Cadence Design Systems Form 10-Q Dated 9/28/2002

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

At November 2, 2002, there were 268,880,372 shares of the registrant’s common stock, $0.01 par value, outstanding.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

The Condensed Consolidated Financial Statements included in this Quarterly Report have been prepared by Cadence Design Systems, Inc., or 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 contained in this Quarterly Report fully comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These Condensed Consolidated Financial Statements are meant to be, and 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 29, 2001.

The unaudited Condensed Consolidated Financial Statements included in this Quarterly Report 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 Condensed Consolidated Financial Statements for the three and nine months ended September 29, 2001 have been reclassified to conform to the September 28, 2002 presentation. For the nine months ended September 29, 2001, Cadence reclassified Proceeds from transfer of financial assets in exchange for cash from Cash Flows from Financing Activities to Cash Flows from Operating Activities in the Condensed Consolidated Statements of Cash Flows to conform to the September 28, 2002 presentation, which is consistent with the guidance of Statement of Financial Accounting Standards, or SFAS, No. 95, “Statement of Cash Flows”.

On September 27, 2002, Cadence acquired International Business Machines Corporation’s, or IBM’s, Test Design Automation, or TDA, business and paid a total cash purchase price of approximately $70.0 million. Concurrent with the acquisition, Cadence licensed software to IBM under term and subscription licenses, and entered into an agreement to provide services for cash to be paid over the duration of the respective contracts under standard terms. Cash to be paid by IBM will be significantly in excess of the cash paid by Cadence for the TDA business. The software licenses and services transactions were determined to have fair value based upon pricing for comparable transactions. Cadence purchased IBM’s TDA business to acquire key technology and personnel. The results of operations of the TDA business and the estimated fair value of the assets acquired and liabilities assumed have been included in Cadence’s Condensed Consolidated Financial Statements from the date of the acquisition.

For these concurrent transactions, Cadence considered SFAS No. 141, “Business Combinations”, and Emerging Issues Task Force, or EITF Issue No. 98-3, “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business”, to determine whether the acquisition of the TDA business qualified for accounting as a purchase business combination. In addition, Cadence considered Accounting Principles Board, or APB, Opinion No. 29, “Accounting for Nonmonetary Transactions” and EITF, No. 01-02, “Interpretation of APB Opinion No. 29,” to determine whether the concurrent transactions were appropriately recorded at their respective fair values. Monetary transactions and nonmonetary transac-

tions that represent the culmination of an earnings process are recorded at the fair values of the products delivered or products or services received, whichever is more readily determinable, if the fair values are reasonably determinable. In concluding that the fair values were reasonably determinable, Cadence considered its recent history of cash sales for similar products or services in similar sized transactions with similar terms.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition of the TDA business and the estimated amortization period for the acquired intangibles:

The $6.6 million assigned to acquired in-process technology was determined by a third party appraiser through established valuation techniques. The acquired in-process technology was immediately expensed because technological feasibility had not been established and no future alternative use exists. The in-process technology write-off is included in Restructuring, asset impairment and special charges in the Condensed Consolidated Statement of Operations. The weighted-average useful life of the acquired intangibles, excluding in-process technology, is approximately five years.

The $38.7 million of goodwill was assigned to the Product segment. For tax purposes, $19.9 million of the goodwill is expected to be deductible.

In June 2002, Cadence acquired 100% of the outstanding common stock of Simplex Solutions, Inc., a publicly-traded company that provides software and services for the design and verification of integrated circuits, for approximately 14.6 million shares of Cadence common stock, valued at $267.3 million, 4.5 million shares of Cadence common stock issuable on the exercise of assumed options, with a fair value of $46.4 million, and acquisition costs of $16.0 million, for a total purchase price of $329.7 million. The value of the common stock issued was determined based on the average market price of Cadence’s common stock for the five day period including two days before and after the acquisition was announced. Cadence purchased Simplex to acquire key personnel and technology. The results of operations of Simplex and the estimated fair value of the assets acquired and liabilities assumed have been included in Cadence’s Condensed Consolidated Financial Statements from the date of the acquisition.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition of Simplex and the estimated amortization period for the acquired intangibles:

The $27.4 million assigned to acquired in-process technology was determined by a third party appraiser through established valuation techniques. The acquired in-process technology was immediately expensed because technological feasibility had not been established and no future alternative use exists. The in-process technology write-off is included in Restructuring, asset impairment and special charges in the Condensed Consolidated Statement of Operations. The weighted-average useful life of the acquired intangibles, excluding in-process technology, is approximately four years.

The $226.2 million of goodwill was assigned to the Product and Services segments in the amounts of $116.1 million and $110.1 million, respectively. None of the goodwill is expected to be deductible for tax purposes.

In the nine months ended September 28, 2002, Cadence also acquired three other companies and substantially all of the assets of one other division of a company. The preliminary aggregate price was $56.1 million plus future contingent payments, of which $20.3 million was cash and $35.8 million was shares of Cadence common stock.

Goodwill recognized in these transactions was $41.1 million, all of which was assigned to the Product segment. Of the total goodwill, $7.3 million is expected to be deductible for tax purposes.

Comparative pro forma financial information for the 2002 acquisitions has not been presented because the results of operations were not material to Cadence’s Condensed Consolidated Financial Statements.

In the nine months ended September 28, 2001, Cadence acquired substantially all of the assets of two companies for an aggregate price of $10.5 million, 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 $1.0 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use.

In December 2001, Cadence acquired Silicon Perspective Corporation, or SPC, a privately-held design technology firm, for approximately 6.2 million shares of Cadence common stock, valued at $129.4 million, 0.8 million shares of stock issuable upon the exercise of assumed options with a fair value of $2.0 million, and acquisition costs of $3.3 million, for a total purchase price of $134.7 million. SPC provides electronic design tools that bridge the gap between front-end logic designers and the back-end physical design process. The

purchase price will increase as certain predetermined performance goals are achieved in fiscal 2002 and 2003, referred to as earnouts. As of September 28, 2002, 9.3 million shares valued at $150.3 million were earned based on the achievement of these predetermined performance goals and will be issued no later than February 15, 2003. These goals are related to bookings, product development and continued employment of certain SPC employees. Cadence recorded approximately 89% of the value associated with the 9.3 million shares as goodwill and the remaining 11% of the value as deferred compensation. In connection with the acquisition, Cadence preliminarily allocated $107.6 million of the purchase price to goodwill, which has been adjusted to $241.9 million as a result of the earnout, and technology, trademarks, employee agreements and other assumed contractual obligations intangibles of $19.5 million. The goodwill is not expected to be deductible for tax purposes. The technology and other acquired intangibles are being amortized over one to five years. Compensation expense in connection with the earnout for the three and nine months ended September 28, 2002 was $4.9 million.

In February 2001, Cadence acquired CadMOS Design Technology, Inc., a privately-held design tools firm, for approximately 3.6 million shares of Cadence common stock and assumed options, valued at $92.7 million, and the acquisition was accounted for as a purchase. CadMOS provides solutions to the signal integrity problems experienced in ultra-deep submicron processes. In the first quarter of 2002, Cadence issued an additional 0.2 million shares, valued at $3.6 million, due to CadMOS’ achievement of certain predetermined performance goals. In addition, the purchase price will increase by up to an additional 0.3 million Cadence shares if certain predetermined performance goals are achieved during the second and third years following the acquisition. These goals are related to bookings, product development and continued employment of certain CadMOS employees. In connection with the acquisition, Cadence allocated the purchase price primarily to goodwill of $58.3 million, which has been adjusted to $61.9 million as a result of the achievement of performance goals, and technology and other acquired intangibles of $12.9 million. The goodwill is not expected to be deductible for tax purposes. The technology and other acquired intangibles are being amortized over three to five years. The results of operations of CadMOS and the estimated fair values of the assets acquired and liabilities assumed are included in Cadence’s Condensed Consolidated Financial Statements from the date of acquisition.

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 reflected the uncertainty surrounding successful development of the acquired in-process technology. The in-process technology was completed as of September 28, 2002. Expenditures to complete the in-process technology totaled $1.9 million. These projects will require additional development after they have reached a state of technological and commercial feasibility.

In July 2000, Cadence announced its plan to separate its electronics design services group into a new company named Tality Corporation. Tality’s separation from Cadence was substantially completed in October 2000, and the electronic design services business thereafter operated as a subsidiary of Cadence. Due to the economic downturn, Tality was reorganized and restructured beginning in 2001. In the second quarter of 2002, Simplex’s SoC Design Foundry was combined with Tality to operate as Cadence Design Foundry. Cadence Design Foundry will focus on high-end digital, analog and mixed-signal integrated circuit design in close conjunction with Cadence technology development groups. As a result, Cadence no longer has a separate design services group named Tality.

Cadence commenced a plan of restructuring activities throughout the company targeted at eliminating redundancies and consolidating facilities and resources, in the second quarter of 2001. The restructuring

activities were initiated primarily due to the economic downturn in the electronics industry. The restructuring was primarily aimed at reducing excess employee and capacity costs within Cadence’s design services business and certain other business/infrastructure groups.

For the nine months ended September 28, 2002, Cadence recorded $73.2 million of restructuring charges. Cadence’s restructuring costs consisted of $28.3 million for workforce reduction, $26.3 million in changes in estimates for previously recorded accruals and to downsize and close excess facilities and $18.6 million of asset impairment charges related to certain long-lived assets. Management estimates that Cadence will realize annualized cost reductions of approximately $83.2 million in salary and benefit costs related to the 2002 workforce reduction and $20.7 million in facility costs related to facilities downsized or closed since the commencement of the restructuring activity in 2001, which amounts could vary based upon changes in estimates.

The 2002 restructuring activities will result in the termination of employment of approximately 830 employees for the nine months ended September 28, 2002. While such terminations of employment are across various business functions, operating units and geographic regions, the communications-related areas within the design services business are the most affected. Costs resulting from the restructuring included severance benefits, notice pay and outplacement services. All terminations and termination benefits were communicated to the affected employees prior to September 28, 2002. All severance benefits will be paid by September 28, 2003.

For the nine months ended September 28, 2002, facilities consolidation charges of $26.3 million were incurred in connection with the further downsizing of three previously downsized sites, the downsizing and closing of 10 additional sites and changes in lease loss estimates for four sites. Of the $26.3 million, $12.3 million related to changes in lease loss estimates. 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 estimates 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 and represents the low end of the range. The low end of the lease loss range related to all worldwide restructuring activities initiated in 2001 is $22.9 million, which will be adjusted in the future upon triggering events (such as changes in estimates of time to sublease and actual sublease rates). Cadence has estimated that the high end of the lease loss could be as much as $48.5 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. Since June 2001, 27 sites have been selected for downsizing or closure. As of September 28, 2002, 15 sites had been vacated, eight sites had been downsized and actions related to the four remaining sites are scheduled to occur by the end of 2002.

For the nine months ended September 28, 2002, asset-related charges of $18.6 million were incurred in connection with leasehold improvements for facilities and other fixed assets that were either abandoned or for which the estimated future cash flows were insufficient to cover the associated expenses.

The following table summarizes Cadence’s restructuring activity for the nine months ended September 28, 2002:

In the nine months ended September 28, 2002, Cadence recorded a $13.4 million write-down of equity investments held in its venture capital partnerships to estimated fair value, as Cadence determined that the decline in fair value was other than temporary. The write-down is included in Other income (expense), net, in the Condensed Consolidated Statement of Operations.

In the nine months ended September 28, 2002, Cadence recorded $11.1 million of expense for estimated losses related to certain litigation. This expense is classified as a special charge and included in Restructuring, asset impairment and special charges in the Condensed Consolidated Statement of Operations.

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 nine months ended September 28, 2002, Cadence recorded a $9.3 million write-off of inventory, which is included in Cost of product in the Condensed Consolidated Statement of Operations. The $9.3 million charge reflects inventory surplus over sales forecast for the succeeding 12-months.

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

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

Options to purchase 47,820,118 and 68,977,594 shares of common stock were outstanding for the three and nine months ended September 28, 2002, respectively, but were not included in the computation of diluted net income (loss) per share because their effect would be antidilutive. These options expire at various dates through 2012. Warrants to purchase 140,000 shares of common stock were outstanding at September 28, 2002, but were not included in the computation of diluted net loss per share for the nine months ended September 28, 2002, because their effect would be antidilutive. The outstanding warrants expire in June 2003. Put warrants to purchase 2,897,500 shares of common stock were not included in the computation of diluted net loss for the nine months ended September 28, 2002, because their effect would be antidilutive. These put warrants expired on various dates through May 2002. Contingently issuable shares of 1,035,781 were not included in the calculation of diluted net loss per share for the nine months ended September 28, 2002, because their effect would be antidilutive.

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 the effect would be antidilutive. These options expire at various dates through

2011. Put warrants obligating Cadence to purchase from warrant holders 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 expired on various dates through May 2002.

On September 27, 2002, Cadence entered into two syndicated, senior unsecured credit facilities, or the 2002 Facilities, that allow Cadence to borrow up to $375.0 million. One of the 2002 Facilities is a $187.5 million three-year revolving credit facility, or the Three-Year Facility, which terminates on September 27, 2005. The other 2002 Facility consists of a $187.5 million, 364-day revolving credit facility convertible into a term loan, or the 364-Day Facility. The 364-Day Facility will terminate on September 26, 2003; provided, that at the request of Cadence and with the consent of members of the bank group that wish to do so, the date of termination may be extended for one additional 364-day period with respect to the portion of the amounts outstanding under the 364-Day Credit Agreement that a consenting bank holds. Upon the scheduled and/or extended termination, amounts outstanding under the 364-Day Facility may be converted to a one-year term loan.

For both of the 2002 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 the Federal Funds Rate plus 0.50% or the prime rate. In addition, commitment fees are payable on the unused portion of the Three-Year Facility at rates between 0.25% and 0.335% 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 2002 Facilities whenever combined borrowings under the 2002 Facilities exceed $123.8 million. Cadence may not borrow under the 364-Day Facility at any time that any portion of the Three-Year Facility remains unused.

The 2002 Facilities contain certain financial and other covenants, which must be maintained. The financial covenants specify that Cadence must maintain a minimum Earnings Before Interest Taxes Depreciation and Amortization, or EBITDA, of not less than $200.0 million. Additionally Cadence must maintain a minimum fixed charge coverage ratio (the ratio of EBITDA to the sum of (i) interest expense plus (ii) 20% of funded debt plus (iii) taxes paid in cash plus (iv) capital lease payments) of not less than 1.5 to 1.0. Other covenants require Cadence to maintain a minimum one-to-one ratio of current assets to current liabilities and a maximum two-to-one funded debt to EBITDA ratio, and to directly own not less than 51% of its consolidated total assets. From time to time, Cadence borrows amounts under the 2002 Facilities. At September 28, 2002, Cadence was in compliance with the covenants in the 2002 Facilities and there were outstanding borrowings of $95.0 million under the Three-Year Facility.

The 2002 Facilities replaced two previously existing credit facilities, which terminated on September 27, 2002. In connection with the termination of the existing credit facilities, Cadence paid all interest, principal, fees, and other amounts owing thereunder in full.

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 or agents for misappropriation of trade secrets, copyright infringement, conspiracy and other illegal acts involving intellectual property.

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 $10.0 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.

On July 25, 2001, Avant! was ordered to pay Cadence $194.6 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. This conspiracy included the theft by Avant! and certain individuals of Cadence intellectual property, including software code, as well as other trade secrets. As of December 29, 2001, approximately $196.0 million, consisting of all of the restitution award plus interest was received.

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, prior to June 1994, 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 and stayed the case. On October 31, 2001, the California Supreme Court agreed to accept such certification. The California Supreme Court heard oral argument on September 4, 2002. The matter is under submission.

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 alleging that Quickturn infringed a U.S. patent owned by Aptix and licensed to Meta. 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. On September 8, 2000, the Court ordered Aptix to pay $4.2 million to Quickturn as reimbursement of attorneys’ fees and costs it incurred in the litigation. Aptix appealed the District Court’s judgment and posted a $2.0 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 vacated the District Court’s judgment of unenforceability, but affirmed the District Court’s dismissal of Aptix’s and Meta’s complaint and the award of attorneys fees and costs. Cadence received the bonded portion of the judgment in April 2002.

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. Settlement of the companion action is conditioned upon approval of the Chancery Court and Mentor’s not being awarded attorneys’ fees for Mentor II. In an order dated August 17, 2001, the Chancery Court denied Mentor’s fee application, and on February 13, 2002, issued an order dismissing the case. Mentor has filed a notice of appeal with the Delaware Supreme Court of the denial of the fee application. On July 25, 2002, the Chancery Court approved the settlement of the companion action.

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^TM and MercuryPlus^TM 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 defendant. Quickturn and Cadence are vigorously defending themselves against Mentor’s claims, and have filed counterclaims for declaratory judgment of non-infringement and invalidity of these patents. In March 2002, the Court ruled that Mentor’s title to U.S. Patent No. 5,777,489 was defective at the time the action was filed and dismissed that patent from the action without prejudice to re-file. Mentor has since filed Civil Action No. C02-1426-SI, alleging that Quickturn’s Mercury^TM hardware emulation systems (but not Quickturn’s MercuryPlus^TM emulation systems) infringe U.S. Patent No. 5,777,489. This new action has been consolidated with Civil Action No. C 99-5464 for pre-trial purposes. Quickturn and Cadence continue to vigorously defend themselves against Mentor’s claims regarding U.S. Patent No. 5,777,489 in the new action.

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 infringement of U.S. Patent No. 5,754,827 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 (U.S. Patent No. 5,943,490). Quickturn and Cadence are vigorously defending themselves against these claims, and have filed counterclaims for declaratory judgment of non-infringement, unenforceability and invalidity of U.S. Patent No. 5,754,827. Quickturn and Cadence have also counterclaimed for declaratory judgment of non-infringement, unenforceability and invalidity of two additional patents allegedly assigned to Mentor, U.S. Patent Nos. 5,999,725 and 6,057,706 which Mentor has threatened to assert against Quickturn. Mentor’s response to Quickturn’s counterclaims affirmatively alleges infringement of both of these patents. On August 7, 2002, the Court ruled that Mercury^TM and MercuryPlus^TM infringed Claim 8 of U.S. Patent No. 5,999,725.

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. Cadence and Quickturn are vigorously defending themselves against Mentor’s claim, and have filed counterclaims for declaratory judgment of invalidity, unenforceability and non-infringement of this patent. The parties have agreed to consolidate this action with Civil Action Nos. C 99-5464, C 00-01030 and C 02-1426-SI, described above, for purposes of discovery and pre-trial motions. A trial date has been set for January 6, 2003. On April 2, 2002, the Court ruled that MercuryPlus^TM infringes Claims 1 and 5 of the patent. On May 20, 2002, in response to a motion for summary judgment brought by Quickturn and Cadence, the Court ruled that Claim 1 of the patent was invalid and, accordingly, dismissed that claim from the case. Quickturn and Cadence continue to vigorously defend against U.S. Patent No. 5,574,388 on the grounds of invalidity and unenforceability. On October 23, 2002, the Court ruled that Mercury^TM and MercuryPlus^TM infringe Claim 1 of U.S. Patent No. 5,754,827.

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 IC 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 July 29, 2002, IKOS Systems, Inc., a subsidiary of Mentor, filed a complaint against Cadence and Quickturn in the U.S. District Court, District of Delaware, Civil Action No. 02-1335, accusing Quickturn’s Palladium^TM product of infringing IKOS’ U.S. Patent No. 5,847,578, and seeking unspecified damages and injunctive relief. Cadence and Quickturn believe the complaint is without merit and intend to vigorously defend themselves. On October 22, 2002, upon motion by Cadence and Quickturn, the court ordered the action to be transferred to the U.S. District Court, Northern District of California.

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, and Rule 14d-10 thereunder. The lawsuit arose out of Cadence’s acquisition of OrCAD, which was completed in August 1999. The parties have settled the matter for the payment of $1.25 million by Cadence. The settlement is subject to court approval.

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.

On August 1, 2001, Cadence authorized a stock repurchase program under which repurchased stock with a value of up to $500.0 million may be used for general corporate purposes, including the stock issuance requirements of Cadence’s employee stock option and purchase plans and acquisitions. During the three and nine month periods ended September 28, 2002, Cadence repurchased 3.0 million shares under this program at a total cost of $42.1 million. As of September 28, 2002, the remaining repurchase authorization under this program totaled $457.9 million.

Cadence had previously authorized three 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. Under these programs, Cadence spent $57.9 million to repurchase 4.8 million shares during the three months ended September 28, 2002 and $116.1 million to repurchase 7.5 million shares during the nine month period ended September 28, 2002. As of September 28, 2002, there was no remaining repurchase authorization under these three programs.

As part of its authorized stock repurchase program, Cadence has previously sold put warrants and purchased call options through private placements to manage equity price risk and dilution. On September 28, 2002, there were no put warrants or call options outstanding.

Supplemental cash-flow information for the nine months ended September 28, 2002 and September 29, 2001 is as follows:

Cadence’s chief operating decision maker is its President and Chief Executive Officer, or CEO. Cadence’s CEO reviews Cadence’s consolidated results within three segments: Product, Services and Maintenance.

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.

Segment income from operations is defined as gross margin under generally accepted accounting principles and excludes Amortization of acquired intangibles, operating expenses (Marketing and sales, Research and development, and General and administrative), Restructuring, asset impairment and special charges, Amortization of deferred stock compensation, Other income (expense), net, and Provision for 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.

Cadence 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 CEO 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 28, 2002 and September 29, 2001:

The following tables present information about reported segments for the nine months ended September 28, 2002 and September 29, 2001:

Internationally, excluding Japan, Cadence markets and supports its products and services primarily through its subsidiaries. Cadence licenses most of its software products in Japan through Innotech Corporation, of which Cadence is an approximately 15% stockholder. Cadence markets its methodology and design 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 28, 2002, one customer accounted for 14% of total revenues of which 13% was related to the concurrent transaction. In the nine months ended September 28, 2002, no customer accounted for greater than 10% of total revenues. In the three months ended September 29, 2001, one customer accounted for 14% and one customer accounted for 11% of total revenues. In the nine months ended September 29, 2001, no customer accounted for greater than 10% of total revenues.

In the three and nine months ended September 29, 2001, operating expenses and unusual items include the receipt of proceeds from the criminal restitution from Avant! of $168.5 million.

The following table presents a summary of revenues by geographic region for the three months ended September 28, 2002 and September 29, 2001:

The following table presents a summary of revenues by geographic region for the nine months ended September 28, 2002 and September 29, 2001:

The following table presents a summary of long-lived assets by geographic region as of September 28, 2002 and December 29, 2001:

On December 30, 2001 (the beginning of Cadence’s fiscal year 2002), SFAS No. 142, “Goodwill and Other Intangible Assets” was adopted and, as a result, Cadence has ceased to amortize approximately $201.8 million of goodwill, net of amortization. In lieu of amortization, Cadence is required to perform an impairment test as of the date of adoption, and an impairment review at least annually. As required by the transitional provisions of SFAS No. 142, Cadence completed the first step of the transitional goodwill impairment test before the end of the second quarter of 2002. Based on the results of the impairment review, Cadence has determined that no indicators of impairment existed for any of its reporting units and accordingly did not proceed to the second step of the transitional goodwill impairment test. No impairment charge was recognized as of the date of adoption of SFAS No. 142.

During the three months ended September 28, 2002, Cadence completed its annual impairment review of acquired technology, goodwill and intangibles. A third-party appraiser was engaged to estimate the fair value of each of the reporting units using established valuation techniques. Based on the results of the impairment review, Cadence has determined that no indicators of impairment existed for any of its reporting units, and therefore no impairment charge has been recognized as of September 28, 2002.

Cadence reviewed the realizability of acquired technology, goodwill and intangibles and performed procedures under the applicable accounting pronouncements to quantify any impairment that may exist as of December 30, 2001. Determining the amount of impairment of these assets required Cadence to estimate future cash flows and make judgments regarding discount rates and other variables that impact the net

realizable value or fair value of those assets, as applicable. Actual future cash flows and other assumed variables could differ from these estimates and could create conditions under which material future impairment charges would be required under SFAS No. 142.

The pro forma effects of the adoption of SFAS No. 142 for the three and nine months ended September 28, 2002 and September 29, 2001:

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 in this report. 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.”

Cadence provides comprehensive software and other technology to, and offers design and methodology services for the product development requirements of, the world’s leading electronics companies. Cadence licenses its leading-edge 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’s products and services are used by companies to design and develop complex integrated circuits 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.

Integrated circuit manufacturers and electronics systems companies experienced a slowdown of demand and production in 2001, which has intensified in 2002. Cadence expects its revenue to continue to be adversely affected by the general slowdown in the economy and, in particular, the electronics industry.

On September 27, 2002, Cadence acquired IBM’s TDA business and paid a total cash purchase price of approximately $70.0 million. Concurrent with the acquisition, Cadence licensed software to IBM under term and subscription licenses, and entered into an agreement to provide services for cash to be paid over the duration of the respective contracts under standard terms. Cash to be paid by IBM will be significantly in excess of the cash paid by Cadence for the TDA business. The software licenses and services transactions were determined to have fair value based upon pricing for comparable transactions. Cadence purchased IBM’s TDA business to acquire key technology and personnel. The results of operations of the TDA business and the estimated fair value of the assets acquired and liabilities assumed have been included in Cadence’s Condensed Consolidated Financial Statements from the date of the acquisition.

In June 2002, Cadence acquired 100% of the outstanding common stock of Simplex Solutions, Inc., a publicly-traded company, for approximately 14.6 million shares of Cadence common stock, valued at $267.3 million, 4.5 million shares of Cadence common stock issuable on the exercise of assumed options, with a fair value of $46.4 million, and acquisition costs of $16.0 million, for a total purchase price of $329.7 million. The value of the common stock issued was determined based on the average market price of Cadence’s common stock for the five day period including two days before and after the acquisition was announced. Simplex provides software and services for the design and verification of integrated circuits. Cadence purchased Simplex to acquire key technology and personnel. The results of operations of Simplex and the estimated fair value of the assets acquired and liabilities assumed have been included in Cadence’s Condensed Consolidated Financial Statements from the date of the acquisition.

In December 2001, Cadence acquired SPC, a privately-held design technology firm, for approximately 6.2 million shares of Cadence common stock, valued at $129.4 million, 0.8 million shares of stock issuable upon the exercise of assumed options with a fair value of $2.0 million, and acquisition costs of $3.3 million, for a total purchase price of $134.7 million. SPC provides electronic design tools that bridge the gap between front-end logic designers and the back-end physical design process. The purchase price will increase as certain predetermined performance goals are achieved in fiscal 2002 and 2003, referred to as an earnout. As of

September 28, 2002, 9.3 million shares valued at $150.3 million were earned based on the achievement of these predetermined performance goals and will be issued no later than February 15, 2003. These goals are related to bookings, product development and continued employment of certain SPC employees. Cadence recorded approximately 89% of the value associated with the 9.3 million shares as goodwill and the remaining 11% of the value as deferred compensation. In connection with the acquisition, Cadence preliminarily allocated $107.6 million of the purchase price to goodwill, which has been adjusted to $241.9 million as a result of the earnout, and technology, trademarks, employee agreements and other assumed contractual obligations intangibles of $19.5 million. The goodwill is not expected to be deductible for tax purposes. The technology and other acquired intangibles are being amortized over one to five years. Compensation expense in connection with the earnout for the three and nine months ended September 28, 2002 was $4.9 million.

In February 2001, Cadence acquired CadMOS Design Technology, Inc., a privately-held design tools firm, for approximately 3.6 million shares of Cadence common stock and assumed options, valued at $92.7 million, and the acquisition was accounted for as a purchase. CadMOS provides solutions to the noise problems experienced in ultra-deep submicron processes. In the first quarter of 2002, Cadence issued an additional 0.2 million shares, valued at $3.6 million, due to CadMOS’ achievement of certain predetermined performance goals. In addition, the purchase price will increase by up to an additional 0.3 million Cadence shares if certain predetermined performance goals are achieved during the second and third years following the acquisition. These goals are related to bookings, product development and continued employment of certain CadMOS employees. In connection with the acquisition, Cadence allocated the purchase price primarily to goodwill of $58.3 million, which has been adjusted to $61.9 million as a result of the achievement of performance goals, and technology and other acquired intangibles of $12.9 million. The goodwill is not expected to be deductible for tax purposes. The technology and other acquired intangibles are being amortized over three to five years. The results of operations of CadMOS and the estimated fair values of the assets acquired and liabilities assumed are included in Cadence’s Condensed Consolidated Financial Statements from the date of acquisition.

In July 2000, Cadence announced its plan to separate its electronics design services group into a new company named Tality Corporation, and Tality filed a registration statement with the Securities and Exchange Commission for Tality’s IPO. Tality’s separation from Cadence was substantially completed in October 2000, and the electronic design services business thereafter operated as a subsidiary of Cadence. As a result of the separation, Cadence recorded deferred stock compensation resulting from Tality option grants and sales of Tality restricted stock. In October 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 expensed $2.8 million of IPO-related costs in the first quarter of 2001. In addition to the $2.8 million, in 2001 Cadence also expensed $2.0 million of Tality separation costs related primarily to information systems separation, legal and consulting fees. In April 2001, Cadence announced the withdrawal of the Tality IPO registration statement. Tality was reorganized and restructured during 2001, and in the first and second quarters of 2002. See “Restructuring, Asset Impairment and Special Charges – Tality IPO-Related Expense, Separation Costs and Other.” With the acquisition of Simplex in June 2002, Simplex’s SoC Design Foundry business, was combined with Tality to operate as Cadence Design Foundry. Cadence Design Foundry will focus on high-end digital, analog and mixed-signal integrated circuit design in close conjunction with Cadence technology development groups. As a result, Cadence no longer has a separate design services group named Tality.


	•	revenue recognition;

	•	estimating valuation allowances and accrued liabilities;

	•	accounting for income taxes; and

	•	valuation of long-lived and intangible assets and goodwill.

Cadence derives revenue from three sources: (i) product revenue, which includes software licensing, hardware sales and hardware leases, (ii) maintenance revenue from software and hardware and (iii) services revenue. As described below, significant management judgments and estimates are made and used to determine the revenue recognized in any accounting period.

Cadence applies the provisions of Statement of Position 97-2, “Software Revenue Recognition,” as amended by Statement of Position 98-9 “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions,” to all product revenue transactions where the software is not incidental. Cadence also applies the provisions of Statement of Financial Accounting Standards, or SFAS, No. 13, “Accounting for Leases”, to all hardware lease transactions. Cadence applies the provisions of Statement of Position 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” to all services transactions, as required by SOP 97-2.

Cadence recognizes product revenue when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable, collection of the resulting receivable is probable and vendor-specific objective evidence, or VSOE, of fair value exists to allocate the total fee among all delivered and undelivered elements in the arrangement. If VSOE of fair value does not exist for all elements to support the allocation of the total fee among all delivered and undelivered elements of the arrangement, revenue is deferred until such evidence does exist for the undelivered elements, or until all elements are delivered, whichever is earlier.

Cadence’s VSOE for product elements of an arrangement is based upon the pricing for comparable transactions when the element is sold separately. Cadence’s VSOE for maintenance is based upon the customer’s annual renewal rates. VSOE for services is based on the price charged when the services are sold separately. The timing of revenue recognition for both delivered and undelivered elements is in accordance with the relevant provisions of SOP 97-2.


	•	Term licenses – software licensed for a specific time period, generally two to three years, with no rights to return or exchange the licensed software;

	•	Subscription licenses – software licensed for a specific time period, generally two to three years, with no rights to return and limited rights to exchange the licensed software for unspecified future technology; and

	•	Perpetual licenses – software licensed on a perpetual basis with no right to return or exchange the licensed software.

For term and subscription licenses and hardware leases, Cadence uses the license and a signed contract as evidence of an arrangement. For perpetual licenses, hardware sales, maintenance renewals and small fixed-price service projects, such as training classes and small, standard methodology service engagements of approximately $10,000 in size or less, Cadence uses a purchase order as evidence of an arrangement. For all other service engagements, Cadence uses a signed professional services agreement and a statement of work to evidence an arrangement. Sales through its Japanese distributor are evidenced by a master agreement governing the relationship, together with binding purchase orders from the distributor on a transaction-by-transaction basis.

Software is delivered to customers electronically or on a CD-ROM. With respect to hardware, delivery of an entire system is deemed to occur upon installation.

Cadence assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction. Cadence uses installment contracts for term and subscription licenses for which it has established a history of collecting under the original contract without providing concessions on payments, products or services. The time periods of installment contracts are equal to or less than the time period of the licenses and payments are generally collected quarterly. If different conditions were to prevail, and Cadence no longer had a history of collecting without providing concessions on term licenses, then revenue from term

Cadence assesses collectibility based on a number of factors, including the customer’s past payment history and its current creditworthiness. If collection of a fee is not reasonably assured, Cadence defers the revenue and recognizes it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment.

Provided all the related conditions discussed above are met, Cadence recognizes revenue for each software license type as follows:


	•	Term licenses and Perpetual licenses – all revenue associated with licensed software is recognized upon the effective date of the license and delivery of the product; and

	•	Subscription licenses – revenue associated with licensed software is recognized ratably over the term of the license commencing upon the effective date of the license.

Maintenance revenue consists of fees for providing technical support and software updates. Cadence recognizes all maintenance revenue ratably over the maintenance period under each software license agreement. For term and perpetual licenses, customers renew maintenance agreements annually.

Services revenue consists primarily of revenue received for performing methodology and design services. Fixed-price methodology and design service contracts are accounted for using contract accounting, which is generally the percentage-of-completion method rather than the completed-contract method, and time and materials contracts are accounted for on a monthly basis as work is performed. In addition, for small fixed-price projects, such as training classes and small, standard methodology service engagements of approximately $10,000 in size or less, revenue is recognized when the work is completed. Cadence has a history of accurately estimating project status and the cost to complete projects. If different conditions were to prevail such that accurate estimates could not be made, then the use of the completed contract method would be required and all revenue and costs would be deferred until the project was completed. This change would have a material impact on Cadence’s results of operations.

In September 2002, Cadence acquired IBM’s TDA business. Concurrent with the acquisition, Cadence licensed software to IBM and entered into an agreement to provide services.

For these concurrent transactions, Cadence considered SFAS No. 141, “Business Combinations”, and EITF Issue No. 98-3, “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business”, to determine whether the acquisition of the TDA business qualified for accounting as a purchase business combination. In addition, Cadence considered APB Opinion No. 29, “Accounting for Nonmonetary Transactions” and EITF, No. 01-02, “Interpretation of APB Opinion No. 29,” to determine whether the concurrent transactions were appropriately recorded at their respective fair values. Monetary transactions and nonmonetary transactions that represent the culmination of an earnings process are recorded at the fair values of the products delivered or products or services received, whichever is more readily determinable, if the fair values are reasonably determinable. In concluding that the fair values were reasonably determinable, Cadence considered its recent history of cash sales for similar products or services in similar sized transactions with similar terms.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of assets and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.

Management specifically analyzes accounts receivable and also analyzes historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in customer payment terms, changes in customer demand and sales returns when evaluating the adequacy of the allowance for doubtful accounts and sales returns in any accounting period. Material differences may result in the amount and timing

Cadence has restructured business units in the past and has established reserves at the low end of the range of estimable cost against outstanding commitments for leased properties that it has vacated. These reserves are based upon management’s estimate of the landlord’s willingness to negotiate a termination fee, the time required to sublet the properties and the amount of sublease income that we estimate will be generated between the date the property was vacated and expiration of the lease for each of the vacated properties. These estimates are reviewed and revised quarterly and may result in a substantial increase to restructuring expense should different conditions prevail than were anticipated in original management estimates.

Cadence assesses the need to write down inventory based on forward projections of hardware product sales that are updated monthly. As a result of these projections, all inventory value in excess of 12 months’ sales projections (except for inventory expected to be used in ongoing service and maintenance of the installed base of customer owned systems) is permanently written off and any cash proceeds for the sale of such inventory in excess of its net book value are recorded in the period of sale to Cost of product.

In preparing its Condensed Consolidated Financial Statements, Cadence is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating actual current tax liability together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Condensed Consolidated Balance Sheet. Cadence then assesses the likelihood that deferred tax assets will be recovered from future taxable income, and to the extent it believes that recovery is not likely, Cadence must establish a valuation allowance. To the extent Cadence establishes a valuation allowance for tax provisions or increases this allowance in a period, Cadence includes an expense within the tax provision in its Condensed Consolidated Statement of Operations.

Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. The valuation allowance is based on estimates of taxable income for each jurisdiction in which Cadence operates and the period over which deferred tax assets will be recoverable. In the event that actual results differ from these estimates or Cadence adjusts these estimates in future periods, Cadence may need to establish an additional valuation allowance, which could materially affect its financial position and results of operations.

Cadence reviews, at least annually, goodwill resulting from purchase business combinations for impairment in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. Cadence reviews long-lived assets, including certain identifiable intangibles, for impairment whenever events or changes in circumstances indicate that Cadence will not be able to recover the asset’s carrying amount in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

For long-lived assets to be held and used, including acquired intangibles, Cadence initiates its review whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows expected to result from the use and eventual disposition of that asset, excluding future interest costs that would be recognized as an expense when incurred. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. Significant management judgment is required in the forecasting of future operating results and proceeds from disposition which are used in the preparation of projected cash flows and, should different conditions prevail or judgments be made, material write-downs of net intangible assets and/or goodwill could occur.

Product revenue decreased $7.2 million and increased $66.6 million in the three and nine months ended September 28, 2002, respectively, when compared to the same periods in 2001. The decrease in product revenue for the three months ended September 28, 2002, was primarily due to a decrease in the sales volume of Cadence’s digital integrated circuit implementation products and a shift in license mix to a higher percentage of subscription licenses. Ratable revenue includes all revenue from subscription licenses, term licenses with less than a two-year duration and cash collections from customers with lower credit ratings. The increase in product revenue for the nine months ended September 28, 2002 was primarily due to an increase in sales volume of Cadence’s custom integrated circuit implementation products. In each of the three and nine months ended September 28, 2002, and September 29, 2001, approximately 40% of software revenue was generated by Cadence’s ratable arrangements.

Material differences may result in the amount and timing of Cadence’s reported revenue depending on the actual mix of license types in any given period. In July 2002, Cadence announced an expected change in the mix of software license types going forward, due to an increasing customer preference for its subscription licenses, which give customers limited access to new technology. Accordingly, the shift in mix to a higher percentage of revenue recognized on a ratable basis has resulted in lower revenue for the three months ended September 28, 2002, when compared to the same period in 2001. This trend is expected to continue through the remainder of 2002 and the first half of 2003.

Services revenue decreased $24.0 million and $97.5 million in the three and nine months ended September 28, 2002, respectively, when compared to the same periods in 2001, primarily due to a reduction in customers’ spending for external services in the telecommunications and consumer products industries. Cadence believes that the slowdown will continue through at least the first half of 2003.

Maintenance revenue declined $1.6 million and $4.5 million in the three and nine months ended September 28, 2002, respectively, when compared to the same periods in 2001, primarily due to fewer renewals of maintenance contracts.

International revenue decreased $47.5 million in the three months ended September 28, 2002, when compared to the same period in 2001, primarily due to a decrease in product revenue in Asia and Europe partially offset by an increase in product revenue in Japan. International revenue decreased $25.2 million in the nine months ended September 28, 2002, when compared to the same periods in 2001, primarily due to a decrease in services revenue in all regions.

Quarterly fluctuations in revenue by geography are primarily due to the timing of significant customer contracts.

Foreign currency exchange rates positively affected revenue by $1.7 million for the three months ended September 28, 2002, when compared to the same period in 2001, primarily due to the strengthening of the Japanese yen in relation to the U.S. dollar. Foreign currency exchange rates negatively affected revenue by $8.8 million for the nine months ended September 28, 2002, when compared to the same period in 2001, primarily due to the weakening of the Japanese yen in relation to the U.S. dollar. Additional information about revenue by geographic areas can be found under “Segment Reporting” in the Notes to Condensed Consolidated Financial Statements.

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

Cost of product revenue decreased $17.4 million in the three months ended September 28, 2002, when compared to the same period in 2001, primarily due to inventory write-offs in 2001. Cost of product revenue decreased $18.7 million in the nine months ended September 28, 2002, when compared to the same period in 2001, primarily due to a decrease in sales of emulation system products and lower amounts of inventory write-offs.

During the nine months ended September 28, 2002, Cadence recorded inventory write-offs of approximately $9.3 million, based on Cadence’s determination that inventory exceeded sales forecasts for the next 12 months. During the three and nine months ended September 29, 2001, Cadence recorded inventory write-offs of approximately $12.9 million and $18.7 million, based on Cadence’s determination that inventory exceeded sales forecasts for the succeeding 12-month period.

At September 28, 2002, Cadence determined that inventory levels were within forecasts for the succeeding 12-month period. Accordingly, no inventory write-offs were recorded resulting in an increase in the product gross margin when compared to the same period in 2001.

Cost of services revenue primarily includes employee salary and benefits, costs to maintain the infrastructure necessary to manage a services organization and provisions for loss contracts, if any. Cost of services revenue decreased $20.6 million and $61.5 million in the three and nine months ended September 28, 2002, respectively, when compared to the same periods in 2001, primarily due to decreases in employee salary and benefit costs resulting from Cadence’s reduction of services professionals in connection with its restructuring actions initiated in 2001 and 2002.

Services gross margin remained relatively flat for the three months ended September 28, 2002, when compared to the same period in 2001. Services gross margin decreased for the nine months ended September 28, 2002, when compared to the same period in 2001, primarily due to the slowdown in the electronics systems industry, resulting in revenues declining faster than costs. Services gross margin has been, and may continue to be, reduced should Cadence be unable 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 employees and documentation of maintenance updates. Cost of maintenance revenue, and the associated gross margin, remained relatively flat for the three and nine months ended September 28, 2002, when compared to the same periods in 2001.

Marketing and sales expense increased $6.6 million and $10.0 million in the three and nine months ended September 28, 2002, respectively, when compared to the same periods in 2001, primarily due to an increase in employee salary and benefit costs resulting from an increase in employees, primarily from acquisitions, partially offset by a decrease in marketing program expense.

Research and development expense, prior to the reduction for capitalization of software development costs, was $89.6 million, representing 27% of total revenue, in the three months ended September 28, 2002, and $81.5 million, representing 23% of total revenue, for the three months ended September 29, 2001. Research and development expense, prior to the reduction for capitalization of software development costs, was $261.3 million, representing 26% of total revenue, in the nine months ended September 28, 2002, and $241.7 million, representing 23% of total revenue, for the nine months ended September 29, 2001. For the three and nine months ended September 28, 2002, Cadence capitalized software development costs of $5.0 million and $20.2 million, respectively, representing 6% and 8% of total research and development expenditures, respectively. 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 29, 2001. The decrease in capitalized software development costs for the three and nine months ended September 28, 2002, resulted primarily from increased costs of product updates that are expensed rather than capitalized, in compliance with SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed”. In any given period, the amount of capitalized software development costs may vary depending on the exact nature of the development work performed.

The increase in net research and development expense of $10.4 million and $22.0 million for the three and nine months ended September 28, 2002, respectively, when compared to the same periods in 2001, was primarily due to an increase in employee salary and benefit costs resulting from an increase in employees, primarily from acquisitions, and increased costs of product updates that are expensed rather than capitalized, in compliance with SFAS No. 86.

General and administrative expense decreased $1.3 million in the three months ended September 28, 2002, when compared to the same period in 2001, primarily due to a decrease in employee salary and benefit costs. General and administrative expense decreased $7.6 million in the nine months ended September 28, 2002, when compared to the same period in 2001, primarily due to a decrease in bad debt expense.

Foreign currency exchange rates effectively increased operating expenses by $1.6 million in the three months ended September 28, 2002, primarily due to the strengthening of the Euro and the British pound in relation to the U.S. dollar. Foreign currency exchange rates effectively decreased operating expenses by $0.5 million in the nine months ended September 28, 2002, respectively, when compared to the same period in 2001, primarily due to the weakening of the Japanese yen in relation to the U.S. dollar.

Amortization of acquired intangibles decreased $2.0 million and $12.2 million in the three and nine months ended September 28, 2002, respectively, when compared with the same periods in 2001, primarily due to the effects of Statement of Financial Accounting Standards, or SFAS, No. 142, “Goodwill and Other Intangible Assets” partially offset by the amortization of intangibles acquired from SPC and Simplex. See “Notes to Condensed Consolidated Financial Statements – Goodwill and Other Intangibles Assets.”

Cadence records deferred stock compensation resulting from stock options granted in 2001 and 2000 to purchase Tality stock and sales of Tality restricted stock (subsequently retired). 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 the price paid for restricted stock by certain Cadence executives and employees, and the deemed fair market value of Tality’s common stock at the time of those grants and sales.

In addition, Cadence recorded deferred stock compensation resulting from Cadence’s acquisition of CadMOS, Simplex and Plato Design Systems Incorporated. Deferred stock compensation resulting from these acquisitions represents the difference between the exercise price of unvested stock option grants to acquired employees and the fair market value of Cadence’s common stock at the time of such acquisitions.

Cadence also recorded deferred stock compensation resulting from certain earnout provisions related to Cadence’s acquisition of SPC. The acquisition agreement provides for the issuance of additional shares of Cadence’s common stock as certain predetermined performance goals are achieved in fiscal 2002 and 2003. Deferred compensation was recorded because one of the performance goals requires continued employment with Cadence of certain employees.

Cadence is amortizing the deferred stock compensation using the straight-line method. Amortization of deferred stock compensation increased $8.0 million and $5.8 million for the three and nine months ended September 28, 2002, respectively, when compared to the same periods in 2001. The increase was primarily due to the deferred stock compensation related to the Plato, Simplex and SPC acquisitions.

The following table presents information regarding restructuring and special charges for the three and nine months ended September 28, 2002 and September 29, 2001:

In the second quarter of 2001, Cadence announced a plan of restructuring activities throughout the company targeted at eliminating redundancies and consolidating facilities and resources. The restructuring activities were initiated primarily due to the severe economic downturn in the electronics industry. The restructuring was primarily aimed at reducing excess employee and capacity costs within Cadence’s design services business and certain other business/infrastructure groups.

Management estimates that Cadence will realize annualized cost reductions of approximately $83.2 million in salary and benefit costs related to the 2002 workforce reduction and annualized cost reductions of approximately $20.7 million in facility costs related to facilities downsized or closed since the commencement of the restructuring activities in 2001. These amounts could vary based upon changes in estimates.

The 2002 restructuring activities will result in the termination of employment for approximately 80 and 830 employees for the three and nine months ended September 28, 2002, respectively. While such terminations of employment are across various business functions, operating units and geographic regions, the

communications-related areas within the design services business are the most affected. Costs resulting from the restructuring included severance benefits, notice pay and outplacement services. All terminations and termination benefits were communicated to the affected employees prior to September 28, 2002. All severance benefits will be paid by September 28, 2003.

Facilities consolidation charges of $26.3 million were incurred in the nine months ended September 28, 2002, in connection with the further downsizing of five previously downsized sites, the downsizing and closing of 10 additional sites, and changes in lease loss estimates for four sites. Of the $26.3 million charges, $12.3 million related to changes in lease loss estimates. 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 estimates 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 and represents the low end of the range. The low end of the lease loss range related to all worldwide restructuring activities initiated in 2001 is $22.9 million, which will be adjusted in the future upon triggering events (such as changes in estimates of time to sublease and actual sublease rates). Cadence has estimated that the high end of the lease loss could be as much as $48.5 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. Since June 2001, 27 sites have been selected for downsizing or closure. As of September 28, 2002, 15 sites had been vacated, eight sites had been downsized and actions related to the four remaining sites are scheduled to occur by the end of 2002.

Asset-related charges of $18.6 million for the nine months ended September 28, 2002, were incurred in connection with leasehold improvements for facilities and other fixed assets that were either abandoned or for which the resulting estimated future reduced cash flows were insufficient to cover the associated expenses.

On July 25, 2001, Avant! Corporation was ordered to pay Cadence $195.4 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 recorded $168.5 million, net of $0.5 million in fees and $1.0 million of interest. The remaining $26.4 million, plus nominal interest was paid on October 3, 2001. Cadence is accounting for the Avant! criminal restitution on a cash basis and no contingent gain was recorded due to the uncertainty of collectibility.

Upon consummation of the acquisition of IBM’s TDA business in September 2002, Cadence immediately charged to expense $6.6 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 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 reflects the uncertainty surrounding successful development of the acquired in-process technology. The in-process technology is expected to be commercially viable in March 2003. Expenditures to complete the in-process technology are expected to total approximately $4.0 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, the acquired entity’s in-process research and development projects were related to the development of TestBench Tools. The nature of the efforts to complete these projects related, in varying degrees, to the completion of all planning, designing, prototyping, verification and

The net cash flows resulting from the projects underway at the acquired entity 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 primarily peak in 2006 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 $12.2 million. The net cash flows generated from the acquired in-process technology were expected to reflect earnings before interest, taxes and depreciation of approximately 65% of the revenue generated from in-process technology. However, there can be no assurance that these estimates will prove accurate, or that Cadence will realize the anticipated benefit of the acquisition.

The rate used to discount the net cash flows from purchased in-process technology was approximately 24%. The discount rate is sometimes higher than the weighted average cost of capital, or 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.

Upon consummation of the Simplex acquisition in June 2002, Cadence immediately charged to expense $27.4 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 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 reflects the uncertainty surrounding successful development of the acquired in-process technology. The in-process technology is expected to be commercially viable in March 2003. As of September 28, 2002, expenditures to complete the in-process technology totaled $3.0 million and expenditures to complete the remaining in-process technology are expected to total approximately $2.0 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, Simplex’s in-process research and development projects were related to the development of extraction and power analysis technologies. 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 Simplex 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 primarily peak in 2003 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 $13.9 million. The net cash flows generated from the acquired in-process technology were expected to reflect earnings before interest,

taxes, and depreciation of approximately 53% of the revenue generated from in-process technology. However, there can be no assurance that these estimates will prove accurate, or that Cadence will realize the anticipated benefit of the acquisition.

The rate used to discount the net cash flows from purchased in-process technology was approximately 30%. 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.

Upon consummation of the CadMOS acquisition in February 2001, 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 was completed as of September 28, 2002. Expenditures to complete the in-process technology totaled $1.9 million. These projects will require additional 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, advanced fixing capabilities in the noise analysis area, and in the mixed signal area, 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 estimates will prove accurate, or that Cadence will realize the anticipated benefit of the acquisition.

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.

In relation to the wireless communications business downsizing and current decline in business conditions generally, Cadence restructured certain of its businesses. As a result, in the nine months ended September 29, 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 employees directly related to these assets and reduction of future emphasis on 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.

In the nine months ended September 28, 2002, Cadence recorded $11.1 million of expense for estimated losses related to certain litigation. This expense is classified as a special charge. See Part II “Other Information” Item 1 “Legal Proceedings”.

In the second quarter of 2001, Cadence recorded $1.3 million of Tality separation costs primarily related to legal and consulting fees.

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

In the first quarter of 2001, Cadence expensed $2.8 million of Tality IPO-related costs as a result of the postponement of the Tality IPO in October 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.

Other income decreased $0.8 million for the three months ended September 28, 2002, when compared to the same period in 2001, primarily due to a decrease in interest income. Other income decreased $5.7 million for the nine months ended September 28, 2002, when compared to the same period in 2001, primarily due to a write-down of equity investments to fair value and a decrease in interest income, partially offset by investment gains.

The following table presents the effective tax rate for the three and nine months ended September 28, 2002 and September 29, 2001:

The effective tax rate for the year ending December 28, 2002, excluding write-off of in process technology not deductible for income tax and amortization of deferred stock compensation, is estimated to be 26.0%. Based on current estimates, and including the excluded items in the last sentence, the effective tax rate for the year ending December 28, 2002 will be 63.7%. The effective tax rate for the three and nine months ended September 29, 2001, excluding proceeds from the Avant! criminal restitution, write-off of in process technology not deductible for income tax and amortization of deferred stock compensation, was 26.5%.

At September 28, 2002, Cadence’s principal sources of liquidity consisted of $185.1 million of cash and cash equivalents and short-term investments, compared to $274.8 million at December 29, 2001, and two syndicated senior unsecured credit facilities totaling $375.0 million. At September 28, 2002, Cadence had $95.0 million outstanding under these credit facilities.

Cash provided by operating activities decreased $320.8 million, to $70.2 million for the nine months ended September 28, 2002, when compared to the nine months ended September 29, 2001. In the comparable period of 2001, Cadence generated $391.1 million in cash from its operating activities. The decrease in cash provided by operating activities in the first nine months of 2002 was primarily due to an increase in trade and installment contract receivables and the Avant! criminal restitution of which $168.5 million was paid to Cadence in the nine months ended September 29, 2001.

Cadence has entered into agreements whereby it may transfer qualifying accounts receivables, for which Cadence has recognized the related revenue, to certain financing institutions on a non-recourse basis. These transfers are recorded as sales and accounted for in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” At September 28, 2002 and September 29, 2001, Cadence transferred accounts receivable totaling $162.8 million and $155.3 million, respectively, which approximated fair value, to financing institutions on a non-recourse basis. For the nine months ended September 29, 2001, Cadence reclassified Proceeds from transfer of financial assets in exchange for cash from Cash Flows from Financing Activities to Cash Flows from Operating Activities in the Condensed Consolidated Statements of Cash Flows to conform to the September 28, 2002 presentation.

At September 28, 2002, Cadence had net working capital of $140.8 million, as compared with $162.5 million at December 29, 2001. The working capital decrease was primarily attributable to a decrease in cash and short-term investments, partially offset by an increase in receivables. The decrease in cash was due to the repurchasing of Cadence’s common stock and cash paid for acquisitions, partially offset by the amount drawn on the credit facilities.

In addition to its short-term investments, Cadence’s primary investing activities consisted of acquisitions, and the related acquired intangibles, purchases of property, plant, and equipment, capitalization of software development costs, and venture capital partnership investments, which combined represented $162.4 million and $152.9 million of cash used for investing activities in the nine months ended September 28, 2002 and September 29, 2001, respectively.

Cadence does not provide for U.S. income taxes on earnings of foreign subsidiaries that are considered permanently invested outside of the United States. If some or all of these foreign earnings were to be distributed to Cadence’s U.S. companies, Cadence would need to provide for additional U.S. income taxes.

Cadence has previously sold put warrants and purchased call options through private placements. See “Notes to Condensed Consolidated Financial Statements – Stock Repurchase Programs.” At September 28, 2002, there were no put warrants or call options outstanding.

Cadence also purchased $158.2 million of its common stock and reissued $73.6 million of common stock through its employee option and stock purchase programs in the nine months ended September 28, 2002.

As part of its overall investment strategy, Cadence is a limited partner in two venture capital funds, Telos Venture Partners, L.P., and Telos Venture Partners II, L.P. As of September 28, 2002, Cadence has committed a combined $76.6 million to both funds and is contractually committed to contribute up to an additional $54.3 million. Cadence’s investments in both funds are recorded in Other assets in the accompanying Condensed Consolidated Balance Sheets.

The primary components of Other long-term liabilities are income taxes payable of $97.8 million, deferred compensation of $37.7 million and lease obligations related to restructuring activities of $32.2 million. Other long-term liabilities increased $33.5 million to $168.3 million for the nine months ended September 28, 2002. The increase was primarily attributable to the long-term lease obligations of the restructuring activities.

so, the date of termination may be extended for one additional 364-day period with respect to the portion of the amounts outstanding under the 364-Day Credit Agreement that a consenting bank holds. Upon the scheduled and/or extended termination, amounts outstanding under the 364-Day Facility may be converted to a one-year term loan.

Management estimates that the restructuring savings in the first three quarters of 2002 will result in annualized cost reductions of approximately $83.2 million in salary and benefits costs related to the 2002 workforce reduction. All severance benefits are expected to be paid by September 28, 2003. Management estimates that the restructuring savings in the first three quarters of 2002 will result in annualized cost reductions of approximately $20.7 million in facility costs related to facilities downsized or closed since the commencement of the restructuring activity in 2001, which amounts could vary based upon changes in estimates.

Cadence anticipates that current cash and short-term investment balances, cash flow from operations, and its $375.0 million revolving credit facilities will be sufficient to meet its working capital and other capital requirements for at least the next 12-months.

In June 2002, the Financial Accounting Standards Board, or FASB, issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 eliminates Emerging Issues Task Force, or EITF, Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs

to Exit an Activity (Including Certain Costs Incurred in a Restructuring).” Under SFAS No. 146, liabilities for costs associated with an exit or disposal activity are recognized when the liabilities are incurred, as opposed to being recognized at the date of entity’s commitment to an exit plan under EITF No. 94-3. Furthermore, SFAS No. 146 establishes that fair value is the objective for initial measurement of the liabilities. This Statement will be effective for exit or disposal activities that are initiated after December 31, 2002. Cadence has determined SFAS No. 146 will not have a material effect on its consolidated financial position, results of operations or cash flows. However, SFAS No. 146 will impact the timing of accruals for future restructurings, if any.

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 determined SFAS No. 143 will not have a material effect on its consolidated financial position, results of operations or cash flows.

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 deems immaterial also may impair Cadence’s business operations. If any of the following risks actually occurs, 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.

Cadence is subject to the cyclical nature of the integrated circuit and electronics systems industries, and the current downturn or any future downturns may reduce Cadence’s 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 overcapacity, high inventory levels and accelerated erosion of average selling prices. During these downturns, the number of new design projects may decrease. Integrated circuit manufacturers and electronics systems companies experienced a slowdown of demand and production in 2001, which has intensified in 2002. Cadence expects services and hardware revenue to continue to be adversely affected by the general slowdown in the economy and in the electronics industry. The current slowdown and any future downturns may reduce Cadence’s software and maintenance revenue and further reduce its services and hardware revenue and harm its results of operations.

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 entirely within Cadence’s control, including the timing of significant orders and the mix of licenses used to sell products. See “Management’s Discussion and Analysis of Financial Condition and Result of Operation – Critical Accounting Policies” for a discussion of Cadence’s licenses. 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

Cadence’s quarterly operating results are affected by the mix of license types entered into in connection with the sale of software products. Cadence has three basic licensing models: term, subscription and perpetual. Product revenue associated with term and perpetual licenses is generally recognized at the beginning of the license period, while product revenue associated with subscription licenses is recognized ratably over the term of the license. Material differences may result in the amount and timing of Cadence’s reported revenue, depending on the actual mix of license types in any given period. In July 2002, Cadence announced an expected change in the mix of software license types going forward, due to an increasing customer preference for its subscription licenses, which give customers limited access to new technology. During the three months ended September 28, 2002, Cadence noticed this shift in mix to a higher percentage of subscription licenses and expects the trend to continue. This shift has resulted in lower revenue during the three months ended September 28, 2002 and is expected to continue to result in lower revenue in the remainder of 2002 and the first half of 2003, on a year-over-year comparative basis.

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 integrated circuits 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. Lengthy hardware sales cycles subject Cadence to a number of significant risks over which Cadence has little or no control, including insufficient, excess or obsolete 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. 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. Many of Cadence’s services engagements are terminable with little or no advance notice and without penalty. Since a significant portion of the costs of services is labor-related, Cadence may not be able to reduce its costs in a timely manner to respond to an unanticipated revenue loss when one or more projects is terminated.

Cadence believes that quarter-to-quarter comparisons of its results of operations may not be meaningful. Therefore, stockholders should not view Cadence’s historical results of operations as reliable indicators of its future performance. 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.

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 the sales cycle may cause Cadence’s revenue and operating results to vary unexpectedly from quarter-to-quarter. The complexity and expense associated with Cadence’s business generally requires a lengthy customer education, evaluation 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 Cadence from pursuing other opportunities.

In addition, sales of Cadence 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; or

	•	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 be able to communicate to the public, revenue or earnings shortfalls until late in a fiscal quarter.

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 electronic integrated circuit, or IC and system design industries are experiencing several revolutionary trends:


	•	Migration to Deep SubMicron/ Nanometer Design: The size of features such as wires, transistors and contacts on ICs 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 IC. Feature size is normally identified by the headline transistor length, which is shrinking from 180 nanometers to 130 nanometers and smaller. This is commonly referred to in the semiconductor industry as the migration to deep submicron or nanometer design. It represents a major challenge for all levels of the semiconductor industry, from IC 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 or 400,000 nanometers) is challenging fundamental laws of physics and chemistry.

	•	The ability to design very large ICs, 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 the evolution of these changes, Cadence may lose its competitive position, and its products or technologies may become uncompetitive or obsolete. 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 respect.

Cadence has historically suffered losses in its electronics design services business

The market for electronics design services is relatively new, rapidly evolving and sensitive to customer budgetary constraints and engineering capacity. Cadence’s design services business historically suffered losses, and Cadence incurred significant expense in connection with the separation, restructuring and reorganization of its Tality subsidiary, now a part of Cadence Design Foundry. If Cadence’s design services business fails to increase its revenue to offset its expenses, the design services business will continue to experience losses. Cadence’s failure to succeed in the design services business may seriously harm Cadence’s business, operating results and financial condition.

The success of Cadence’s services businesses depend on factors that are difficult to control

In order to be successful with its services, Cadence must overcome several factors that are difficult to control, including the following:


	•	Cadence’s cost of services employees 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 employees. 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 employees or not fully utilizing these employees can significantly lower gross margin, and it is difficult to adjust staffing levels quickly to reflect customer demand for services and therefore, the services business could experience losses.

	•	A substantial portion of these services contracts consists of fixed-price contracts. This means that the customer pays a fixed price that has been agreed upon ahead of time, no matter how much time or how many resources Cadence must devote to perform the contract. If Cadence’s cost in performing the services were to consistently and significantly exceed the amount the customer has agreed to pay, it could seriously 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 were 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 EDA 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;

	•	Due to budgeting constraints or excess engineering capacity, electronics manufacturers often choose to perform design and methodology services internally, rather than purchase these services from outside vendors;

	•	The pace of 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 two large companies: Mentor Graphics Corporation and Synopsys, Inc. In 2002, Synopsys and Avant! merged, and the combined company may improve its competitive position with respect to Cadence. Cadence also competes with Magma Design Automation, Inc. and numerous smaller companies, a number of which have become publicly-traded companies or have combined with other EDA 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 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 software and other intellectual property in the future. Cadence’s design services business also requires it to license software or other intellectual property of third parties, including that of competitors. Cadence’s failure to obtain for its use software or other intellectual property licenses or other intellectual

Also, Cadence generally relies on patents, copyrights, trademarks, trade secret laws, licenses and restrictive agreements 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 safeguards. 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 or restrictive agreements with 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 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 Cadence to do one or more of the following:


	•	Pay damages, license fees or royalties 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 use the relevant technology, which license may not be available on reasonable terms, or at all; or

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

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

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 IBM to manufacture hardware components for Cadence’s Palladium^TM 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.

Cadence expects to acquire other companies and may not successfully integrate them or the companies it has recently acquired

Cadence has acquired numerous other businesses before and is likely to acquire other businesses in the future. 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 evaluating and 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 employees 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 has 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 43% for the third quarter of 2002 and 52% for the third quarter of 2001. Cadence also transacts business in various foreign currencies. Recent economic and political uncertainty and the volatility of foreign currencies in certain regions, most notably Japan and Europe, have had, and may continue to have, a seriously harmful effect on Cadence’s revenue and operating results.

Fluctuations in the rate of exchange between the U.S. dollar and the currencies of other countries 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. Cadence’s international operations may also be subject to other 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;

	•	Business interruptions from terrorism, military operations and war;

	•	Unexpected changes in regulatory requirements;

	•	Tariffs and other trade barriers; and


	•	U.S. government licensing requirements for exports which may lengthen the sales cycle or restrict or prohibit the sale or licensing of certain products.

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

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 must comply with U.S. Department of Commerce regulations in shipping its software products and other technologies outside 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 failure to attract, train, motivate and retain key employees may harm its business

Competition for highly skilled employees is 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 employees. The high cost of training new employees, not fully utilizing these employees, or losing trained employees to competing employers could reduce Cadence’s gross margins and harm its business and operating results. Competition for these employees is intense, particularly in geographic areas recognized as high technology centers such as the Silicon Valley area, where Cadence’s principal offices are located, and the other locations where it maintains 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 its operating results. If Cadence does not succeed in hiring and retaining candidates with appropriate qualifications, it will not be able to grow its business and its 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 employees, 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 Cadence from hiring employees or cause it 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 itself from these claims could also divert the attention of Cadence’s management from its operations.

Errors or defects in Cadence’s products and services 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. 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 resolve the problem;

	•	Increased service costs; and

	•	Liability for damages.

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 and by-laws 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 exposure to market risk for changes in interest rates relates primarily to its short-term investment portfolio. While Cadence is exposed to interest rate fluctuations in many of the world’s leading industrialized countries, Cadence’s interest income and interest expense are 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 part of 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 short-term interest-bearing 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. The carrying value approximated fair value at September 28, 2002.

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 with financial institutions to protect against currency exchange risks associated with existing assets and liabilities. A foreign currency forward exchange contract acts as a hedge by increasing in value when underlying asset exposures decrease in value or underlying liability exposures increase in value. Conversely, a foreign currency forward exchange contract decreases in value when underlying asset exposures increase in value or underlying liability exposures decrease in value. Forward contracts are not accounted for as hedges and, therefore, the unrealized gains and losses are recognized in Other income (expense), net in advance of the actual foreign currency cash flows with the fair value of these forward contracts being recorded as accrued liabilities.

Cadence also purchases foreign currency put options from financial institutions to hedge the currency exchange risks associated with probable but not firmly committed transactions. Although there were no foreign currency put options outstanding in the quarters ended September 28, 2002 or September 29, 2001, Cadence may choose to use put options in the future. A foreign currency put option acts as an economic hedge by increasing in value as the underlying transactional value decreases. 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 prepaid expenses and 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 in effect as the forward contracts and put options mature.

The table below provides information as of September 28, 2002 about Cadence’s forward contracts. As of September 28, 2002, 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 on various dates prior to November 14, 2002.

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 28, 2002. The realized gain (loss) on the forward contracts as they matured was not material to the consolidated operations of Cadence.

Cadence repurchases shares of its common stock under its stock repurchase program. Repurchased shares may be used for general corporate purposes including the share issuance requirements of Cadence’s employee stock option and purchase plans and acquisitions. Cadence may purchase stock in the open market for cash, or may purchase call options or sell put warrants to mitigate equity price risk associated with its stock repurchase program. 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:


	•	Cadence may purchase shares of its common stock on the open market at the prevailing market prices.

	•	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.

Within 90 days prior to the filing date of this Quarterly Report on Form 10-Q, Cadence carried out an evaluation, under the supervision and with the participation of the company’s management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), of the effectiveness of the design and operation of Cadence’s “disclosure controls and procedures” and “internal controls” as specified in Item 307 of Regulation S-K.

Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in the company’s reports filed under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal controls are procedures designed with the objective of providing reasonable assurance that the company’s (A) transactions are properly authorized; (B) assets are safeguarded against unauthorized or improper use; and (C) transactions are properly recorded and reported; all to permit the preparation of the company’s financial statements in conformity with generally accepted accounting principles.

The evaluation of the company’s disclosure controls and procedures and internal controls included a review of their objectives and processes, implementation by the company and effect on the information generated for use in this Quarterly Report on Form 10-Q. In the course of this evaluation, Cadence sought to identify any significant deficiencies or material weaknesses in Cadence’s controls, and whether the company had identified any acts of fraud involving personnel who have a significant role in the company’s internal controls, and to confirm that any necessary corrective action, including process improvements, were being undertaken. This type of evaluation will be done on a quarterly basis so that the conclusions concerning the effectiveness of these controls can be reported in the company’s Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. The company’s internal controls are also evaluated on an ongoing basis by Cadence’s internal auditors, by other personnel in Cadence’s Finance organization and by the company’s independent auditors in connection with their audit and review activities. The overall goals of these evaluation activities are to monitor the company’s disclosure and internal controls and to make modifications as necessary. The company intends to maintain these controls as processes that may be appropriately modified as circumstances warrant.

Based on the evaluation described above and subject to the discussion below, the Chief Executive Officer and Chief Financial Officer concluded that Cadence’s controls and procedures are effective in timely alerting them to material information relating to the company (including its consolidated subsidiaries) required to be included in this Quarterly Report on Form 10-Q. There have been no significant changes in the company’s internal controls or in other factors that could significantly affect those controls since the date of their last evaluation. However, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Management necessarily applied its judgment in assessing the benefits of controls relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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.

District Court’s dismissal of Quickturn’s abuse of process counterclaim. On November 5, 2001, the Federal Circuit vacated the District Court’s judgment of unenforceability, but affirmed the District Court’s dismissal of Aptix’s and Meta’s complaint and the award of attorneys fees and costs. Cadence received the bonded portion of the judgment in April 2002.

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 and the Quickturn Board of Directors for declaratory and injunctive relief for various alleged breaches of fiduciary duty purportedly owed 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 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. Settlement of the companion action is conditioned upon approval of the Chancery Court and Mentor’s not being awarded attorneys’ fees for Mentor II. In an order dated August 17, 2001, the Chancery Court denied Mentor’s fee application, and on February 13, 2002, issued an order dismissing the case. Mentor has filed a notice of appeal with the Delaware Supreme Court of the denial of the fee application. On July 25, 2002, the Chancery Court approved the settlement of the companion action.

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 infringement of U.S. Patent No. 5,754,827 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 (U.S. Patent No. 5,943,490). Quickturn and Cadence are vigorously defending themselves against these claims, and have filed counterclaims for declaratory judgment of non-infringement, unenforceability and invalidity of U.S. Patent No. 5,754,827. Quickturn and Cadence have also counterclaimed for declaratory judgment of non-infringement, unenforceability and invalidity of two additional patents allegedly assigned to Mentor, U.S. Patent Nos. 5,999,725 and 6,057,706 which Mentor has threatened to assert against Quickturn. Mentor’s response to Quickturn’s counterclaims affirmatively alleges infringement of both of these patents. On August 7, 2002, the Court ruled that Mercury ^TM and MercuryPlus^TM infringed Claim 8 of U.S. Patent No. 5,999,725.

patent. On May 20, 2002, in response to a motion for summary judgment brought by Quickturn and Cadence, the Court ruled that claim 1 of the patent was invalid and, accordingly, dismissed that claim from the case. Quickturn and Cadence continue to vigorously defend against U.S. Patent No. 5,574,388 on the grounds of invalidity and unenforceability. On October 23, 2002, the Court ruled that Mercury^TM and MercuryPlus^TM infringe Claim 1 of U.S. Patent No. 5,754,827.

In connection with Cadence’s acquisition of Silicon Perspective Corporation completed in December 2001, 6.2 million shares of Cadence common stock were issued to the former SPC shareholders in December 2001. In addition, as a result of performance goals attained during the nine months ended September 28, 2002, Cadence will issue to former SPC shareholders up to an additional 9,348,207 shares of its capital stock in February 2003, pursuant to an earnout. Such shares were, or will be issued pursuant to an exemption from registration under Section 3(a)(10) of the Securities Act of 1933, as amended.

On August 13, 2002, the Registrant furnished a Current Report on Form 8-K reporting that each of the Chief Executive Officer, H. Raymond Bingham and the Chief Financial Officer, William Porter, of Cadence Design Systems, Inc., made certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, accompanying the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 29, 2002.

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.

1. I have reviewed this quarterly report on Form 10-Q of Cadence Design Systems, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

1. I have reviewed this quarterly report on Form 10-Q of Cadence Design Systems, Inc.;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

58 EX-10.06 3 f85715exv10w06.txt EXHIBIT 10.06 EXHIBIT 10.06 CADENCE DESIGN SYSTEMS, INC. AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE PLAN ADOPTED BY BOARD OF DIRECTORS NOVEMBER 9, 1998 STOCKHOLDER APPROVAL NOT REQUIRED TERMINATION DATE: NONE 1. PURPOSE. (a) The Plan initially was established effective as of January 30, 1990 (the "Initial Plan") and has been amended subsequently from time to time. The Initial Plan hereby is amended and restated in its entirety as the Amended and Restated Employee Stock Purchase Plan effective as of the date of its adoption. The terms of the Initial Plan shall remain in effect and apply to all Rights granted pursuant to the Initial Plan. (b) The purpose of the Plan is to provide a means by which Employees of the Company and certain designated Affiliates may be given an opportunity to purchase Shares of the Company. (c) The Company, by means of the Plan, seeks to retain the services of such Employees, to secure and retain the services of new Employees and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. (d) The Company intends that the Rights to purchase Shares granted under the Plan be considered options issued under an "employee stock purchase plan," as that term is defined in Section 423(b) of the Code. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the United States Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a committee of the Board appointed by the Board in accordance with subsection 3(c) of the Plan. (e) "COMPANY" means Cadence Design Systems, Inc., a Delaware corporation. (f) "DIRECTOR" means a member of the Board. (g) "ELIGIBLE EMPLOYEE" means an Employee who meets the requirements set forth in the Offering Memorandum for eligibility to participate in the Offering. (h) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or an Affiliate of the Company. Neither service as a Director nor payment of a director's fee shall be sufficient to constitute "employment" by the Company or the Affiliate. (i) "EMPLOYEE STOCK PURCHASE PLAN" means a plan that grants rights intended to be options issued under an "employee stock purchase plan," as that term is defined in Section 423(b) of the Code. (j) "EXCHANGE ACT" means the United States Securities Exchange Act of 1934, as amended. (k) "FAIR MARKET VALUE" means the value of a security, as determined in good faith by the Board. If the security is listed on the New York Stock Exchange or any other established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of the security shall be the closing sales price (rounded up where necessary to the nearest whole cent) for such security (or the closing bid, if no sales were reported) as quoted on such exchange or market (or, in the event that the security is traded on more than one such exchange or market, the exchange or market with the greatest volume of trading in the relevant security of the Company) on the trading day occurring on or closest to the relevant determination date, as reported in The Wall Street Journal or such other source as the Board deems reliable, and on the date as determined more precisely in the Offering Memorandum. (l) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. (m) "OFFERING" means the grant of Rights to purchase Shares under the Plan to Eligible Employees. (n) "OFFERING DATE" means a date selected by the Board for an Offering to commence. (o) "OFFERING MEMORANDUM" means a memorandum describing the terms of the then current or otherwise relevant Offering. 2 (p) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of the Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (q) "PARTICIPANT" means an Eligible Employee who holds an outstanding Right granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Right granted under the Plan. (r) "PLAN" means this Amended and Restated Employee Stock Purchase Plan. (s) "PURCHASE DATE" means one or more dates established by the Board during an Offering on which Rights granted under the Plan shall be exercised and purchases of Shares carried out in accordance with such Offering. (t) "RIGHT" means an option to purchase Shares granted pursuant to the Plan. (u) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3 as in effect with respect to the Company at the time discretion is being exercised regarding the Plan. (v) "SECURITIES ACT" means the United States Securities Act of 1933, as amended. (w) "SHARE" means a share of the common stock of the Company. 3. ADMINISTRATION. (a) The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). Whether or not the Board has delegated administration, the Board shall have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan. (b) The Board (or the Committee) shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine when and how Rights to purchase Shares shall be granted and the provisions of each Offering of such Rights (which need not be identical). (ii) To designate from time to time which Affiliates of the Company shall be eligible to participate in the Plan. 3 (iii) To construe and interpret the Plan and Rights granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iv) To amend the Plan as provided in Section 14. (v) Generally, to exercise such powers and to perform such acts as it deems necessary or expedient to promote the best interests of the Company and its Affiliates and to carry out the intent that the Plan be treated as an Employee Stock Purchase Plan. (c) The Board may delegate administration of the Plan to a Committee of the Board composed of two (2) or more members, all of the members of which Committee may be, in the discretion of the Board, Non-Employee Directors and/or Outside Directors. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee of two (2) or more Outside Directors any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or such a subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 4. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of Section 13 relating to adjustments upon changes in securities, the Shares that may be sold pursuant to Rights granted under the Plan shall not exceed in the aggregate Twenty Nine Million Five Hundred Thousand (29,500,000) Shares. If any Right granted under the Plan shall for any reason terminate without having been exercised, the Shares not purchased under such Right shall again become available for the Plan. (b) The Shares subject to the Plan may be unissued Shares or Shares that have been bought on the open market at prevailing market prices or otherwise. 5. GRANT OF RIGHTS; OFFERING. (a) The Board may from time to time grant or provide for the grant of Rights to purchase Shares of the Company under the Plan to Eligible Employees in an Offering on one or more Offering Dates selected by the Board. Each Offering shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate, which shall comply with the requirements of Section 423(b)(5) of the Code that all Employees granted Rights to purchase Shares under the Plan shall have the same rights and privileges. The terms and conditions of an Offering shall be incorporated by reference into the Plan and treated as part of the Plan. The provisions of separate Offerings need not be identical, but each Offering shall include (through incorporation of the provisions of this Plan by reference in the Offering Memorandum or 4 otherwise) the period during which the Offering shall be effective, which period shall not exceed twenty-seven (27) months beginning with the Offering Date, and the substance of the provisions contained in Sections 6 through 9, inclusive. (b) If a Participant has more than one Right outstanding under the Plan, unless he or she otherwise indicates in agreements or notices delivered hereunder: (i) each agreement or notice delivered by that Participant will be deemed to apply to all of his or her Rights under the Plan, and (ii) an earlier-granted Right (or a Right with a lower exercise price, if two Rights have identical grant dates) will be exercised to the fullest possible extent before a later-granted Right (or a Right with a higher exercise price if two Rights have identical grant dates) will be exercised. 6. ELIGIBILITY. (a) Rights may be granted only to Employees of the Company or, as the Board may designated as provided in subsection 3(b), to Employees of an Affiliate. Except as provided in subsection 6(b), an Employee shall not be eligible to be granted Rights under the Plan unless, on the Offering Date, such Employee has been in the employ of the Company or the Affiliate, as the case may be, for such continuous period preceding such grant as the Board may require, but in no event shall the required period of continuous employment be equal to or greater than two (2) years. (b) The Board may provide that each person who, during the course of an Offering, first becomes an Eligible Employee will, on a date or dates specified in the Offering which coincides with the day on which such person becomes an Eligible Employee or which occurs thereafter, receive a Right under that Offering, which Right shall thereafter be deemed to be a part of that Offering. Such Right shall have the same characteristics as any Rights originally granted under that Offering, as described herein, except that: (i) the date on which such Right is granted shall be the "Offering Date" of such Right for all purposes, including determination of the exercise price of such Right; (ii) the period of the Offering with respect to such Right shall begin on its Offering Date and end coincident with the end of such Offering; and (iii) the Board may provide that if such person first becomes an Eligible Employee within a specified period of time before the end of the Offering, he or she will not receive any Right under that Offering. (c) No Employee shall be eligible for the grant of any Rights under the Plan if, immediately after any such Rights are granted, such Employee owns stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Affiliate. For purposes of this subsection 6(c), the rules of Section 424(d) of the Code shall apply in determining the stock ownership of any Employee, and stock which such 5 Employee may purchase under all outstanding rights and options shall be treated as stock owned by such Employee. (d) An Eligible Employee may be granted Rights under the Plan only if such Rights, together with any other Rights granted under all Employee Stock Purchase Plans of the Company and any Affiliates, as specified by Section 423(b)(8) of the Code, do not permit such Eligible Employee's rights to purchase Shares of the Company or any Affiliate to accrue at a rate which exceeds twenty five thousand dollars ($25,000) of the fair market value of such Shares (determined at the time such Rights are granted) for each calendar year in which such Rights are outstanding at any time. (e) The Board may provide in an Offering that Employees who are highly compensated employees within the meaning of Section 423(b)(4)(D) of the Code shall not be eligible to participate. 7. RIGHTS; PURCHASE PRICE. (a) On each Offering Date, each Eligible Employee, pursuant to an Offering made under the Plan, shall be granted the Right to purchase up to the number of Shares purchasable either: (i) with a percentage designated by the Board not exceeding fifteen percent (15%) of such Employee's Earnings (as defined by the Board in each Offering) during the period which begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no later than the end of the Offering; or (ii) with a maximum dollar amount designated by the Board that, as the Board determines for a particular Offering, (1) shall be withheld, in whole or in part, from such Employee's Earnings (as defined by the Board in each Offering) during the period which begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no later than the end of the Offering and/or (2) shall be contributed, in whole or in part, by such Employee during such period. (b) The Board shall establish one or more Purchase Dates during an Offering on which Rights granted under the Plan shall be exercised and purchases of Shares carried out in accordance with such Offering. (c) In connection with each Offering made under the Plan, the Board may specify a maximum amount of Shares that may be purchased by any Participant as well as a maximum aggregate amount of Shares that may be purchased by all Participants pursuant to such Offering. In addition, in connection with each Offering that contains more than one Purchase Date, the Board may specify a maximum aggregate amount of Shares which may be purchased by all Participants on any given Purchase Date under the Offering. If the aggregate purchase of Shares upon exercise of Rights granted under the Offering would exceed any such maximum aggregate 6 amount, the Board shall make a pro rata allocation of the Shares available in as nearly a uniform manner as shall be practicable and as it shall deem to be equitable. (d) The purchase price of Shares acquired pursuant to Rights granted under the Plan shall be not less than the lesser of: (i) an amount equal to eighty-five percent (85%) of the fair market value of the Shares on the Offering Date; or (ii) an amount equal to eighty-five percent (85%) of the fair market value of the Shares on the Purchase Date. 8. PARTICIPATION; WITHDRAWAL; TERMINATION. (a) An Eligible Employee may become a Participant in the Plan pursuant to an Offering by delivering a participation agreement to the Company within the time specified in the Offering Memorandum, in such form as the Company provides. Each such agreement shall authorize payroll deductions of up to the maximum percentage specified by the Board of such Employee's Earnings during the Offering (as defined in each Offering). The payroll deductions made for each Participant shall be credited to a bookkeeping account for such Participant under the Plan and either may be deposited with the general funds of the Company or may be deposited in a separate account in the name of, and for the benefit of, such Participant with a financial institution designated by the Company. To the extent provided in the Offering, a Participant may reduce (including to zero) or increase such payroll deductions. To the extent provided in the Offering, a Participant may begin such payroll deductions after the beginning of the Offering. A Participant may make additional payments into his or her account only if specifically provided for in the Offering and only if the Participant has not already had the maximum permitted amount withheld during the Offering. (b) At any time during an Offering, a Participant may terminate his or her payroll deductions under the Plan and withdraw from the Offering by delivering to the Company a notice of withdrawal in such form as the Company provides. Such withdrawal may be elected at any time prior to the end of the Offering except as provided by the Board in the Offering. Upon such withdrawal from the Offering by a Participant, the Company shall distribute to such Participant all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire Shares for the Participant) under the Offering, without interest unless otherwise specified in the Offering, and such Participant's interest in that Offering shall be automatically terminated. A Participant's withdrawal from an Offering will have no effect upon such Participant's eligibility to participate in any other Offerings under the Plan but such Participant will be required to deliver a new participation agreement in order to participate in subsequent Offerings under the Plan. (c) Rights granted pursuant to any Offering under the Plan shall terminate immediately upon cessation of any participating Employee's employment with the Company and its designated Affiliates for any reason (subject to any post-employment participation period 7 required by law) or other lack of eligibility. The Company shall distribute to such terminated Employee all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire Shares for the terminated Employee) under the Offering, without interest unless otherwise specified in the Offering. If the accumulated payroll deductions have been deposited with the Company's general funds, then the distribution shall be made from the general funds of the Company, without interest. If the accumulated payroll deductions have been deposited in a separate account with a financial institution as provided in subsection 8(a), then the distribution shall be made from the separate account, without interest unless otherwise specified in the Offering. (d) Rights granted under the Plan shall not be transferable by a Participant otherwise than by will or the laws of descent and distribution, or by a beneficiary designation as provided in Section 15 and, otherwise during his or her lifetime, shall be exercisable only by the person to whom such Rights are granted. 9. EXERCISE. (a) On each Purchase Date specified therefor in the relevant Offering, each Participant's accumulated payroll deductions and other additional payments specifically provided for in the Offering (without any increase for interest) will be applied to the purchase of Shares up to the maximum amount of Shares permitted pursuant to the terms of the Plan and the applicable Offering, at the purchase price specified in the Offering. No fractional Shares shall be issued upon the exercise of Rights granted under the Plan unless specifically provided for in the Offering and permitted by law. (b) Unless otherwise specifically provided in the Offering, the amount, if any, of accumulated payroll deductions remaining in any Participant's account after the purchase of Shares that is equal to the amount required to purchase one or more whole Shares on the final Purchase Date of the Offering shall be distributed in full to the Participant at the end of the Offering, without interest. If the accumulated payroll deductions have been deposited with the Company's general funds, then the distribution shall be made from the general funds of the Company, without interest. If the accumulated payroll deductions have been deposited in a separate account with a financial institution as provided in subsection 8(a), then the distribution shall be made from the separate account, without interest unless otherwise specified in the Offering. (c) The amount, if any, of accumulated payroll deductions remaining in any Participant's account after the purchase of Shares that is less than the amount required to purchase one whole Share on the final Purchase Date of the Offering shall be carried forward, without interest, into the next Offering. (d) No Rights granted under the Plan may be exercised to any extent unless the Shares to be issued upon such exercise under the Plan (including Rights granted thereunder) are covered by an effective registration statement pursuant to the Securities Act and the Plan is in material compliance with all applicable state, foreign and other securities and other laws applicable to the 8 Plan. If on a Purchase Date in any Offering hereunder the Plan is not so registered or in such compliance, no Rights granted under the Plan or any Offering shall be exercised on such Purchase Date, and the Purchase Date shall be delayed until the Plan is subject to such an effective registration statement and such compliance, except that the Purchase Date shall not be delayed more than twelve (12) months and the Purchase Date shall in no event be more than twenty-seven (27) months from the Offering Date. If, on the Purchase Date of any Offering hereunder, as delayed to the maximum extent permissible, the Plan is not registered and in such compliance, no Rights granted under the Plan or any Offering shall be exercised and all payroll deductions accumulated during the Offering (reduced to the extent, if any, such deductions have been used to acquire Shares) shall be distributed to the Participants, without interest unless otherwise specified in the Offering. If the accumulated payroll deductions have been deposited with the Company's general funds, then the distribution shall be made from the general funds of the Company, without interest. If the accumulated payroll deductions have been deposited in a separate account with a financial institution as provided in subsection 8(a), then the distribution shall be made from the separate account, without interest unless otherwise specified in the Offering. 10. COVENANTS OF THE COMPANY. (a) During the terms of the Rights granted under the Plan, the Company shall ensure that the amount of Shares required to satisfy such Rights are available. (b) The Company shall seek to obtain from each federal, state, foreign or other regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell Shares upon exercise of the Rights granted under the Plan. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Shares under the Plan, the Company shall be relieved from any liability for failure to issue and sell Shares upon exercise of such Rights unless and until such authority is obtained. 11. USE OF PROCEEDS FROM SHARES. Proceeds from the sale of Shares pursuant to Rights granted under the Plan shall constitute general funds of the Company. 12. RIGHTS AS A STOCKHOLDER AND EMPLOYEE. (a) A Participant shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, Shares subject to Rights granted under the Plan unless and until the Participant's Shares acquired upon exercise of Rights under the Plan are recorded in the books of the Company. (b) Neither the Plan nor the grant of any Right thereunder shall confer any right on any Employee to remain in the employ of the Company or any Affiliate or restrict the right of the Company or any Affiliate to terminate such Employee's employment. 9 13. ADJUSTMENTS UPON CHANGES IN SECURITIES. (a) Subject to any required action by the stockholders of the Company, the number of Shares covered by each Right under the Plan that has not yet been exercised and the number of Shares that have been authorized for issuance under the Plan but have not yet been placed under a Right (collectively, the "Reserves"), as well as the price per Share covered by each Right under the Plan that has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split or the payment of stock dividend (but only on the Common Stock) or any other increase or decrease in the number of Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to a Right. (b) In the event of the proposed dissolution or liquidation of the Company, any and all Offerings shall terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, declare that the Rights under the Plan shall terminate as of a date fixed by the Board and give each Participant the right to exercise his or her Right. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation or a parent or subsidiary of such successor corporation when the Company is not the surviving corporation, any and all Offerings shall terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, and in lieu of assumption or substitution of the Rights, provide that each Participant shall have the right to exercise his or her Right. If the Board makes a Right exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify the Participant that the Right shall be fully exercisable for a period of twenty (20) days from the date of such notice (or such other period of time as the Board shall determine), and the Right shall terminate upon the expiration of such period. (c) The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per Share covered by each outstanding Right, in the event that the Company effects one or more reorganizations, recapitalizations, rights offering, or other increases or reductions of outstanding Shares, and in the event of the Company being consolidated with or merged into any other corporation. 14. AMENDMENT OF THE PLAN. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 13 relating to adjustments upon changes in securities and except as 10 to minor amendments to benefit the administration of the Plan, to take account of a change in legislation or to obtain or maintain favorable tax, exchange control or regulatory treatment for Participants or the Company or any Affiliate, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary for the Plan to satisfy the requirements of Section 423 of the Code, Rule 16b-3 under the Exchange Act or any Nasdaq or other securities exchange listing requirements. Currently under the Code, stockholder approval within twelve (12) months before or after the adoption of the amendment is required where the amendment will: (i) Increase the amount of Shares reserved for Rights under the Plan; (ii) Modify the provisions as to eligibility for participation in the Plan to the extent such modification requires stockholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code; or (iii) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code. (b) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Employee Stock Purchase Plans and/or to bring the Plan and/or Rights granted under it into compliance therewith. (c) Rights and obligations under any Rights granted before amendment of the Plan shall not be impaired by any amendment of the Plan without the consent of the person to whom such Rights were granted, or except as necessary to comply with any laws or governmental regulations, or except as necessary to ensure that the Plan and/or Rights granted under the Plan comply with the requirements of Section 423 of the Code. 15. DESIGNATION OF BENEFICIARY. (a) A Participant may file a written designation of a beneficiary who is to receive any Shares and/or cash, if any, from the Participant's account under the Plan in the event of such Participant's death subsequent to the end of an Offering but prior to delivery to the Participant of such Shares and cash. In addition, a Participant may file a written designation of a beneficiary who is to receive any cash from the Participant's account under the Plan in the event of such Participant's death during an Offering. (b) The Participant may change such designation of beneficiary at any time by written notice. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant's death, the Company shall deliver such Shares and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the 11 Company), the Company, in its sole discretion, may deliver such Shares and/or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board in its discretion may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate at the time that all of the Shares subject to the Plan's reserve, as increased and/or adjusted from time to time, have been issued under the terms of the Plan. No Rights may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Rights granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except as expressly provided in the Plan or with the consent of the person to whom such Rights were granted, or except as necessary to comply with any laws or governmental regulation, or except as necessary to ensure that the Plan and/or Rights granted under the Plan comply with the requirements of Section 423 of the Code. 17. EFFECTIVE DATE OF PLAN. The Plan shall become effective upon adoption by the Board. 12 EMPLOYEE STOCK PURCHASE PLAN HISTORY ADOPTED JANUARY 30, 1990 APPROVED BY STOCKHOLDERS MAY 11, 1990 1991 AMENDMENT APPROVED BY STOCKHOLDERS MAY 7, 1991 1992 AMENDMENT APPROVED BY STOCKHOLDERS MAY 7, 1992 1993 AMENDMENT APPROVED BY STOCKHOLDERS MAY 4, 1993 1994 AMENDMENT APPROVED BY STOCKHOLDERS MAY 17, 1994 AMENDED AUGUST 1, 1996 TO BECOME EFFECTIVE AUGUST 15, 1996 1997 AMENDMENT APPROVED BY STOCKHOLDERS MAY 1, 1997 AMENDED AND RESTATED NOVEMBER 9, 1998(1) AMENDED MAY 5, 1999 1999 AMENDMENT APPROVED BY STOCKHOLDERS JULY 1, 1999 - ---------------- (1) The 29,500,000 share reserve includes the 6,000,000 shares reserved for issuance in October 2002, 6,000,000 shares reserved for issuance in May 1999, 2,000,000 shares reserved for issuance in March 1997 and has been adjusted to reflect the 3-2 stock splits which occurred in October 1995 and May 1996 and the 2-1 stock split which occurred in October 1997. 13 EX-10.45 4 f85715exv10w45.txt EXHIBIT 10.45 EXHIBIT 10.45 ================================================================================ CADENCE DESIGN SYSTEMS, INC. --------------------------------- $187,500,000 CREDIT AGREEMENT Dated as of September 27, 2002 --------------------------------- FLEET NATIONAL BANK, as Agent, with FLEET SECURITIES, INC. having acted as Sole Lead Arranger and KEY CORPORATE CAPITAL, INC. AND JPMORGAN CHASE BANK, AS CO-SYNDICATION AGENTS AND THE BANK OF NOVA SCOTIA, AND BNP/PARIBAS AS CO-DOCUMENTATION AGENTS ================================================================================ TABLE OF CONTENTS

i ARTICLE IV REDUCTION OF REVOLVING COMMITMENTS; REPAYMENT; PREPAYMENT........................23 SECTION 4.01 Reduction or Termination of the Revolving Commitments...................23 (a) Optional Reduction or Termination................................23 (b) Mandatory Termination............................................23 (c) Notice...........................................................23 (d) Adjustment of Revolving Commitment Fee and Utilization Fee; No Reinstatement............................................23 SECTION 4.02 Repayment of Loans......................................................23 SECTION 4.03 Prepayments.............................................................23 (a) Optional Prepayments.............................................23 (b) Notice; Application..............................................24 ARTICLE V YIELD PROTECTION AND ILLEGALITY...................................................24 SECTION 5.01 Inability to Determine Rates............................................24 SECTION 5.02 Funding Losses..........................................................24 SECTION 5.03 Regulatory Changes......................................................24 (a) Increased Costs..................................................24 (b) Capital Requirements.............................................25 (c) Requests.........................................................25 SECTION 5.04 Illegality..............................................................25 SECTION 5.05 Funding Assumptions.....................................................26 SECTION 5.06 Obligation to Mitigate..................................................26 SECTION 5.07 Substitution of Banks...................................................26 ARTICLE VI PAYMENTS ........................................................................26 SECTION 6.01 Pro Rata Treatment......................................................26 SECTION 6.02 Payments................................................................27 (a) Payments.........................................................27 (b) Application......................................................27 (c) Extension........................................................27 SECTION 6.03 Taxes...................................................................27 (a) No Reduction of Payments.........................................27 (b) Deduction or Withholding; Tax Receipts...........................27 (c) Indemnity........................................................28 (d) Forms W-8BEN and W-8ECI..........................................28 (e) Mitigation.......................................................28 SECTION 6.04 Non-Receipt of Funds....................................................28 SECTION 6.05 Sharing of Payments.....................................................29 ARTICLE VII CONDITIONS PRECEDENT............................................................29 SECTION 7.01 Conditions Precedent to the Initial Loans...............................29 (a) Fees and Expenses................................................29

ii (b) Loan Documents...................................................29 (c) Certificate of Responsible Officer...............................29 (d) Corporate Documents..............................................29 (e) Legal Opinion....................................................30 (f) Compliance Certificate...........................................30 (g) Material Adverse Effect..........................................30 (h) Existing Credit Agreement........................................30 (i) Projections......................................................30 SECTION 7.02 Conditions Precedent to All Loans.......................................30 (a) Notice...........................................................30 (b) Representations and Warranties; No Default.......................30 (c) Additional Documents.............................................31 ARTICLE VIII REPRESENTATIONS AND WARRANTIES.................................................31 SECTION 8.01 Representations and Warranties..........................................31 (a) Organization and Powers..........................................31 (b) Authorization; No Conflict.......................................31 (c) Binding Obligation...............................................32 (d) Consents.........................................................32 (e) No Defaults......................................................32 (f) Title to Properties; Liens.......................................32 (g) Litigation.......................................................32 (h) Compliance with Environmental Laws...............................32 (i) Governmental Regulation..........................................32 (j) ERISA............................................................33 (k) Subsidiaries.....................................................33 (l) Margin Regulations...............................................33 (m) Taxes............................................................33 (n) Patents and Other Rights.........................................34 (o) Insurance........................................................34 (p) Financial Statements.............................................34 (q) Liabilities......................................................34 (r) Labor Disputes, Etc..............................................34 (s) Solvency.........................................................34 (t) Disclosure.......................................................34 (u) Distribution Agreement...........................................35 ARTICLE IX COVENANTS........................................................................35 SECTION 9.01 Reporting Covenants.....................................................35 (a) Financial Statements and Other Reports...........................35 (b) Additional Information...........................................36 SECTION 9.02 Financial Covenants.....................................................37 (a) Minimum Consolidated EBITDA......................................37 (b) Minimum Total Assets.............................................37 (c) Minimum Fixed Charge Coverage Ratio..............................37

iii (d) Minimum Current Ratio............................................37 (e) Maximum Funded Debt to EBITDA Ratio..............................38 SECTION 9.03 Additional Affirmative Covenants........................................38 (a) Preservation of Existence, Etc...................................38 (b) Payment of Obligations...........................................38 (c) Maintenance of Insurance.........................................38 (d) Keeping of Records and Books of Account..........................38 (e) Inspection Rights................................................39 (f) Compliance with Laws, Etc........................................39 (g) Maintenance of Properties, Etc...................................39 (h) Licenses.........................................................39 (i) Action Under Environmental Laws..................................39 (j) Use of Proceeds..................................................40 (k) Further Assurances and Additional Acts...........................40 (l) Recharacterization of Subordinated Debt..........................40 SECTION 9.04 Negative Covenants......................................................40 (a) Liens; Negative Pledges..........................................40 (b) Change in Nature of Business.....................................40 (c) Restrictions on Fundamental Changes..............................40 (d) Sales of Assets..................................................41 (e) Loans and Investments............................................42 (f) Transactions with Related Parties................................43 (g) Hazardous Substances.............................................44 (h) Accounting Changes...............................................44 (i) Restrictions on Upstream Limitations.............................44 (j) Restricted Payments..............................................44 ARTICLE X EVENTS OF DEFAULT.................................................................44 SECTION 10.01 Events of Default.......................................................44 (a) Payments.........................................................44 (b) Representations and Warranties...................................45 (c) Failure by Borrower to Perform Certain Covenants.................45 (d) Failure by Borrower to Perform Other Covenants...................45 (e) Insolvency; Voluntary Proceedings................................45 (f) Involuntary Proceedings..........................................45 (g) Default Under Other Indebtedness.................................45 (h) Judgments........................................................46 (i) ERISA............................................................46 (j) Dissolution, Etc.................................................47 (k) Subordination Provisions.........................................47 (l) Mergers and Acquisitions.........................................47 SECTION 10.02 Effect of Event of Default..............................................47 ARTICLE XI THE AGENT........................................................................47 SECTION 11.01 Authorization and Action................................................47

iv SECTION 11.02 Limitation on Liability of Agent; Notices; Closing......................48 (a) Limitation on Liability of Agent.................................48 (b) Notices..........................................................49 (c) Closing..........................................................49 SECTION 11.03 Agent and Affiliates....................................................49 SECTION 11.04 Notice of Defaults......................................................49 SECTION 11.05 Non-Reliance on Agent...................................................49 SECTION 11.06 Indemnification.........................................................50 SECTION 11.07 Delegation of Duties....................................................50 SECTION 11.08 Successor Agent.........................................................50 SECTION 11.09 Co-Agents...............................................................51 ARTICLE XII MISCELLANEOUS...................................................................51 SECTION 12.01 Amendments and Waivers..................................................51 SECTION 12.02 Notices.................................................................52 (a) Notices..........................................................52 (b) Facsimile and Telephonic Notice..................................52 SECTION 12.03 No Waiver; Cumulative Remedies..........................................52 SECTION 12.04 Costs and Expenses; Indemnification.....................................53 (a) Costs and Expenses...............................................53 (b) Indemnification..................................................53 (c) Other Charges....................................................54 SECTION 12.05 Right of Set-Off........................................................54 SECTION 12.06 Survival................................................................54 SECTION 12.07 Obligations Several.....................................................54 SECTION 12.08 Benefits of Agreement...................................................54 SECTION 12.09 Binding Effect; Assignment..............................................55 (a) Binding Effect...................................................55 (b) Assignment.......................................................55 (c) Accession........................................................56 SECTION 12.10 Governing Law...........................................................58 SECTION 12.11 Submission to Jurisdiction..............................................58 (a) Submission to Jurisdiction.......................................58 (b) No Limitation....................................................59 SECTION 12.12 Waiver of Jury Trial....................................................59 SECTION 12.13 Limitation on Liability.................................................59 SECTION 12.14 Confidentiality.........................................................59 SECTION 12.15 Entire Agreement........................................................60 SECTION 12.16 Severability............................................................60 SECTION 12.17 Counterparts............................................................60

v SCHEDULES ANNEXES 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 [Intentionally omitted.] 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 Exhibit G Form of Instrument of Accession vi CREDIT AGREEMENT THIS CREDIT AGREEMENT (this "Agreement"), dated as of September 27, 2002, 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"), Key Corporate Capital, Inc. and JPMorgan Chase Bank as co-syndication agents hereunder, The Bank of Nova Scotia and BNP/Paribas, as co- documentation agents hereunder, and Fleet National Bank, 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 $187,500,000 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: "364-Day Credit Agreement" means that certain 364-Day Credit Agreement dated as of September 27, 2002, among the Borrower, the lenders party thereto and Fleet National Bank, as administrative agent, as the same may be amended, restated, supplemented or otherwise modified in accordance with its terms. "Acceding Bank" has the meaning set forth in Section 12.09(c)(i). "Affected Bank" has the meaning set forth in Section 5.07. "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. 1 "Agreement" has the meaning set forth in the recitals hereto. "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" 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. "Approved Fund" means (a) a CLO and (b) with respect to any Bank that is a fund which invests in bank loans and similar extensions of credit, any other fund that invests in bank loans and similar extensions of credit and is managed by the same investment advisor as such Bank or by an Affiliate of such investment advisor, provided, in each case that such CLO or fund, as applicable, has the requisite power, authority and financial ability to fulfill its obligations hereunder in connection with the Revolving Commitment and, as to any fund set forth in clause (b) hereof, such fund is the only Person receiving confidential information delivered hereunder and such information is not subsequently delivered to investors in such fund. "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 variable rate of interest so designated from time to time by Fleet as its "prime rate", such rate being a reference rate and not necessarily representing the lowest or best rate being charged to any customer. 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, without notice or demand of any kind. "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. 2 "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 Boston, Massachusetts and New York, New York, and (iii) if the applicable Business Day relates to any Eurodollar Rate Loan, that is a Eurodollar Business Day. "Buying Lender" has the meaning set forth in Section 12.09(c)(i). "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). "CLO" means any entity (whether a corporation, partnership, trust or otherwise) that is engaged in making, purchasing, holding or otherwise investing in bank loans and similar extensions of credit in the ordinary course of its business and is administered or managed by a Bank or an Affiliate of such Bank. "Commitment Increase Notice" has the meaning set forth in Section 12.09(c)(i). "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, 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; provided, however, when calculating 3 Consolidated EBITDA hereunder, Consolidated EBITDA shall not include any extraordinary items of income and/or gains in an aggregate amount in excess of $10,000,000 which the Borrower recognizes in connection with any litigation award, settlement, claim, judgement or otherwise in connection therewith. "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. "Distribution" means the declaration or payment of any dividend on or in respect of any shares of any class of capital stock of the Borrower, other than dividends payable solely in shares of common stock of the Borrower; the purchase, redemption, defeasance or other acquisition of any shares of any class of capital stock of the Borrower, directly or indirectly through a Subsidiary of the Borrower or otherwise (including the setting apart of assets for a sinking or other analogous fund to be used for such purpose); the return of capital by the Borrower to its shareholders as such; or any other distribution on or in respect of any shares of any class of capital stock of the Borrower. "Dollars" and the sign "$" each means lawful money of the United States. "Domestic Subsidiary" means any Subsidiary which is incorporated or organized under the laws of the United States of America, any state thereof or in the District of Columbia. "Effective Commitment Amount" has the meaning set forth in Section 12.09(c)(i). 4 "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; (iii) an Approved Fund; and (iv 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. "Eurodollar Rate Loan" means a Loan bearing interest at a rate determined by reference to the Eurodollar Rate. 5 "Eurodollar Reference Bank" means Fleet, 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 Credit Agreement dated as of September 29, 2000, by and among the Borrower, the lenders party thereto and ABN AMRO Bank, N.V., as administrative agent, as amended. "FDIC" means the Federal Deposit Insurance Corporation, or any successor thereto. "Fee Letter" means the fee letter dated on or prior to the Closing Date, 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). "Fleet" means Fleet National Bank, in its individual capacity. "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 issued and outstanding 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 Revolving Termination Date, provided that no repayment, prepayment, repurchase, redemption shall have occurred with respect to such Indebtedness (the "Subordinated Debt")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. 6 "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 7 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. "Indemnified Liabilities" has the meaning set forth in Section 12.04(b). "Indemnified Person" has the meaning set forth in Section 12.04(b). "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. "Instrument of Accession" has the meaning set forth in Section 12.09(c)(i). "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. 8 "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. "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. "Maximum Rate" has the meaning set forth in Section 3.07. "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. "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. "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. "OECD" means the Organization for Economic Cooperation and Development. 9 "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; (vii) statutory landlord's Liens under leases to which the Borrower or any of its Subsidiaries is a party; 10 (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 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 11 (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, (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. 12 "Regulation D" means Regulation D of the FRB. "Regulatory Change" has the meaning set forth in Section 5.03. "Related Party" has the meaning set forth in Section 9.04(f). "Related Person" has the meaning set forth in Section 11.06. "Replacement Bank" has the meaning set forth in Section 5.07. "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. "Restricted Payment" means, in relation to the Borrower and its Subsidiaries, any (a) Distribution, or (b) payment or prepayment by the Borrower or its Subsidiaries to the Borrower's or any Subsidiary's shareholders (or other equity holders) and (i) consisting of management, consulting or similar fees other than those fees incurred in the ordinary course of business consistent with past practices and fees charged for a fair exchange of services or sale or other disposition of goods in the ordinary course of business for fair value, (ii) consisting of any fees or other payments made outside the ordinary course of business or (iii) made to such Person in its capacity as a shareholder other than for an exchange of services or sale or other disposition of goods in the ordinary course of business for fair value, in each case other than a payment to the Borrower or to any wholly-owned Domestic Subsidiary. "Revolving Commitment," as to each Bank, has the meaning specified in subsection 2.01. "Revolving Loan" has the meaning specified in subsection 2.01. "Revolving Note" means a promissory note substantially in the form of Exhibit A. "Revolving Termination Date" means the earlier to occur of: (a) September 27, 2005, 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 13 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. "Selling Lender" has the meaning set forth in Section 12.09(c)(ii). "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 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. "Subordinated Debt" has the meaning set forth in the definition of "Funded Debt". "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. "Substantial Assets" has the meaning set forth in Section 9.04(d). "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). "Taxes" has the meaning set forth in Section 6.03. "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; 14 (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. "Total Commitment" means the sum of the Revolving Commitments of the Banks, as in effect from time to time. "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 Fund" 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. 15 SECTION 1.03 Interpretation. In the Loan Documents, except to the extent the context otherwise requires: (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. 16 ARTICLE II THE LOANS SECTION 2.01 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. 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, prepay under Section 4.03 and reborrow under this subsection 2.01. 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 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 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 17 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. 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 $1,000,000 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 11:00 A.M. (California time) on the date of the proposed borrowing or conversion; (ii) any Notice with respect to any Borrowing or continuation of, or conversion into, Eurodollar 18 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; (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 the Revolving Termination Date with respect to any Revolving 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; 19 (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 (and the Borrower hereby promises to pay interest on the dates required herein) 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. 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 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 20 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) 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. (c) Utilization Fees. The Company shall pay to the Agent for the account of each Bank a utilization fee calculated on the actual daily utilized portion of such Bank's Revolving Commitment which constitute Eurodollar Rate Loans, 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 under this Agreement plus the utilization of the combined "Revolving Commitments" and "Term Loan Commitments" under and as defined in the 364-Day Credit Agreement (whether or not such utilization consists of Base Rate Loans or Eurodollar Rate Loans) equals or exceeds 33% of the combined Revolving Commitments under this Agreement plus the combined "Revolving Commitments" or "Term Loan Commitments" under the 364-Day 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 364-Day Credit Agreement, the Revolving Commitments under this Agreement and the "Revolving Commitments" and "Term Loan Commitments" under and as defined in the 364-Day Credit 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 be applicable 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 utilized under this Agreement, and not on the portion of the "Revolving Commitments" or "Term Loan Commitments" utilized under the 364-Day Credit Agreement. (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. 21 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 $1,000,000, 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 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. 22 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. (c) Notice. The Agent shall give each Bank prompt notice of any termination or reduction of its Revolving Commitments under this Section 4.01. (d) Adjustment of Revolving Commitment 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(c) 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. 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. 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 amount of the Loans in whole or ratably in part, without premium or penalty, provided, however, the Borrower shall not be permitted to make any such repayments until such time as there are no outstanding amounts owing on the 364-Day Credit Agreement. Partial prepayments shall be in Minimum Amounts. 23 (b) 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. 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. 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 24 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 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. 25 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, 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 (provided, no Bank shall be required to acquire or assume all or any part of such Affected Bank's Loans and/or 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 or delayed). 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. 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. 26 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 1:00 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 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 27 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 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 28 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. (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 or Event of 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: 29 (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 29, 2002. (g) Material Adverse Effect. On and as of the date of such Borrowing, there shall have occurred no Material Adverse Effect since June 29, 2002. (h) Existing Credit Agreement. All interest, principal, fees and other amounts owing under the Existing Credit Agreement shall have been paid in full (or shall have been paid in full concurrently with the initial Borrowing hereunder), and all commitments to lend thereunder terminated, and the Existing Credit Agreement shall have been cancelled and be of no further force or effect (except for such provisions thereof that expressly survive the termination thereof). Each Bank that is a party to the Existing Credit Agreement hereby waives its five-day advance notice of termination of the commitments thereunder. (i) Projections. The Agent shall have received the financial projections for the Borrower, including, without limitation, a balance sheet, income statement and cash flow statement, for the period beginning on September 29, 2002 through December 31, 2005, with such financial projections to be in form and substance reasonably satisfactory to the Agent. 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). (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 30 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 (except to the extent that such representations and warranties relate expressly to an earlier date, in which case such representations and warranties shall have been true, correct and complete on and as of such date); and (ii) no Default or Event of 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 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 29, 2001, 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 29, 2002, 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 29, 2002 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 prior to the Closing Date, other than liabilities arising in the ordinary course of business since June 29, 2002. (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 or omits any material 34 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. (u) Distribution Agreement. Except as set forth on Schedule 8.01(u) hereto, as of the Closing Date the Borrower is not a party to any binding written agreement to make a Distribution consisting of a capital stock repurchase or redemption. 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 35 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 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; 36 (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 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; (x) within 30 days of the date thereof, or, if earlier, on the date of delivery of any financial statements pursuant to subsection (a), an amendment to Schedule 8.01(k) reflecting the addition of any Material Subsidiary created, formed, acquired or otherwise existing as of the date of delivery of such amended Schedule; and (xi) 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) Minimum Total Assets. The Borrower shall at all times directly own not less than fifty one percent (51%) of the Consolidated Total Assets. (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 37 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 364-Day 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 such date 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. 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 provided, further that the Borrower and each Subsidiary of the Borrower will pay all such taxes, assessments, charges, levies or claims forthwith immediately after the commencement of proceedings to foreclose any Lien that may have attached as security therefor; (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 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 38 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 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. 39 (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. (l) Recharacterization of Subordinated Debt. Except in the case of a conversion of all or any portion of the Subordinated Debt into capital stock of the Borrower with no payments in cash being made by the Borrower in connection with such conversion (except for payments made solely in respect of fractional shares), the Borrower shall, prior to making any repayment, prepayment, repurchase or redemption on any Subordinated Debt, provide the Agent with a Compliance Certificate that includes the aggregate amount of such Subordinated Debt (prior to giving effect to any such repayment, prepayment, repurchase or redemption) now being included in the calculation of Funded Debt demonstrating that the Borrower is in compliance with all of its financial covenants set forth in Section 9.2 hereof both immediately prior to, and will be in compliance with all such financial covenants immediately after giving effect to, any such repayment, prepayment, repurchase or redemption. 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. Neither the Borrower nor any Domestic Subsidiary shall 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 40 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 or acquire all or substantially all of the assets of another Person, provided that (a) in the case of a merger or consolidation, the Borrower is the surviving corporation in respect of any merger or consolidation involving the Borrower, (b) subject to the preceding clause (a), in the case of a merger or consolidation, after giving effect to any such merger or consolidation, the surviving entity in respect thereof shall be a wholly owned Subsidiary, (c) no such acquisition, 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 (d) the board of directors of the Person to be acquired has approved such acquisition, merger or consolidation; 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 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/design foundry operation pursuant to a "spin-off" of the capital stock of a Subsidiary owning such operations or similar transaction provided that the aggregate value of all such assets sold or otherwise disposed of does not exceed, in the aggregate, $156,000,000; 41 (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 (vi) 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: (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 42 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 prior to and 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; (xi) investments in connection with any Permitted Receivables Purchase Facility; and (xii) investments consisting of shares (or other equity interests) held by the Borrower in any Person in connection with any "spin-off" or similar transaction contemplated by Section 9.04(d)(v) hereof. (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 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 43 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. (i) Restrictions on Upstream Limitations. The Borrower will not, nor will it permit any of its Subsidiaries to enter into or permit to exist any arrangement or agreement (excluding this Agreement and the other Loan Documents) which directly or indirectly restricts the ability of any Subsidiary of the Borrower to pay or make dividends or distributions in cash or kind to the Borrower, to make loans, advances or other payments of whatsoever nature to the Borrower, or to make transfers or distributions of all or any part of its assets to the Borrower, except to the extent that any such restriction is necessary for a Subsidiary to comply with adequate capitalization requirements applicable to such Subsidiary. (j) Restricted Payments. The Borrower will not make any Restricted Payments except that, (a) so long as no Event of Default has occurred and is continuing or would exist as a result thereof, the Borrower may make Distributions and (b) to the extent that prior to the occurrence of any Event of Default the Borrower has entered into a binding written agreement to make a Distribution consisting of a capital stock repurchase or redemption, the Borrower shall be permitted to make such Distribution. 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. 44 (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 9.02, subsections (a)(i), (j) or (l) of Section 9.03 or Section 9.04 other than Subsection 9.04(g). (d) Failure by Borrower to Perform Other Covenants. (i) The Borrower shall fail to perform or observe any term, covenant or agreement contained in Section 9.01(a) and such failure shall remain unremedied for a period of five (5) Business Days after either (1) a Responsible Officer of the Borrower knew or reasonably should have known of such failure or (2) the Borrower receives written notice thereof by the Agent or any Bank; or (ii) 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 (1) a Responsible Officer of the Borrower knew or reasonably should have known of such failure or (2) 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 45 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 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. 46 (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 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 Fleet 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 47 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 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. 48 (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 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 49 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, 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. 50 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, 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 each of the Banks affected thereby (or by the Agent with the written consent of each of the Banks affected thereby), 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 such Bank; (B) reduce the principal of, or interest on, the Loans or any fee or other amount payable to such Bank 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 such Banks 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 to such Bank under the Loan Documents; (F) waive any of the conditions specified in Article VII with respect to a Loan to be made by such Bank; 51 (G) amend, modify or waive the provisions of Section 6.01, 6.05 or 12.07; or (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 (or, in the case of a Bank, to the Agent and the Borrower). 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. 52 SECTION 12.04 Costs and Expenses; Indemnification. (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, provided that each Bank acknowledges that such Bank is not, as of the Closing Date, aware of any such claims being asserted against such Bank on or prior to the Closing Date; (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. 53 (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 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. 54 SECTION 12.09 Binding Effect; Assignment; Increase in Total Commitment. (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 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 or an Approved Fund; 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 $7,500,000. (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. 55 (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 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. (c) Accession. (i) At any time from the Closing Date through October 9, 2002 (but not thereafter), the Borrower may request that the Total Commitment be increased in accordance with the terms of this Section 12.09(c). In connection with such an increase, except 56 as otherwise provided herein, Allied Irish Banks, p.l.c. (the "Acceding Bank") may, at the request of the Borrower (such request being hereinafter referred to as a "Commitment Increase Notice"), become party to this Agreement by entering into an Instrument of Accession in substantially the form of Exhibit G hereto (an "Instrument of Accession") with the Borrower and the Agent and assuming thereunder a Revolving Commitment in an amount to be agreed upon by the Borrower and the Acceding Bank, to make Revolving Loans to the Borrower and the Total Commitment shall thereupon be increased by the amount of the Acceding Bank's Revolving Commitment, provided, however that in no event shall the Total Commitment be increased under any one or more of such Instruments of Accession so as to exceed, in the aggregate, $200,000,000 minus the aggregate amount of all reductions in the Total Commitment under this Agreement previously made pursuant to Section 4.01(a) or (b) hereof. Based upon the Commitment Increase Notice, the Agent shall notify the Borrower, the Acceding Bank and the Banks immediately prior to the proposed effective date of any such increase in the Total Commitment of the amount of each Bank's and the Acceding Bank's Revolving Commitment (the "Effective Commitment Amount") and its percentage of the Total Commitment and the amount of the Total Commitment, which amounts shall be effective on the date specified in such notice subject to the conditions set forth herein. Any increase in the Total Commitment under this Agreement shall be subject to the following conditions precedent: (i) as of the date of the Commitment Increase Notice and as of the proposed effective date of the increase in the Total Commitment under this Agreement, all representations and warranties shall be true and correct in all material respects as though made on such date (unless such representation and warranty is made as of a specific date, in which case, such representation and warranty shall be true and correct as of such date) and no event shall have occurred and then be continuing which constitutes a Default or Event of Default under this Agreement; and (ii) the Borrower, the Agent and each Acceding Bank shall have agreed to provide a "Revolving Commitment" in support of such increase in the Total Commitment under this Agreement, shall have executed and delivered the Instrument of Accession. Upon satisfaction of the conditions precedent to any increase in the Total Commitment under this Agreement, the Agent shall promptly advise the Borrower and each Bank of the effective date of such increase. Upon the effective date of any increase in the Total Commitment under this Agreement that is supported by an Acceding Bank, such Acceding Bank shall be a party to this Agreement as a Bank and shall have the rights and obligations of a Bank hereunder. In addition, on such effective date, the Agent shall replace the existing Schedule 1 attached hereto with the revised Schedule 1 reflecting such new Total Commitment and each Bank's Revolving Commitment. Nothing contained herein shall constitute, or otherwise be deemed to be, a commitment on the part of any Bank to increase its Commitment hereunder. (ii) For purposes of this paragraph (ii), (A) the term "Buying Lender(s)" shall mean (1) each Bank the Effective Commitment Amount of which is greater than its Revolving Commitment prior to the effective date of any increase in the Total Commitment under this Agreement and (2) each Acceding Bank that is allocated an Effective Commitment Amount in connection with any Commitment Increase Notice and (B) the term "Selling Lender(s)" shall mean each Bank whose Revolving Commitment under this Agreement is not being increased from that in effect prior to such increase in the Total Commitment under this Agreement as the case may be. Effective on the effective date of any increase in the Total Commitment under this Agreement pursuant to paragraph (i) above, each Selling Lender hereby sells, grants, assigns and conveys to each Buying Lender, without recourse, warranty or representation of any kind, except as specifically provided herein, an undivided percentage in such Selling Lender's right, title and 57 interest in and to its outstanding Revolving Loans in the respective amounts and percentages necessary so that, from and after such sale, each such Selling Lender's outstanding Revolving Loans shall equal such Selling Lender's pro rata share (calculated based upon the Effective Commitment Amounts) of the outstanding Revolving Loans under this Agreement as applicable. Effective on the effective date of any increase in the Total Commitment under this Agreement pursuant to paragraph (i) above, each Buying Lender hereby purchases and accepts such grant, assignment and conveyance from the Selling Lenders. Each Buying Lender hereby agrees that its respective purchase price for the portion of the outstanding Revolving Loans purchased hereby shall equal the respective amount necessary so that, from and after such payments, each Buying Lender's outstanding Revolving Loans shall equal such Buying Lender's pro rata share (calculated based upon the Effective Commitment Amounts) of the outstanding Revolving Loans under this Agreement. Such amount shall be payable on the effective date of the increase in the Total Commitment under this Agreement by wire transfer of immediately available funds to the Agent. The Agent, in turn, shall wire transfer any such funds received to the Selling Lenders, in same day funds, for the sole account of the Selling Lenders. Each Selling Lender hereby represents and warrants to each Buying Lender that such Selling Lender owns the Revolving Loans being sold and assigned hereby for its own account and has not sold, transferred or encumbered any or all of its interests in such Revolving Loans, except for participations which will be extinguished upon payment to the Selling Lender of any amount equal to the portion of the outstanding Revolving Loans being sold by such Selling Lender. Each Buying Lender hereby acknowledges and agrees that, except for such Selling Lender's representations and warranties contained in the foregoing sentence, each such Buying Lender has entered into its Instrument of Accession with respect to such increase on the basis of its own independent investigation and has not relied upon, and will not rely upon, any explicit or implicit written or oral representation, warranty or other statement of the Banks or the Agent concerning the authorization, execution, legality, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or the other Loan Documents. The Borrower hereby agrees to compensate each Selling Lender for all losses, expenses and liabilities incurred by each Bank in connection with the sale and assignment of any Eurodollar Rate Loans hereunder on the terms and in the manner set forth in Section 5.02 hereof. SECTION 12.10 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 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 New York and the Federal courts of the United States sitting in the State of New York 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 58 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 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 59 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 executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. [SIGNATURE PAGES FOLLOW.] 60 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 /s/ Charles H. Eldredge ------------------------------------ Name: Charles H. Eldredge Title: Vice President and Treasurer THE AGENT FLEET NATIONAL BANK, AS AGENT By /s/ Debra E. DelVecchio ------------------------------------ Name: Debra E. DelVecchio Title: Director Attachment A-2 THE BANKS FLEET NATIONAL BANK, AS A BANK By /s/ Debra E. DelVecchio ------------------------------------ Name: Debra E. DelVecchio Title: Director Attachment A-3 BNP/PARIBAS By /s/ Stuart Darby ------------------------------------ Name: Stuart Darby Title: Vice President By /s/ Richard Ong Pho ------------------------------------ Name: Richard Ong Pho Title: Associate Attachment A-4 JPMORGAN CHASE BANK By /s/ David F. Gibbs ------------------------------------ Name: David F. Gibbs Title: Vice President Attachment A-5 KEY CORPORATE CAPITAL, INC. By /s/ Robert W. Boswell ------------------------------------ Name: Robert W. Boswell Title: Vice President THE BANK OF NOVA SCOTIA By /s/ Chris Johnson ------------------------------------ Name: Chris Johnson Title: Managing Director & Industry Head BARCLAYS BANK PLC By /s/ Nicholas A. Bell ------------------------------------ Name: Nicholas A. Bell Title: Director Loan Transaction Management U.S. BANK NATIONAL ASSOCIATION By /s/ Douglas A. Rich ------------------------------------ Name: Douglas A. Rich Title: Vice President WELLS FARGO BANK, NATIONAL ASSOCIATION By /s/ Roger Fleischmann ------------------------------------ Name: Roger Fleischmann Title: Senior Vice President By /s/ Lauren Downum ------------------------------------ Name: Lauren Downum Title: Vice President BANK OF AMERICA, N.A. By /s/ Sugeet Manchanda ------------------------------------ Name: Sugeet Manchanda Title: Principal BANK ONE, NA By /s/ Joseph R. Perdenza ------------------------------------ Name: Joseph R. Perdenza Title: Director MELLON BANK, N.A. By /s/ J. Cate ------------------------------------- Name: J. Cate Title: Vice President UBS AG, STAMFORD BRANCH By /s/ Luke Goldsworthy ------------------------------------- Name: Luke Goldsworthy Title: Associate Director Banking Products Services, US By /s/ Patricia O'Kicki ------------------------------------- Name: Patricia O'Kicki Title: Director Banking Products Services Schedule 1-1 EX-10.46 5 f85715exv10w46.txt EXHIBIT 10.46 EXHIBIT 10.46 ================================================================================ CADENCE DESIGN SYSTEMS, INC. --------------------------------- $187,500,000 364-DAY CREDIT AGREEMENT Dated as of September 27, 2002 --------------------------------- FLEET NATIONAL BANK, AS AGENT with FLEET SECURITIES, INC. having acted as Sole Lead Arranger, with KEY CORPORATE CAPITAL, INC. AND JPMORGAN CHASE BANK AS CO-SYNDICATION AGENTS AND THE BANK OF NOVA SCOTIA, AND BNP/PARIBAS AS CO-DOCUMENTATION AGENTS ================================================================================ TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS........................................................................1 SECTION 1.01 Certain Defined Terms....................................................1 SECTION 1.02 Accounting Principles...................................................16 (a) Accounting Terms.................................................16 (b) GAAP Changes.....................................................16 (c) "Fiscal Year" and "Fiscal Quarter"...............................16 SECTION 1.03 Interpretation..........................................................16 ARTICLE II THE LOANS........................................................................17 SECTION 2.01 Amounts and Terms of Commitments........................................17 (a) The Revolving Credit.............................................17 (b) The Term Loans...................................................18 SECTION 2.02 Borrowing Procedure.....................................................18 (a) Notice to the Agent..............................................18 (b) Notice to the Banks..............................................18 SECTION 2.03 Non-Receipt of Funds....................................................19 SECTION 2.04 Lending Offices.........................................................19 SECTION 2.05 Evidence of Indebtedness................................................19 SECTION 2.06 Minimum Amounts.........................................................19 SECTION 2.07 Required Notice.........................................................20 ARTICLE III INTEREST AND FEES; CONVERSION OR CONTINUATION...................................20 SECTION 3.01 Interest................................................................20 (a) Interest Rate....................................................20 (b) Interest Periods.................................................20 (c) Interest Payment Dates...........................................21 (d) Notice to the Borrower and the Banks.............................21 SECTION 3.02 Default Rate of Interest................................................21 SECTION 3.03 Fees....................................................................22 (a) Revolving Commitment Fees........................................22 (b) Utilization Fees.................................................22 (c) Agency Fee.......................................................22 (d) Fees Nonrefundable...............................................23 SECTION 3.04 Computations............................................................23 SECTION 3.05 Conversion or Continuation..............................................23 (a) Election.........................................................23 (b) Automatic Conversion.............................................23 (c) Notice to the Agent..............................................23 (d) Notice to the Banks..............................................24
i.
Page ---- SECTION 3.06 Replacement of Reference Banks..........................................24 SECTION 3.07 Highest Lawful Rate.....................................................24 ARTICLE IV REDUCTION OF REVOLVING COMMITMENTS; REPAYMENT; PREPAYMENT........................24 SECTION 4.01 Reduction or Termination of the Revolving Commitments...................24 (a) Optional Reduction or Termination................................24 (b) Mandatory Termination............................................24 (c) Extension of Revolving Termination Date..........................24 (d) Notice...........................................................25 (e) Adjustment of Revolving Commitment Fee and Utilization Fee; No Reinstatement............................................25 SECTION 4.02 Repayment of Loans......................................................25 (a) Revolving Loans..................................................25 (b) Term Loans.......................................................26 SECTION 4.03 Prepayments.............................................................26 (a) Optional Prepayments.............................................26 (b) Notice; Application..............................................26 ARTICLE V YIELD PROTECTION AND ILLEGALITY...................................................26 SECTION 5.01 Inability to Determine Rates............................................26 SECTION 5.02 Funding Losses..........................................................26 SECTION 5.03 Regulatory Changes......................................................27 (a) Increased Costs..................................................27 (b) Capital Requirements.............................................27 (c) Requests.........................................................27 SECTION 5.04 Illegality..............................................................28 SECTION 5.05 Funding Assumptions.....................................................28 SECTION 5.06 Obligation to Mitigate..................................................28 SECTION 5.07 Substitution of Banks...................................................28 ARTICLE VI PAYMENTS 29 SECTION 6.01 Pro Rata Treatment......................................................29 SECTION 6.02 Payments................................................................29 (a) Payments.........................................................29 (b) Application......................................................29 (c) Extension........................................................29 SECTION 6.03 Taxes...................................................................29 (a) No Reduction of Payments.........................................29 (b) Deduction or Withholding; Tax Receipts...........................30 (c) Indemnity........................................................30 (d) Forms W-8BEN and W-8ECI..........................................30 (e) Mitigation.......................................................30
ii.
Page ---- SECTION 6.04 Non-Receipt of Funds....................................................31 SECTION 6.05 Sharing of Payments.....................................................31 ARTICLE VII CONDITIONS PRECEDENT............................................................31 SECTION 7.01 Conditions Precedent to the Initial Loans...............................31 (a) Fees and Expenses................................................31 (b) Loan Documents...................................................31 (c) Certificate of Responsible Officer...............................32 (d) Corporate Documents..............................................32 (e) Legal Opinion....................................................32 (f) Compliance Certificate...........................................32 (g) Material Adverse Effect..........................................32 (h) Existing Credit Agreement........................................32 (i) Projections......................................................33 SECTION 7.02 Conditions Precedent to All Loans.......................................33 (a) Notice...........................................................33 (b) Representations and Warranties; No Default.......................33 (c) Additional Documents.............................................33 SECTION 7.03 Conditions Precedent to Making The Term Loan............................33 (a) Documents........................................................33 (b) Certificate of Responsible Officer...............................34 (c) Corporate Documents..............................................34 (d) Legal Opinion....................................................34 ARTICLE VIII REPRESENTATIONS AND WARRANTIES.................................................34 SECTION 8.01 Representations and Warranties..........................................34 (a) Organization and Powers..........................................34 (b) Authorization; No Conflict.......................................35 (c) Binding Obligation...............................................35 (d) Consents.........................................................35 (e) No Defaults......................................................35 (f) Title to Properties; Liens.......................................35 (g) Litigation.......................................................35 (h) Compliance with Environmental Laws...............................35 (i) Governmental Regulation..........................................36 (j) ERISA............................................................36 (k) Subsidiaries.....................................................36 (l) Margin Regulations...............................................37 (m) Taxes............................................................37 (n) Patents and Other Rights.........................................37 (o) Insurance........................................................37 (p) Financial Statements.............................................37 (q) Liabilities......................................................37
iii.
Page ---- (r) Labor Disputes, Etc..............................................38 (s) Solvency.........................................................38 (t) Disclosure.......................................................38 (u) Distribution Agreement...........................................38 ARTICLE IX COVENANTS........................................................................38 SECTION 9.01 Reporting Covenants.....................................................38 (a) Financial Statements and Other Reports...........................38 (b) Additional Information...........................................39 SECTION 9.02 Financial Covenants.....................................................40 (a) Minimum Consolidated EBITDA......................................40 (b) Minimum Total Assets.............................................40 (c) Minimum Fixed Charge Coverage Ratio..............................40 (d) Minimum Current Ratio............................................41 (e) Maximum Funded Debt to EBITDA Ratio..............................41 SECTION 9.03 Additional Affirmative Covenants........................................41 (a) Preservation of Existence, Etc...................................41 (b) Payment of Obligations...........................................41 (c) Maintenance of Insurance.........................................41 (d) Keeping of Records and Books of Account..........................42 (e) Inspection Rights................................................42 (f) Compliance with Laws, Etc........................................42 (g) Maintenance of Properties, Etc...................................42 (h) Licenses.........................................................42 (i) Action Under Environmental Laws..................................43 (j) Use of Proceeds..................................................43 (k) Further Assurances and Additional Acts...........................43 (l) Recharacterization of Subordinated Debt..........................43 SECTION 9.04 Negative Covenants......................................................43 (a) Liens; Negative Pledges..........................................43 (b) Change in Nature of Business.....................................43 (c) Restrictions on Fundamental Changes..............................44 (d) Sales of Assets..................................................44 (e) Loans and Investments............................................45 (f) Transactions with Related Parties................................47 (g) Hazardous Substances.............................................47 (h) Accounting Changes...............................................47 (i) Restrictions on Upstream Limitations.............................47 (j) Restricted Payments..............................................47 ARTICLE X EVENTS OF DEFAULT.................................................................48 SECTION 10.01 Events of Default.......................................................48 (a) Payments.........................................................48 (b) Representations and Warranties...................................48
iv.
Page ---- (c) Failure by Borrower to Perform Certain Covenants.................48 (d) Failure by Borrower to Perform Other Covenants...................48 (e) Insolvency; Voluntary Proceedings................................48 (f) Involuntary Proceedings..........................................48 (g) Default Under Other Indebtedness.................................49 (h) Judgments........................................................49 (i) ERISA............................................................49 (j) Dissolution, Etc.................................................50 (k) Subordination Provisions.........................................50 (l) Mergers and Acquisitions.........................................50 SECTION 10.02 Effect of Event of Default..............................................50 ARTICLE XI THE AGENT........................................................................51 SECTION 11.01 Authorization and Action................................................51 SECTION 11.02 Limitation on Liability of Agent; Notices; Closing......................51 (a) Limitation on Liability of Agent.................................51 (b) Notices..........................................................52 (c) Closing..........................................................52 SECTION 11.03 Agent and Affiliates....................................................52 SECTION 11.04 Notice of Defaults......................................................52 SECTION 11.05 Non-Reliance on Agent...................................................53 SECTION 11.06 Indemnification.........................................................53 SECTION 11.07 Delegation of Duties....................................................53 SECTION 11.08 Successor Agent.........................................................53 SECTION 11.09 Co-Agents...............................................................54 ARTICLE XII MISCELLANEOUS...................................................................54 SECTION 12.01 Amendments and Waivers..................................................54 SECTION 12.02 Notices.................................................................55 (a) Notices..........................................................55 (b) Facsimile and Telephonic Notice..................................55 SECTION 12.03 No Waiver; Cumulative Remedies..........................................56 SECTION 12.04 Costs and Expenses; Indemnification.....................................56 (a) Costs and Expenses...............................................56 (b) Indemnification..................................................56 (c) Other Charges....................................................57 SECTION 12.05 Right of Set-Off........................................................57 SECTION 12.06 Survival................................................................57 SECTION 12.07 Obligations Several.....................................................58 SECTION 12.08 Benefits of Agreement...................................................58 SECTION 12.09 Binding Effect; Assignment..............................................58 (a) Binding Effect...................................................58 (b) Assignment.......................................................58 (c) Accession........................................................60
v.
Page ---- SECTION 12.10 Governing Law...........................................................62 SECTION 12.11 Submission to Jurisdiction..............................................62 (a) Submission to Jurisdiction.......................................62 (b) No Limitation....................................................62 SECTION 12.12 Waiver of Jury Trial....................................................62 SECTION 12.13 Limitation on Liability.................................................63 SECTION 12.14 Confidentiality.........................................................63 SECTION 12.15 Entire Agreement........................................................63 SECTION 12.16 Severability............................................................63 SECTION 12.17 Counterparts............................................................64 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 Exhibit G Form of Opinion of Counsel to the Guarantor Exhibit H Form of Instrument of Accession Exhibit I Form of Guaranty
vi. 364-DAY CREDIT AGREEMENT This 364-DAY CREDIT AGREEMENT (this "Agreement"), dated as of September 27, 2002, 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"), Key Corporate Capital, Inc. and JPMorgan Chase Bank as co-syndication agents hereunder, The Bank of Nova Scotia and BNP/Paribas, as co- documentation agents hereunder, and Fleet National Bank, 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 $187,500,000 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: "Acceding Bank" has the meaning set forth in Section 12.09(c)(i). "Affected Bank" has the meaning set forth in Section 5.07. "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. "Agreement" has the meaning set forth in the recitals hereto. "Alchemy" means Alchemy Semiconductor, Inc. 1. "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" 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 which are Revolving Loans, 0% per annum; (ii) with respect to Eurodollar Rate Loans which are Revolving 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; (iii) with respect to Base Rate Loans which constitute all or any portion of the Term Loan, 0.25% per annum; and (iv) with respect to Eurodollar Rate Loans which constitute all or any portion of the Term Loan, the sum of (x) 0.25%, (y) the amount set forth opposite Level 1 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, and (z) the amount set forth opposite the Level 1 below the heading "Utilization Fee" 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. "Approved Fund" means (a) a CLO and (b) with respect to any Bank that is a fund which invests in bank loans and similar extensions of credit, any other fund that invests in bank loans and similar extensions of credit and is managed by the same investment advisor as such Bank or by an Affiliate of such investment advisor, provided, in each case that such CLO or fund, as applicable, has the requisite power, authority and financial ability to fulfill its obligations hereunder in connection with the Revolving Commitment and Term Loan Commitment and, as to any fund set forth in clause (b) hereof, such fund is the only Person receiving confidential information delivered hereunder and such information is not subsequently delivered to investors in such fund. "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 variable rate of interest so designated from time to time by Fleet as its "prime rate", such rate being a reference rate and not necessarily representing the lowest or best rate being charged to any customer. 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, without notice or demand of any kind. 2. "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 Boston, Massachusetts and New York, New York, and (iii) if the applicable Business Day relates to any Eurodollar Rate Loan, that is a Eurodollar Business Day. "Buying Lender" has the meaning set forth in Section 12.09(c)(ii). "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). "CLO" means any entity (whether a corporation, partnership, trust or otherwise) that is engaged in making, purchasing, holding or otherwise investing in bank loans and similar extensions of credit in the ordinary course of its business and is administered or managed by a Bank or an Affiliate of such Bank. "Commitment Increase Notice" has the meaning set forth in Section 12.09(c)(i). "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 3. 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, 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; provided, however, when calculating Consolidated EBITDA hereunder, Consolidated EBITDA shall not include any extraordinary items of income and/or gains in an aggregate amount in excess of $10,000,000 which the Borrower recognizes in connection with any litigation award, settlement, claim, judgement or otherwise in connection therewith. "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. "Distribution" means the declaration or payment of any dividend on or in respect of any shares of any class of capital stock of the Borrower, other than dividends payable solely in shares of common stock of the Borrower; the purchase, redemption, defeasance or other acquisition of any shares of any class of capital stock of the Borrower, directly or indirectly through a Subsidiary of the Borrower or otherwise (including the setting apart of assets for a sinking or other analogous fund to be used for such purpose); the return of capital by the Borrower to its shareholders as such; or any other distribution on or in respect of any shares of any class of capital stock of the Borrower. "Dollars" and the sign "$" each means lawful money of the United States. 4. "Domestic Subsidiary" means any Subsidiary which is incorporated or organized under the laws of the United States of America, any state thereof or in the District of Columbia. "Effective Commitment Amount" has the meaning set forth in Section 12.09(c)(i). "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; (iii) an Approved Fund and (iv) 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. 5. "Eurodollar Rate Loan" means a Loan bearing interest at a rate determined by reference to the Eurodollar Rate. "Eurodollar Reference Bank" means Fleet, 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 $260,000,000 Amended and Restated 364-Day Credit Agreement, dated as of September 28, 2001, by and among the Borrower, the lenders party thereto and ABN AMRO Bank N.V., as administrative agent, as amended. "FDIC" means the Federal Deposit Insurance Corporation, or any successor thereto. "Fee Letter" means the fee letter dated on or prior to the Closing Date 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). "Fleet" means Fleet National Bank, in its individual capacity. "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 issued and outstanding 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 later to occur of the Revolving Termination Date and the Term Loan Maturity Date, provided that no repayment, prepayment, repurchase, redemption shall have 6. occurred with respect to such Indebtedness (the "Subordinated Debt"), 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. "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. "Guarantors" means, collectively, all the Material Domestic Subsidiaries which are required to become guarantors hereunder in accordance with the provisions of Section 7.03 hereof. "Guaranty" means that certain Guaranty dated on or prior to the date on which the Term Loan is made pursuant to Section 7.03 hereof from each of the Guarantors to the Agent and each of the Banks, and in substantially the form of Exhibit I hereto. "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 7. 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 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. "Indemnified Liabilities" has the meaning set forth in Section 12.04(b). "Indemnified Person" has the meaning set forth in Section 12.04(b). "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. "Instrument of Accession" has the meaning set forth in Section 12.09(c)(i). "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. 8. "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, the Guaranty 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. "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 Domestic Subsidiary" means any Material Subsidiary which is incorporated or organized under the laws of the United States of America, any state thereof or in the District of Columbia. "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. "Maximum Rate" has the meaning set forth in Section 3.07. "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 27, 2002, among the Borrower, the lenders party thereto and Fleet National Bank, 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 9. 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. "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); 10. (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; (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; 11. (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 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). 12. "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, (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 Party" has the meaning set forth in Section 9.04(f). "Related Person" has the meaning set forth in Section 11.06. "Replacement Bank" has the meaning set forth in Section 5.07. "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 13. controllership function of such Person and having substantially the same authority and responsibility. "Restricted Payment" means, in relation to the Borrower and its Subsidiaries, any (a) Distribution, or (b) payment or prepayment by the Borrower or its Subsidiaries to the Borrower's or any Subsidiary's shareholders (or other equity holders) and (i) consisting of management, consulting or similar fees other than those fees incurred in the ordinary course of business consistent with past practices and fees charged for a fair exchange of services or sale or other disposition of goods in the ordinary course of business for fair value, (ii) consisting of any fees or other payments made outside the ordinary course of business or (iii) made to such Person in its capacity as a shareholder other than for an exchange of services or sale or other disposition of goods in the ordinary course of business for fair value, in each case other than a payment to the Borrower or to any wholly-owned Domestic Subsidiary. "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. "Selling Lender" has the meaning set forth in Section 12.09(c)(ii). "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 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. 14. "Subordinated Debt" has the meaning set forth in the definition of "Funded Debt". "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. "Substantial Assets" has the meaning set forth in Section 9.04(d). "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). "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 the date which is one (1) year from the Term Loan Conversion Date, provided in no event shall the Term Loan Maturity Date be later than September 25, 2005. "Term Loan Commitment" has the meaning set forth in Section 2.01(b). "Term Loan Conversion Date" 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; (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; 15. (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. "Total Commitment" means the sum of the Revolving Commitments of the Banks, as in effect from time to time. "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: (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, 16. 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. 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 17. 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 (including without limitation satisfaction of the conditions set forth in Section 7.03 hereof), to make a single term loan (each a "Term Loan" and, collectively, the "Term Loans") to the Borrower on the Revolving Termination Date (the date such Term Loan is made being hereinafter referred to as the "Term Loan Conversion 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 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. 18. 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. 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 19. 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 $1,000,000 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 11:00 A.M. (California time) on 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; (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 20. 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 (and the Borrower hereby promises to pay interest on the dates required herein) 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. 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, 21. 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 calculated on the actual daily utilized portion of such Bank's Revolving Commitment or Term Loan Commitment which constitute Eurodollar Rate Loans, 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 (whether or not such utilization consists of Base Rate Loans or Eurodollar Rate Loans) 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 be applicable 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. (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. 22. (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 $1,000,000, 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 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. 23. (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 additional 364-day period. The Borrower shall be permitted to make only one such request for an extension during the life of this Agreement. Each Bank and the Agent may grant or reject such request in its sole discretion, and the Borrower acknowledges that there is no commitment 24. 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, provided, the parties hereto hereby acknowledge and agree that any extension shall not be for more than 364 days from the effective date of such extension. 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) and, to the extent the Borrower has not elected to convert all of the outstanding Revolving Loans to a Term Loan pursuant to Section 2.01(b), the Borrower shall immediately pay to such non-consenting Bank all amounts owing such Bank on the Revolving Termination 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. To the extent the Borrower elects to extend the Revolving Termination Date pursuant to this Section 4.01(c) and such Revolving Termination Date is so extended pursuant to the terms hereof, the Borrower shall have the right, subject to the terms and conditions contained herein (including, without limitation, Section 2.01(b) and Section 7.03 hereof), to convert the Revolving Loans to a Term Loan upon the then-existing Revolving Termination Date in accordance with the terms hereof. (d) Notice. The Agent shall give each Bank prompt notice of any termination, reduction or extension of its Revolving Commitments under this Section 4.01. (e) 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. 25. (b) Term Loans. The Borrower shall repay to the Banks in full on the Term Loan Maturity Date the aggregate principal amount of the Term Loans outstanding on such 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 amount of the Loans in whole or ratably in part, without premium or penalty. Partial prepayments shall be in Minimum Amounts. (b) 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 26. 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. 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. 27. 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 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 (provided, no Bank shall be required to acquire or assume all or any part of such Affected Bank's Loans and/or 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 or delayed). 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 28. 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. 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 1:00 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, 29. 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 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 30. 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 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, 31. executed by the Borrower, for any Banks requesting Notes; and (iii) the Fee Letter, executed by each of the respective parties thereto. (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 29, 2002. (g) Material Adverse Effect. On and as of the date of such Borrowing, there shall have occurred no Material Adverse Effect since June 29, 2002. (h) Existing Credit Agreement. All interest, principal, fees and other amounts owing under the Existing Credit Agreement shall have been paid in full (or shall have been paid in full concurrently with the initial Borrowing hereunder), and all commitments to lend thereunder terminated, and the Existing Credit Agreement shall have been cancelled and be of no further force or effect (except for such provisions thereof that expressly survive the termination thereof). Each Bank that is a party to the Existing Credit Agreement hereby waives its five-day advance notice of termination of the commitments thereunder. 32. (i) Projections. The Agent shall have received the financial projections for the Borrower, including, without limitation, a balance sheet, income statement and cash flow statement, for the period beginning on September 29, 2002 through December 31, 2005, with such financial projections to be in form and substance reasonably satisfactory to the Agent. 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). (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 (except to the extent that such representations and warranties relate expressly to an earlier date, in which case such representations and warranties shall have been true, correct and complete 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. SECTION 7.03 Conditions Precedent to Making the Term Loan. The obligation of each Bank to make the Term Loan in accordance with the provisions of Section 2.01(b) shall be subject to the satisfaction of each of the conditions precedent set forth in Section 7.02 and, in addition, shall be subject to the satisfaction of each of the following conditions precedent: (a) Documents. The Agent and each of the Banks shall have received, by not later than the Term Loan Conversion Date, the following Loan Documents: (i) the Guaranty, executed by each Material Domestic Subsidiary; and (ii) the Term Note executed by the Borrower for any Bank requesting a Term Note. 33. (b) 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 Term Loan Conversion 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 Term Loan Conversion Date, no Default shall have occurred and be continuing or shall result from the Borrowing of the Term Loan. (c) 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 each Material Domestic Subsidiary, together with certificates as to good standing and tax status, from the Secretary of State or other Governmental Authority, as applicable, of such Material Domestic Subsidiary's state of incorporation and each jurisdiction in which such Material Domestic Subsidiary is required to be qualified as a foreign corporation, each dated as of a recent date prior to the Term Loan Conversion Date; and (ii) a certificate of the Secretary or Assistant Secretary of each Material Domestic Subsidiary, dated the Term Loan Conversion Date, certifying (a) copies of the bylaws of such Material Domestic Subsidiary and the resolutions of the Board of Directors of such Material Domestic Subsidiary authorizing the execution, delivery and performance of the Loan Documents to which it is a party and (b) the incumbency, authority and signatures of each officer of each Material Domestic Subsidiary authorized to execute and deliver the Loan Documents to which it is a party 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 such Material Domestic Subsidiary canceling or amending such prior certificate. (d) Legal Opinion. The Agent shall have received the opinion of legal counsel acceptable to the Agent to each Material Domestic Subsidiary, dated the Term Loan Conversion Date, in substantially the form of Exhibit G hereto. 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 34. 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. (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, 35. 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 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 36. 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 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 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 29, 2001, 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 29, 2002, 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 29, 2002 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 prior to the Closing Date, other than liabilities arising in the ordinary course of business since June 29, 2002. 37. (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 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. (u) Distribution Agreement. Except as set forth on Schedule 8.01(u) hereto, as of the Closing Date the Borrower is not a party to any binding written agreement to make a Distribution consisting of a capital stock repurchase or redemption. 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, 38. 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 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; 39. (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 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; (x) within 30 days of the date thereof, or, if earlier, on the date of delivery of any financial statements pursuant to subsection (a), an amendment to Schedule 8.01(k) reflecting the addition of any Material Subsidiary created, formed, acquired or otherwise existing as of the date of delivery of such amended Schedule; and (xi) 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) Minimum Total Assets. The Borrower shall at all times directly own not less than fifty one percent (51%) of the Consolidated Total Assets. (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 40. 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 such date 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. 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 provided, further that the Borrower and each Subsidiary of the Borrower will pay all such taxes, assessments, charges, levies or claims forthwith immediately after the commencement of proceedings to foreclose any Lien that may have attached as security therefor; (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 41. financially sound 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 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, 42. 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. (l) Recharacterization of Subordinated Debt. Except in the case of a conversion of all or any portion of the Subordinated Debt into capital stock of the Borrower with no payments in cash being made by the Borrower in connection with such conversion (except for payments made solely in respect of fractional shares), the Borrower shall, prior to making any repayment, prepayment, repurchase or redemption on any Subordinated Debt, provide the Agent with a Compliance Certificate that includes the aggregate amount of such Subordinated Debt (prior to giving effect to any such repayment, prepayment, repurchase or redemption) now being included in the calculation of Funded Debt demonstrating that the Borrower is in compliance with all of its financial covenants set forth in Section 9.02 hereof both immediately prior to, and will be in compliance with all such financial covenants immediately after giving effect to, any such repayment, prepayment, repurchase or redemption. 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. Neither the Borrower nor any Domestic Subsidiary shall 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 43. 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 or acquire all or substantially all of the assets of another Person, provided that (a) in the case of a merger or consolidation, the Borrower is the surviving corporation in respect of any merger or consolidation involving the Borrower, (b) subject to the preceding clause (a), in the case of a merger or consolidation, after giving effect to any such merger or consolidation, the surviving entity in respect thereof shall be a wholly owned Subsidiary, (c) no such acquisition, 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 (d) the board of directors of the Person to be acquired has approved such acquisition, merger or consolidation; 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. Neither the Borrower nor any Guarantor shall 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 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; 44. (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/design foundry operation pursuant to a "spin-off" of the capital stock of a Subsidiary owning such operations or similar transaction provided that the aggregate value of all such assets sold or otherwise disposed of does not exceed, in the aggregate, $156,000,000 ; (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: (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 45. 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 prior to and 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; (xi) investments in connection with any Permitted Receivables Purchase Facility; and (xii) investments consisting of shares (or other equity interests) held by the Borrower in any Person in connection with any "spin-off" or similar transaction contemplated by Section 9.04(d)(v) hereof. 46. (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 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. (i) Restrictions on Upstream Limitations. The Borrower will not, nor will it permit any of its Subsidiaries to enter into or permit to exist any arrangement or agreement (excluding this Agreement and the other Loan Documents) which directly or indirectly restricts the ability of any Subsidiary of the Borrower to pay or make dividends or distributions in cash or kind to the Borrower, to make loans, advances or other payments of whatsoever nature to the Borrower, or to make transfers or distributions of all or any part of its assets to the Borrower, except to the extent that any such restriction is necessary for a Subsidiary to comply with adequate capital requirements applicable to such Subsidiary. (j) Restricted Payments. The Borrower will not make any Restricted Payments except that, (a) so long as no Event of Default has occurred and is continuing or would exist as a result thereof, the Borrower may make Distributions and (b) to the extent that prior to the occurrence of any Event of Default the Borrower has entered into a binding written agreement to make a Distribution consisting of a capital stock repurchase or redemption, the Borrower shall be permitted to make such Distribution. 47. 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. (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 9.02, subsections (a)(i), (j) or (l) of Section 9.03 or Section 9.04 other than Subsection 9.04(g). (d) Failure by Borrower to Perform Other Covenants. (i) The Borrower shall fail to perform or observe any term, covenant or agreement contained in Section 9.01(a) and such failure shall remain unremedied for a period of five (5) Business Days after either (1) a Responsible Officer of the Borrower knew or reasonably should have known of such failure or (2) the Borrower receives written notice thereof by the Agent or any Bank; or (ii) 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 (1) a Responsible Officer of the Borrower knew or reasonably should have known of such failure or (2) 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, 48. 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 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 49. 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 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. 50. ARTICLE XI THE AGENT SECTION 11.01 Authorization and Action. Each Bank hereby appoints Fleet 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 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 51. 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 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 52. 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, 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 53. 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, 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 each of the Banks affected thereby (or by the Agent with the written consent of each of the Banks affected thereby), 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 such Bank, except as otherwise provided in subsection 4.01(c) with respect to the extension of the Revolving Termination Date as provided therein; 54. (B) reduce the principal of, or interest on, the Loans or any fee or other amount payable to such Bank 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 such Bank 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 to such Bank under the Loan Documents; (F) waive any of the conditions specified in Article VII with respect to a Loan to be made by such Bank; (G) amend, modify or waive the provisions of Section 6.01, 6.05 or 12.07; or (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 (or, in the case of a Bank, to the Agent and the Borrower). 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 55. 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. (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, provided that each Bank acknowledges that such Bank is not, as of the Closing Date, aware of any such claims 56. being asserted against such Bank on or prior to the Closing Date; (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 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 57. 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; Increase in Total Commitment. (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 or an Approved Fund; 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 $7,500,000. 58. (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. (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 59. 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. (c) Accession. (i) At any time from the Closing Date through October 9, 2002 (but not thereafter), the Borrower may request that the Total Commitment be increased in accordance with the terms of this Section 12.09(c). In connection with such an increase, except as otherwise provided herein, Allied Irish Banks, p.l.c. (the "Acceding Bank") may, at the request of the Borrower (such request being hereinafter referred to as a "Commitment Increase Notice"), become party to this Agreement by entering into an Instrument of Accession in substantially the form of Exhibit H hereto (an "Instrument of Accession") with the Borrower and the Agent and assuming thereunder a Revolving Commitment in an amount to be agreed upon by the Borrower and the Acceding Bank, to make Revolving Loans to the Borrower and the Total Commitment shall thereupon be increased by the amount of the Acceding Bank's Revolving Commitment, provided, however that in no event shall the Total Commitment be increased under any one or more of such Instruments of Accession so as to exceed, in the aggregate, $200,000,000 minus the aggregate amount of all reductions in the Total Commitment under this Agreement previously made pursuant to Section 4.01(a) or (b) hereof. Based upon the Commitment Increase Notice, the Agent shall notify the Borrower, the Acceding Bank and the Banks immediately prior to the proposed effective date of any such increase in the Total Commitment of the amount of each Bank's and the Acceding Bank's Revolving Commitment (the "Effective Commitment Amount") and its percentage of the Total Commitment and the amount of the Total Commitment, which amounts shall be effective on the date specified in such notice subject to the conditions set forth herein. Any increase in the Total Commitment under this Agreement shall be subject to the following conditions precedent: (i) as of the date of the Commitment Increase Notice and as of the proposed effective date of the increase in the Total Commitment under this Agreement, all representations and warranties shall be true and correct in all material respects as though made on such date (unless such representation and warranty is made as of a specific date, in which case, such representation and warranty shall be true and correct as of such date) and no event shall have occurred and then be continuing which constitutes a Default or Event of Default under this Agreement; and (ii) the Borrower, the Agent and each Acceding Bank shall have agreed to provide a "Revolving Commitment" in support of such increase in the Total Commitment under this Agreement, shall have executed and delivered 60. the Instrument of Accession. Upon satisfaction of the conditions precedent to any increase in the Total Commitment under this Agreement, the Agent shall promptly advise the Borrower and each Bank of the effective date of such increase. Upon the effective date of any increase in the Total Commitment under this Agreement that is supported by an Acceding Bank, such Acceding Bank shall be a party to this Agreement as a Bank and shall have the rights and obligations of a Bank hereunder. In addition, on such effective date, the Agent shall replace the existing Schedule 1 attached hereto with the revised Schedule 1 reflecting such new Total Commitment and each Bank's Revolving Commitment. Nothing contained herein shall constitute, or otherwise be deemed to be, a commitment on the part of any Bank to increase its Commitment hereunder. (ii) For purposes of this paragraph (ii), (A) the term "Buying Lender(s)" shall mean (1) each Bank the Effective Commitment Amount of which is greater than its Revolving Commitment prior to the effective date of any increase in the Total Commitment under this Agreement and (2) each Acceding Bank that is allocated an Effective Commitment Amount in connection with any Commitment Increase Notice and (B) the term "Selling Lender(s)" shall mean each Bank whose Revolving Commitment under this Agreement is not being increased from that in effect prior to such increase in the Total Commitment under this Agreement as the case may be. Effective on the effective date of any increase in the Total Commitment under this Agreement pursuant to paragraph (i) above, each Selling Lender hereby sells, grants, assigns and conveys to each Buying Lender, without recourse, warranty or representation of any kind, except as specifically provided herein, an undivided percentage in such Selling Lender's right, title and interest in and to its outstanding Revolving Loans in the respective amounts and percentages necessary so that, from and after such sale, each such Selling Lender's outstanding Revolving Loans shall equal such Selling Lender's pro rata share (calculated based upon the Effective Commitment Amounts) of the outstanding Revolving Loans under this Agreement as applicable. Effective on the effective date of any increase in the Total Commitment under this Agreement pursuant to paragraph (i) above, each Buying Lender hereby purchases and accepts such grant, assignment and conveyance from the Selling Lenders. Each Buying Lender hereby agrees that its respective purchase price for the portion of the outstanding Revolving Loans purchased hereby shall equal the respective amount necessary so that, from and after such payments, each Buying Lender's outstanding Revolving Loans shall equal such Buying Lender's pro rata share (calculated based upon the Effective Commitment Amounts) of the outstanding Revolving Loans under this Agreement. Such amount shall be payable on the effective date of the increase in the Total Commitment under this Agreement by wire transfer of immediately available funds to the Agent. The Agent, in turn, shall wire transfer any such funds received to the Selling Lenders, in same day funds, for the sole account of the Selling Lenders. Each Selling Lender hereby represents and warrants to each Buying Lender that such Selling Lender owns the Revolving Loans being sold and assigned hereby for its own account and has not sold, transferred or encumbered any or all of its interests in such Revolving Loans, except for participations which will be extinguished upon payment to the Selling Lender of any amount equal to the portion of the outstanding Revolving Loans being sold by such Selling Lender. Each Buying Lender hereby acknowledges and agrees that, except for such Selling Lender's representations and warranties contained in the foregoing sentence, each such Buying Lender has entered into its Instrument of Accession with respect to such increase on the basis of its own independent investigation and has not relied upon, and will not rely upon, any explicit or implicit written or oral representation, warranty or other statement of the Banks or the Agent concerning the authorization, execution, legality, validity, effectiveness, genuineness, 61. enforceability or sufficiency of this Agreement or the other Loan Documents. The Borrower hereby agrees to compensate each Selling Lender for all losses, expenses and liabilities incurred by each Bank in connection with the sale and assignment of any Eurodollar Rate Loans hereunder on the terms and in the manner set forth in Section 5.02 hereof. SECTION 12.10 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 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 New York and the Federal courts of the United States sitting in the State of New York 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 62. 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 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 63. 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 executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. [SIGNATURE PAGES FOLLOW.] 64. 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 s/ Charles H. Eldredge ------------------------------------ Name: Charles H. Eldredge Title: Vice President and Treasurer THE AGENT FLEET NATIONAL BANK, AS AGENT By s/ Debra E. DelVecchio ---------------------------------- Name: Debra E. DelVecchio Title: Director Attachment A-2 THE BANKS FLEET NATIONAL BANK, AS A BANK By s/ Debra E. DelVecchio ---------------------------------- Name: Debra E. DelVecchio Title: Director Attachment A-3 BNP/PARIBAS By s/ Stuart Darby ---------------------------------- Name: Stuart Darby Title: Vice President By s/ Richard Ong Pho ---------------------------------- Name: Richard Ong Pho Title: Associate Attachment A-4 JPMORGAN CHASE BANK By s/ David F. Gibbs ---------------------------------- Name: David F. Gibbs Title: Vice President Attachment A-5 KEY CORPORATE CAPITAL, INC. By s/ Robert W. Boswell ---------------------------------- Name: Robert W. Boswell Title: Vice President THE BANK OF NOVA SCOTIA By s/ Chris Johnson ---------------------------------- Name: Chris Johnson Title: Managing Director & Industry Head BARCLAYS BANK PLC By s/ Nicholas A. Bell ---------------------------------- Name: Nicholas A. Bell Title: Director Loan Transaction Management U.S. BANK NATIONAL ASSOCIATION By s/ Douglas A. Rich ---------------------------------- Name: Douglas A. Rich Title: Vice President WELLS FARGO BANK, NATIONAL ASSOCIATION By s/ Roger Fleischmann ---------------------------------- Name: Roger Fleischmann Title: Senior Vice President By s/ Lauren Downum ---------------------------------- Name: Lauren Downum Title: Vice President BANK OF AMERICA, N.A. By s/ Sugeet Manchanda ---------------------------------- Name: Sugeet Manchanda Title: Principal BANK ONE, NA By s/ Joseph R. Perdenza ---------------------------------- Name: Joseph R. Perdenza Title: Director MELLON BANK, N.A. By s/ J. Cate ---------------------------------- Name: J. Cate Title: Vice President UBS AG, STAMFORD BRANCH By s/ Luke Goldsworthy ---------------------------------- Name: Luke Goldsworthy Title: Associate Director Banking Products Services, US By s/ Patricia O'Kicki ---------------------------------- Name: Patricia O'Kicki Title: Director Banking Products Services -----END PRIVACY-ENHANCED MESSAGE-----


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

For the quarterly period ended September 28, 2002

OR

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

For the transition period from to


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)


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED 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
	Item 4. Controls and Procedures
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
SIGNATURES
CERTIFICATION
CERTIFICATION
EXHIBIT 10.06
EXHIBIT 10.45
EXHIBIT 10.46


			Page

PART I.		FINANCIAL INFORMATION

	Item 1.	Financial Statements:
		Condensed Consolidated Balance Sheets: September 28, 2002 and December 29, 2001		3
		Condensed Consolidated Statements of Operations: Three and Nine Months Ended September 28, 2002 and September 29, 2001		4
		Condensed Consolidated Statements of Cash Flows: Nine Months Ended September 28, 2002 and September 29, 2001.		5
		Notes to Condensed Consolidated Financial Statements		6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		46

	Item 4.	Controls and Procedures		50

PART II.		OTHER INFORMATION

	Item 1.	Legal Proceedings		51

	Item 2.	Changes in Securities and Use of Proceeds		53

	Item 3.	Defaults Upon Senior Securities		53

	Item 4.	Submission of Matters to a Vote of Security Holders		53

	Item 5.	Other Information		53

	Item 6.	Exhibits and Reports on Form 8-K		54
		Signatures		55
		Certifications		56


			September 28,			December 29,
			2002			2001

			(Unaudited)
Current Assets:
	Cash and cash equivalents		$	164,135		$	206,311
	Short-term investments			20,972			68,483
	Receivables, net			298,300			258,402
	Inventories			7,575			18,151
	Prepaid expenses and other			90,826			83,575

		Total current assets		581,808			634,922
Property, plant and equipment, net				440,245			417,189
Software development costs, net				13,194			11,938
Acquired intangibles, net				874,083			413,641
Installment contract receivables, net				99,095			58,918
Other assets				199,347			193,422

Total Assets			$	2,207,772		$	1,730,030

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
	Current portion of capital leases		$	1,685		$	1,397
	Accounts payable and accrued liabilities			245,918			259,029
	Deferred revenue			193,449			211,965

		Total current liabilities		441,052			472,391

Long-Term Liabilities:
	Long-term debt and capital leases			95,867			1,476
	Other long-term liabilities			168,349			134,816

		Total long-term liabilities		264,216			136,292

Stockholders’ Equity:
	Common stock and capital in excess of par value			1,040,707			628,697
	Deferred stock compensation			(46,331	)		(56,241	)
	Retained earnings			518,766			535,511
	Accumulated other comprehensive income (loss)			(10,638	)		13,380

		Total stockholders’ equity		1,502,504			1,121,347

Total Liabilities and Stockholders’ Equity			$	2,207,772		$	1,730,030



			Three Months Ended						Nine Months Ended

			September 28,			September 29,			September 28,			September 29,
			2002			2001			2002			2001

Revenue:
	Product		$	210,286		$	217,408		$	655,399		$	588,831
	Services			33,992			57,992			114,284			211,810
	Maintenance			82,958			84,608			247,087			251,599

		Total revenue		327,236			360,008			1,016,770			1,052,240

Costs and Expenses:
	Cost of product			14,630			32,029			62,552			81,308
	Cost of services			28,078			48,652			89,628			151,133
	Cost of maintenance			16,007			16,849			49,775			49,725
	Marketing and sales			103,216			96,593			296,167			286,243
	Research and development			84,647			74,247			241,092			219,129
	General and administrative			26,267			27,640			78,249			85,849
	Amortization of acquired intangibles			22,034			23,995			59,731			71,915
	Amortization of deferred stock compensation(A)			10,465			2,480			21,412			15,595
	Restructuring, asset impairment and special charges			6,600			(167,686	)		118,331			(88,694	)

		Total costs and expenses		311,944			154,799			1,016,937			872,203

Income (loss) from operations				15,292			205,209			(167	)		180,037
	Other income (expense), net			(492	)		277			(5,311	)		435

Income (loss) before provision for income taxes				14,800			205,486			(5,478	)		180,472
	Provision for income taxes			6,569			78,061			11,267			78,114

Net income (loss)			$	8,231		$	127,425		$	(16,745	)	$	102,358

Basic net income (loss) per share			$	0.03		$	0.52		$	(0.07	)	$	0.41

Diluted net income (loss) per share			$	0.03		$	0.50		$	(0.07	)	$	0.40

Weighted average common shares outstanding				267,300			246,487			256,461			246,864

Weighted average common and potential common shares outstanding – assuming dilution				271,437			256,978			256,461			258,700


(A) Amortization of deferred stock compensation would be further classified as follows:
Cost of services			$	1,360		$	712		$	2,131		$	3,758
Marketing and sales				3,594			172			7,482			2,958
Research and development				4,258			365			7,472			2,443
General and administrative				1,253			1,231			4,327			6,436

			$	10,465		$	2,480		$	21,412		$	15,595


				(In thousands)
Property, plant and equipment, net				$	448
Acquired intangibles:
	In-process technology				6,600
	Existing technology (five-year weighted-average useful life)				12,200
	Patents (five-year weighted-average useful life)				2,100
	Service agreements (five-year weighted-average useful life)				3,500
Goodwill					38,651
Other non-current assets					7,480

		Total assets acquired		$	70,979

Current liabilities				$	984

		Total liabilities assumed			984

			Net assets acquired	$	69,995


				(In thousands)
Current assets				$	57,370
Property, plant and equipment, net					5,645
Acquired intangibles:
	In-process technology				27,400
	Existing technology (four-year weighted-average useful life)				13,900
	Employee agreements (three-year weighted-average useful life)				7,500
	Patents (four-year weighted-average useful life)				4,700
	Maintenance agreements (four-year weighted-average useful life)				4,700
	Order backlog, trademarks and other assets (one-year weighted-average useful life)				5,273
Goodwill					226,180
Other non-current assets					3,074

		Total assets acquired		$	355,742

Current liabilities				$	11,902
Other non-current liabilities					14,162

		Total liabilities assumed			26,064

			Net assets acquired	$	329,678



		For the Nine Months Ended September 28, 2002

		Severance
		And			Excess						Other
		Benefits			Facilities			Assets			Restructuring			Total


		(In thousands)
Balance, December 29, 2001		$	4,183		$	17,233		$	2,067		$	—		$	23,483
	2002 restructuring charges		28,271			25,273			18,564			1,084			73,192
	Non-cash charges		146			709			(8,345	)		—			(7,490	)
	Cash charges		(16,650	)		(12,998	)		(125	)		(1,084	)		(30,857	)

Balance, September 28, 2002		$	15,950		$	30,217		$	12,161		$	—		$	58,328



		For the Nine Months Ended

		September 28,			September 29,
		2002			2001


		(In thousands)
Cash Paid During the Period For:
	Interest	$	889		$	1,951

	Income taxes (including foreign withholding tax)	$	5,750		$	16,064

Non-Cash Investing and Financing Activities:
	Stock issued for acquisitions	$	484,304		$	100,452

	Unrealized gain (loss) on available-for-sale securities	$	(26,727	)	$	8,242

	Deferred stock compensation related to stock options and restricted stock, net of terminations	$	12,634		$	3,428

	Repurchase of restricted Tality stock and cancellation of a portion of related notes payable	$	—		$	2,775

	Capital lease obligations incurred for equipment	$	—		$	153



		For the Three Months Ended September 28, 2002

											Consolidated
		Product		Services		Maintenance		Other			Total


		(In thousands)
Revenue		$	210,286	$	33,992	$	82,958	$	—		$	327,236
Cost of revenue			14,630		28,078		16,007		—			58,715
Amortization of acquired intangibles			—		—		—		22,034			22,034

	Gross margin		195,656		5,914		66,951		(22,034	)		246,487
Operating expenses and unusual items			—		—		—		(231,195	)		(231,195	)
Other expense, net			—		—		—		(492	)		(492	)

Income before provision for income taxes		$	195,656	$	5,914	$	66,951	$	(253,721	)	$	14,800



		For the Nine Months Ended September 29, 2001

											Consolidated
		Product		Services		Maintenance		Other			Total


		(In thousands)
Revenue		$	588,831	$	211,810	$	251,599	$	—		$	1,052,240
Cost of revenue			81,308		151,133		49,725		—			282,166
Amortization of acquired intangibles			—		—		—		71,915			71,915

	Gross margin		507,523		60,677		201,874		(71,915	)		698,159
Operating expenses and unusual items			—		—		—		(518,122	)		(518,122	)
Other income, net			—		—		—		435			435

Income before provision for income taxes		$	507,523	$	60,677	$	201,874	$	(589,602	)	$	180,472



			For the Three Months Ended

			September 28,		September 29,
			2002		2001

North America:
	United States		$	186,830	$	172,091
	Other			6,723		6,698

		Total North America		193,553		178,789

Europe				61,075		118,297
Japan				47,115		30,053
Asia				25,493		32,869

		Total	$	327,236	$	360,008



			As of

			September 28,		December 29,
			2002		2001

North America:
	United States		$	389,756	$	365,742
	Other			1,175		2,291

		Total North America		390,931		368,033

Europe				37,832		39,609
Japan				2,877		3,001
Asia				8,605		6,546

		Total	$	440,245	$	417,189


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


	Revenue recognition


	Accounting for income taxes



		Three Months Ended						Nine Months Ended

		September 28,		September 29,				September 28,		September 29,
		2002		2001		% Change		2002		2001		% Change


		(In millions, except percentages)
Product		$	210.2	$	217.4		(3)%	$	655.4	$	588.8		11%
Services			34.0		58.0		(41)%		114.3		211.8		(46)%
Maintenance			83.0		84.6		(2)%		247.1		251.6		(2)%

	Total revenue	$	327.2	$	360.0		(9)%	$	1,016.8	$	1,052.2		(3)%

*Sources of Revenue as a Percent of Total Revenue*
Product			65%		60%				65%		56%
Services			10%		16%				11%		20%
Maintenance			25%		24%				24%		24%



		Three Months Ended						Nine Months Ended

		September 28,		September 29,				September 28,		September 29,
		2002		2001		% Change		2002		2001		% Change


		(In millions, except percentages)
Domestic		$	186.8	$	172.1		9%	$	561.2	$	571.4		(2)%
International			140.4		187.9		(25)%		455.6		480.8		(5)%

	Total revenue	$	327.2	$	360.0		(9)%	$	1,016.8	$	1,052.2		(3)%

*Revenue by Geography as a Percent of Total Revenue*
Domestic			57%		48%				55%		54%
International			43%		52%				45%		46%


	*Tality IPO-Related Expense, Separation Costs and Other*



		Payments Due by Period

				(In thousands)
				Less than 1
		Total		Year		1-3 Years

Capital leases		$	2,552	$	1,685	$	867
Long-term debt			95,000		—		95,000

	Total contractual obligations	$	97,552	$	1,685	$	95,867


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


			Carrying		Average
			Value		Interest Rate

			(In millions)
Interest Bearing Instruments:
	Cash – variable rate		$	108.9		1.99%
	Cash – fixed rate			25.0		2.34%
	Cash equivalents – variable rate			7.8		0.73%
	Short-term investments – fixed rate			0.2		2.84%

		Total interest bearing instruments	$	141.9		1.99%


					Weighted
					Average
			Notional		Contract
			Principal		Rate

			(In millions)
Forward Contracts:
	Euro		$	56.2		0.97
	Japanese yen			26.1		118.82
	British pound sterling			7.9		1.55
	Canadian dollars			6.7		1.57
	Swedish krona			5.5		9.47
	Hong Kong dollars			3.2		7.80
	Singapore dollars			2.3		1.76

		Total forward contracts	$	107.9

		Estimated fair value	$	0.9


Exhibit
Number		Exhibit Title

	10.06	The registrant’s amended and restated Employee Stock Purchase Plan, as amended on October 30, 2002 (Formerly referred to as the 1990 Employee Stock Purchase Plan).
	10.45	Multi-Year Credit Agreement, dated as of September 27, 2002 between Cadence Design Systems, Inc., the lenders from time to time parties thereto and Fleet National Bank as administrative agent.
	10.46	364-Day Credit Agreement, dated as of September 27, 2002 between Cadence Design Systems, Inc., the lenders from time to time parties thereto and Fleet National Bank as administrative agent.


		CADENCE DESIGN SYSTEMS, INC. (Registrant)

DATE: November 11, 2002		By: /s/ H. Raymond Bingham -------------------------------------------------------- H. Raymond Bingham President, Chief Executive Officer, and Director

DATE: November 11, 2002		By: /s/ William Porter -------------------------------------------------------- William Porter Senior Vice President and Chief Financial Officer