidated Total Assets, measured as of the last day of the then most recent fiscal quarter. "Minimum Amount" has the meaning set forth in Section 2.06. "Multiemployer Plan" means a "multiemployer plan" as defined in Sections 3(37) and 4001(a)(3) of ERISA. "Multi-Year Commitments" means the commitments of the lenders party to the Multi-Year Credit Agreement to make loans to the Borrower, as provided therein. "Multi-Year Credit Agreement" means that certain Credit Agreement dated as of September 29, 2000, as amended pursuant to that certain First Amendment to Credit Agreement dated as of September 28, 2001, among the Borrower, the lenders party thereto and ABN AMRO, as administrative agent, as the same may be amended, restated, supplemented or otherwise modified in accordance with its terms. "Net Cash Proceeds" means when used in respect of any issuance of any debt or equity securities of the Borrower or any Subsidiary, the gross proceeds received by the Borrower or such Subsidiary from such issuance less all direct costs and expenses incurred or to be incurred, and all federal, state, local and foreign taxes assessed or to be assessed, in connection therewith. "Notes" means the Revolving Notes and the Term Notes. "Notice" means a Notice of Borrowing, a Notice of Conversion or Continuation or a Notice of Prepayment. "Notice of Borrowing" has the meaning set forth in Section 2.02(a). "Notice of Conversion or Continuation" has the meaning set forth in Section 3.05(c). "Notice of Prepayment" has the meaning set forth in Section 4.03. "Obligations" means the indebtedness, liabilities and other obligations of the Borrower to the Agent or any Bank under or in connection with the Loan Documents, including all Loans, all interest accrued thereon, all fees due under this Agreement and all other amounts payable by the Borrower to the Agent or any Bank thereunder or in connection therewith, whether now or hereafter existing or arising, and whether due or to become due, absolute or contingent, liquidated or unliquidated, determined or undetermined. 8. "OECD" means the Organization for Economic Cooperation and Development. "Operating Lease" means, for any Person, any lease of any property of any kind by that Person as lessee which is not a Capital Lease. "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "Pension Plan" means any employee pension benefit plan covered by Title IV of ERISA (other than a Multiemployer Plan) that is maintained for employees of the Borrower or any ERISA Affiliate or with regard to which the Borrower or an ERISA Affiliate is a contributing sponsor within the meaning of Sections 4001(a)(13) or 4069 of ERISA. "Permitted Investments" means, in respect of the Borrower or any Subsidiary, short-term investment grade debt securities of any type authorized from time to time under an investment policy for short-term cash investments approved by the Borrower's board of directors or such Subsidiary's board of directors, as the case may be. "Permitted Liens" means: (i) Liens in favor of the Banks or the Agent for the benefit of the Banks to secure the Obligations; (ii) the existing Liens listed in Schedule 9.04(a); (iii) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings and which are adequately reserved for in accordance with GAAP; (iv) Liens of materialmen, mechanics, warehousemen, carriers or employees or other like Liens arising in the ordinary course of business and securing obligations either not delinquent or being contested in good faith by appropriate proceedings which are adequately reserved for in accordance with GAAP and which do not in the aggregate materially impair the use or value of the property or risk the loss or forfeiture of title thereto; (v) Liens consisting of deposits or pledges to secure the payment of worker's compensation, unemployment insurance or other social security benefits or obligations, or to secure the performance of bids, trade contracts, leases (other than Capital Leases), public or statutory obligations, surety or appeal bonds or other obligations of a like nature incurred in the ordinary course of business (other than for indebtedness or any Liens arising under ERISA); (vi) easements, rights of way, servitudes or zoning or building restrictions and other minor encumbrances on real property and irregularities in the title to such property which do not in the aggregate materially impair the use or value of such property or risk the loss or forfeiture of title thereto; 9. (vii) statutory landlord's Liens under leases to which the Borrower or any of its Subsidiaries is a party; (viii) Liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided that (i) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by the Borrower in excess of those set forth by regulations promulgated by the FRB, and (ii) such deposit account is not intended by the Borrower or any Subsidiary to provide collateral to the depository institution; (ix) Liens (a) upon or in any property acquired or held by the Borrower or any of its Subsidiaries to secure the purchase price of such property or Indebtedness incurred solely for the purpose of financing the acquisition of such property, or (b) existing on such property at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon; (x) Liens on assets of Persons which become Subsidiaries of the Borrower after the date hereof, provided that such Liens existed at the time any such Persons became Subsidiaries of the Borrower and were not created in anticipation thereof; (xi) Liens on Receivables and Receivables Related Assets in connection with any Permitted Receivables Purchase Facility; (xii) Leases or subleases and licenses and sublicenses granted to others in the ordinary course of business and not interfering in any material respect with the business of the Borrower and any interest or title of a lessor or licensor under any lease or license; (xiii) Liens on equipment leased by the Borrower pursuant to an operating lease in the ordinary course of business (including proceeds thereof and accessions thereto) incurred solely for the purpose of financing the lease of such equipment (including Liens arising from UCC financing statements regarding leases permitted by this Agreement); (xiv) Liens arising from judgments, decrees or attachments to the extent and only so long as such judgment, decree or attachment has not caused or resulted in an Event of Default; (xv) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xvi) Liens incurred in connection with the extension, renewal, refunding, refinancing, modification, amendment or restatement of the Indebtedness secured by Liens of the type described in clauses (i) through (xv) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered 10. by the existing Lien, the principal amount of Indebtedness being extended, renewed or refinanced does not increase and such Lien otherwise remains a Permitted Lien under clauses (i) through (xv) above; and (xvii) Liens not otherwise permitted hereunder securing Indebtedness in an aggregate principal amount not to exceed 15% of Consolidated Tangible Net Worth, measured as of the last day of the then most recent fiscal quarter, at any time outstanding. "Permitted Receivables Purchase Facility" shall mean any receivables sales, financing or securitization programs now or hereafter entered into by the Borrower or any of its Subsidiaries, in each case for the purpose of financing Receivables, including, without limitation, the facilities identified on Attachment A hereto, in each case, as amended, restated or supplemented from time to time. "Person" means an individual, corporation, partnership, limited liability company, joint venture, trust, unincorporated organization or any other entity of whatever nature or any Governmental Authority. "Plan" means any employee pension benefit plan as defined in Section 3(2) of ERISA (including any Multiemployer Plan) and any employee welfare benefit plan, as defined in Section 3(1) of ERISA (including any plan providing benefits to former employees or their survivors). "Premises" means any and all real property, including all buildings and improvements now or hereafter located thereon and all appurtenances thereto, now or hereafter owned, leased, occupied or used by the Borrower and its Subsidiaries. "Pro Rata Share" means, as to any Bank at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Bank's Revolving Commitment divided by the combined Revolving Commitments of all Banks (or, if all Revolving Commitments have been terminated, the aggregate principal amount of such Bank's Loans divided by the aggregate principal amount of the Loans then held by all Banks). The initial Pro Rata Share of each Bank is set forth opposite such Bank's name in Schedule 1 under the heading "Pro Rata Share." "Rate Contracts" means interest rate swaps, caps, floors and collars, currency swaps, or other similar financial products designed to provide protection against fluctuations in interest, currency or exchange rates. "Receivables" means any rights to payment for license fees, whether in the form of accounts receivable, general intangibles, instruments, chattel paper or otherwise. "Receivables Related Assets" means (a) any rights arising under the documentation governing or relating to Receivables which are the subject of a Permitted Receivables Purchase Facility, including, without limitation, rights in respect of Liens securing such Receivables, (b) any proceeds of such Receivables and any lockboxes or accounts in which such proceeds are deposited, (c) spread accounts and other similar accounts, and any amounts on deposit therein, established in connection with any Permitted Receivables Purchase Facility, 11. (d) any warranty, indemnity, dilution and other intercompany claim arising out of any Permitted Receivables Purchase Facility, and (e) other assets which are customarily transferred or in respect of which security interests are customarily granted in connection with factoring or asset securitization transactions involving Receivables. "Regulation D" means Regulation D of the FRB. "Regulatory Change" has the meaning set forth in Section 5.03. "Related Person" has the meaning set forth in Section 11.06. "Required Notice Date" has the meaning set forth in Section 2.07. "Responsible Officer" means, with respect to any Person, the chief executive officer, the president, the chief financial officer, the vice president of corporate finance, the treasurer or the controller of such Person, or any other senior officer of such Person having substantially the same authority and responsibility; or, with respect to compliance with financial covenants, the chief financial officer, the treasurer or the controller of any such Person, or any other senior officer of such Person involved principally in the financial administration or controllership function of such Person and having substantially the same authority and responsibility. "Revolving Commitment," as to each Bank, has the meaning specified in subsection 2.01(a). "Revolving Loan" has the meaning specified in subsection 2.01(a). "Revolving Note" means a promissory note substantially in the form of Exhibit A. "Revolving Termination Date" means the earlier to occur of: (a) the date which is 364 calendar days after the Closing Date, as such date may be extended in accordance with subsection 4.01(c); and (b) the date on which the Revolving Commitments terminate in accordance with the provisions of this Agreement. "SEC" means the Securities and Exchange Commission, or any successor thereto. "Seely Avenue Campus" means the real property, taken either in whole or any part thereof, consisting of approximately 50.5 acres of land and 10 buildings that total approximately 778,000 square feet and is located on both the east and west sides of Seely Avenue, in San Jose, California. Specific street addresses for the property are: 535, 545, 555, 575 River Oaks Parkway, 2655 Seely Avenue (which consists of five buildings and entitled land for a sixth building), and 2670 Seely Avenue. "Solvent" means, as to any Person at any time, that (i) the fair value of the property of such Person is greater than the amount of such Person's liabilities (including disputed, contingent and unliquidated liabilities) as such value is established and liabilities evaluated for purposes of Section 101(31) of the Bankruptcy Code; (ii) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability 12. to pay as such debts and liabilities mature; and (iii) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute unreasonably small capital. "SpinCircuit" means SpinCircuit, Inc. "Subsidiary" means, as to any Person, any corporation, association, partnership, joint venture or other business entity of which more than 50% of the voting stock or other equity interest is owned directly or indirectly by such Person or one or more of the other Subsidiaries of such Person or a combination thereof. Unless the context otherwise clearly requires, references to a "Subsidiary" shall mean a Subsidiary of the Borrower. "Swap Termination Value" means, in respect of any one or more Rate Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Rate Contracts, (i) for any date on or after the date such Rate Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (ii) for any date prior to the date referenced in clause (i), the amount(s) determined as the mark-to-market value(s) for such Rate Contracts, as determined by the Borrower based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Rate Contracts (which may include any Bank). "Tality IPO" means the initial public offering of the Borrower's design-services operation pursuant to terms and conditions substantially consistent with those disclosed in the Borrower's Form S-1 filed with the Securities Exchange Commission on July 17, 2000 (registration number 333-41552). "Taxes" has the meaning set forth in Section 6.03. "Term Loan" has the meaning specified in subsection 2.01(b). "Term Loan Maturity Date" means September 29, 2003. "Term Loan Commitment" has the meaning set forth in Section 2.01(b). "Term Note" means a promissory note substantially in the form of Exhibit B. "Termination Event" means any of the following: (i) with respect to a Pension Plan, a reportable event described in Section 4043 of ERISA and the regulations issued thereunder (other than a reportable event not subject to the provisions for 30-day notice to the PBGC under such regulations); (ii) the withdrawal of the Borrower or an ERISA Affiliate from a Pension Plan during a plan year in which the withdrawing employer was a "substantial employer" as defined in Section 4001(a)(2) or 4062(e) of ERISA; 13. (iii) the taking of any actions (including the filing of a notice of intent to terminate) by the Borrower, an ERISA Affiliate, the PBGC, a Plan Administrator, or any other Person to terminate a Pension Plan or the treatment of a Plan amendment as a termination of a Pension Plan under Section 4041 of ERISA; (iv) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; or (v) the complete or partial withdrawal of the Borrower or an ERISA Affiliate from a Multiemployer Plan. "UCC" means the Uniform Commercial Code of the jurisdiction the law of which governs the Loan Document in which such term is used or the attachment, perfection or priority of the Lien on any collateral. "Unfunded Accrued Benefits" means the excess of a Pension Plan's accrued benefits, as defined in Section 3(23) of ERISA, over the current value of that Plan's assets, as defined in Section 3(26) of ERISA. "United States" and "U.S." each means the United States of America. "Venture Funds" means, collectively, Telos Venture Partners, L.P. and Telos Venture Partners II, L.P. SECTION 1.02 Accounting Principles. (a) Accounting Terms. Unless otherwise defined or the context otherwise requires, all accounting terms not expressly defined herein shall be construed, and all accounting determinations and computations required under the Loan Documents shall be made, in accordance with GAAP, consistently applied. (b) GAAP Changes. If GAAP shall have been modified after the Closing Date and the application of such modified GAAP shall have a material effect on any financial computations hereunder (including the computations required for the purpose of determining compliance with the covenants set forth in Section 9.02), then such computations shall be made and the financial statements, certificates and reports due hereunder shall be prepared, and all accounting terms not otherwise defined herein shall be construed, in accordance with GAAP, as in effect prior to such modification, unless and until the Majority Banks and the Borrower shall have agreed upon the terms of the application of such modified GAAP which agreement shall not be unreasonably withheld. (c) "Fiscal Year" and "Fiscal Quarter". References herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of the Borrower. SECTION 1.03 Interpretation. In the Loan Documents, except to the extent the context otherwise requires: 14. (i) Any reference to an Article, a Section, a Schedule or an Exhibit is a reference to an article or section thereof, or a schedule or an exhibit thereto, respectively, and to a subsection or a clause is, unless otherwise stated, a reference to a subsection or a clause of the Section or subsection in which the reference appears. (ii) The words "hereof," "herein," "hereto," "hereunder" and the like mean and refer to this Agreement or any other Loan Document as a whole and not merely to the specific Article, Section, subsection, paragraph or clause in which the respective word appears. (iii) The meaning of defined terms shall be equally applicable to both the singular and plural forms of the terms defined. (iv) The words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation." (v) References to agreements and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of the Loan Documents. (vi) References to statutes or regulations are to be construed as including all statutory and regulatory provisions consolidating, amending or replacing the statute or regulation referred to. (vii) Any table of contents, captions and headings are for convenience of reference only and shall not affect the construction of this Agreement or any other Loan Document. (viii) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding"; and the word "through" means "to and including." (ix) The use of a word of any gender shall include each of the masculine, feminine and neuter genders. (x) This Agreement and the other Loan Documents are the result of negotiations among the Agent, the Borrower and the other parties, have been reviewed by counsel to the Agent, the Borrower and such other parties, and are the products of all parties. Accordingly, they shall not be construed against the Banks or the Agent merely because of the Agent's or Banks' involvement in their preparation. 15. ARTICLE II THE LOANS SECTION 2.01 Amounts and Terms of Commitments. (a) The Revolving Credit. Each Bank severally agrees, on the terms and conditions set forth herein, to make loans to the Borrower (each such loan, a "Revolving Loan") from time to time on any Business Day during the period from the Closing Date to the Revolving Termination Date, in an aggregate amount not to exceed at any time outstanding the amount set forth opposite such Bank's name on Schedule 1 under the heading "Revolving Commitment" (such amount, as the same may be reduced under Section 4.01 or reduced or increased as a result of one or more assignments under Section 12.09, such Bank's "Revolving Commitment"); provided, however, that, after giving effect to any Borrowing of Revolving Loans, the aggregate principal amount of all outstanding Revolving Loans shall not at any time exceed the combined Revolving Commitments; and provided further that no Borrowings of Revolving Loans shall be permitted hereunder at any time that any portion of the Multi-Year Commitments remains unused. Within the limits of each Bank's Revolving Commitment, and subject to the other terms and conditions hereof, the Borrower may borrow under this subsection 2.01(a), prepay under Section 4.03 and reborrow under this subsection 2.01(a). (b) The Term Loans. Each Bank severally agrees, on the terms and conditions set forth herein, to make a single term loan (each a "Term Loan" and, collectively, the "Term Loans") to the Borrower on the Revolving Termination Date in a principal amount up to but not exceeding such Bank's Revolving Commitment (the "Term Loan Commitment"); provided, however, that no Borrowings of Term Loans shall be permitted hereunder at any time that any portion of the Multi-Year Commitments remain unused. No Term Loans shall be made after the Revolving Termination Date, and any portion of the Revolving Commitments not borrowed as Term Loans on the Revolving Termination Date may not be borrowed thereafter. Any amount of the Term Loans repaid may not be reborrowed. SECTION 2.02 Borrowing Procedure. (a) Notice to the Agent. Each Borrowing shall be made on a Business Day upon written or telephonic notice (in the latter case to be confirmed promptly in writing) from the Borrower to the Agent, which notice shall be received by the Agent not later than 2:00 P.M. (New York City time) on the Required Notice Date. Each such notice, except as provided in Section 5.01 and 5.04, shall be irrevocable and binding on the Borrower, shall be in substantially the form of Exhibit C (a "Notice of Borrowing") and shall specify whether the Borrowing consists of Base Rate Loans or Eurodollar Rate Loans, and whether such Borrowing shall be of Revolving Loans or Term Loans, and shall contain the other information required thereby. (b) Notice to the Banks. The Agent shall give each Bank prompt notice by telephone (confirmed promptly in writing) or by facsimile of each Borrowing, specifying the information contained in the Borrower's Notice and such Bank's Pro Rata Share of the Borrowing. On the date of each Borrowing, each Bank shall make available such Bank's Pro Rata Share of such Borrowing, in same day or immediately available funds, to the Agent for the Agent's Account, not later than 3:00 P.M. (New York City time). Upon fulfillment of the 16. applicable conditions set forth in Article VII and after receipt by the Agent of any such funds, and unless other payment instructions are provided by the Borrower, the Agent shall make such funds available to the Borrower by crediting the Borrower's Account with same day or immediately available funds on such Borrowing date. SECTION 2.03 Non-Receipt of Funds. Unless the Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank shall not make available to the Agent such Bank's Pro Rata Share of such Borrowing, the Agent may assume that such Bank has made such portion available to the Agent on the date of such Borrowing in accordance with Section 2.02(b) and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent such Bank shall not have so made such Pro Rata Share available to the Agent, and the Agent in such circumstances shall have made available to the Borrower such amount, such Bank agrees to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan as part of such Borrowing for purposes of this Agreement. If such amount is not made available by such Bank to the Agent on the Business Day following the Borrowing date, the Agent shall notify the Borrower of such failure to fund and, upon demand by the Agent, the Borrower shall pay such amount to the Agent for the Agent's Account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Loans comprising such Borrowing. SECTION 2.04 Lending Offices. The Loans made by each Bank may be made from and maintained at such offices of such Bank (each a "Lending Office") as such Bank may from time to time designate (whether or not such office is specified on Schedule 2). A Bank shall not elect a Lending Office that, at the time of making such election, increases the amounts which would have been payable by the Borrower to such Bank under this Agreement in the absence of such election. With respect to Eurodollar Rate Loans made from and maintained at any Bank's non-U.S. offices, the obligation of the Borrower to repay such Eurodollar Rate Loans shall nevertheless be to such Bank and shall, for all purposes of this Agreement (including for purposes of the definition of the term "Majority Banks") be deemed made or maintained by it, for the account of any such office. SECTION 2.05 Evidence of Indebtedness. The Loans made by each Bank shall be evidenced by one or more loan accounts maintained by such Bank in accordance with its usual practices. The loan accounts maintained by the Agent and each such Bank shall be rebuttable presumptive evidence of the amount of the Loans made by such Bank to the Borrower and the interest and payments thereon. Any failure so to record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Borrower hereunder to pay any amount owing with respect to the Loans. At the request of any Bank, as additional evidence of the Indebtedness of the Borrower to such Bank resulting from the Loans made by such Bank, the Borrower shall execute and deliver for account of such Bank pursuant to Article VII Notes setting forth such Bank's Revolving Commitment as the maximum principal amount thereof and, if the Term Loans are borrowed on the Revolving Termination Date under subsection 2.01(b), Notes setting forth the principal amount of the Term Loans so made by such Bank. 17. SECTION 2.06 Minimum Amounts. Any Borrowing, conversion, continuation, Revolving Commitment reduction or prepayment of Loans hereunder shall be in an aggregate amount determined as follows (each such specified amount a "Minimum Amount"): (i) any Borrowing or partial prepayment of Base Rate Loans shall be in the amount of $250,000 or a greater amount which is an integral multiple of $50,000; (ii) any Borrowing, continuation or partial prepayment of, or conversion into, Eurodollar Rate Loans shall be in the amount of $2,000,000 or a greater amount which is an integral multiple of $100,000; and (iii) any partial Revolving Commitment reduction under Section 4.01(a) shall be in the amount of $5,000,000 or a greater amount which is an integral multiple of $5,000,000. SECTION 2.07 Required Notice. Any Notice hereunder shall be given not later than the date determined as follows (each such specified date a "Required Notice Date"): (i) any Notice with respect to a Borrowing of, or conversion into, Base Rate Loans shall be given not later than the date of the proposed borrowing or conversion; (ii) any Notice with respect to any Borrowing or continuation of, or conversion into, Eurodollar Rate Loans shall be given at least three Eurodollar Business Days prior to the date of the proposed Borrowing, conversion or continuation; (iii) any Notice with respect to any prepayment under Section 4.03(a) shall be given at least one Business Day prior to the date of the proposed prepayment, in the case of Base Rate Loans, and at least three Eurodollar Business Days prior to the date of the proposed prepayment, in the case of Eurodollar Rate Loans; and (iv) any Notice with respect to any Revolving Commitment reduction or termination under Section 4.01(a) shall be given at least five Business Days prior to the proposed reduction or termination date. ARTICLE III INTEREST AND FEES; CONVERSION OR CONTINUATION SECTION 3.01 Interest. (a) Interest Rate. Subject to Section 3.02, the Borrower shall pay interest on the unpaid principal amount of each Loan from the date of such Loan until such principal amount shall be paid in full, at the following rates: (i) during such periods as such Loan is a Base Rate Loan, at a rate per annum equal at all times to the Base Rate plus the Applicable Margin; and (ii) during such periods as such Loan is a Eurodollar Rate Loan, at a rate per annum equal at all times during each Interest Period for such Eurodollar Rate Loan to the Eurodollar Rate for such Interest Period plus the Applicable Margin. (b) Interest Periods. The initial and each subsequent Interest Period for Eurodollar Rate Loans shall be a period of one, two, three or six months. The determination of Interest Periods shall be subject to the following provisions: (A) in the case of immediately successive Interest Periods, each successive Interest Period shall commence on the day on which the next preceding Interest Period expires; 18. (B) if any Interest Period pertaining to an Eurodollar Rate Loan would otherwise end on a day which is not a Business Day, that Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day; (C) no Interest Period shall extend beyond (1) the Revolving Termination Date with respect to any Revolving Loan, and (2) the Term Loan Maturity Date with respect to any Term Loan; (D) any Interest Period pertaining to a Eurodollar Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the ending calendar month of such Interest Period) shall end on the last Business Day of the ending calendar month of such Interest Period; (E) there shall be no more than ten Interest Periods in effect at any one time. (c) Interest Payment Dates. Subject to Section 3.02, interest on the Loans shall be payable in arrears at the following times: (i) interest on each Base Rate Loan shall be payable quarterly in arrears on the last Business Day in each calendar quarter, on the date of any prepayment or conversion of any such Base Rate Loan, and at maturity; (ii) interest on each Eurodollar Rate Loan shall be payable on the last day of each Interest Period for such Eurodollar Rate Loan, provided that (a) in the case of any such Interest Period which is greater than three months, interest on such Eurodollar Rate Loan shall be payable on each date that is three months, or any integral multiple thereof, after the beginning of such Interest Period, and on the last day of such Interest Period, and (b) if any prepayment, conversion, or continuation is effected other than on the last day of such Interest Period, accrued interest on such Eurodollar Rate Loan shall be due on such prepayment, conversion or continuation date as to the principal amount of such Eurodollar Rate Loan prepaid, converted or continued plus all amounts required under Section 5.02. (d) Notice to the Borrower and the Banks. Each determination by the Agent hereunder of a rate of interest and of any change therein, including any changes in (i) the Applicable Margin, (ii) the Base Rate during any periods in which Base Rate Loans shall be outstanding, and (iii) the Eurodollar Reserve Percentage (if any) during any periods in which Eurodollar Rate Loans shall be outstanding, in the absence of manifest error, shall be conclusive and binding on the parties hereto and shall be promptly notified by the Agent to the Borrower and the Banks. Such notice shall set forth in reasonable detail the basis for any such determination or change. The failure of the Agent to give any such notice specified in this subsection shall not affect the Borrower's obligation to pay such interest or fees. 19. SECTION 3.02 Default Rate of Interest. Notwithstanding Section 3.01, in the event that any amount of principal of or interest on any Loan, or any other amount payable hereunder or under the Loan Documents, is not paid in full when due (whether at stated maturity, by acceleration or otherwise), the Borrower shall pay interest on such unpaid principal, interest or other amount, from the date such amount becomes due until the date such amount is paid in full, and after as well as before any entry of judgment to the extent permitted by law, payable on demand, at a rate per annum equal at all times to the Base Rate plus 2% plus the Applicable Margin in respect of Base Rate Loans. SECTION 3.03 Fees. (a) Revolving Commitment Fees. The Borrower agrees to pay to the Agent for the account of each Bank a commitment fee on the average daily unused portion of such Bank's Revolving Commitment as in effect from time to time from the Closing Date until the Revolving Termination Date at a rate per annum equal to the Applicable Fee Amount, payable quarterly in arrears on the last Business Day of each calendar quarter (commencing on the first such date after the Closing Date), and on the earlier of the date such Revolving Commitment is terminated hereunder and the Revolving Termination Date. (b) Utilization Fees. The Company shall pay to the Agent for the account of each Bank a utilization fee on the actual daily utilized portion of such Bank's Revolving Commitment or Term Loan Commitment, computed on a quarterly basis in arrears on the last Business Day of each calendar quarter based upon the actual daily utilization for that quarter, as calculated by the Agent, at a rate per annum equal to the Applicable Fee Amount for each day during such quarter on which utilization of the combined Revolving Commitments or Term Loan Commitment under this Agreement plus the utilization of the combined "Revolving Commitments" under and as defined in the Multi-Year Credit Agreement equals or exceeds 33% of the combined Revolving Commitments or Term Loan Commitments under this Agreement plus the combined "Revolving Commitments" under the Multi-Year Credit Agreement at the close of the Agent's business on such day (or the close of the Agent's business on the next preceding Business Day in the case of a Saturday or Sunday or other day not a Business Day). For purposes of calculating utilization under this Agreement and under the Multi-Year Credit Agreement, the Revolving Commitments and Term Loan Commitment under this Agreement and the "Revolving Commitments" under and as defined in the Multi-Year Agreement, respectively, shall be deemed utilized to the extent of the aggregate principal amount of the Loans then outstanding hereunder and thereunder. Such utilization fee shall accrue from and after the Closing Date and shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter commencing on the first such date following the Closing Date; provided that, in connection with any termination of Revolving Commitments under Section 4.01 of this Agreement, the accrued utilization fee calculated for the period ending on such date shall also be paid on the date of such termination; provided further that the Applicable Fee Amount shall be payable only in respect of the amount of the Revolving Commitments or Term Loan Commitment utilized under this Agreement, and not on the portion of the "Revolving Commitments" utilized under the Multi-Year Credit Agreement. The utilization fees provided in this subsection shall accrue at all times after the above-mentioned Closing Date. 20. (c) Agency Fee. The Borrower agrees to pay to the Agent for its own account such fee for administrative agency services rendered by it as specified in the Fee Letter. (d) Fees Nonrefundable. All fees payable under this Section 3.03 shall be nonrefundable. SECTION 3.04 Computations. All computations of interest based upon the Base Rate (including interest accruing based upon the Federal Funds Rate) shall be made on the basis of a year of 365 or 366 days, as the case may be, for the actual number of days occurring in the period for which such interest is payable. All computations of Revolving Commitment fee, the utilization fee and of interest based upon the Eurodollar Rate shall be made on the basis of a year of 360 days for the actual number of days occurring in the period for which such Revolving Commitment fee, utilization fee or interest is payable, which results in more interest being paid than if computed on the basis of a 365-day year, and in accordance with the pricing grid set forth in Annex 1. SECTION 3.05 Conversion or Continuation. (a) Election. The Borrower may elect (i) to convert all or any part of (A) outstanding Base Rate Loans into Eurodollar Rate Loans, or (B) outstanding Eurodollar Rate Loans into Base Rate Loans; or (ii) to continue all or any part of a Loan with one type of interest rate as such; provided, however, that if the aggregate amount of Eurodollar Rate Loans in respect of any Borrowing shall have been reduced, by payment, prepayment, or conversion of part thereof to be less than $2,000,000, such Eurodollar Rate Loans shall automatically convert into Base Rate Loans, and on and after such date the right of the Borrower to continue such Loans as, and convert such Loans into, Eurodollar Rate Loans, as the case may be, shall terminate. The continued or converted Base Rate and Eurodollar Rate Loans shall be allocated to the Banks ratably in accordance with their Pro Rata Shares. Any conversion or continuation of Eurodollar Rate Loans shall be made on the last day of the current Interest Period for such Eurodollar Rate Loans. No outstanding Loan may be converted into or continued as a Eurodollar Rate Loan if any Event of Default has occurred and is continuing. (b) Automatic Conversion. On the last day of any Interest Period for any Eurodollar Rate Loans, such Eurodollar Rate Loans shall, if not repaid, automatically convert into Base Rate Loans unless the Borrower shall have made a timely election to continue such Eurodollar Rate Loans as such for an additional Interest Period or to convert such Eurodollar Rate Loans, in each case as provided in subsection (a). (c) Notice to the Agent. The conversion or continuation of any Loans contemplated by subsection (a) shall be made upon written or telephonic notice (in the latter case to be confirmed promptly in writing) from the Borrower to the Agent, which notice shall be received by the Agent not later than 11:00 A.M. (California time) on the Required Notice Date. Each such notice (a "Notice of Conversion or Continuation") shall, except as provided in Sections 5.01 and 5.04, be irrevocable and binding on the Borrower, shall refer to this Agreement and shall specify: (i) the proposed date of the conversion or continuation, which shall be a Business Day; (ii) the outstanding Loans (or parts thereof) to be converted into or continued as Base Rate or Eurodollar Rate Loans; (iii) the aggregate amount of the Loans which are the 21. subject of such continuation or conversion, which shall be in a Minimum Amount; (iv) if the conversion or continuation consists of any Eurodollar Rate Loans, the duration of the Interest Period with respect thereto; and (v) that no Event of Default exists hereunder. (d) Notice to the Banks. The Agent shall give each Bank prompt notice by telephone (confirmed promptly in writing) or by facsimile of (i) the proposed conversion or continuation of any Loans, specifying the information contained in the Borrower's Notice and such Bank's Pro Rata Share thereof or (ii), if timely notice was not received from the Borrower, the details of any automatic conversion under subsection (b). SECTION 3.06 Replacement of Reference Banks. If the Loans of the Eurodollar Reference Bank are prepaid in full or its Revolving Commitment shall terminate (otherwise than on termination of all the Revolving Commitments), or if the Eurodollar Reference Bank transfers its Loans in full to an unaffiliated Person or otherwise shall cease to be a Bank hereunder, the Agent shall, in consultation with the Borrower and with the approval of the Majority Banks, appoint another similarly situated Bank to replace such Bank as Eurodollar Reference Bank. SECTION 3.07 Highest Lawful Rate. Anything herein to the contrary notwithstanding, if during any period for which interest is computed hereunder, the applicable interest rate, together with all fees, charges and other payments which are treated as interest under applicable law, as provided for herein or in any other Loan Document, would exceed the maximum rate of interest which may be charged, contracted for, reserved, received or collected by any Bank in connection with this Agreement under applicable law (the "Maximum Rate"), the Borrower shall not be obligated to pay, and such Bank shall not be entitled to charge, collect, receive, reserve or take, interest in excess of the Maximum Rate, and during any such period the interest payable hereunder to such Bank shall be limited to the Maximum Rate. ARTICLE IV REDUCTION OF REVOLVING COMMITMENTS; REPAYMENT; PREPAYMENT SECTION 4.01 Reduction or Termination of the Revolving Commitments. (a) Optional Reduction or Termination. The Borrower may, upon prior written notice to the Agent delivered not later than the Required Notice Date, terminate in whole or reduce ratably in part, as of the date specified by the Borrower in such notice, any then unused portion of the Revolving Commitments, provided that each partial reduction shall be in a Minimum Amount. (b) Mandatory Termination. The Revolving Commitments shall terminate on the Revolving Termination Date (including such date, if any, that the Term Loans are made pursuant to subsection 2.01(b), it being understood that once the Term Loans are made, if at all, the Revolving Commitments of all of the Banks shall thereupon terminate). (c) Extension of Revolving Termination Date. Notwithstanding the preceding subsection 4.01(b), the Borrower may give written notice to the Banks (through the Agent) no more than 60 days and no less than 30 days prior to the Revolving Termination Date then in effect that it requests that the Agent and the Banks extend the Revolving Termination Date for an 22. additional 364-day period. Each Bank and the Agent may grant or reject such request in its sole discretion, and the Borrower acknowledges that there is no commitment or understanding that the Revolving Termination Date will be extended. If such request is granted by the Agent and one or more of the Banks, the Revolving Termination Date then in effect shall be so extended in respect of the Revolving Commitment of each consenting Bank (but not in respect of the Revolving Commitments of any non-consenting Banks), subject to such changed terms and payment of such fee (if any) as shall have been agreed upon by the Borrower, such consenting Banks and the Agent. Any Bank that does not consent in writing to an extension request delivered by the Borrower under this subsection 4.01(c) by the date which is 10 days prior to the Revolving Termination Date then in effect shall be deemed to have rejected such extension request in respect of its Revolving Commitment. The Revolving Commitment of each non-consenting Bank under this subsection 4.01(c) shall terminate on the Revolving Termination Date then in effect, subject to such Bank's obligations under subsection 2.01(b) on such date (if the Term Loans are made on such date). The parties agree and acknowledge that effective immediately upon any extension of the Revolving Termination Date pursuant to this subsection 4.01(c), the obligation to make Loans hereunder of any Bank that has not consented to such extension shall be terminated, and such Bank shall immediately thereupon relinquish its rights and be released from its obligations under this Agreement; provided, however, that such Bank shall not be deemed to have relinquished any of such rights or be released from any of such obligations to the extent arising or accruing prior to such time. In no event shall the Revolving Termination Date be extended beyond the Term Loan Maturity Date. (d) [Intentionally Omitted.] (e) Notice. The Agent shall give each Bank prompt notice of any termination, reduction or extension of its Revolving Commitments under this Section 4.01. (f) Adjustment of Revolving Commitment Fee and Utilization Fee; No Reinstatement. From the effective date of any reduction or termination prior to the Revolving Termination Date, the Revolving Commitment fee payable under Section 3.03(a) and the utilization fee payable under Section 3.03(b) shall be computed on the basis of the Revolving Commitments as so reduced or terminated. Once reduced or terminated, the Revolving Commitments may not be increased or otherwise reinstated. SECTION 4.02 Repayment of Loans. (a) Revolving Loans. The Borrower shall repay to the Banks in full on the Revolving Termination Date the aggregate principal amount of the Revolving Loans outstanding on such date. (b) Term Loans. The Borrower shall repay to the Banks the aggregate principal amount of the Term Loans on the Term Loan Maturity Date. SECTION 4.03 Prepayments. (a) Optional Prepayments. Subject to Section 5.02, the Borrower may, upon prior written notice to the Agent not later than the Required Notice Date, prepay the outstanding 23. amount of the Loans in whole or ratably in part, without premium or penalty. Partial prepayments shall be in Minimum Amounts. (b) [Intentionally Omitted.] (c) Notice; Application. The notice given of any prepayment (a "Notice of Prepayment") shall specify the date and amount of the prepayment and whether the prepayment is of Base Rate or Eurodollar Rate Loans or a combination thereof, and if of a combination thereof the amount of the prepayment allocable to each. Such Notice of Prepayment shall also specify whether the prepayment is of Revolving Loans or Term Loans. Upon receipt of the Notice of Prepayment the Agent shall promptly notify each Bank thereof. If the Notice of Prepayment is given, the Borrower shall make such prepayment and the prepayment amount specified in such Notice shall be due and payable on the date specified therein, with accrued interest to such date on the amount prepaid. ARTICLE V YIELD PROTECTION AND ILLEGALITY SECTION 5.01 Inability to Determine Rates. If the Agent shall determine that adequate and reasonable means do not exist to ascertain the Eurodollar Rate, or the Majority Banks shall determine that the Eurodollar Rate does not accurately reflect the cost to the Banks of making or maintaining Eurodollar Rate Loans, then the Agent shall give telephonic notice (promptly confirmed in writing) to the Borrower and each Bank of such determination. Such notice shall specify the basis for such determination and shall, in the absence of manifest error, be conclusive and binding for all purposes. Thereafter, the obligation of the Banks to make or maintain Eurodollar Rate Loans hereunder shall be suspended until the Agent (upon the instructions of the Majority Banks) revokes such notice. Upon receipt of such notice, the Borrower may revoke any Notice then submitted by it. If the Borrower does not revoke such Notice, the Banks shall make, convert or continue Loans, as proposed by the Borrower, in the amount specified in the Notice submitted by the Borrower, but such Loans shall be made, converted or continued as Base Rate Loans instead of Eurodollar Rate Loans, as the case may be. SECTION 5.02 Funding Losses. In addition to such amounts as are required to be paid by the Borrower pursuant to Section 5.03, the Borrower shall compensate each Bank, promptly upon receipt of such Bank's written request made to the Borrower (with a copy to the Agent), for all losses, costs and expenses (including any loss or expense incurred by such Bank in obtaining, liquidating or re-employing deposits or other funds to fund or maintain its Eurodollar Rate Loans), if any, which such Bank sustains: (I) if the Borrower repays, converts or prepays any Eurodollar Rate Loan on a date other than the last day of an Interest Period for such Eurodollar Rate Loan (whether as a result of an optional prepayment, mandatory prepayment, a payment as a result of acceleration or otherwise); (II) if the Borrower fails to borrow a Eurodollar Rate Loan after giving its Notice (other than as a result of the operation of Section 5.01 or 5.04); (III) if the Borrower fails to convert into or continue a Eurodollar Rate Loan after giving its Notice (other than as a result of the operation of Section 5.01 or 5.04); or (IV) if the Borrower fails to prepay a Eurodollar Rate Loan after giving its Notice. Any such request for compensation shall set forth the basis for the calculation of requested compensation and shall, in the absence of manifest error, be conclusive and binding for all purposes. 24. SECTION 5.03 Regulatory Changes. (a) Increased Costs. If after the date hereof, the adoption of, or any change in, any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof (a "Regulatory Change"), or compliance by any Bank (or its Lending Office) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including any such requirement imposed by the FRB, but excluding with respect to any Eurodollar Rate Loan any such requirement included in the calculation of the Eurodollar Rate) against assets of, deposits with or for the account of, or credit extended by, any Bank's Lending Office or shall impose on any Bank (or its Lending Office) or on the United States market for the interbank eurodollar market any other condition affecting its Eurodollar Rate Loans or its obligation to make Eurodollar Rate Loans, and the result of any of the foregoing is to increase the cost to such Bank (or its Lending Office) of making or maintaining any Eurodollar Rate Loan hereunder, or to reduce the amount of any sum received or receivable by such Bank (or its Lending Office) under this Agreement with respect thereto, by an amount deemed by such Bank, in good faith and on a non-discriminatory basis, to be material, then from time to time, within 30 days after written demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amounts as shall compensate such Bank for such increased cost or reduction in respect of its Eurodollar Rate Loans hereunder. (b) Capital Requirements. If any Bank shall have determined in good faith that any Regulatory Change regarding capital adequacy, or compliance by such Bank (or any corporation controlling such Bank) with any request, guideline or directive regarding capital adequacy (whether or not having the force of law) of any Governmental Authority, has or shall have the effect of reducing the rate of return on such Bank's or such corporation's capital as a consequence of such Bank's obligations hereunder to a level below that which such Bank or such corporation would have achieved but for such adoption, change or compliance (taking into consideration such Bank's or such corporation's policies with respect to capital adequacy), by an amount deemed, in good faith and on a non-discriminatory basis, by such Bank to be material, then from time to time, within 30 days after written demand by such Bank (with a copy to the Agent) in reasonable detail describing such reduction, the Borrower shall pay to such Bank such additional amounts as shall compensate such Bank for such reduction in respect of its obligations hereunder. (c) Requests. Any such request for compensation by a Bank under this Section 5.03 shall set forth the basis of calculation thereof and shall, in the absence of manifest error, be conclusive and binding for all purposes. In determining the amount of such compensation, such Bank may use any reasonable averaging and attribution methods. SECTION 5.04 Illegality. If any Bank shall determine that it has become unlawful, as a result of any Regulatory Change, for such Bank to make, convert into or maintain Eurodollar Rate Loans as contemplated by this Agreement, such Bank shall promptly give notice of such determination to the Borrower (through the Agent), and (I) the obligation of such Bank to make or convert into Eurodollar Rate Loans, as the case may be, shall be suspended until such Bank gives notice that the circumstances causing such suspension no longer exist; and (II) each 25. of such Bank's outstanding Eurodollar Rate Loans, as the case may be, shall, if requested by such Bank, be converted into a Base Rate Loan not later than upon expiration of the Interest Period related to such Eurodollar Rate Loan, or, if earlier, on such date as may be required by the applicable Regulatory Change, as shall be specified in such request. Any such determination shall, in the absence of manifest error, be conclusive and binding for all purposes. SECTION 5.05 Funding Assumptions. Solely for purposes of calculating amounts payable by the Borrower to the Banks under this Article V, each Eurodollar Rate Loan made by a Bank (and any related reserve, special deposit or similar requirement) shall be conclusively deemed to have been funded at the Interbank Rate used in determining the Eurodollar Rate for such Eurodollar Rate Loan by a matching deposit or other borrowing in the interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Eurodollar Rate Loan is in fact so funded. SECTION 5.06 Obligation to Mitigate. Each Bank agrees that as promptly as practicable after it becomes aware of the occurrence of an event that would entitle it to give notice pursuant to Section 5.03(a), 5.03(b) or 5.04, and in any event if so requested by the Borrower, each Bank shall use reasonable efforts to make, fund or maintain its affected Eurodollar Rate Loans through another Lending Office if as a result thereof the increased costs would be avoided or materially reduced or the illegality would thereby cease to exist; provided, however, that such Bank shall not be obligated to select an alternative Lending Office if such Bank determines that (a) as a result of such selection such Bank would be in violation of any applicable law, regulation, treaty, or guideline, or would incur additional costs or expenses or (b) such selection would be inadvisable for regulatory reasons or inconsistent with the interests of such Bank. SECTION 5.07 Substitution of Banks. Upon the receipt by the Borrower from any Bank (an "Affected Bank") of a request for compensation under Section 5.03, a notice under Section 5.04 or a request for payment under Section 6.03, or upon notice to the Agent from any Bank that it shall not consent to a request by the Borrower for an extension of the Revolving Termination Date pursuant to subsection 4.01(c), the Borrower may (i) request one more of the other Banks to acquire and assume all or part of such Affected Bank's Loans and Revolving Commitment; or (ii) designate an Eligible Assignee satisfactory to the Borrower to acquire and assume all or part of such Affected Bank's Loans and Revolving Commitment (in each case, a "Replacement Bank"). Any such designation of a Replacement Bank under clause (ii) shall be subject to the prior written consent of the Agent (which consent shall not be unreasonably withheld). In connection with any such assumption (a) the Replacement Bank shall pay to the Affected Bank in immediately available funds on the date of the assignment the principal amount of the Loans made by the Affected Bank hereunder which are being acquired by the Replacement Bank, and (b) the Borrower shall pay to the Affected Bank in immediately available funds on the date of the assignment the interest accrued to the date of the assignment on the Loans which are being acquired by the Replacement Bank and all other amounts then accrued for the Affected Bank's account or owed to it hereunder with respect to such Loans, including any amounts owing under Section 5.02. 26. ARTICLE VI PAYMENTS SECTION 6.01 Pro Rata Treatment. Except as otherwise provided in this Agreement, each Borrowing hereunder, each Revolving Commitment reduction, each payment (including each prepayment) by the Borrower on account of the principal of and interest on the Loans and on account of any Revolving Commitment fee or utilization fee, and each conversion or continuation of Loans, shall be made ratably in accordance with the respective Pro Rata Shares of the Banks. SECTION 6.02 Payments. (a) Payments. The Borrower shall make each payment under the Loan Documents, unconditionally in full without set-off, counterclaim or other defense, not later than 2:00 P.M. (California time) on the day when due to the Agent in Dollars and in same day or immediately available funds, to the Agent's Account. The Agent shall promptly thereafter distribute like funds relating to the payment of principal or interest, Revolving Commitment fee, utilization fee or any other amounts payable to the Banks, ratably (except as a result of the operation of Article V) to the Banks in accordance with their Pro Rata Shares. (b) Application. (i) Unless the Agent shall receive a timely election by the Borrower with respect to the application of any principal payments, each payment of principal by the Borrower shall be applied (a) first, to the Base Rate Loans then outstanding, and (b) second, to the Eurodollar Rate Loans. (c) Extension. Whenever any payment hereunder shall be stated to be due, or whenever any Interest Payment Date or any other date specified hereunder would otherwise occur, on a day other than a Business Day, then, except as otherwise provided herein, such payment shall be made, and such Interest Payment Date or other date shall occur, on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest, Revolving Commitment fee or utilization fee hereunder. SECTION 6.03 Taxes. (a) No Reduction of Payments. The Borrower shall pay all amounts of principal, interest, fees and other amounts due under the Loan Documents free and clear of, and without reduction for or on account of, any present and future taxes, levies, imposts, duties, fees, assessments, charges, deductions or withholdings and all liabilities with respect thereto excluding, in the case of each Bank and the Agent, income and franchise taxes imposed on it by the jurisdiction under the laws of which such Bank or the Agent is organized or in which its principal executive offices may be located or any political subdivision or taxing authority thereof or therein or by the jurisdiction of such Bank's Lending Office and any political subdivision or taxing authority thereof or therein (all such nonexcluded taxes, levies, imposts, duties, fees, assessments, charges, deductions, withholdings and liabilities being hereinafter referred to as "Taxes"). If any Taxes shall be required by law to be deducted or withheld from any payment, the Borrower shall increase the amount paid so that the respective Bank or the Agent receives when due (and is entitled to retain), after deduction or withholding for or on account of such 27. Taxes (including deductions or withholdings applicable to additional sums payable under this Section 6.03), the full amount of the payment provided for in the Loan Documents. (b) Deduction or Withholding; Tax Receipts. If the Borrower makes any payment hereunder in respect of which it is required by law to make any deduction or withholding, it shall pay the full amount to be deducted or withheld to the relevant taxation or other authority within the time allowed for such payment under applicable law and promptly thereafter shall furnish to the Agent (for itself or for redelivery to the Bank to or for the account of which such payment was made) an original or certified copy of a receipt evidencing payment thereof, together with such other information and documents as the Agent or any Bank (through the Agent) may reasonably request. (c) Indemnity. If any Bank or the Agent is required by law to make any payment on account of Taxes, or any liability in respect of any Tax is imposed, levied or assessed against any Bank or the Agent, the Borrower shall indemnify the Agent and the Banks for and against such payment or liability, together with any incremental taxes, interest or penalties, and all costs and expenses, payable or incurred in connection therewith, including Taxes imposed on amounts payable under this Section 6.03. A certificate of the Agent or any Bank as to the amount of any such payment shall, in the absence of manifest error, be conclusive and binding for all PURPOSES. If any Bank shall obtain a credit with respect to all or part of any tax paid or indemnified by the Borrower pursuant to this Section 6.03, then, to the extent such items have not previously been taken into account in computing the amount of any payment pursuant to this sentence or the amount of indemnification payable under this Section 6.03, such Bank shall promptly pay to the Borrower an amount equal to the amount of such credit, reduced by the amount of any prior payments by such Bank to, or for the benefit of, the Borrower arising from the same claim. All computations required hereunder shall be made by such Bank, acting reasonably and in good faith and the results of such computations shall be delivered to the Borrower. At the request and expense of the Borrower the accuracy of such computations shall be verified by such Bank's independent accounts. (d) Forms W-8BEN and W-8ECI. Each Bank that is incorporated under the laws of any jurisdiction outside the United States agrees to deliver to the Agent and the Borrower on or prior to the Closing Date, and in a timely fashion thereafter, Internal Revenue Service Form W-8BEN, Form W-8ECI or such other documents and forms of the I.R.S., duly executed and completed by such Bank, as are required under United States law to establish such Bank's status for United States withholding tax purposes. (e) Mitigation. Each Bank agrees that as promptly as practicable after it becomes aware of the occurrence of an event that would cause the Borrower to make any payment in respect of Taxes to such Bank or a payment in indemnification with respect to any Taxes, and in any event if so requested by the Borrower following such occurrence, each Bank shall use reasonable efforts to make, fund or maintain its affected Loan (or relevant part thereof) through another Lending Office if as a result thereof the additional amounts so payable by the Borrower would be avoided or materially reduced; provided, however, that such Bank shall not be obligated to select an alternative Lending Office if such Bank determines that (a) as a result of such selection such Bank would be in violation of any applicable law, regulation, treaty, or 28. guideline, or would incur additional costs or expenses or (b) such selection would be inadvisable for regulatory reasons or inconsistent with the interests of such Bank. SECTION 6.04 Non-Receipt of Funds. Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to any of the Banks hereunder that the Borrower shall not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent the Borrower shall not have so made such payment in full to the Agent, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate. SECTION 6.05 Sharing of Payments. If any Bank shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Loans made by it (other than pursuant to a provision hereof providing for non-pro rata treatment) in excess of its Pro Rata Share of payments on account of the Loans obtained by all the Banks, such Bank shall forthwith advise the Agent of the receipt of such payment, and within five Business Days of such receipt purchase from the other Banks (through the Agent), without recourse, such participations in the Loans made by them as shall be necessary to cause such purchasing Bank to share the excess payment ratably with each of them in accordance with the respective Pro Rata Shares of the Banks; provided, however, that if all or any portion of such excess payment is thereafter recovered by or on behalf of the Borrower from such purchasing Bank, the purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. No documentation other than notices and the like referred to in this Section 6.05 shall be required to implement the terms of this Section 6.05. The Agent shall keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased pursuant to this Section 6.05 and shall in each case notify the Banks following any such purchases. ARTICLE VII CONDITIONS PRECEDENT SECTION 7.01 Conditions Precedent to the Initial Loans. The obligation of each Bank to make its initial Loan shall be subject to the satisfaction of each of the following conditions precedent on or before the Closing Date: (a) Fees and Expenses. The Borrower shall have paid (i) all invoiced fees then due in accordance with Section 3.03 and under the Fee Letter and (ii) all invoiced costs and expenses then due in accordance with Section 12.04(a). (b) Loan Documents. The Agent shall have received the following Loan Documents: (i) this Agreement, executed by the Borrower and each Bank (ii) the Notes, executed by the Borrower, for any Banks requesting Notes; and (iii) the Fee Letter, executed by each of the respective parties thereto. 29. (c) Certificate of Responsible Officer. The Agent shall have received in form and substance satisfactory to it a certificate of a Responsible Officer of the Borrower, dated the Closing Date, stating that (a) the representations and warranties contained in Section 8.01 and in the other Loan Documents are true and correct on and as of the date of such certificate as though made on and as of such date and (b) on and as of the Closing Date, no Default shall have occurred and be continuing or shall result from the initial Borrowing. (d) Corporate Documents. The Agent shall have received the following, in form and substance satisfactory to it: (i) certified copies of the certificate or articles, as the case may be, of incorporation of the Borrower, together with certificates as to good standing and tax status, from the Secretary of State or other Governmental Authority, as applicable, of the Borrower's state of incorporation and California, each dated as of a recent date prior to the Closing Date; (ii) a certificate of the Secretary or Assistant Secretary of the Borrower, dated the Closing Date, certifying (a) copies of the bylaws of the Borrower and the resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance of the Loan Documents and (b) the incumbency, authority and signatures of each officer of the Borrower authorized to execute and deliver the Loan Documents and act with respect thereto, upon which certificate the Agent and the Banks may conclusively rely until the Agent shall have received a further certificate of the Secretary or an Assistant Secretary of the Borrower canceling or amending such prior certificate; (e) Legal Opinion. The Agent shall have received the opinion of Gibson Dunn & Crutcher LLP, counsel to the Borrower, dated the Closing Date, in substantially the form of Exhibit E. (f) Compliance Certificate. The Agent shall have received a completed Compliance Certificate for the Borrower's fiscal quarter ended on June 30, 2001. (g) Material Adverse Effect. On and as of the date of such Borrowing, there shall have occurred no Material Adverse Effect since June 30, 2001. (h) Payment to Departing Banks. All interest, principal, fees and other amounts owing under the Existing Credit Agreement to any Departing Bank shall have been paid in full, and all commitments by any Departing Bank to lend thereunder shall be terminated. SECTION 7.02 Conditions Precedent to All Loans. The obligation of each Bank to make a Loan (including its initial Loan) on the occasion of each Borrowing shall be subject to the satisfaction of each of the following conditions precedent: (a) Notice. The Borrower shall have given the Notice of Borrowing as provided in Section 2.02(a). 30. (b) Representations and Warranties; No Default. On the date of such Borrowing, both before and after giving effect thereto and to the application of proceeds therefrom: (i) the representations and warranties contained in Section 8.01 and in the other Loan Documents shall be true, correct and complete on and as of the date of such Borrowing as though made on and as of such date; and (ii) no Default shall have occurred and be continuing or shall result from such Borrowing. For purposes of this Section 7.02(b), the representation and warranty made in Section 8.01(p) shall be deemed instead to refer to the last day of the most recent quarter and year for which financial statements have then been delivered; the preceding clause (i) shall not be deemed to refer to any other representations and warranties which relate solely to an earlier date (provided that such other representations and warranties shall be true, correct and complete as of such earlier date); and the preceding clause (i) shall take into account any amendments to the Schedules and other disclosures made in writing by the Borrower to the Agent and the Banks after the Closing Date and approved by the Agent and the Majority Banks. The giving of any Notice of Borrowing and the acceptance by the Borrower of the proceeds of each Borrowing on or following the Closing Date shall each be deemed a certification to the Agent and the Banks that on and as of the date of such Borrowing such statements are true. (c) Additional Documents. The Agent shall have received, in form and substance satisfactory to it, such additional approvals, opinions, documents and other information as the Agent or any Bank (through the Agent) may reasonably request. ARTICLE VIII REPRESENTATIONS AND WARRANTIES SECTION 8.01 Representations and Warranties. The Borrower represents and warrants to each Bank and the Agent that: (a) Organization and Powers. Each of the Borrower and its Material Subsidiaries (i) is a corporation or partnership duly organized or formed, as the case may be, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation, (ii) except as set forth on Schedule 8.01(a), is qualified to do business and is in good standing in each jurisdiction in which the failure so to qualify or be in good standing would result in a Material Adverse Effect and (iii) has all requisite power and authority to own its assets and carry on its business and, with respect to the Borrower, to execute, deliver and perform its obligations under the Loan Documents. (b) Authorization; No Conflict. The execution, delivery and performance by the Borrower of the Loan Documents have been duly authorized by all necessary corporate action of the Borrower and do not and will not (i) contravene the terms of the certificate or articles, as the case may be, of incorporation and the bylaws of the Borrower or result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected; (ii) violate any provision of any law, rule, regulation, order, writ, judgment, injunction, decree or the like binding on or affecting the Borrower; or (iii) except as contemplated by this Agreement, result in, or require, the creation or imposition of any Lien upon or with respect to any of the properties of the Borrower. 31. (c) Binding Obligation. The Loan Documents constitute, or when delivered under this Agreement will constitute, legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms. (d) Consents. No authorization, consent, approval, license, exemption of, or filing or registration with, any Governmental Authority, or approval or consent of any other Person, is required for the due execution, delivery or performance by the Borrower of any of the Loan Documents. (e) No Defaults. Neither the Borrower nor any of its Material Subsidiaries is in default under any material contract, lease, agreement, judgment, decree or order to which it is a party or by which it or its properties may be bound. (f) Title to Properties; Liens. The Borrower and its Material Subsidiaries have good and marketable title to, or valid and subsisting leasehold interests in, their properties and assets, and there is no Lien upon or with respect to any of such properties or assets, except for Permitted Liens. (g) Litigation. Except as set forth on Schedule 8.01(g), there are no actions, suits or proceedings pending or, to the best of the Borrower's knowledge, threatened against or affecting the Borrower or any of its Subsidiaries or the properties of the Borrower or any of its Subsidiaries before any Governmental Authority or arbitrator which if determined adversely to the Borrower or any such Subsidiary would result in a Material Adverse Effect. (h) Compliance with Environmental Laws. Except as set forth on Schedule 8.01(h), and except in respect of matters that in the aggregate are not and cannot reasonably be expected to result in a Material Adverse Effect, the Borrower and each Material Subsidiary is in full compliance with all Environmental Laws, whether in connection with the ownership, use, maintenance or operation of its Premises or the conduct of any business thereon, or otherwise. Neither the Borrower, any Material Subsidiary, nor to the best of the Borrower's knowledge, any previous owner, tenant, occupant, user or operator of the Premises, or any present tenant or other present occupant, user or operator of the Premises has used, generated, manufactured, installed, treated, released, stored or disposed of any Hazardous Substances on, under, or at the Premises, except in compliance with all applicable Environmental Laws. To the best of the Borrower's knowledge, no Hazardous Substances have at any time been spilled, leaked, dumped, deposited, discharged, disposed of or released on, under, at or from the Premises, nor have any of the Premises been used at any time by any Person as a landfill or waste disposal site. Except as set forth on Schedule 8.01(h), there are no actions, suits, claims, notices of violation, hearings, investigations or proceedings pending or, to the best of the Borrower's knowledge, threatened against or affecting the Borrower, any Material Subsidiary or with respect to the ownership, use, maintenance and operation of the Premises, relating to Environmental Laws or Hazardous Substances. (i) Governmental Regulation. Neither the Borrower nor any of its Material Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Investment Company Act of 1940, the Interstate Commerce Act, any 32. state public utilities code or any other federal or state statute or regulation limiting its ability to incur Indebtedness. (j) ERISA. (i) The Borrower and all ERISA Affiliates have satisfied all applicable contribution requirements under Section 412(c)(11) of the Internal Revenue Code and have never sought a waiver under Section 412(d) of the Internal Revenue Code; (ii) no Termination Event has occurred and is continuing, or is reasonably expected to occur; (iii) the aggregate amount of Unfunded Accrued Benefits under all Pension Plans (excluding in such computation Pension Plans with assets greater than accrued benefits) does not exceed $5,000,000; (iv) there is no condition or event under which the Borrower, any ERISA Affiliate, or any Plan maintained by the Borrower or any ERISA Affiliate could be subject to any risk of material liability under ERISA or the Internal Revenue Code, regardless of whether the Borrower or any ERISA Affiliate engaged in a transaction giving rise to the liability; (v) neither the Borrower nor any ERISA Affiliate has unfunded, contingent liability that exceeds $5,000,000 with respect to Plans that provide post-retirement welfare benefits; and (vi) all Plans maintained by, or contributed to by, the Borrower or any ERISA Affiliate comply in all material respects, and have been administered in material compliance with, the requirements of applicable law (including, if applicable, foreign law, ERISA and the Internal Revenue Code), and in accordance with each Plan's terms. (k) Subsidiaries. The name, capital structure and ownership of each Subsidiary of the Borrower on the date of this Agreement is as set forth in Schedule 8.01(k). All of the outstanding capital stock of, or other interest in, each such Subsidiary has been validly issued, and is fully paid and nonassessable. Except as set forth in such Schedule, on the date of this Agreement the Borrower has no equity interest in any Person. Each Material Subsidiary of the Borrower, as of the date of this Agreement, is specified as such on Schedule 8.01(k). (l) Margin Regulations. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying "margin stock" (within the meaning of Regulations G or U of the FRB). No part of the proceeds of the Loans will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock, except in accordance with the provisions of Regulations T, U, and X of the FRB. (m) Taxes. Each of the Borrower and its Material Subsidiaries has duly filed all tax and information returns required to be filed, and has paid all taxes, fees, assessments and other governmental charges or levies that have become due and payable, except to the extent 33. such taxes or other charges are being contested in good faith and are adequately reserved against in accordance with GAAP. (n) Patents and Other Rights. Each of the Borrower and its Subsidiaries possesses all permits, franchises, licenses, patents, trademarks, trade names, service marks, copyrights and all rights with respect thereto, free from burdensome restrictions, that are reasonably necessary for the ownership, maintenance and operation of its business and neither the Borrower nor any such Subsidiary is in violation of any rights of others with respect to the foregoing, except where the failure to do so would not reasonably be expected to result in a Material Adverse Effect. (o) Insurance. The properties of the Borrower and its Material Subsidiaries are insured, with financially sound and reputable insurance companies, in such amounts, with such deductibles and covering such risks as is customarily carried by companies engaged in similar businesses and owning similar properties in the localities where the Borrower or such Material Subsidiary operates. (p) Financial Statements. The audited consolidated balance sheet of the Borrower and its Subsidiaries as at December 30, 2000, and the related consolidated statements of income, shareholders' equity and cash flows for the fiscal year then ended, and the unaudited consolidated balance sheet of the Borrower and its Subsidiaries as at June 30, 2001, and the related consolidated statements of income, shareholders' equity and cash flows, for the quarter then ended and the 6-month period then ended, are complete and correct and fairly present the financial condition of the Borrower and its Subsidiaries as at such dates and the results of operations of the Borrower and its Subsidiaries for the periods covered by such statements, in each case in accordance with GAAP consistently applied, subject, in the case of the June 30, 2001 financial statements, to normal year-end adjustments and the absence of notes. (q) Liabilities. Neither the Borrower nor any of its Material Subsidiaries has any material liabilities, fixed or contingent, that are not reflected in the financial statements referred to in subsection (p), in the notes thereto or otherwise disclosed in writing to the Banks, other than liabilities arising in the ordinary course of business since June 30, 2001. (r) Labor Disputes, Etc. There are no strikes, lockouts or other labor disputes against the Borrower or any of its Material Subsidiaries, or, to the best of the Borrower's knowledge, threatened against or affecting the Borrower or any of its Material Subsidiaries, and no event of loss has occurred with respect to any assets or property of the Borrower or any of its Subsidiaries, which would reasonably be expected to result in a Material Adverse Effect. (s) Solvency. Each of the Borrower and its Material Subsidiaries is Solvent. (t) Disclosure. None of the representations or warranties made by the Borrower in the Loan Documents as of the date of such representations and warranties, and none of the statements contained in each exhibit, report, certificate or written statement furnished by or on behalf of the Borrower or any of its Subsidiaries to the Agent and the Banks in connection with the Loan Documents, contains any untrue statement of a material fact 34. or omits any material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they are made, not misleading, as of the time made or delivered. ARTICLE IX COVENANTS SECTION 9.01 Reporting Covenants. So long as any of the Obligations shall remain unpaid or any Bank shall have any Revolving Commitment, the Borrower agrees that: (a) Financial Statements and Other Reports. The Borrower shall furnish to the Agent in sufficient copies for distribution to the Banks: (i) as soon as available and in any event within 55 days after the end of each of the first three fiscal quarters of each fiscal year, a consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such quarter, and the related consolidated statements of income, shareholders' equity and cash flows of the Borrower and its Subsidiaries for such quarter and the portion of the fiscal year through the end of such quarter, prepared in accordance with GAAP consistently applied, all in reasonable detail and setting forth in comparative form the figures for the corresponding period in the preceding fiscal year, together with a certificate of a Responsible Officer of the Borrower stating that such financial statements fairly present the financial condition of the Borrower and its Subsidiaries as at such date and the results of operations of the Borrower and its Subsidiaries for the period ended on such date and have been prepared in accordance with GAAP consistently applied, subject to changes resulting from normal, year-end audit adjustments and except for the absence of notes; (ii) as soon as available and in any event within 100 days after the end of each fiscal year, a consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such fiscal year, and the related consolidated statements of income, shareholders' equity and cash flows of the Borrower and its Subsidiaries for such fiscal year, prepared in accordance with GAAP consistently applied, all in reasonable detail and setting forth in comparative form the figures for the previous fiscal year, accompanied by a report thereon of a firm of independent certified public accountants of recognized national standing, which report shall be unqualified as to scope of audit or the status of the Borrower and its Subsidiaries as a going concern; (iii) together with the financial statements required pursuant to clauses (i) and (ii), a Compliance Certificate of a Responsible Officer as of the end of the applicable accounting period; (iv) promptly after the giving, sending or filing thereof, copies of all reports, if any, which the Borrower sends to the holders of its respective capital stock or other securities and of all reports or filings, if any, by the Borrower with the SEC or any national securities exchange. As to any information contained in materials furnished pursuant to clause (iv), the Borrower shall not be separately required to furnish such information under clause (i) or (ii), but the 35. foregoing shall not be in derogation of the obligation of the Borrower to furnish the information and materials described in clauses (i) and (ii) at the times specified therein. (b) Additional Information. The Borrower shall furnish to the Agent: (i) promptly after the Borrower has knowledge or becomes aware thereof, notice of the occurrence or existence of any Default; (ii) prompt written notice of (A) any proposed acquisition of stock, assets or property by the Borrower or any of its Material Subsidiaries that could reasonably be expected to result in material environmental liability under Environmental Laws, and (B)(1) any spillage, leakage, discharge, disposal, leaching, migration or release of any Hazardous Substances required to be reported to any Governmental Authority under applicable Environmental Laws, and (2) all actions, suits, claims, notices of violation, hearings, investigations or proceedings pending, or to the best of the Borrower's knowledge, threatened against or affecting the Borrower or any of its Material Subsidiaries or with respect to the ownership, use, maintenance and operation of the Premises, relating to Environmental Laws or Hazardous Substances; (iii) prompt written notice of all actions, suits and proceedings before any Governmental Authority or arbitrator pending, or to the best of the Borrower's knowledge, threatened against or affecting the Borrower or any of its Material Subsidiaries which if adversely determined would be reasonably expected to have a Material Adverse Effect; (iv) promptly after the Borrower has knowledge or becomes aware thereof, (a) notice of the occurrence of any Termination Event, together with a copy of any notice of such Termination Event to the PBGC, and (b) the details concerning any material action taken or proposed to be taken by the IRS, PBGC, Department of Labor or other Person with respect thereto; (v) the information regarding insurance maintained by the Borrower and its Material Subsidiaries as required under Section 9.03(c); (vi) within 30 days of the date thereof, or, if earlier, on the date of delivery of any financial statements pursuant to subsection (a), notice of any material change in accounting policies or financial reporting practices by the Borrower or any of its Material Subsidiaries; (vii) promptly after the occurrence thereof, notice of any labor controversy resulting in or threatening to result in any strike, work stoppage, boycott, shutdown or other material labor disruption against or involving the Borrower or any of its Material Subsidiaries; (viii) upon the reasonable request from time to time, but no more often than once per fiscal quarter, of the Agent or any Bank (through the Agent), the Swap Termination Values, together with a description of the method by which such values were 36. determined, relating to any then-outstanding Rate Contracts to which the Borrower or any of its Material Subsidiaries is party; (ix) prompt written notice of any other condition or event which has resulted, or that could reasonably be expected to result, in a Material Adverse Effect; and (x) such other information respecting the operations, properties, business or condition (financial or otherwise) of the Borrower or its Subsidiaries as any Bank (through the Agent) may from time to time reasonably request. Each notice pursuant to this subsection (b) shall be accompanied by a written statement by a Responsible Officer of the Borrower setting forth details of the occurrence referred to therein, and stating what action the Borrower proposes to take with respect thereto. SECTION 9.02 Financial Covenants. So long as any of the Obligations shall remain unpaid or any Bank shall have any Revolving Commitment, the Borrower agrees that: (a) Minimum Consolidated EBITDA. The Borrower shall maintain as of the last day of each fiscal quarter a minimum Consolidated EBITDA for the period of four fiscal quarters ended on such date (taken as a single accounting period) of not less than $200,000,000; (b) [Intentionally omitted.] (c) Minimum Fixed Charge Coverage Ratio. The Borrower shall maintain as of the last day of each fiscal quarter a ratio (such ratio, the "Fixed Charge Coverage Ratio") of (i) Consolidated EBITDA to (ii) the sum of (without duplication) (A) Consolidated Interest Expense plus (B) 20% of Funded Debt plus (C) taxes paid in cash, plus (D) payments in respect of Capital Leases, in each case, of the Borrower and its Subsidiaries on a consolidated basis, as determined in accordance with GAAP, for the 12-month period ended on such date, of not less than 1.50 to 1.00. (d) Minimum Current Ratio. The Borrower shall maintain as of the last day of each fiscal quarter a ratio of (i) current assets to (ii) current liabilities, in each case, of the Borrower and its Subsidiaries on a consolidated basis, as determined in accordance with GAAP, of not less than 1.00 to 1.00. For purposes of calculating the Borrower's compliance with this Section 9.02(d) as of the last day of any fiscal quarter, current liabilities shall include (A) off-balance sheet Indebtedness having a maturity of less than one year from such fiscal quarter-end, (B) reimbursement obligations in respect of letters of credit having an expiry date less than one year from such fiscal quarter-end and (C) the current portion of (1) all Loans then outstanding hereunder and (2) all loans then outstanding under the Multi-Year Credit Agreement. (e) Maximum Funded Debt to EBITDA Ratio. The Borrower shall maintain as of the last day of each fiscal quarter a ratio of (i) Funded Debt of the Borrower and its Subsidiaries on a consolidated basis, to (ii) Consolidated EBITDA for the twelve-month period ended on such date, of not more than 2.00 to 1.00. 37. SECTION 9.03 Additional Affirmative Covenants. So long as any of the Obligations shall remain unpaid or any Bank shall have any Revolving Commitment, the Borrower agrees that: (a) Preservation of Existence, Etc. The Borrower shall, and shall cause each of its Material Subsidiaries to, (i) maintain and preserve its legal existence, and (ii) maintain and preserve its rights to transact business and all other rights, franchises and privileges necessary or desirable in the normal course of its business and operations and the ownership of its properties, except in connection with transactions permitted by Section 9.04. (b) Payment of Obligations. The Borrower shall, and shall cause each of its Material Subsidiaries to, pay and discharge (i) all taxes, fees, assessments and governmental charges or levies imposed upon it or upon its properties or assets prior to the date on which penalties attach thereto, and all lawful claims for labor, materials and supplies which, if unpaid, might become a Lien upon any properties or assets of the Borrower or any Material Subsidiary, except to the extent such taxes, fees, assessments or governmental charges or levies, or such claims, are being contested in good faith by appropriate proceedings and are adequately reserved against in accordance with GAAP; (ii) all lawful claims which, if unpaid, would by law become a Lien upon its property not constituting a Permitted Lien; and (iii) all Indebtedness, as and when due and payable, but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness. (c) Maintenance of Insurance. The Borrower shall, and shall cause each of its Material Subsidiaries to, carry and maintain in full force and effect, at its own expense and with financially sound and reputable insurance companies, insurance in such amounts, with such deductibles and covering such risks as is customarily carried by companies engaged in the same or similar businesses and owning similar properties in the localities where the Borrower or such Subsidiary operates, including fire, extended coverage, business interruption, public liability, property damage and worker's compensation. Upon the request of the Agent or any Bank, the Borrower shall furnish to the Agent from time to time a certificate of the Borrower's insurance broker or other insurance specialist stating that all premiums then due on the policies relating to insurance have been paid, that such policies are in full force and effect and that such insurance coverage and such policies comply with all the requirements of this subsection. (d) Keeping of Records and Books of Account. The Borrower shall, and shall cause each of its Material Subsidiaries to, keep adequate records and books of account, in which complete entries shall be made in accordance with GAAP, reflecting all financial transactions of the Borrower and its Material Subsidiaries. (e) Inspection Rights. Upon reasonable prior notice to the Borrower (except during the existence of an Event of Default, in which case no prior notice shall be required), the Borrower shall at any reasonable time and from time to time permit the Agent and the Banks or any of their respective agents or representatives to visit and inspect any of the properties of the Borrower and its Material Subsidiaries and to examine and make copies of and abstracts from the records and books of account of the Borrower and its Material Subsidiaries, and to discuss the business affairs, finances and accounts of the Borrower and any such Material Subsidiary with any of the officers or accountants of the Borrower or such Material Subsidiary; provided that 38. with respect to any such discussions with the Borrower's or any Material Subsidiary's accountants, the Borrower shall be given a reasonable opportunity to have a representative participate in or otherwise be present at any such discussion; and provided further that so long as no Event of Default has occurred and is continuing, the Borrower's prior written consent (which consent shall not be unreasonably withheld) shall be required prior to any discussions between the Agent or any Bank or any of their respective agents or representatives, on the one hand, and the Borrower's or any Material Subsidiary's accountants, on the other. (f) Compliance with Laws, Etc. The Borrower shall, and shall cause each of its Material Subsidiaries to, comply in all material respects with the requirements of all applicable laws, rules, regulations and orders of any Governmental Authority (including all Environmental Laws) and the terms of any indenture, contract or other instrument to which it may be a party or under which it or its properties may be bound, except to the extent that the failure to so comply would not reasonably be expected to result in a Material Adverse Effect. (g) Maintenance of Properties, Etc. The Borrower shall, and shall cause each of its Material Subsidiaries to, maintain and preserve all of its properties necessary or useful in the proper conduct of its business in good working order and condition in accordance with the general practice of other corporations of similar character and size, ordinary wear and tear excepted. (h) Licenses. The Borrower shall, and shall cause each of its Material Subsidiaries to, obtain and maintain all licenses, authorizations, consents, filings, exemptions, registrations and other governmental approvals necessary in connection with (i) the execution, delivery and performance of the Loan Documents and the consummation of the transactions therein contemplated and (ii) the operation and conduct of its business and ownership of its properties, except, in the case of this clause (ii), where the failure to do so would not reasonably be expected to have a Material Adverse Effect. (i) Action Under Environmental Laws. The Borrower shall, and shall cause each of its Material Subsidiaries to, upon becoming aware of the presence of any Hazardous Substance or the existence of any environmental liability under applicable Environmental Laws with respect to the Premises, take all actions, at their cost and expense, as shall be necessary or advisable to investigate and clean up the condition of the Premises, including all removal, containment and remedial actions, and restore the Premises to a condition in compliance with applicable Environmental Laws. (j) Use of Proceeds. The Borrower shall use the proceeds of the Loans solely for general corporate purposes, including the repurchase of the Borrower's stock for immediate cancellation and for acquisitions, in each case, in compliance herewith. (k) Further Assurances and Additional Acts. The Borrower shall execute, acknowledge, deliver, file, notarize and register at its own expense all such further agreements, instruments, certificates, documents and assurances and perform such acts as the Agent or the Majority Banks shall reasonably deem necessary or appropriate to effectuate the purposes of the Loan Documents, and promptly provide the Agent with evidence of the foregoing satisfactory in form and substance to the Agent or the Majority Banks. 39. SECTION 9.04 Negative Covenants. So long as any of the Obligations shall remain unpaid or any Bank shall have any Revolving Commitment, the Borrower agrees that: (a) Liens; Negative Pledges. The Borrower shall not create, incur, assume or suffer to exist any Lien upon or with respect to any of its properties, revenues or assets, whether now owned or hereafter acquired, other than Permitted Liens. (b) Change in Nature of Business. The Borrower shall not, and shall not permit any of its Subsidiaries to, engage in any material line of business substantially different from those lines of business carried on by it at the date hereof or other businesses incidental or reasonably related thereto. Without limiting the generality of the preceding sentence, the parties hereto agree that this subsection 9.04(b) shall not operate to prohibit any Permitted Receivables Purchase Facility otherwise permitted hereunder. (c) Restrictions on Fundamental Changes. The Borrower shall not, and shall not permit any of its Subsidiaries to, merge with or consolidate into, or acquire all or substantially all of the assets of, any Person, or sell, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets, except that: (i) any of the Borrower's wholly owned Subsidiaries may merge with, consolidate into or transfer all or substantially all of its assets to another of the Borrower's wholly owned Subsidiaries or to the Borrower and in connection therewith such Subsidiary may be liquidated or dissolved; (ii) the Borrower or any of its Subsidiaries may sell or dispose of assets in accordance with the provisions of subsection 9.04(d); (iii) the Borrower or any of its Subsidiaries may make any investment permitted by subsection 9.04(e); (iv) the Borrower or any of its Subsidiaries may merge with or consolidate into any other Person, provided that (a) the Borrower is the surviving corporation in respect of any merger or consolidation involving the Borrower, (b) subject to the preceding clause (a), after giving effect to any such merger or consolidation, the surviving entity in respect thereof shall be a wholly owned Subsidiary, and (c) no such merger or consolidation shall be made if a Default would exist, or with the giving of notice or a passage of time, or both, would come into existence after giving effect thereto; and (v) the Borrower or any of its Subsidiaries may sell, transfer or dispose of any Receivables and Receivables Related Assets pursuant to any Permitted Receivables Purchase Facility. (d) Sales of Assets. The Borrower shall not convey, sell, lease, transfer, or otherwise dispose of, or part with control of (whether in one transaction or a series of transactions) all or any or any material part of its business, property or assets (including any 40. shares of stock in any Subsidiary or other Person), whether now owned or hereafter acquired, except sales or other dispositions of any of the following: (i) any inventory in the ordinary course of business; (ii) any Permitted Investments; (iii) any assets which have become worn out or obsolete or which are promptly being replaced, in the ordinary course of business; (iv) any Receivables and Receivables Related Assets pursuant to any Permitted Receivables Purchase Facility; (v) assets constituting the Borrower's design-services operation pursuant to the Tality IPO; (vi) the Seely Avenue Campus pursuant to a sale-leaseback transaction, provided that such sale is made for fair value and the aggregate sales price from such sale is paid in cash; (vii) any other assets to the extent not otherwise permitted hereunder; provided that such assets do not constitute Substantial Assets and such sale or disposition is made for fair value; and provided further that (A) at the time of any such sale or disposition, no Default shall exist or shall result therefrom, (B) the aggregate sales price from such sale or disposition shall be paid in cash, or, if approved by the board of directors of the Borrower, capital stock or debt obligations so long as the aggregate sales price paid in capital stock or debt obligations, when added to the non-cash sales price of all other assets sold, leased, transferred or otherwise disposed of pursuant to this clause (vii) after the Closing Date pursuant to this Section 9.04(d)(vii), does not exceed 5% of Consolidated Tangible Net Worth measured as of the last day of the then most recent fiscal quarter, and (C) no dispositions of accounts or notes receivable shall be permitted under this clause (vii) unless in connection with the sale of all or substantially all of a business unit, division or Subsidiary of the Borrower and such sale is otherwise permitted hereunder. For purposes of clause (vii), a sale, lease, transfer or other disposition of assets shall be deemed to be of "Substantial Assets" if such assets, when added to all other assets sold, leased, transferred or otherwise disposed of after the Closing Date (other than assets sold in the ordinary course of business), shall exceed 15% of Consolidated Tangible Net Worth measured as of the last day of the then most recent fiscal quarter. (e) Loans and Investments. The Borrower shall not, and shall not permit any of its Subsidiaries to, purchase or otherwise acquire the capital stock, assets (constituting a business unit), obligations or other securities of or any interest in any Person, or otherwise extend any credit to, guarantee the obligations of or make any additional investments in any Person, other than in connection with: 41. (i) extensions of credit in the nature of accounts receivable, general intangibles or notes receivable arising from the licensing of software or the sales of goods or services in the ordinary course of business; (ii) investments by the Borrower in the capital stock of wholly-owned Subsidiaries, and extensions of credit by the Borrower to any of its wholly owned Subsidiaries or by any of its wholly owned direct or indirect Subsidiaries to another of its wholly owned direct or indirect Subsidiaries or the Borrower, in each case in the ordinary course of business; (iii) Permitted Investments; (iv) investments permitted under Section 9.04 (c)(iv); (v) to the extent not otherwise permitted under this subsection 9.04(e), additional purchases of, loans to or investments in joint ventures or the capital stock, assets, obligations or other securities of or interest in other Persons not exceeding 15% of Consolidated Tangible Net Worth, measured as of the last day of the then most recent fiscal quarter, as to all such investments, loans and purchases in the aggregate, provided that (A) in the case of any such acquisition or investment the prior, effective written consent or approval to such acquisition or investment of the board of directors or equivalent governing body of the acquiree is obtained and (B) immediately after giving effect thereto, no Default shall have occurred and be continuing; (vi) investments in the Venture Funds, so long as the aggregate unrecovered investment made therein (not counting recoveries fairly characterized as income) does not exceed $150,000,000; (vii) investments existing on the Closing Date disclosed in Schedule 9.04(e); (viii) investments consisting of the endorsement of negotiable instruments for deposit; (ix) investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business; (x) extensions of credit in the ordinary course of business consisting of (a) compensation of employees, officers and directors of the Borrower or a Subsidiary, as the case may be, so long as the board of directors of the Borrower or such Subsidiary determines that such compensation is in the best interests of the Borrower or such Subsidiary, (b) travel advances, employee relocation loans and other employee loans and advances, (c) loans to employees, officers or directors relating to the purchase of equity securities of the Borrower, and (d) other loans to officers and employees approved by the board of directors; 42. (xi) investments in connection with any Permitted Receivables Purchase Facility; and (xii) investments consisting of shares in Tality Corporation retained by the Borrower resulting from the Tality IPO. (f) Transactions with Related Parties. Except in connection with (i) any Permitted Receivables Purchase Facility otherwise permitted hereunder, or (ii) investments in Alchemy or SpinCircuit or resulting from the Tality IPO which are otherwise permitted by subsection (e) above, the Borrower shall not, and shall not permit any of its Material Subsidiaries to, enter into any transaction, including the purchase, sale or exchange of property or the rendering of any services, with any Affiliate, any officer or director thereof or any Person which beneficially owns or holds 5% or more of the equity securities, or 5% or more of the equity interest, thereof (a "Related Party"), or enter into, assume or suffer to exist, or permit any Material Subsidiary to enter into, assume or suffer to exist, any employment or consulting contract with any Related Party, except a transaction or contract which is in the ordinary course of the Borrower's or such Material Subsidiary's business and which, when considered in the aggregate with all such transactions between the Related Party and the Borrower or such Material Subsidiary, such aggregate transactions are upon fair and reasonable terms not less favorable to the Borrower or such Material Subsidiary than it would obtain in a comparable arm's length transaction (or series of transactions) with a Person not a Related Party. (g) Hazardous Substances. The Borrower shall not, and shall not permit any of its Material Subsidiaries to, use, generate, manufacture, install, treat, release, store or dispose of any Hazardous Substances, except in compliance with all applicable Environmental Laws. (h) Accounting Changes. The Borrower shall not, and shall not suffer or permit any of its Material Subsidiaries to, (i) make any significant change in accounting treatment or reporting practices, except as required or permitted by GAAP, or, in respect of any non-U.S. Subsidiary, as required or permitted by generally accepted accounting principles as then in effect in the jurisdiction in which such non-U.S. Subsidiary is located or (ii) without the prior written consent of the Majority Banks (not to be unreasonably withheld), change its fiscal year or that of any of its consolidated Subsidiaries, except to change the fiscal year of a Subsidiary acquired in connection with a permitted acquisition to conform its fiscal year to the Borrower's. ARTICLE X EVENTS OF DEFAULT SECTION 10.01 Events of Default. Any of the following events which shall occur shall constitute an "Event of Default": (a) Payments. The Borrower shall fail to pay (i) when due any amount of principal of any Loan or Note, or (ii) within three days after the date due, any amount of interest on any Loan or Note or any fee or other amount payable hereunder or under any of the Loan Documents. 43. (b) Representations and Warranties. Any representation or warranty by the Borrower under or in connection with the Loan Documents shall prove to have been incorrect in any material respect when made or deemed made. (c) Failure by Borrower to Perform Certain Covenants. The Borrower shall fail to perform or observe any term, covenant or agreement contained in Section 9.02, subsections (a)(i) or (j) of Section 9.03 or Section 9.04 other than Subsection 9.04(g). (d) Failure by Borrower to Perform Other Covenants. The Borrower shall fail to perform or observe any other term, covenant or agreement contained in this Agreement or any other Loan Document on its part to be performed or observed and any such failure shall remain unremedied for a period of 30 days after either (i) a Responsible Officer of the Borrower knew or reasonably should have known of such failure or (ii) the Borrower receives written notice thereof by the Agent or any Bank. (e) Insolvency; Voluntary Proceedings. The Borrower or any Material Subsidiary (i) generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace periods, if any, whether at stated maturity or otherwise; (ii) voluntarily ceases to conduct its business in the ordinary course; (iii) commences any Insolvency Proceeding with respect to itself; or (iv) takes any action to effectuate or authorize any of the foregoing; or (f) Involuntary Proceedings. (i) Any involuntary Insolvency Proceeding is commenced or filed against the Borrower or any Material Subsidiary, or any writ, judgment, warrant of attachment, execution or similar process, is issued or levied against a substantial part of the Borrower's or any Material Subsidiary's properties, and any such proceeding or petition shall not be dismissed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded within 60 days after commencement, filing or levy; (ii) the Borrower or any Material Subsidiary admits the material allegations of a petition against it in any Insolvency Proceeding, or an order for relief (or similar order under non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) the Borrower or any Material Subsidiary acquiesces in the appointment of a receiver, trustee, custodian, conservator, liquidator, mortgagee in possession (or agent therefor), or other similar Person for itself or a substantial portion of its property or business; or (g) Default Under Other Indebtedness. (i) The Borrower or any of its Material Subsidiaries shall fail (A) to make any payment of any principal of, or interest or premium on, any single Indebtedness (other than in respect of the Loans) having a principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than $10,000,000 (or its equivalent in another currency) when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace or notice period, if any, specified in the agreement or instrument relating to such Indebtedness as of the date of such failure; or (B) to perform or observe any term, covenant or condition on its part to be performed or observed under any agreement or instrument relating to any such Indebtedness, when required to be performed or observed, or any other event shall occur or condition shall exist under any such agreement or instrument, and such failure, event or 44. condition shall continue after the applicable grace or notice period, if any, specified in such agreement or instrument, if the effect of such failure, event or condition is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or (ii) any such Indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; (iii) there occurs under any Rate Contract an Early Termination Date (as defined in such Rate Contract) resulting from (A) any event of default under such Rate Contract as to which the Borrower or any Material Subsidiary is the Defaulting Party (as defined in such Rate Contract) or (B) any Termination Event (as so defined) as to which the Borrower or any Material Subsidiary is an Affected Party (as so defined), and, in either event, the Swap Termination Value owed by the Borrower or such Material Subsidiary as a result thereof is greater than $10,000,000 (or its equivalent in another currency). (h) Judgments. (i) A final judgment or order for the payment of money in excess of $50,000,000 (or its equivalent in another currency) which is not fully covered by third-party insurance shall be rendered against the Borrower or any of its Material Subsidiaries; or (ii) any non-monetary judgment or order shall be rendered against the Borrower or any Material Subsidiary which has or would reasonably be expected to have a Material Adverse Effect; and in each case there shall be any period of 30 consecutive days during which such judgment continues unsatisfied or during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect. (i) ERISA. (i) The Borrower or an ERISA Affiliate shall fail to satisfy its contribution requirements in an amount in excess of $5,000,000 under Section 412(c)(11) of the Internal Revenue Code, whether or not it has sought a waiver under Section 412(d) of the Internal Revenue Code; (ii) in the case of a Termination Event involving the withdrawal from a Pension Plan of a "substantial employer" (as defined in Section 4001(a)(2) or Section 4062(e) of ERISA), the Borrower's or an ERISA Affiliate's proportionate share of that Pension Plan's Unfunded Accrued Benefits is more than $5,000,000; (iii) in the case of a Termination Event involving the complete or partial withdrawal from a Multiemployer Plan, the Borrower or an ERISA Affiliate has incurred a withdrawal liability in an aggregate amount exceeding $5,000,000; (iv) in the case of a Termination Event not described in clause (ii) or (iii), the Unfunded Accrued Benefits of the relevant Pension Plan or Plans exceed $5,000,000; (v) a Plan of the Borrower or an ERISA Affiliate that is intended to be qualified under Section 401(a) of the Internal Revenue Code shall lose its qualification, and the loss can reasonably be expected to impose on the Borrower or an ERISA Affiliate liability (for additional taxes, to Plan participants, or otherwise) in the aggregate amount of $5,000,000 or more; (vi) the commencement or increase of contributions to, the adoption of, or the amendment of a Plan by, the Borrower or an ERISA Affiliate shall result in a net increase in unfunded liabilities to the Borrower or an ERISA Affiliate in excess of $5,000,000; or (vii) the occurrence of any combination of events listed in clauses (ii) through (vi) that involves a net increase in aggregate Unfunded Accrued Benefits and unfunded liabilities in excess of $5,000,000. (j) Dissolution, Etc. The Borrower or any of its Material Subsidiaries shall (i) liquidate, wind up or dissolve (or suffer any liquidation, wind-up or dissolution), except to the extent expressly permitted by Section 9.04, (ii) suspend its operations other than in the ordinary 45. course of business, or (iii) take any corporate or similar action to authorize any of the actions or events set forth above in this subsection (j). (k) Subordination Provisions. The subordination provisions of any agreement or instrument governing any Indebtedness subordinated to the Obligations shall for any reason be revoked or invalidated, or otherwise cease to be in full force and effect, any Person shall contest in any manner the validity or enforceability thereof or deny that it has any further liability or obligation thereunder, or the Indebtedness hereunder shall for any reason be subordinated or shall not have the priority contemplated by this Agreement or such subordination provisions. (l) Mergers and Acquisitions. The Borrower or any Subsidiary shall acquire or otherwise merge or consolidate with any Person for cash consideration (in whole or in part), without the prior, effective written consent or approval to such acquisition, merger or consolidation of the board of directors or equivalent governing body of such Person. SECTION 10.02 Effect of Event of Default. If any Event of Default shall occur and be continuing, the Agent shall, at the request of, or may, with the consent of, the Majority Banks, (I) by notice to the Borrower, (A) declare the Revolving Commitments of the Banks to be terminated, whereupon the same shall forthwith terminate, and (B) declare the entire unpaid principal amount of the Loans and the Notes, all interest accrued and unpaid thereon and all other Obligations to be forthwith due and payable, whereupon the Loans and the Notes, all such accrued interest and all such other Obligations shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower, provided that if an event described in Sections 10.01(e) or 10.01(f) shall occur, the result which would otherwise occur only upon giving of notice by the Agent to the Borrower as specified in this clause (I) shall occur automatically, without the giving of any such notice; and (II) whether or not the actions referred to in clause (I) have been taken, proceed to enforce all other rights and remedies available to the Agent and the Banks under the Loan Documents and applicable law. ARTICLE XI THE AGENT SECTION 11.01 Authorization and Action. Each Bank hereby appoints ABN AMRO as Agent and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and perform such duties under this Agreement and the other Loan Documents as are delegated to the Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto. The duties and obligations of the Agent are strictly limited to those expressly provided for herein, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against the Agent. As to any matters not expressly provided for by the Loan Documents (including enforcement or collection of the Loan Documents), the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Banks, and such instructions shall be binding upon all Banks; provided, however, that except for action expressly required of the Agent hereunder, the Agent shall in all cases be fully justified in failing or refusing to act under any Loan Document unless it shall be indemnified to 46. its satisfaction by the Banks against any and all liability and expense which may be incurred by reason of taking or continuing to take any such action, and that the Agent shall not in any event be required to take any action which exposes the Agent to liability or which is contrary to any Loan Document or applicable law. Nothing in any Loan Document shall, or shall be construed to, constitute the Agent a trustee or fiduciary for any Bank. In performing its functions and duties hereunder, the Agent shall act solely as the agent of the Banks and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for the Borrower. Without limiting the generality of the foregoing, the use of the term "agent" in this Agreement and the other Loan Documents with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. SECTION 11.02 Limitation on Liability of Agent; Notices; Closing. (a) Limitation on Liability of Agent. Neither the Agent nor any Affiliate thereof nor any of their respective directors, officers, employees or agents shall be liable for any action taken or omitted to be taken by it or them under or in connection with any Loan Document, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Agent (i) may treat a Bank as the holder of its Loans for all purposes hereof unless and until such Bank and its assignee shall have delivered to the Agent and the Borrower an Assignment and Acceptance Agreement substantially in the form of Exhibit F (an "Assignment and Acceptance"), and the Agent receives written notice of the assignment in substantially the form of Schedule 1 to the Assignment and Acceptance and the other conditions to assignment set forth in Section 12.09 shall have been satisfied; (ii) may consult with legal counsel (including counsel to the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; and (iii) shall incur no liability to any Bank under or in respect of any Loan Document by acting upon any notice, consent, certificate, telegram, facsimile, telex or teletype message, statement or other instrument or writing believed by it to be genuine and signed or sent by the proper party or parties or by acting upon any representation or warranty made or deemed to be made hereunder or under any other Loan Document. Further, the Agent (A) makes no warranty or representation to any Bank and shall not be responsible to any Bank for the accuracy or completeness of any information, exhibit or report furnished under any Loan Document, for any statements, warranties or representations (whether written or oral) made or deemed made in or in connection with any Loan Documents; (B) shall have no duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or any other Loan Document on the part of the Borrower or any other Person or to inspect the property, books or records of the Borrower or any other Person; and (C) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, sufficiency, value or collectibility of this Agreement or any other Loan Document or of any collateral. (b) Notices. Promptly upon receipt thereof, the Agent shall forward to each Bank originals or copies, as specified in this Agreement or any other Loan Document, of all agreements, instruments, opinions, financial statements, notices and other documents delivered 47. by the Borrower or any other Person to the Agent pursuant to any Loan Document for distribution to the Banks. Except for any of the foregoing expressly required to be furnished to the Banks by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrower which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. (c) Closing. For purposes of determining compliance with the conditions specified in Section 7.01, each Bank that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent (or made available) by the Agent to such Bank for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to such Bank, unless an officer of the Agent responsible for the transactions contemplated by the Loan Documents shall have received notice from such Bank prior to the Closing Date specifying its objection thereto and either such objection shall not have been withdrawn by notice to the Agent to that effect on or prior to the Closing Date or, if any Borrowing on the Closing Date has been requested, the Bank shall not have made available to the Agent on or prior to the Closing Date the Bank's Pro Rata Share of any Borrowing. SECTION 11.03 Agent and Affiliates. With respect to its Revolving Commitment, the Loans made by it, the Notes issued to it and all other Obligations owing to it as a Bank, the Agent shall have the same rights and powers under the Loan Documents as any other Bank and may exercise the same as though it were not the Agent; and the term "Bank" or "Banks" shall, unless otherwise expressly indicated, include the Agent in its individual capacity. The Agent and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of and generally engage in any kind of business with the Borrower, and any Affiliate thereof, all as if the Agent were not the Agent hereunder and without any duty to account therefor to the Banks. SECTION 11.04 Notice of Defaults. The Agent shall not be deemed to have knowledge or notice of the occurrence of a Default hereunder (other than nonpayment of principal of or interest on the Loans or of any fees or any of its costs and expenses) unless the Agent has actual knowledge thereof or has received notice in writing from a Bank or the Borrower referring to this Agreement, describing such event or condition and expressly stating that such notice is a "notice of default." Should the Agent receive such notice of the occurrence of a Default, the Agent shall promptly give notice thereof to the Banks. The Agent thereupon shall take such action with respect to such Default as shall be reasonably directed by the Majority Banks; provided that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interests of the Banks. SECTION 11.05 Non-Reliance on Agent. Each Bank has itself been, and will continue to be, based on such documents and information as it has deemed appropriate, solely responsible for making its own independent appraisal of and investigations into the financial condition, creditworthiness, condition, affairs, status and nature of the Borrower or any of its Subsidiaries. Accordingly, each Bank confirms to the Agent that it has not relied, and will not hereafter rely, on the Agent (I) to check or inquire on such Bank's behalf into the adequacy, 48. accuracy or completeness of any information provided by the Borrower or any other Person under or in connection with the Loan Documents or the transactions herein contemplated (whether or not such information has been or is hereafter distributed to such Bank by the Agent), or (II) to assess or keep under review on such Bank's behalf the financial condition, creditworthiness, condition, affairs, status or nature of the Borrower or any Subsidiary. SECTION 11.06 Indemnification. The Banks agree to indemnify the Agent, and any Affiliates, directors, officers, employees, agents, counsel and other advisors (collectively, the "Related Persons") of the Agent (to the extent not reimbursed by the Borrower), ratably in accordance with the respective Pro Rata Shares of the Banks, against and hold each of them harmless from any and all liabilities, obligations, losses, claims, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever, including the reasonable fees and disbursements of counsel to the Agent (including allocated costs of internal counsel), which may be imposed on, incurred by, or asserted against the Agent or any such Related Person to be indemnified, in any way relating to or arising out of the Loan Documents, the use or intended use of the proceeds of the Loans or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent or other such Related Person to be indemnified in connection with any of the foregoing; provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent they are found by a final decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Agent, or any other Related Person to be indemnified. SECTION 11.07 Delegation of Duties. The Agent may, in its discretion, employ from time to time one or more agents or attorneys-in-fact (including any of the Agent's Affiliates) to perform any of the Agent's duties under the Loan Documents. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. SECTION 11.08 Successor Agent. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving 90 days' written notice thereof to the Banks and the Borrower. Upon any such resignation, the Borrower shall have the right to appoint a successor Agent from among the Banks, with the consent of the Majority Banks (which shall not be unreasonably withheld), and the Borrower and the Banks shall use their best efforts so to appoint a successor Agent. If no successor Agent shall have been so appointed by the Borrower and the Majority Banks, and shall have accepted such appointment, prior to the effective date of the retiring Agent's resignation, the retiring Agent may, on behalf of the Banks, appoint a successor Agent from among the Banks. Upon the effectiveness of the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges, duties and obligations of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under the Loan Documents. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article XI shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under the Loan Documents. SECTION 11.09 Co-Agents. None of the Banks identified on the facing page or signature pages of this Agreement as a "co-agent" shall have any right, power, obligation, 49. liability, responsibility or duty under this Agreement other than those applicable to all Banks as such. Without limiting the foregoing, none of the Banks so identified as a "co-agent" shall have or be deemed to have any fiduciary relationship with any Bank. Each Bank acknowledges that it has not relied, and will not rely, on any of the Banks so identified in deciding to enter into this Agreement or in taking or not taking action hereunder. ARTICLE XII MISCELLANEOUS SECTION 12.01 Amendments and Waivers. Except as otherwise provided herein or in any other Loan Document, (I) no amendment to any provision of this Agreement or any of the other Loan Documents shall in any event be effective unless the same shall be in writing and signed by the Borrower, the Agent and the Majority Banks (or the Agent with the written consent of the Majority Banks); and (II) no waiver of any provision of this Agreement or any other Loan Document, or consent to any departure by the Borrower, shall in any event be effective unless the same shall be in writing and signed by the Agent and the Majority Banks (or the Agent with the consent of the Majority Banks). Any such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that, notwithstanding the foregoing provisions of this Section 12.01, any term or provision of Article XI (other than the provisions of Section 11.08 pertaining to Borrower consent) may be amended without the agreement or consent of, or prior notice to, the Borrower; and provided further, however, that, unless in writing and signed by all of the Banks (or by the Agent with the written consent of all the Banks), no amendment, waiver or consent shall do any of the following: (A) increase the amount, or extend the stated expiration or termination date, of the Revolving Commitments of the Banks (or any of them), except as otherwise provided in subsection 4.01(c) with respect to the extension of the Revolving Termination Date as provided therein; (B) reduce the principal of, or interest on, the Loans or any fee or other amount payable to the Banks (or any of them) hereunder; (C) postpone any date fixed for any payment in respect of principal of, or interest on, the Loans or any fee or other amount payable to the Banks (or any of them) hereunder; (D) change the definition of "Majority Banks" or any definition or provision of this Agreement requiring the approval of Majority Banks or some other specified amount of Banks; (E) consent to the assignment or transfer by the Borrower of any of its rights and obligations under the Loan Documents; (F) waive any of the conditions specified in Article VII; (G) amend, modify or waive the provisions of Section 6.01, 6.05 or 12.07; or 50. (H) amend, modify or waive the provisions of this Section 12.01; and provided, further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Banks required hereinabove to take such action, affect the rights, obligations or duties of the Agent under any Loan Document, and (ii) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed by the parties thereto. SECTION 12.02 Notices. (a) Notices. All notices and other communications provided for hereunder and under the other Loan Documents shall, unless otherwise stated herein, be in writing (including by facsimile transmission followed by a telephone call by the sender to confirm receipt by the recipient party) and mailed, sent or delivered to the respective parties hereto at or to their respective addresses or facsimile numbers set forth in Schedule 2, or at or to such other address or facsimile number as shall be designated by any party in a written notice to the other parties hereto. All such notices and communications shall be effective (i) if delivered by hand, when delivered; (ii) if sent by mail, upon the earlier of the date of receipt and five Business Days after deposit in the mail, first class (or air mail, with respect to communications to be sent to or from the United States), postage prepaid; and (iii) if sent by facsimile transmission, upon verbal confirmation of receipt by the recipient party; provided, however, that notices and communications to the Agent shall not be effective until received. (b) Facsimile and Telephonic Notice. The Borrower acknowledges and agrees that the agreement of the Agent and the Banks herein and in any other Loan Document to receive certain notices by telephone and facsimile is solely for the convenience and at the request of the Borrower. The Agent and the Banks shall be entitled to rely on the authority of any Person purporting to be a Person authorized by the Borrower to give such notice and the Agent and the Banks shall not have any liability to the Borrower or any other Person on account of any action taken or not taken by the Agent and the Banks in reliance upon such telephonic or facsimile notice. The obligation of the Borrower to repay the Loans and the other Obligations shall not be affected in any way or to any extent by any failure by the Agent and the Banks to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agent and the Banks of a confirmation which is at variance with the terms understood by the Agent and the Banks to be contained in the telephonic or facsimile notice. SECTION 12.03 No Waiver; Cumulative Remedies. No failure on the part of the Agent or any Bank to exercise, and no delay in exercising, any right, remedy, power or privilege under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, remedy, power or privilege preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights and remedies under the Loan Documents are cumulative and not exclusive of any rights, remedies, powers and privileges that may otherwise be available to the Agent or any Bank. SECTION 12.04 Costs and Expenses; Indemnification. 51. (a) Costs and Expenses. The Borrower agrees to pay not later than 30 days after written demand therefor, including a statement of account, whether or not the transactions contemplated hereby shall be consummated: (i) the reasonable out-of-pocket costs and expenses of the Agent and any of its Affiliates, and the reasonable fees and disbursements of outside counsel to the Agent, in connection with the negotiation, preparation, execution, delivery and syndication of the Loan Documents, and any amendments, modifications or waivers requested by the Borrower of the terms thereof; and (ii) all costs and expenses of the Agent, its Affiliates and the Banks, and fees and disbursements of counsel (including allocated costs of internal counsel), in connection with (a) any Default, (b) the enforcement or attempted enforcement of, and preservation of any rights or interests under, the Loan Documents, and (c) any out-of-court workout or other refinancing or restructuring or any bankruptcy case, including any losses, costs and expenses sustained by the Agent and any Bank as a result of any failure by the Borrower to perform or observe its obligations contained in the Loan Documents. (b) Indemnification. Whether or not the transactions contemplated hereby shall be consummated, the Borrower hereby agrees to indemnify the Agent, each Bank and any Related Person thereof (each an "Indemnified Person") against, and hold each of them harmless from, any and all liabilities, obligations, losses, claims, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever, including the reasonable fees and disbursements of counsel to an Indemnified Person (including allocated costs of internal counsel), which may be imposed on, incurred by, or asserted against any Indemnified Person, (i) in any way relating to or arising out of any of the Loan Documents, the use or intended use of the proceeds of the Loans, or the transactions contemplated hereby, (ii) with respect to any investigation, litigation or other proceeding relating to any of the foregoing, irrespective of whether the Indemnified Person shall be designated a party thereto, or (iii) in any way relating to or arising out of the use, generation, manufacture, installation, treatment, storage or presence, or the spillage, leakage, leaching, migration, dumping, deposit, discharge, disposal or release, at any time, of any Hazardous Substances on, under, at or from any Premises, including any personal injury or property damage suffered by any Person, and any investigation, site assessment, environmental audit, feasibility study, monitoring, clean-up, removal, containment, restoration, remedial response or remedial work undertaken by or on behalf of the any Indemnified Person at any time, voluntarily or involuntarily, with respect to the Premises (the "Indemnified Liabilities"); provided that the Borrower shall not be liable to any Indemnified Person for any portion of such Indemnified Liabilities to the extent they are found by a final decision of a court of competent jurisdiction to have resulted from such Indemnified Person's gross negligence or willful misconduct. Subject to the preceding proviso, if and to the extent that the foregoing indemnification is for any reason held unenforceable, the Borrower agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. (c) Other Charges. The Borrower agrees to indemnify the Agent and each of the Banks against and hold each of them harmless from any and all present and future stamp, transfer, documentary and other such taxes, levies, fees, assessments and other charges made by 52. any jurisdiction by reason of the execution, delivery, performance and enforcement of the Loan Documents. SECTION 12.05 Right of Set-Off. Upon the occurrence and during the continuance of any Event of Default, each Bank hereby is authorized, to the extent permitted by applicable statute, at any time and from time to time, without notice to the Borrower (any such notice being expressly waived by the Borrower), to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank to or for the credit or the account of the Borrower against any and all of the Obligations of the Borrower now or hereafter existing under this Agreement and the other Loan Documents, irrespective of whether or not such Bank shall have made any demand under this Agreement or any such other Loan Document and although such Obligations may be unmatured. Each Bank agrees promptly to notify the Borrower (through the Agent) after any such set-off and application made by such Bank; provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Bank under this Section 12.05 are in addition to other rights and remedies (including other rights of set-off) which such Bank may have. SECTION 12.06 Survival. All covenants, agreements, representations and warranties made in any Loan Documents shall, except to the extent otherwise provided therein, survive the execution and delivery of this Agreement, the making of the Loans and the execution and delivery of the Notes, and shall continue in full force and effect so long as the Banks have any Revolving Commitments, any Loans remain outstanding or any other Obligations remain unpaid or any obligation to perform any other act under any Loan Document remains unsatisfied. Without limiting the generality of the foregoing, the obligations of the Borrower under Sections 5.02, 5.03, 6.03 and 12.04, and of the Banks under Sections 6.03 and 11.06, and all similar obligations under the other Loan Documents (including all obligations to pay costs and expenses and all indemnity obligations), shall survive the repayment of the Loans and the termination of the Revolving Commitments. SECTION 12.07 Obligations Several. The obligations of the Banks under the Loan Documents are several. The failure of any Bank or the Agent to carry out its obligations thereunder shall not relieve any other Bank or the Agent of any obligation thereunder, nor shall any Bank or the Agent be responsible for the obligations of, or any action taken or omitted by, any other Person hereunder or thereunder. Nothing contained in any Loan Document shall be deemed to cause any Bank or the Agent to be considered a partner of or joint venturer with any other Bank or Banks, the Agent or the Borrower. SECTION 12.08 Benefits of Agreement. The Loan Documents are entered into for the sole protection and benefit of the parties hereto and their successors and assigns, and no other Person other than Affiliates of the Agent and the Related Persons referred to in Sections 11.06, 12.04 and 12.14 shall be a direct or indirect beneficiary of, or shall have any direct or indirect cause of action or claim in connection with, any Loan Document. SECTION 12.09 Binding Effect; Assignment. 53. (a) Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Agent and when the Agent shall have been notified by each Bank that such Bank has executed it and thereafter shall be binding upon, inure to the benefit of and be enforceable by the Borrower, the Agent and each Bank and their respective successors and assigns. (b) Assignment. The Borrower shall not have the right to assign its rights and obligations hereunder or under the other Loan Documents or any interest herein or therein without the prior written consent of the Banks. Each Bank may sell, assign, transfer or grant participations in all or any portion of such Bank's rights and obligations hereunder and under the other Loan Documents to any Bank or Eligible Assignee on the basis set forth below in this subsection (b). (i) Any Bank may, with the written consent of the Borrower and the Agent (which in each case shall not be unreasonably withheld), at any time assign and delegate to one or more Eligible Assignees all, or any ratable part of all, of the Revolving Loans and Revolving Commitment, or the Term Loans, as the case may be, and the other rights and obligations of such Bank hereunder; provided, however, that (A) no consent of the Borrower shall be required during the existence of an Event of Default; (B) no consent of the Borrower or the Agent shall be required in connection with any assignment and delegation by a Bank to an Eligible Assignee that is another Bank or an Affiliate of such Bank; and (C) except in connection with an assignment of all of a Bank's rights and obligations with respect to its Revolving Commitment and Loans, any such assignment to an Eligible Assignee that is not a Bank hereunder shall be equal to or greater than $15,000,000. (ii) In the event of any such assignment, unless and until (A) an Assignment and Acceptance and notice of assignment shall have been delivered pursuant to clause (i) of Section 11.02(a), (B) the Agent shall have received payment of an administrative transfer charge in the amount of $3,500 from the assigning Bank (unless the assignee shall otherwise agree to pay such charge), and (C) the Agent and the Borrower shall have received all tax forms and documents required under Section 6.03(d), such assignee shall not be entitled to exercise the rights of a Bank under this Agreement and the other Loan Documents with respect to such assignment and the Agent shall not be obligated to make payment of any amount to which such assignee may become entitled thereunder other than to the assigning Bank. Subject to satisfaction of the foregoing conditions in connection with any assignment, upon the effectiveness of such assignment, the assignee shall be deemed a "Bank" for all purposes of this Agreement and the other Loan Documents with respect to the rights and obligations assigned to it, and the assigning Bank shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Documents; provided, however, that the assigning Bank shall not relinquish its rights under Article V or under Sections 6.03 and 12.04 to the extent such rights relate to the time prior to the effective date of the Assignment and Acceptance. 54. (iii) In connection with any partial assignment, upon the request of the assigning Bank or the assignee, (A) the Borrower shall execute and deliver substitute Notes to the assigning Bank or the assignee, dated the effective date of such assignment, setting forth the respective Revolving Commitment, or Term Loans, as the case may be, of such assigning Bank and assignee as the respective maximum principal amounts thereof, and containing other appropriate insertions, and the assigning Bank shall thereupon return the Notes previously held by it; and (B) Schedules 1 and 2 shall be deemed amended to reflect the adjustment of the Revolving Commitments and Pro Rata Shares of the Banks resulting therefrom and the Lending Office, if any, and address for notices of the assignee. (iv) In the event of any grant of a participation, the granting Bank shall remain a "Bank" for purposes of this Agreement, the Borrower, the other Banks and the Agent shall continue to deal solely and directly with such Bank in connection with this Agreement and the other Loan Documents, and no Bank shall transfer or grant any participating interest under which the participant shall have rights to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment, consent or waiver would require the consent of the Bank granting such participation as described in the second proviso to Section 12.01 or the unanimous consent of all of the Banks as described in the third proviso to Section 12.01. In the case of any such participation, the participant shall not have any of the rights of a Bank under this Agreement or the other Loan Documents, except that the participant shall (A) be deemed to have a right of setoff under Section 12.05 in respect of its participation to the same extent as if it were a "Bank" hereunder, provided that such participant shall also be considered a "Bank" for purposes of Section 6.05; and (B) such participant shall also be entitled to the benefits of Sections 5.02, 5.03, 6.03 and 12.04, provided that any amounts payable under Sections 5.03 or 6.03 to any participant shall not exceed the amounts which would have been payable by the Borrower thereunder to the Bank granting such participation. (v) The Borrower agrees that in connection with any such grant or assignment, such Bank may deliver to the prospective participant or assignee financial statements and other relevant information relating to the Borrower and its Subsidiaries. (vi) Each Bank shall obtain from any such prospective participant or assignee a confidentiality agreement in which such participant or assignee agrees to an obligation of confidentiality substantially similar to the terms of Section 12.14. (vii) Notwithstanding any other provision in this Agreement, any Bank may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and any Note held by it in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR Section 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 55. SECTION 12.10 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA. SECTION 12.11 Submission to Jurisdiction. (a) Submission to Jurisdiction. The Borrower hereby (i) submits to the non-exclusive jurisdiction of the courts of the State of California and the Federal courts of the United States sitting in the State of California for the purpose of any action or proceeding arising out of or relating to the Loan Documents, (ii) agrees that all claims in respect of any such action or proceeding may be heard and determined in such courts, (iii) irrevocably waives (to the extent permitted by applicable law) any objection which it now or hereafter may have to the laying of venue of any such action or proceeding brought in any of the foregoing courts, and any objection on the ground that any such action or proceeding in any such court has been brought in an inconvenient forum and (iv) agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner permitted by law. (b) No Limitation. Nothing in this Section 12.11 shall limit the right of the Agent or the Banks to bring any action or proceeding against the Borrower or its property in the courts of other jurisdictions. SECTION 12.12 Waiver of Jury Trial. THE BORROWER, THE BANKS AND THE AGENT HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE BORROWER, THE BANKS AND THE AGENT HEREBY AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT IN ANY WAY LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM, OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. A COPY OF THIS SECTION 12.12 MAY BE FILED WITH ANY COURT AS WRITTEN EVIDENCE OF THE WAIVER OF THE RIGHT TO TRIAL BY JURY AND CONSENT TO TRIAL BY COURT. SECTION 12.13 Limitation on Liability. No claim shall be made by the Borrower or its Affiliates against the Agent, the Banks or any of their respective Related Persons for any 56. special, indirect, exemplary, consequential or punitive damages in respect of any breach or wrongful conduct (whether or not the claim therefor is based on contract, tort or duty imposed by law), in connection with, arising out of or in any way related to the transactions contemplated by the Loan Documents or any act or omission or event occurring in connection therewith; and the Borrower hereby waives, releases and agrees not to sue upon any such claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. SECTION 12.14 Confidentiality. Each Bank and the Agent shall hold all non-public information relating to the Borrower and its Subsidiaries obtained by it under this Agreement in accordance with its customary procedures for handling confidential information of this nature, except for: (i) disclosure to its Affiliates or to its counsel or to any agent or advisor acting on its behalf in connection with the negotiation, execution or performance of the Loan Documents; (ii) disclosure as reasonably required in connection with a transfer to a prospective assignee or participant of all or part of its Loans or Revolving Commitment or any participation therein, as provided in Section 12.09(b); (iii) disclosure as may be required or requested by any Governmental Authority or representative thereof or pursuant to legal process; (iv) disclosure to any Person and in any proceeding necessary in such Bank's or the Agent's judgment to protect its interests in connection with any claim or dispute involving such Bank or the Agent; and (v) any other disclosure with the prior written consent of the Borrower. Prior to any disclosure by any Bank or the Agent of such non-public information permitted under clause (iii) (other than in connection with an examination of the financial condition of such Bank, the Agent or any of their Affiliates by any Governmental Authority), it shall, if permitted by applicable laws or judicial order, notify the Borrower of such pending disclosure. In no event shall any Bank or the Agent be obligated or required to return any materials furnished by the Borrower or its Subsidiaries. Notwithstanding the foregoing, such obligation of confidentiality shall not apply if the information or substantially similar information (a) is rightfully received by any Bank or the Agent from a Person other than the Borrower or any of its Affiliates without such Bank or the Agent being under an obligation to such Person not to disclose such information, or (b) is or becomes part of the public domain. SECTION 12.15 Entire Agreement. The Loan Documents reflect the entire agreement among the Borrower, the Banks and the Agent with respect to the matters set forth herein and therein and supersede any prior agreements, Revolving Commitments, drafts, communications, discussions and understandings, oral or written, with respect thereto. SECTION 12.16 Severability. Whenever possible, each provision of the Loan Documents shall be interpreted in such manner as to be effective and valid under all applicable laws and regulations. If, however, any provision of any of the Loan Documents shall be prohibited by or invalid under any such law or regulation in any jurisdiction, it shall, as to such jurisdiction, be deemed modified to conform to the minimum requirements of such law or regulation, or, if for any reason it is not deemed so modified, it shall be ineffective and invalid only to the extent of such prohibition or invalidity without affecting the remaining provisions of such Loan Document, or the validity or effectiveness of such provision in any other jurisdiction. SECTION 12.17 Counterparts This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so 57. executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. SECTION 12.18 Effect of Amendment. This Agreement is intended to amend the Existing Credit Agreement and, solely for convenience of reference, to restate it. The Borrower hereby acknowledges, certifies and agrees that, with respect to the "Loans" outstanding under and as defined in the Existing Credit Agreement as of the Closing Date, the Borrower's obligation to repay such loans to the Banks shall continue and constitute Revolving Loans under and subject to the terms and provisions of this Agreement and shall initially be deemed Base Rate Loans or Eurodollar Rate Loans hereunder to the same extent as under the Existing Credit Agreement on the Closing Date. All outstanding Notes under the Existing Credit Agreement (i) shall be superseded and replaced by the Notes delivered under this Agreement; and (ii) will be deemed cancelled upon the occurrence of the Closing Date. Furthermore, the Borrower hereby reaffirms the validity and binding effect of all documents and agreements executed and delivered pursuant to the Existing Credit Agreement, some or all of which have been amended pursuant to this Agreement. SECTION 12.19 Certain Transitional Matters. On the Closing Date, the amount of "Revolving Loans" then outstanding under and as defined in the Existing Credit Agreement and held by each "Bank" under and as defined in the Existing Credit Agreement shall be adjusted to reflect the changes in the Banks' Revolving Commitments and Pro Rata Shares under this Agreement as set forth in Schedule 1, subject to Section 5.02. Each "Bank" having "Revolving Loans" then outstanding and whose "Pro Rata Share" under and as defined in the Existing Credit Agreement has been decreased on the Closing Date as a result of this Agreement shall be deemed to have assigned on the Closing Date, without recourse, to each "Bank" increasing its "Revolving Commitment" under and as defined in the Existing Credit Agreement such portion of such "Revolving Loans" as shall be necessary to effectuate such adjustment. Each Bank increasing its "Revolving Commitment" on the Closing Date as a result of this Agreement shall (i) be deemed to have assumed such portion of such "Revolving Loans" and (ii) fund on the Closing Date such assumed amounts to the Agent for the account of the assigning "Bank" in accordance with the provisions hereof in the amount notified to such increasing "Bank" by the Agent. [SIGNATURE PAGES FOLLOW.] 58. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, as of the date first above written. THE BORROWER CADENCE DESIGN SYSTEMS, INC. By ------------------------------------ Name: Title: THE AGENT ABN AMRO BANK N.V., AS AGENT By ------------------------------------ Name: Title: By ------------------------------------ Name: Title: THE BANKS ABN AMRO BANK N.V., AS A BANK By ------------------------------------ Name: Title: By ------------------------------------ Name: Title: U.S. BANK NATIONAL ASSOCIATION By ------------------------------------ Name: Title: KEYBANK NATIONAL ASSOCIATION By ------------------------------------ Name: Title: UBS AG, STAMFORD BRANCH By ------------------------------------ Name: Title: By ------------------------------------ Name: Title: BARCLAYS BANK PLC By ------------------------------------ Name: Title: THE INDUSTRIAL BANK OF JAPAN, LIMITED By ------------------------------------ Name: Title: FLEET NATIONAL BANK By ------------------------------------ Name: Title: MELLON BANK, N.A. By ------------------------------------ Name: Title: THE BANK OF NOVA SCOTIA By ------------------------------------ Name: Title: THE CHASE MANHATTAN BANK By ------------------------------------ Name: Title: WELLS FARGO BANK, NATIONAL ASSOCIATION By ------------------------------------ Name: Title: By ------------------------------------ Name: Title: THE FUJI BANK LIMITED By ------------------------------------ Name: Title: ATTACHMENT A Permitted Receivables Purchase Facilities 1. Purchase and Sale Program Agreement executed and delivered as of February 25, 1998, by and among Cadence Design Systems, Inc., a Delaware corporation ("Seller"), Cadence Design Systems, Inc., a Delaware corporation (solely in its capacity as the servicer of the Contracts thereunder, "Servicer"), and BancBoston Leasing Inc., a Massachusetts corporation ("BancBoston"), as supplemented by that certain Addendum to Purchase and Sale Program Agreement executed and delivered as of December 31, 1998, by and among Cadence Design Systems, Inc., a Delaware corporation (in its individual capacity "Cadence Design"), Servicer, Cadence Credit Corporation, a Delaware corporation ("Cadence Credit"), Cadence Receivables Consolidation Corporation, a Delaware corporation and BancBoston. 2. Amended and Restated Purchase and Sale Program Agreement executed and delivered as of March 19, 1999, by and among Cadence Design Systems, Inc., a Delaware corporation ("Cadence Design"), Cadence Credit Corporation, a Delaware corporation, ("Cadence Credit"), Cadence Credit Corporation, a Delaware corporation (solely in its capacity as the servicer of the Contracts thereunder, "Servicer"), and Bane One Leasing Corporation, an Ohio corporation ("Banc One"), as supplemented by that certain Addendum to Amended and Restated Purchase and Sale Program Agreement executed and delivered as of March 19, 1999, by and among Cadence Design, Cadence Credit, Servicer, Cadence Receivables Consolidation Corporation, a Delaware corporation, and Banc one. 3. Purchase and Sale Program Agreement executed and delivered as of January 18, 1999, by and among Cadence Design Systems, Inc., a Delaware corporation ("Cadence Design"), Cadence Credit Corporation, a Delaware corporation, ("Cadence Credit"), Servicer, and Dresdner Kleinwort Benson North America Leasing, Inc. ("Dresdner"), as supplemented by that certain Addendum to Purchase and Sale Program Agreement executed and delivered as of April 21, 1999, by and among Cadence Design, Cadence Credit Servicer, Cadence Receivables Consolidation Corporation, a Delaware corporation ("Cadence Consolidation"), and Dresdner. 4. Amended and Restated Purchase and Sale Program Agreement executed and delivered as of December 31, 1998, by and among Cadence Design Systems, Inc., a Delaware corporation ("Cadence Design"), Cadence Credit Corporation, a Delaware corporation, ("Cadence Credit"), Cadence Credit Corporation, a Delaware corporation (solely in its capacity as the servicer of the Contracts thereunder, "Servicer"), and Sanwa Business Credit Corporation, a Delaware corporation ("Sanwa"), as supplemented by that certain Addendum to Amended and Restated Purchase and Sale Program Agreement executed and delivered as of December 31, 1998, by and among Cadence Design, Cadence Credit, Servicer, Cadence Receivables Consolidation Corporation, a Delaware corporation ("Cadence Consolidation"), and Sanwa. 5. Purchase and Sale Program Agreement executed and delivered as of March 24, 1999, by and among Cadence Design Systems, Inc., a Delaware corporation ("Cadence Design, Cadence Credit Corporation, a Delaware corporation, ("Cadence Credit"), Cadence Credit Corporation, a Delaware corporation (solely in its capacity as the servicer of the Attachment A-1 Contracts thereunder, "Servicer", and Heller Financial Leasing, Inc., a Delaware corporation ("Heller"), as supplemented by that certain Addendum to Purchase and Sale Program Agreement executed and delivered as of March 24, 1999, by and among Cadence Design, Cadence Credit, Servicer, Cadence Receivables Consolidation Corporation, a Delaware corporation, and Heller. 6. Purchase and Sale Program Agreement executed and delivered as of March 29, 1999, by and among Cadence Design Systems, Inc., a Delaware corporation ("Cadence Design"), Cadence Credit Corporation, a Delaware corporation, ("Cadence Credit"), Cadence Credit Corporation, a Delaware corporation (solely in its capacity as the servicer of the Contracts thereunder, "Servicer"), and Hitachi Credit America Corp., a Delaware corporation ("Hitachi"), as supplemented by that certain Addendum to Purchase and Sale Program Agreement executed and delivered as of March 29, 1999, by and among Cadence Design, Cadence Credit, Servicer, Cadence Receivables Consolidation Corporation, a Delaware corporation, and Hitachi. 7. Purchase and Sale Program Agreement and amendment thereto executed and delivered as of December 1, 1998, by and among Cadence Design Systems, Inc., a Delaware corporation, Cadence Design Systems, Inc., a Delaware corporation (solely in its capacity as the servicer of the Contracts thereunder), and International Software Finance Corporation, a Delaware corporation. 8. Purchase and Sale Program Agreement executed and delivered as of April 16, 1999, by and among Cadence Design Systems, Inc., a Delaware corporation ("Cadence Design"), Cadence Credit Corporation, a Delaware corporation, ("Cadence Credit"), Cadence Credit Corporation, a Delaware corporation (solely in its capacity as the servicer of the Contracts thereunder, "Servicer"), and Leasetec Corporation, a Delaware corporation ("Leasetec"), as supplemented by that certain Addendum to Purchase and Sale Program Agreement executed and delivered as of April 16, 1999, by and among Cadence Design, Cadence Credit, Servicer, Cadence Receivables Consolidation Corporation, a Delaware corporation, and Leasetec. 9. Amended and Restated Purchase and Sale Program Agreement executed and delivered as of May 21, 1999, by and among Cadence Design Systems, Inc., a Delaware corporation ("Cadence Design"), Cadence Credit Corporation, a Delaware corporation, ("Cadence Credit"), Cadence Credit Corporation, a Delaware corporation (solely in its capacity as the servicer of the Contracts thereunder, "Servicer"), and Mellon US Leasing, a division of Mellon Leasing Corporation, a Pennsylvania corporation ("Mellon"), as supplemented by that certain Addendum to Amended and Restated Purchase and Sale Program executed and delivered as of May 21, 1999, by and among Cadence Design, Cadence Credit, Servicer, Cadence Receivables Consolidation Corporation, a Delaware corporation, and Mellon. 10. Amended and Restated Purchase and Sale Program executed and delivered as of March 12, 1999, by and among Cadence Design Systems, Inc., a Delaware corporation ("Cadence Design"), Cadence Credit Corporation, a Delaware corporation, ("Cadence Credit"), Cadence Credit Corporation, a Delaware corporation (solely in its capacity as the servicer of the Contracts thereunder, "Servicer"), and Prime Leasing, Inc., an Illinois corporation ("Prime Leasing"), as supplemented by that certain Addendum to Amended and Restated Purchase and Sale Program Agreement executed and delivered as of March 12, 1999, by and among Cadence Attachment A-2 Design, Cadence Credit, Servicer, Cadence Receivables Consolidation Corporation, a Delaware corporation, and Prime Leasing. 11. Purchase and Sale Program Agreement s executed and delivered as of March 31, 1999, by and among Cadence Design Systems, Inc., a Delaware corporation ("Cadence Design"), Cadence Credit Corporation, a Delaware corporation, ("Cadence Credit"), Cadence Credit Corporation, a Delaware corporation (solely in its capacity as the servicer of the Contracts thereunder, "Servicer"), and Siemens Credit Corporation, a Delaware corporation ("Siemens"), as supplemented by that certain Addendum to Purchase and Sale Program Agreement executed and delivered as of March 31, 1999, by and among Cadence Design, Cadence Credit, Servicer, Cadence Receivables Consolidation Corporation, a Delaware corporation, and Siemens. 12. Purchase and Sale Program Agreement executed and delivered as of June 24, 1998, by and among Cadence Design Systems, Inc., a Delaware corporation, Cadence Design Systems, Inc., a Delaware corporation (solely in its capacity as the servicer of the Contracts thereunder), and Software Lease Finance Group, Inc., a California corporation. 13. Purchase and Sale Program Agreement (United Kingdom) executed and delivered as of June 30, 2000, by and between Cadence Design Systems Limited ("Sellee") and Leasetec UK Limited ("Purchaser"). 14. Receivables Sale Agreement dated as of September 30, 1998, among Cadence Receivables Corporation, Cadence Credit Corporation, Cadence Design Systems, Inc., Windmill Funding Corporation, the liquidity providers from time to time party thereto, and ABN AMRO Bank N.V., as the enhancer and the agent, together with the other agreements in connection therewith. Attachment A-3 ANNEX I PRICING GRID The Applicable Margin and the Applicable Fee Amount, for any day, shall be the amount per annum set forth below based on the Fixed Charge Coverage Ratio set forth in the Compliance Certificate most recently delivered by the Borrower to the Agent pursuant to Section 9.01(a)(iii) (or Section 7.01(f), as the case may be) of the Credit Agreement; changes in the Applicable Margin and the Applicable Fee Amount resulting from a change in the Fixed Charge Coverage Ratio shall become effective on the earlier of: (i) the date of delivery by the Borrower to the Agent of a new Compliance Certificate and accompanying financial statements pursuant to Section 9.01(a)(iii); and (ii) the date on which the Borrower is required to deliver such new Compliance Certificate and accompanying financial statements pursuant to Section 9.01(a)(iii) (such date, the "Compliance Date"). If the Borrower shall fail to deliver a Compliance Certificate and accompanying financial statements within the number of days after the end of any fiscal quarter or fiscal year as required pursuant to Section 9.01(a)(iii) (without giving effect to any grace period), the parties agree that the Applicable Margin and the Applicable Fee Amount shall be adjusted retroactively to the Compliance Date upon the Agent's receipt of the applicable Compliance Certificate and accompanying financial statements pursuant to Section 9.01(a)(iii).

Annex I-1 SCHEDULE 1 REVOLVING COMMITMENTS AND PRO RATA SHARES

Schedule 1-1 -----END PRIVACY-ENHANCED MESSAGE-----


[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


	•	Cadence’s cost of services personnel is high and reduces gross margin. Gross margin represents the difference between the amount of revenue from the sale of services and Cadence’s cost of providing those services. Cadence must pay high salaries to attract and retain professional services personnel.


		This results in a lower gross margin than the gross margin in Cadence’s software business. In addition, the high cost of training new services personnel or not fully utilizing these personnel can significantly lower gross margin.
	•	A substantial portion of these services contracts are fixed-price contracts. This means that the customer pays a fixed price that is agreed upon at the time of contract execution, regardless of how much time or how many resources Cadence must actually devote to successfully complete the contract. Although Cadence is moving towards more time-based contracts, there can be no guarantee that this shift will occur. If Cadence’s cost in performing the services consistently and significantly exceeds the amount the customer has agreed to pay, it could seriously harm Cadence’s business, operating results, and financial condition.


	•	The size of features such as wires, transistors, and contacts on chips is shrinking due to advances in semiconductor manufacturing processes. Process feature sizes refer to the width of the transistors and the width and spacing of the interconnect on the chip. Feature size is normally identified by the headline transistor length, which is shrinking from 0.25 microns to 0.13 microns and smaller. This is commonly referred to in the semiconductor industry as the migration to deep submicron and it represents a major challenge for all levels of the semiconductor industry from chip design and design automation to design of manufacturing equipment and the manufacturing process itself. Shrinkage of transistor length to such infinitesimal proportions (for reference, the diameter of the period at the end of this sentence is approximately 400 microns) is challenging fundamental laws of physics and chemistry.
	•	The ability to design very large chips, in particular integration of entire electronic systems onto a single chip instead of a circuit board (a process that is referred to in the industry as “system-on-a-chip”), increases the complexity of managing a design that at the lowest level is represented by billions of shapes on the fabrication mask. In addition, systems typically incorporate microprocessors and digital signal processors that are programmed with software, requiring simultaneous design of the silicon chip and the related embedded software on the chip.


	•	Pay damages to the party claiming infringement;
	•	Stop licensing, or providing services that use, the challenged intellectual property;
	•	Obtain a license from the owner of the infringed intellectual property to sell or technology, which license may use the relevant not be available on reasonable terms, or at all; or
	•	Redesign the challenged technology, which could be time-consuming and costly.


	•	Customers’ budgetary constraints and internal acceptance review procedures;
	•	The timing of customers’ budget cycles; and
	•	The timing of customers’ competitive evaluation processes.


	•	Difficulties in combining previously separate businesses into a single unit;
	•	The substantial diversion of management’s attention from day-to-day business when negotiating these transactions and then integrating an acquired business;
	•	The discovery after the acquisition has been completed of liabilities assumed from the acquired business;
	•	The failure to realize anticipated benefits such as cost savings and revenue enhancements;
	•	The failure to retain key personnel of the acquired business;
	•	Difficulties related to assimilating the products of an acquired business in, for example, distribution, engineering, and customer support areas;
	•	Unanticipated costs;
	•	Adverse effects on existing relationships with suppliers and customers; and
	•	Failure to understand and compete effectively in markets in which Cadence have limited previous experience.


	•	The adoption and expansion of government trade restrictions;
	•	Volatile foreign exchange rates and currency conversion risks;
	•	Limitations on repatriation of earnings;
	•	Reduced protection of intellectual property rights in some countries;
	•	Recessions in foreign economies;
	•	Longer receivables collection periods and greater difficulty in collecting accounts receivable;
	•	Difficulties in managing foreign operations;
	•	Political and economic instability, including civil strife and war;
	•	Retaliation for U.S. government economic policies and military actions internationally;
	•	Unexpected changes in regulatory requirements;
	•	Tariffs and other trade barriers; and
	•	U.S. government licensing requirements for export which make licenses difficult to obtain.


	•	The development of competitive EDA products and design and methodology services could result in a shift of customer preferences away from Cadence’s products and services and significantly decrease revenue;
	•	The electronics design and methodology services industries are relatively new and electronics design companies and manufacturers are only beginning to purchase these services from outside vendors;
	•	The pace of the technology change demands continuous technological development to meet the requirements of next-generation design challenges; and
	•	There are a significant number of current and potential competitors in the EDA industry and the cost of entry is low.


	•	Loss of current customers and loss of, or delay in, revenue and loss of market share;
	•	Failure to attract new customers or achieve market acceptance;
	•	Diversion of development resources to resolving the problem;
	•	Increased service costs; and
	•	Liability for damages.


	•	Section 203 of the Delaware General Corporation Law generally prohibits a Delaware corporation from engaging in any business combination with a person owning 15% or more of its voting stock, or who is affiliated with the corporation and owned 15% or more of its voting stock at any time within three years prior to the proposed business combination, for a period of three years from the date the person became a 15% owner, unless specified conditions are met.
	•	Cadence’s Certificate of Incorporation allows Cadence’s Board of Directors to issue, at any time and without stockholder approval, preferred stock with such terms as it may determine. No shares of preferred stock are currently outstanding. However, the rights of holders of any Cadence preferred stock that may be issued in the future may be superior to the rights of holders of its common stock.
	•	Cadence has a rights plan, commonly known as a “poison pill,” which would make it difficult for someone to acquire Cadence without the approval of Cadence’s Board of Directors.


	•	Call options allow Cadence to buy shares of its common stock on a specified day at a specified price. If the market price of the stock is greater than the exercise price of a call option, Cadence will typically exercise the option and receive shares of its stock. If the market price of the common stock is less than the exercise price of a call option, Cadence typically will not exercise the option.
	•	Call option issuers may accumulate a substantial number of shares of Cadence common stock in anticipation of Cadence’s exercising its call option and may dispose of these shares if and when Cadence fails to exercise its call option. This could cause the market price of Cadence common stock to fall.
	•	Depending on the exercise price of the put warrants and the market price of Cadence common stock at the time of exercise, “net share settlement” of the put warrants with Cadence common stock could cause Cadence to issue a substantial number of shares to the holder of the put warrant. The holder may sell these shares in the open market, which could cause the price of Cadence common stock to fall.


	•	Put warrant holders may accumulate a substantial number of shares of Cadence common stock in anticipation of exercising their put warrants and may dispose of these shares if and when they exercise their put warrants and Cadence issues shares in settlement of their put warrants. This could also cause the market price of Cadence common stock to fall.