HNC SOFTWARE INC.

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

The aggregate market value of the common stock held by non-affiliates of the Registrant, based on the closing price as reported on the NASDAQ Stock Market at January 31, 2002 was approximately $577.2 million. The number of shares of the Registrant’s Common Stock outstanding at January 31, 2002 was 35,467,763 shares.

Portions of the Definitive Proxy Statement to be used for the Registrant’s 2002 Annual Meeting of Stockholders is incorporated by reference in Part III of this Form 10-K.

The following are our registered trademarks: CardAlert®, CompCompare®, MIRA®, and ProviderCompare®. The following are also our trademarks: HNC Software^TM, Falcon^TM, and RoamEx^TM. All other trademarks or trade names in this report are the property of their respective owners.

Our World Wide Web site is located at both hnc.com and hncs.com, and investor information can be requested by calling Heidi Flannery, Investor Relations Consultant, at (858) 799-1311. Information on our Web site is not part of this Report.

We were founded in 1986 under the laws of California, and were reincorporated in June 1995 under the laws of Delaware. Our principal executive offices are located at 5935 Cornerstone Court West, San Diego, California 92121-3728, and our telephone number is (858) 546-8877.

This Annual Report on Form 10-K contains forward-looking statements based on our current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions we have made. Words such as “anticipates,” “expects,” “plans,” “intends,” “may,” “will,” “should,” “believes,” “estimates” or similar expressions identify forward-looking statements. These statements include, among other things, statements concerning our anticipated growth strategies, anticipated trends in our business and the markets that we serve, our expectations of our future performance and the market acceptance of our products, our plans for expanding our business, our plans for product functionality and features and the status of evolving technologies. In addition, the section entitled “Risk Factors” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” consists primarily of forward-looking statements. Forward-looking statements are only predictions based upon our current expectations about future events. We cannot guarantee future results, performance or achievements or that predictions or current expectations will be accurate.

Forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The section entitled “Risk Factors” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” discusses some of the important risk factors that may affect us. You should carefully consider those risks. Investors are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements for any reason.

HNC provides high-end analytic and decision management software applications and tools that enable our customers to manage their customer interactions and make other important business choices. Our products analyze large bodies of data, such as customer transaction histories, and convert this information into real-time business recommendations. Our products empower our customers to make millions of mission-critical customer decisions and respond in real time, which can improve their financial performance, reduce their costs and decrease their risk. HNC’s customers include both global and domestic companies in the financial services, insurance, telecommunications, healthcare and other industries, as well as government clients.

A variety of economic and political factors contributed to declines in Information Technology (IT) expenditures by corporations of all sizes and in all industries over the last fiscal year. However, these same constrictions also created an increased demand for software solutions that generate improved productivity and efficiency. At the same time, the amount of decision management data available to corporations has continued to grow exponentially, creating an additional need and opportunities for advanced technology solutions that effectively use this information to simplify analyses and deliver greater returns-on-investment. Consequently, corporations in the U.S. and many international markets, including Europe, the Middle East and Africa, as well as some Asian-Pacific and Latin American countries, are expected to increase expenditures for enterprise analytics software and decision management technology.

With continued consolidation in key industries worldwide, such as financial services, telecommunications and healthcare, mission-critical IT applications that eliminate redundancy and deliver full system integration are increasingly important to corporate profitability and competitiveness. As a result, increased demand for software solutions based on industry-standard architectures is expected, both in North America and abroad. At a time when corporations in all industries are facing increased competition, IT solutions that help these companies anticipate their customers needs, lower risk and better manage expenses will always be in demand.

Our customers comprise leading Fortune 1000 and Global 2000 organizations in the financial, insurance, telecommunications and healthcare industries, as well as government clients. Within the financial services industry, HNC’s customers include leading corporations on six continents, including all of the top 10 U.S. credit card issuers and 17 of the 25 largest credit card issuers worldwide. More than 100 insurance companies and state insurance funds — including nine out of the 10 largest carriers — are HNC customers. HNC has more than 100 wireless and wireline customers worldwide.

HNC’s offerings consist of the HNC Critical Action Platform and three suites of Critical Action Software — our Efficiency Suite, Risk Suite and Opportunity Suite.

The HNC Critical Action Platform is a new software platform technology we are developing in order to enable our customers to swiftly deploy and install multiple HNC products while significantly reducing their product implementation costs. The Critical Action Platform will incorporate common infrastructure tools and technologies that can be shared across our Efficiency, Risk and Opportunity Suite analytic products. These shared technologies will allow us to reduce our costs to develop and install new applications, thus permitting us to offer more competitive pricing for our solutions. By reducing the time, effort and cost associated with implementation of our analytic products, the Critical Action Platform is being designed to encourage customers to purchase multiple products that they can easily deploy on a common pre-existing platform.

The Critical Action Platform is designed to be an open, standards-based J2EE platform that will allow our solutions to easily connect to our customers’ databases, legacy and other systems. This platform is designed to bridge point software solutions and remove barriers to application and data integration, which will enable companies to implement business strategies across an enterprise. At the same time it will also provide a robust decisioning and rules management technology architecture.

The Critical Action Platform also utilizes neural networks and layers of advanced science such as optimization algorithms, context vectors, entity recognition, sophisticated rules management, and pattern recognition to help predict which transactions are likely to result in negative activities such as fraud and payment delinquency, or positive activities including cross-sell and up-sell opportunities. The platform’s decision support tools enable our customers to analyze information and make decisions that take advantage of opportunities while minimizing risks.

The first two products to be released under the Critical Action Platform architecture, an Opportunity Suite product and a Falcon Risk Suite product, are scheduled for release in the third quarter of 2002. We anticipate that additional products and solutions will be released spanning into 2003.

Our Critical Action Software applications utilize our proprietary core technologies — decision management technology, free text analysis, neural networks and decision support tools — to help businesses make the right decisions at the right time through the right channels. Our Critical Action Software consists of the following three suites:


	•	The HNC Efficiency Suite. The products in this suite help our customers reduce costs and improve the quality of their business decisions by automating complex, previously labor-intensive decision processes, such as new account application and medical claims processing. HNC Efficiency Suite applications can improve the efficiency of a company’s personnel, particularly its executives and managers, by automating business policy and streamlining workflows. Our software sorts intelligently, makes sophisticated decisions based on complex data and all facets of the business, automatically takes the critical action needed, or routes information to appropriate persons for further review. The products in the Efficiency Suite are ideal for handling insurance claims, processing new account applications and relationship management actions for financial services and telecommunications companies.

	•	The HNC Risk Suite. The products in this suite help improve our customers’ profitability by intelligently predicting the accuracy and validity of transactions to protect them and their customers


		from fraud and similar losses. HNC Risk Suite applications can analyze millions of customer transactions in milliseconds and generate a recommendation for immediate action critical to stopping fraud and abuse. These applications also detect organized fraud schemes that are too complex and well hidden to be identified by other methods. This suite is designed to detect and prevent credit and debit payment card fraud, identity fraud, telecommunications subscription fraud, healthcare fraud, Medicaid and Medicare fraud, and workers’ compensation fraud. It protects merchants, financial institutions, insurance companies, telecommunications carriers, government agencies and employers. The HNC Risk Suite includes applications for predicting bankruptcy, identifying money laundering and reducing bad debt.

	•	The HNC Opportunity Suite. The products in this suite provide our customers opportunities to derive incremental revenue by optimizing their marketing decisions and improving their interactions with their customers. Our products are designed to help our customers with customer acquisition, customer retention, product pricing and cross-selling. This suite is unique in its ability to use both structured and free-form data to intelligently direct actions to the right targets for maximum return, based on predicted revenue or profitability, including the likelihood of response and retention.

We believe that HNC’s core competencies in the marketplace include the application of advanced science to data analysis, superior industry-specific knowledge, and the ability to deliver significantly improved return-on-investment for our customers. To take advantage of these skills we will continue to focus on solving vertical-industry business issues, but we also plan to extend our product line deeper into customers’ functional business areas. The HNC Critical Action Platform is bringing together our highly differentiated science technologies and expertise into a single, broad analytical architecture for multiple industries and applications. With this development, we will be able to deliver high-quality industry solutions faster and with more flexibility across enterprises and into new vertical markets. We will continue ongoing development work to refine and continuously improve our products under the Critical Action Platform to address changing technology standards and meet changing market needs.


	•	Further Enhance Our Solution Platform. We will continue to commit capital and energy to developing the HNC Critical Action Platform so that new applications are integrated seamlessly and can easily exchange data with other customer systems. Tools within the platform that define business policy will also become easier to implement in a greater diversity of business functions. Further development work will assure that all analytic models are completely self-monitoring and reliable. In addition, we intend to continue to expand our new platform technologies and applications and identify and pursue opportunities to sell product upgrades, as well as our other products, to our current customers. By delivering what we refer to as critical action through advanced science, we believe the HNC Critical Action Platform has the potential to revolutionize the way mission-critical business applications are built for all industries HNC serves and to increase the number of our products used by our customers.

	•	Penetrate Additional New Vertical Markets. We will continue our efforts to expand into new vertical-industry markets and additional application segments within existing sectors. By marketing our products to our existing customers and expanding our product offerings to new high-growth markets such as healthcare and government services, we will continue to exploit our total solutions and industry expertise. For example, we recently announced the first predictive pre-payment fraud detection system for commercial healthcare. In addition, in association with PROS Revenue Management, we recently applied for a government grant to research and develop security systems software for the airline industry. We plan to identify and pursue new vertical-industry applications at an accelerated pace.

	•	Further Expand Global Presence. Despite a recessionary economic environment in most international markets throughout 2001, we continued to pursue our global expansion strategy by adding key sales, support and development personnel with global experience in Europe, the Middle East and Africa, as


		well as the Asian-Pacific and Latin American regions. We will continue to allocate increased resources this year to support international expansion as part of our growth objectives. By taking advantage of new and existing business alliances, we have generated a number of new contracts that broaden our presence overseas. In September, we announced a new software solution for world financial institutions to help protect against the growing problem of money laundering. We also signed a contract with one of Brazil’s largest banks for online credit-approval software. In addition, our RoamEx data exchange network software will now be embedded in all BellSouth Wireless systems in Latin America.

	•	Earn Recurring Revenues Through Long-Term Contracts. Our software and service arrangements are generally structured either with fixed-fee licenses with maintenance or with usage-based fees that generate recurring revenue streams. We will continue to develop usage-based pricing arrangements to provide a combination of advantages for our customers: long-term support commitments for our mission critical software solutions, periodic model updates, ongoing consulting, and flexible, per use pricing.

	•	Develop, Build and Strengthen Strategic Alliances Globally. We are continuing our focus on strategic alliances to broaden distribution for all of our technologies and products and help supplement HNC’s offerings in meeting customers’ wider product needs. These alliances may generally be characterized as: (i) traditional reseller or value added resellers (also known as VARs) who build custom solutions around HNC products or technologies for specific applications, industries or markets; (ii) original equipment distributors that embed HNC products or technologies in their broader offerings; and (iii) hardware and software platform providers, systems integrators, implementation partners and consultancies. We expect to benefit from these relationships by taking advantage of partner customer bases, co-operating in marketing programs to increase our visibility in new markets, and jointly building and delivering unique, industry leading solutions with premier technology and service providers.

	•	Build Robust New Product Development Pipeline. Our customers are constantly seeking out new ways to serve their customers better, faster and more efficiently. Meeting these needs is at the core of our product development efforts. Working both internally and through key strategic relationships worldwide, HNC will continue to use its advanced science and industry knowledge to deliver innovative software solutions that meet our customer’s changing needs. Research and development is always critical to the success of a technology-based company, and HNC will continue to dedicate significant resources to the development of new industry-leading products, services and applications.

	•	Expand Core Capabilities and Bring New Technologies To Our Customers Through Acquisitions. While there were many opportunities in the last fiscal year to acquire assets on attractive terms, we were very selective and conservative in our acquisition strategy in 2001. We completed some targeted acquisitions that helped provide beachhead positions in new markets and gave us access to best-of-breed technologies in completing the build out of our Critical Action Platform. In August 2001 we acquired certain assets of the Blaze Advisor business unit of Brokat Technologies. Blaze Advisor is the industry standard for advanced rules management technology. We believe that Blaze Advisor will help fill an important need in our Critical Action Platform in the area of rules technology, while helping us augment our product offerings with a highly sophisticated tool that will allow customers to build their own decisioning, personalization and workflow applications. In September 2001, we also acquired the UK-based marketing services provider business unit of Chordiant Software. This acquisition is helping us achieve two important goals — it expanded our European presence with the addition of several important customers, and accelerated the growth of our Opportunity Suite group by adding experienced UK-based staff and expertise to help deliver our next generation Opportunity Suite in the UK and elsewhere in Europe.

Our Critical Action software applications include the HNC Efficiency Suite, HNC Risk Suite and HNC Opportunity Suite. Our products enable domestic and global companies in the financial, insurance, telecommunications and healthcare industries and government entities to manage customer interactions by converting

data and business experiences into real-time recommendations. In 2001, we successfully acquired and integrated a number of acquisitions including ClaimPort, Inc., ecDataFlow.com Inc., the Blaze Advisor business unit from Brokat Technologies and the marketing services business unit from Chordiant Software Inc., and as a result have expanded our product offerings, market penetration and ASP delivery channels.

We intend to continue to expand our solution platform through internal product development initiatives as well as through strategic acquisitions that deliver product extensions for existing and new markets.

We sell and market our software and services globally through our direct sales organization and our global channels sales organization, which includes our distribution, hardware platform, and service and consulting partners. Through these direct and indirect channels, we are focusing on three key initiatives to accelerate sales:


	•	Develop and expand strategic partnerships on a global scale;

	•	Commit sales and marketing resources internationally to accelerate global expansion; and

	•	Leverage our existing customer base to cross-sell solutions.

Direct Sales. Our national sales staff is based at our corporate headquarters in San Diego, California as well as in field offices in California, Colorado, Connecticut, Florida, Georgia, Illinois, Maryland, Massachusetts, Missouri, New Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania, Texas and Virginia. Our international field sales offices are located in the United Kingdom, France, the Netherlands, Japan, Singapore and Brazil. To support our sales force, we conduct comprehensive marketing programs, which include demand generation, public relations, advertising, seminars, trade shows and industry advisory council meetings. We sponsor ongoing customer communication programs including events such as our annual technology conference, Power 2C, and users group meetings. We also sponsor an annual global sales meeting for our entire sales force. Our sales staff is generally a relationship and account management model, but also includes assigned geographic territories.

Service Bureaus. We have licensed First Data Corporation, Electronic Data Services, Total Systems and Equifax to act as service bureaus, providing an alternate channel of distribution for end-users of our HNC Falcon Fraud Manager product. We have also licensed First Data as a service bureau for our HNC Falcon Fraud Manager product. We generally assist our service bureau partners in their sales efforts, often employing our direct sales force in the process. These service bureaus pay us monthly usage fees based on the volume of transactions processed. We also have an outsourced bill-review service bureau for the insurance industry. This

ASP (Application Service Provider). We provide credit-card fraud detection to e-commerce merchants through our ASP delivery channel. In the telecommunications market we provide a suite of fraud detection solutions and decision management solutions through the ASP channel. For the insurance industry, our EDI/ Network Connectivity group offers ASP versions of injury-reporting products.

International and Export Activity. Revenues derived from international operations and export sales represented approximately 18.1%, 19.4% and 23.2% of our total revenues in 2001, 2000 and 1999, respectively. International sales resulted primarily from Falcon Fraud Manager product sales, as well as the sale of Retek’s products during the first nine months of 2000, and all of 1999.

We market our products internationally through three primary regions outside of North America. Those regions include Europe, Middle East and Africa (EMEA), Asia Pacific (AP) and Latin America and the Caribbean (LAC). We have three offices in the EMEA region, located in the United Kingdom, the Netherlands and France, two offices in the AP region, located in Japan and Singapore, and one office in the LAC region, located in Brazil. We also market our products through various channels, including distributors and resellers. We plan to continue to expand our operations outside the United States and enter additional international markets, which will require significant management attention and financial resources. We will continue to commit significant time and development resources to customizing our products for selected international markets and developing international sales and support channels. Our efforts to develop international products, databases, models, and sales and support channels may not be successful.

International sales pose additional inherent risks, including longer payment cycles, unexpected changes in regulatory requirements, import and export restrictions and tariffs, difficulties in staffing and managing foreign operations, the burden of complying with a variety of foreign laws, greater difficulty or delay in accounts receivable collection, potentially adverse tax consequences, and political and economic instability. Our international sales are primarily denominated in United States dollars, and a small portion is denominated in other currencies, primarily those of Western Europe and Canada. An increase in the value of the United States dollar relative to foreign currencies could make our products more expensive and potentially less competitive in foreign markets. In the future, to the extent our international sales are denominated in local currencies, foreign currency translations may contribute to significant fluctuations in our business, financial condition and results of operations. The imposition of exchange or price controls or other restrictions on foreign currencies could also harm our business.

The market for our advanced solutions is intensely competitive and is constantly changing. Our competitors vary in size and scope of the products and services they offer. We encounter competition from a number of sources, including:


	•	Other application software companies, including enterprise software vendors;

	•	Management information system departments of customers and potential customers, including financial institutions, insurance companies and telecommunications carriers;

	•	Third-party professional services and consulting organizations;

	•	Internet companies;

	•	Hardware suppliers that bundle or develop complementary software products;

	•	Network and telecommunications switch manufacturers, and service providers that seek to enhance their value-added services;

	•	Neural network tool suppliers; and

	•	Managed care organizations.

In the Risk Management market we have experienced competition from the following companies: Automatic Data Processing, Inc. (ADP), Insurance Services Organization, Inc. (ISO), Lightbridge, Inc., and TSI Corp., among others.

In the Opportunity market, we have experienced competition from the following companies: Computer Associates International, Inc., Fair, Isaac and Company, and MarketSwitch Inc., among others.

In the Efficiency market, we have experienced competition from the following companies: AMDOCS, Inc. Axciom Inc., CorVel Corp., and Science Applications International Corporation (SAIC), among others.

Pricing in the Marketplace. The market for our products is highly competitive, and we expect to face increasing pricing pressures from our customers, current competitors and new market entrants. In particular, increased competition could cause price reductions or changes in our usage-based pricing. In addition, competition could negatively impact our ability to obtain new long-term contracts and renewals of existing long-term contracts on favorable terms. Any reduction in the price of our products could harm our business.

Competitive Factors. We believe the principal competitive factors affecting our markets include: technical performance (for example, accuracy in detecting credit card fraud or evaluating workers’ compensation claims); access to unique proprietary databases; availability in ASP format; product attributes like adaptability, scalability, interoperability, functionality and ease-of-use; product price; customer service and support; the effectiveness of sales and marketing efforts and our reputation. Although we believe our products currently compete favorably with respect to these factors, we may not be able to maintain our competitive position against current and future competitors.

Some of our current competitors, and many of our potential competitors, have significantly greater financial, technical, marketing and other resources than we do, as well as broader integrated product lines. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than we can. They may also possess marketing advantages due to their ability to offer integrated suites of related products vital to the customer’s computing infrastructure. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase their ability to address the needs of our prospective customers. It is possible that new competitors or alliances among competitors may emerge and rapidly gain significant market share. Also, we rely upon our customers to provide data, expertise and other support for updating our models. Our customers, most of which have significantly greater financial and marketing resources than we do, may compete with us in the future or otherwise discontinue their relationships with us, or cease to provide us with critical data or support of our business, all of which could significantly harm our business.

A high level of continuing maintenance, service and technical product support is critical to maintaining the performance of our predictive software solutions. Service and support are also essential to our objective of developing long-term relationships with, and obtaining recurring revenues from, our customers. Our service and support activities relate to system installation, performance validation and ongoing consultation on the optimal use of our products.


	•	Model and Rule Updates. Many of our product license agreements obligate us to provide periodic data, model and/or rule updates to maintain system performance. Our technical personnel often assist the customer with installation of updates. We make commitments to update models and rules at varying intervals, according to both periodically scheduled updates (for example quarterly and annually) as well as unscheduled updates, provided the customer has met its commitments to provide data to us. The choice of data source and data updates are important to customers because this data comprises the fundamental building blocks used to create accurate predictive models. We provide various models built on industry-specific or customer-specific data to meet individual application requirements. Customers and data suppliers provide us with historical transaction data for turnkey models, trend analyses and product updates. This combination of proprietary, turnkey, customized and


		user-developed models allows us to offer products that solve a broad range of predictive application problems.

	•	Education. We offer comprehensive education and training programs to our customers. We provide training associated with many of our products at our facilities and at our client’s facilities. Fees for education and training services are generally included in the pricing of usage-priced products, but may be charged separately in other cases. In addition, we host an annual customer technology conference and Users Group meetings.

	•	Consulting. Our consultants are available to work with our customers’ user application groups and information systems organizations. Customers buy our consulting services, which range from short-term expert consulting and needs analysis to large implementations or performance optimization for our products in their operating environments. Fees for consulting are generally included in the pricing of usage-priced products, but may be charged separately in other cases.

	•	Product Support. Our product support organization provides technical service in support of HNC Software solutions. Customers contact product support to resolve issues they experience that they believe may relate to our products. Fees for product support are generally included along with the pricing of purchased products.

At the heart of our analytic and decision management software solutions lie two critical functions. The first of these is the ability to predict which individuals are most likely to exhibit certain critical business transaction patterns. Examples of these transaction patterns include fraud, payment delinquency, and probable responsiveness to cross-sell/up-sell marketing efforts. The second critical function is the ability to select an appropriate action to either encourage (in the case of a cross-sell) or discourage (in the case of delinquency) an individual’s predicted transaction patterns.

Our key technologies are designed to perform one or both of these critical functions. These technologies include neural network models, intelligent decision engines, profiles, traditional statistical models, business models, expert rules and context vectors. In addition to current technologies, we strive to develop new and innovative technologies that enable new or expanded predictive software capabilities. Some of our longer-term research projects are partially funded through contracts with the U.S. Government or members of the U.S. intelligence community.


	•	Neural Network Technology. The term “neural network” refers to a family of nonlinear, statistical modeling techniques, which were derived from the work of scientists engaged in understanding biological intelligence. While we are far from having a complete understanding of biological intelligence, the techniques proposed by these scientists have proven to be very useful in solving difficult, complex business and engineering problems. We have adopted many of these techniques in our predictive software solutions.

We use neural network techniques to build models of complex transaction patterns such as consumer credit card fraud. These models are created through a process called “training.” Training involves exposing a neural network algorithm to a large data set of examples of transaction patterns. Often hundreds of thousands to millions of examples are provided. The neural network processes this data to identify patterns in the data that are predictive of the transaction patterns being modeled. Once training is complete, the neural network uses these learned patterns to predict the probability that a new individual will exhibit the modeled transaction patterns. We have developed proprietary high-speed and parallel-processor boards to accelerate training and execution of our neural network software.

Although other statistical methods can be used, our neural network technology distinguishes itself in its ability to build highly accurate models more rapidly than other methods. This provides us with a significant competitive advantage in developing and deploying products. Further, our experience with


	•	Transaction Profiling Technology. Many of our products operate on transactional data, such as credit card purchase transactions, or other types of data that change over time, such as worker’s compensations claims. In their raw form, this data is very difficult to use in model building for several reasons. First, a single transaction contains very little information about the transaction patterns of the individual that generated the transaction. Second, transaction patterns change rapidly over time. Finally, this type of data can often be incomplete. To overcome these data problems, we have developed a set of proprietary techniques that transform raw transactional data into a format that is suitable for model building. We refer to this set of techniques as our profiling technology. As the name suggests, our profiling technology accumulates data across multiple transactions to create profiles of transaction patterns. Although these profiles are unintelligible to humans, they provide our neural network models with the information needed to predict complex transaction patterns.

	•	Rule-based Technology. Predicting transaction patterns is only half the battle in determining how to best manage or interact with a customer. The other half involves optimizing the response or action, given the transaction patterns that have been identified and the corresponding predicted outcome. To provide this response optimization, many of our products combine specially trained neural network models with rule-based techniques. Rules provide an effective method of capturing and applying such well-defined information as marketing strategies, corporate policies, and standard operating procedures. We have developed rule engines that operate efficiently in a real time, transaction-oriented system. We believe our combination of these rule engines with neural network models represents a significant technological advantage over more traditional approaches to decision automation.

	•	Context Vector Technology. Much of the information produced and used by the business world is in the form of text documents or similar unstructured data. Context vector technology allows such data to be digested and converted automatically to a mathematical form that can be used in our predictive solutions. Using context vector technology, we can automatically search, classify and route text accurately and build predictive models from both textual and numerical data. When combined with our other technologies, such as neural networks and rule-based systems, we believe that context vectors allow us to effectively use most forms of business data in predictive solutions, provide new data analysis capabilities and improve the performance of existing applications.

Dependence on Third Party Data. Our success depends upon our ability to enter new markets by successfully developing new products for those markets on a timely and cost-effective basis. In order to develop new products, we often require proprietary customer data for decision model development and system installation. As a result, completion of new products (particularly new products for new markets we are entering) may be delayed until we can extract sufficient amounts of statistically relevant data to develop the models. During this development process, we rely on our potential customers in the new market to provide us with relevant data and to help train our personnel in the use and meaning of the data in the specific industry. These relationships also assist us in establishing a presence and credibility in the new market. These potential customers, most of which have significantly greater financial and marketing resources than we do, may compete with us in the future or otherwise discontinue their relationships with or support of us, either during development of our products or later on. If we fail to obtain adequate third-party support for new product development, our ability to enter new markets could be impaired.

Intellectual Property. We rely on a combination of patent, copyright, trademark and trade secret laws and confidentiality procedures to protect our proprietary rights. We currently own 17 issued United States patents and have 19 United States patent applications pending. We also have patent applications pending in a number of other countries. The patents we hold may not be upheld as valid and may not prevent the development of competitive products. In addition, patents may never issue on our pending patent applications or on any future application that we may submit. We seek to protect our software, documentation and other written materials under trade secret and copyright laws. As part of our confidentiality procedures, we generally enter into invention assignment and proprietary information agreements with our employees and independent

Despite our efforts to protect our proprietary rights, existing laws and our contractual arrangements provide only limited protection. Unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult and the steps we have taken might not prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. It may be possible for a third party to copy or otherwise to obtain and use our products or technology without authorization, or to develop similar technology independently.

We have developed technologies for research projects conducted under agreements with various United States Government agencies or their subcontractors. Although we have acquired commercial rights to these technologies, the United States Government typically retains ownership of intellectual property rights and licenses in the technologies that we develop under these contracts. In some cases, the United States Government can terminate our rights to these technologies if we fail to commercialize them on a timely basis. In addition, under United States Government contracts, the government may make the results of our research public, which could limit our competitive advantage with respect to future products based on funded research.

In the past, we have received communications from third parties asserting that our trademarks infringe upon other parties’ trademarks, or that data we use is copyrighted by an independent third party, none of which has resulted in litigation or material losses to us. We have also been involved in patent litigation. Given our ongoing efforts to develop and market new technologies and products, we might receive claims from other third parties asserting that our products infringe upon their intellectual property rights. Licenses to disputed third-party technology or intellectual property rights might not be available to us on reasonable commercial terms, if at all. Furthermore, we may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Litigation could result in significant expense to us, and divert the efforts of our technical and management personnel, whether or not it is resolved in our favor. As a result of an adverse ruling in any litigation, we might be required to pay substantial damages, discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses to infringing technology. In addition, a court might invalidate our patents, trademarks or other proprietary rights.

Research & Development. Our research and development expenses were $45.7 million in 2001, $89.1 million in 2000, and $50.2 million in 1999. Excluding research and development expenses related to Retek, and allocated stock-based compensation and Retek spin-off expenses, our research and development expenses were $45.6 million in 2001, $39.4 million in 2000, and $26.4 million in 1999. We believe that our future success depends on our ability to continually maintain and improve our core technologies, enhance our existing products, and develop new products and technologies that meet an expanding range of markets and customer requirements. We intend to expand our existing product offerings and to introduce new predictive software solutions. In the development of new products and enhancements to existing products, we use our own development tools extensively. We have traditionally relied primarily on the internal development of our products.

Based on timing and cost considerations, however, we have acquired, and in the future may consider acquiring, technology or products from third parties. For example, we acquired technology and products in connection with our acquisitions of WebTrak in 1999, CASA, AIM, Onyx Technologies, Celerity Technologies, HighTouch, CardAlert and Systems/ Link in 2000, and ClaimPort, ecDataFlow, the Blaze Advisor business unit, and the MSP business unit of Chordiant in 2001. The expense associated with acquired technology and products is separately stated on our financial statements as acquired in-process research and development and is not included in our research and development expenses above.

Visionary research has long been a key component of our business plan. We continually monitor research developments internal and external to HNC. We sponsor research programs to develop the ideas that we believe have the most potential. In some cases, external funding (i.e., government grants) is used to develop

initial concepts. One example of this is our bioinformatics program. Funded by the Defense Advanced Research Projects Agency, or DARPA, we are developing advanced computational intelligence algorithms to detect patterns in genomic and medical literature data. A second example is our Cortronics program. Originally funded by DARPA, the program is now fully supported by HNC. The Cortronics project is a long-term research project focused on developing and applying computer models of regions of the cerebral cortex to recognize and associate patterns in text, speech and vision. The objective of this work is to develop intelligent computing systems that are much more capable of interacting with and reasoning about their environments than current systems.

As of December 31, 2001, we had 1,270 employees, including 490 in product management and engineering, 228 in customer service, 140 in sales and marketing, 212 in service bureau and 200 in finance, administration and management information systems. This year we continued our expansion globally and now have employees in France, Germany, the Netherlands, and the UK as well as Asia. None of our employees are represented by a labor union. We have experienced no work stoppages and believe that our employee relationships are generally good.

Our success depends to a significant degree upon the continued focus of our senior management and other key research, development, sales and marketing personnel. Only a small number of our employees have employment agreements, and these agreements may not result in the retention of these employees. In the past, we have experienced difficulty in recruiting a sufficient number of qualified technical and sales employees.

Our principal administrative, sales, marketing, support, and research and development facilities are located in approximately 171,000 square feet of office space in San Diego, California. We also lease an aggregate of approximately 268,000 square feet of additional office space in the following locations:

In addition, we maintain several field offices in the United States in foreign countries. We believe that our current and anticipated facilities are adequate to meet our needs for the foreseeable future. We believe that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed.

Pursuant to General Instruction G (3), the information regarding our executive officers required by Item 401(b) of Regulation S-K, is listed below in Part I of this filing.

The following table provides the names, offices, and ages of each of our executive officers as of January 31, 2002:

John Mutch has been Chief Executive Officer since December 1999. He also served as President from December 1999 to June 2001. Mr. Mutch joined us in July 1997, where he served initially as Vice President, Marketing until September 1998, and later as President of HNC Insurance Solutions from September 1998 to December 1999. He was a founder of MVenture Holdings, Inc., a private equity fund that invests in start-up technology companies, and served as a general partner from June 1994 to July 1997. From December 1986 to June 1997, Mr. Mutch held a variety of executive marketing positions with Microsoft Corporation, including Director of Organization Marketing. He holds a Bachelor’s of Science degree in Applied Economics from Cornell University and a Master’s degree in Business Administration from the University of Chicago

Bruce E. Hansen was appointed President in May 2001. He joined us as President, HNC Financial Solutions in February 2000. He served as President and Chief Executive Officer of CASA, a privately held advanced analytical solutions company that specializes in one-to-one marketing and strategic risk management solutions, until we completed our acquisition of CASA during March 2000. He served as Vice President, Marketing and Business Development at Summit Medical Systems from June 1997 to April 1998, as Senior Vice President and General Manager, Medical Division of MEDE America Corporation from March 1996 to June 1997 and as Vice President, Marketing of National Electronics Corporation from April 1995 to March 1996. Mr. Hansen also served as Vice President, Corporate Development at The Chase Manhattan Bank from April 1994 to April 1995. He holds a Bachelor’s of Arts degree in Economics from Harvard University, and a Master’s degree in Business Administration, economics from the University of Chicago. Mr. Hansen resigned from the Company in March 2002.

Kenneth J. Saunders was appointed Chief Financial Officer during December 1999, and Secretary in January 2000. Mr. Saunders joined us in January 1997 initially serving as Treasurer until June 1998, as Corporate Controller from June 1998 to January 1999, and then as Vice President, Corporate Finance and Corporate Controller from January 1999 to December 1999. From January 1992 to December 1996, Mr. Saunders was employed with Risk Data Corporation, where he served most recently as Chief Financial Officer. In August 1996, HNC acquired Risk Data Corporation. From January 1991 to January 1992, he was Vice President of Finance and Administration for A-Mark Financial Corporation. Mr. Saunders was with Arthur Andersen from 1984 to 1987. He holds a Bachelor’s of Accountancy degree from Widener University and is a Certified Public Accountant.

Mary Burnside joined us in May 2001 as Chief Operating Officer. From January 2000 to June 2001, she served as President and Chief Operating Officer of RealNames Corp., an Internet infrastructure company. From 1988 to April 1997, she was employed at Novell, Inc., where she served as Executive Vice President, Corporate Services from August 1996 to April 1997 and Executive Vice President and Chief Operating Officer

Russell C. Clark joined us as Vice President, Corporate Finance during January 2000. From August 1990 to January 2000, Mr. Clark held various positions with PricewaterhouseCoopers LLP’s Technology Industry Group, most recently as a Senior Manager in the audit and business advisory services group. He holds a Bachelor’s degree in Business Administration with an emphasis in accounting from the University of Iowa, and is a Certified Public Accountant.

Roger Ahern was appointed Vice President of Decision Management in May 2001. He also served as Vice President of Marketing and Product Management for our Telecommunications Solutions Group from June 2000 to May 2001. Mr. Ahern was a program manager at Compaq Computer Corporation from March 1997 to June 2000. From 1992 to March 1997, he was employed with Summit Associates, Inc., where he served most recently as Chief Technology Officer and a director. Mr. Ahern holds a Bachelor of Science degree in Business Administration with a major in Finance and a Master of Science degree in Information Technology and Decision Systems from San Diego State University.

Michael Chiappetta was appointed Vice President of Customer Analytics in May 2001. Since he joined us in 1993, he has served as Executive Director of Profitability Products in the HNC Financial Solutions Group, as Vice President of Risk Products in the Financial Solutions Group and as Vice President of Risk Management Solutions. He holds Bachelor of Science degrees in Economics and Physics from Rensselaer Polytechnic Institute and a Master of Business Administration degree in Finance from New York University.

Sean M. Downs was appointed Vice President of Insurance Transaction Processing in May 2001. He also served as President, HNC Insurance Solutions from June 2000 to May 2001. Mr. Downs joined us in April 1998, where he initially served within our HNC Insurance Solutions segment as President, Workers Compensation until September 1998, as Senior Vice President, Predictive Software Solutions from September 1998 until August 1999, and then as Senior Vice President, Strategic Development from September 1999 until May 2000. From February 1990 to March 1998, Mr. Downs was employed with Risk Data Corporation, where he served most recently as Senior Vice President, Sales and Marketing. In August 1996, HNC acquired Risk Data Corporation. From July 1984 to February 1990, Mr. Downs held various senior management positions with Republic Health Corporation and Assured Health Care Inc. He holds a Bachelor’s of Science Degree in Business Administration, Finance from San Diego State University.

Kyle W. Thomas joined us in May 2000 as Vice President of Global Sales. From November 1995 to May 2000, Mr. Thomas held various positions at ABN AMRO, most recently as Senior Vice President, Global Sales Head in the Global Transaction Services department in Amsterdam, the Netherlands. He holds a Bachelor of Arts degree in Economics with a minor in Computer Science and Mathematics from New York University.

Our common stock is traded on the NASDAQ National Market under the symbol “HNCS.” The following table provides for the periods indicated the high and low sales prices of our common stock, presenting both the historical and adjusted prices for our common stock. The adjusted prices shown below are

As of January 31, 2002, there were approximately 237 holders of record of our common stock.

We have never declared or paid any cash dividends on our capital stock. However, on September 29, 2000, HNC distributed 40,000,000 shares of the common stock of Retek, Inc., a publicly held company, as a dividend to HNC’s stockholders of record as of September 15, 2000. The dividend distribution ratio would in some cases have resulted in the distribution of a fractional Retek share to certain HNC stockholders. To eliminate fractional Retek shares, as an incidental part of the Retek dividend, HNC paid stockholders cash in lieu of fractional Retek shares they would otherwise have received, in an amount representing the fair value of the eliminated fractional share. We currently anticipate that we will retain any future earnings for use in our business and do not anticipate paying any cash dividends in the foreseeable future. Our bank credit agreement prohibits us from declaring or paying any cash dividends without the bank’s consent.

Our selected consolidated financial data for the five years ended December 31, 2001, is included in this Report on page F-2.

Our information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is included in this Report on pages F-3 through F-33.

The following discusses our exposure to market risk related to changes in interest rates, foreign currency exchange rates and equity prices.

The fair value of our marketable securities available for sale at December 31, 2001 was $209.0 million. The objectives of our investment policy are the safety and preservation of invested funds, and liquidity of investments that is sufficient to meet cash flow requirements. Our policy is to place our cash, cash equivalents, and investments available for sale with high credit quality financial institutions, commercial companies, and government agencies in order to limit the amount of credit exposure. Except for certain strategic equity investments, it is also our policy to maintain concentration limits and to invest only in allowable securities as determined by our management. Our investment policy also provides that our investment portfolio must not have an average portfolio maturity of beyond one year and that we must maintain liquidity positions.

The fair value of our 5.25% Convertible Subordinated Notes at December 31, 2001 was approximately $150.0 million. To the extent that general market interest rates may fluctuate in the future, excluding other factors, the fair value of such notes could increase or decrease.

We mitigate our foreign currency risks principally by contracting primarily in U.S. dollars and maintaining only nominal foreign currency cash balances. Working funds necessary to facilitate the short term operations of our subsidiaries are kept in the local currencies in which they do business, with excess funds transferred to our offices in the United States for investment. For the year ended December 31, 2001, approximately 1.0% of our sales were denominated in currencies other than our functional currency, which is the U.S. dollar. These foreign currencies are primarily those of Western Europe and Canada.

We have several equity investments we entered into for strategic business purposes, and therefore are exposed to direct equity price risk. We mitigate this risk by monitoring the financial performance of our investments, which are primarily in the common stock of privately held, non-public companies and thus we may be unable to sell or achieve liquidity in those investments prior to an adverse change in their values. In addition, the current funding environment for high technology companies may expose our investments in such companies to increased risks. During 2000, we recorded a $2.8 million charge related to the write-down of our investment in Network Commerce and during 2001 we further recorded charges totaling $6.0 million related to the write-down of our investments in Azure Capital Partners L.P., KeyLime Software, Qpass Inc., Burning Glass Technologies and Network Commerce. See Notes 6 and 7 of Notes to the Consolidated Financial Statements included in this report on pages F-51 through F-52.

Our consolidated financial statements and footnotes and the report of independent accountants thereon are included in this report on pages F-34 through F-65. Supplementary Financial Data are presented in Note 17 of the Notes to Consolidated Financial Statements included in this report on page F-64.

The information required under Item 10 is incorporated by reference to the information under the captions “Election of Directors” and “Section 16(a) Beneficial Ownership Compliance” in our Proxy Statement for our May 2002 annual meeting. Information about our executive officers is included under the caption “Executive Officers” after Item 4 included in this Report on page 16.

The information required under Item 11 is incorporated by reference to the information under the captions “Director Compensation”, “Executive Compensation”, and “Compensation Committee Interlocks and Insider Participation” in our Proxy Statement for our May 2002 annual meeting.

The information required under Item 12 is incorporated by reference to the information under the caption “Principal Stockholders” in our Proxy Statement for our May 2002 annual meeting.

The information required under Item 13 is incorporated by reference to the information under the caption “Related Party Transactions” in our Proxy Statement for our May 2002 annual meeting.

The list of consolidated financial statements are presented in the accompanying Index to Selected Consolidated Financial Data, the Consolidated Financial Statements and Supplementary Data included in this Report on page F-1. These consolidated financial statements are filed as part of this Report.

All financial statement schedules are omitted because the required information is not applicable, or because the information required is included in the consolidated financial statements and the related notes.

The exhibits listed on the accompanying Exhibit Index included in this Report on page F-66 are filed or incorporated by reference as part of this Report and the Exhibit Index is incorporated by reference.

(b) During the quarter ended December 31, 2001, the Registrant filed Reports on Form 8-K as follows:

Amended Current Report on Form 8-K filed on October 29, 2001, dated August 15, 2001, reporting financial statements under Item 7.

Pursuant to the requirements of Section 13 or 15(d) 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.


	By:	/s/ KENNETH J. SAUNDERS



	Kenneth J. Saunders
	Chief Financial Officer and Secretary
	(Principal Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

The selected consolidated financial data as of December 31, 2001 and 2000, and for each of the years in the three-year period ended December 31, 2001 come from our audited Consolidated Financial Statements included later in this report. The selected consolidated financial data as of December 31, 1999, 1998 and 1997 and for the years ended December 31, 1998 and 1997 are derived from our audited financial statements that are not included in this report. During September 2000, we completed the spin-off of our former Retek subsidiary. Subsequent to the spin-off, Retek’s results of operations and financial condition were not included in our results of operations and financial condition, and consequently the comparability of the data presented below is impacted. The selected consolidated financial data gives retroactive effect to the acquisitions of Risk Data, Retek and CompReview for all periods presented, as we accounted for these acquisitions as poolings of interests. For a complete understanding of the following you should read this selected consolidated financial data in conjunction with “Management’s Discussion and Analysis Results of Operations and Financial Condition” and the Consolidated Financial Statements and related notes included in this Report on pages F-3 through F-65.


(1)	Pro forma net income and net income per share reflect a provision for taxes on the income of CompReview, which prior to our acquisition was a subchapter S corporation, as if CompReview had been liable for corporate income taxes as a C corporation for all periods presented.

On September 29, 2000, HNC spun-off its former subsidiary Retek, Inc. (Retek) through the distribution of all Retek shares then owned by HNC. As a result of this distribution, Retek is no longer affiliated with HNC.

In April 2001, we announced and began to implement a reorganization that involved realigning our internal organization from a vertical market orientation to a horizontal product platform. As a result, we changed our reportable segments beginning in the second quarter of 2001 to reflect the new method in which management primarily organizes and evaluates internal financial information to make operating decisions and assess performance. Our current reportable segments include our Efficiency, Risk and Opportunity product suites.

Our revenues and operating results have varied significantly in the past and in some quarters we have experienced net losses. We expect fluctuations in our operating results to continue for the foreseeable future. As a result, we believe that investors should not rely on period-to-period comparisons of our financial results as an indication of our future performance. Further, we derive a substantial portion of our revenues from our Falcon Fraud Manager, Decision Manager for Medical Bill Review and Outsourced Bill Review products and services. Our Falcon Fraud Manager, Decision Manager for Medical Bill Review and Outsourced Bill Review products and services in the aggregate accounted for 46.8% of our total revenues in 2001. Falcon Fraud Manager revenues accounted for 24.9% of total revenues in 2001 and our combined Decision Manager for Medical Bill Review products and Outsourced Bill Review services accounted for 21.9% of total revenues in 2001. We expect these products and services will continue to account for a substantial portion of our total revenues for the foreseeable future. Our revenue will decline if the market does not continue to accept these products and services.

Because our expense levels are based in part on our expectations regarding future revenues and in the short term are fixed to a large extent, we may be unable to adjust our spending in time to compensate for any unexpected revenue shortfall. We may not be able to achieve or maintain profitability on a quarterly or annual basis in the future. In addition, in the past we have acquired several companies and may continue to do so in the future. During 2000, we completed the spin-off of our former Retek subsidiary. Such transactions typically affect the comparability of our historical financial results. Acquisitions also typically generate significant charges that decrease our net income, including possible charges in future fiscal periods. For the third and fourth quarters of 2001, our operating results were below the expectations of public market analysts and investors. It is possible that this could occur in some future quarter, which could cause a decline in the price of our common stock.

This section contains forward-looking statements about our anticipated future operating expenses, our expectations for our international operations and about the assumptions and projections underlying our in-process research and development expense. Forward-looking statements are subject to risks and uncertainties. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, including, but not limited to, the factors discussed below under the heading “Risk Factors.” You should carefully consider these risks. Investors are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements for any reason.

Our revenues are comprised of license and maintenance revenues and services and other revenues. Total revenues for 2001 decreased $28.2 million, or 11.1%, over 2000. Total revenues for 2000 increased by $38.0 million, or 17.5%, over 1999. Our revenues during 2001, 2000 and 1999 are summarized as follows, and include Retek’s revenues through the September 29, 2000 spin-off date:

License and Maintenance Revenues. We recognize license and maintenance revenues in several different ways, depending on the terms on which the software and maintenance are provided. Revenue from perpetual and short-term periodic licenses of our software is generally recognized upon delivery. Transactional-based fees under software license arrangements are recognized as revenue based on system usage or when fees based on system usage exceed monthly minimum license fees. Software maintenance fees are recognized as revenue ratably over the maintenance periods. Transactional-based fees under network service or internal hosted software arrangements are recognized as revenue based on system usage or when fees based on system usage exceed monthly minimum license fees. Amounts received under contracts in advance of delivery or performance are recorded as deferred revenue and are generally recognized within one year from receipt.

We typically license our software under both recurring and one-time license pricing models. Recurring sources of license and maintenance revenues generally include transactionally-based software license fees, license fees that recur annually under long-term software license arrangements and transactional fees derived under network service or internal hosted software arrangements. Recurring revenues also include all software maintenance fees. One-time sources of license and maintenance revenues are typically perpetual or time-based licenses with upfront, nonrecurring payment terms. To the extent that our customers license our software products under recurring or one-time pricing models, our license and maintenance revenues and gross margins may differ materially from period to period.

The following table presents our license and maintenance revenues by segment for 2001, 2000 and 1999:

License and maintenance revenues in 2001 increased by $2.6 million, or 1.5%, compared with 2000. This increase consisted of a $37.8 million, or 28.9% increase within HNC, offset by the absence of Retek revenues in 2001, which totaled $35.2 million in 2000. The increase within HNC was primarily attributable to a $16.8 million, or 27.4% increase in our Efficiency segment, a $22.4 million, or 41.2% increase in our Risk segment, and a $3.5 million, or 38.4% increase in our Opportunity segment, partially offset by a $4.8 million, or 78.3% decline in other product revenues. The increase in our Efficiency segment of $16.8 million was attributable primarily to $10.0 million of incremental RoamEx revenues, resulting from a full year of revenues associated with our acquisition of Systems/ Link in the third quarter of 2000, incremental Decision Manager ASP product revenues of $5.5 million resulting from our acquisition of Onyx in the first quarter of 2000, incremental revenues of $4.5 million associated with our acquisition of the assets of the Blaze Advisor business unit in the third quarter of 2001, incremental Connectivity Manager revenues of $3.5 million resulting from our acquisitions of ClaimPort and ecDataFlow in the second quarter of 2001 and a full year of revenues resulting from our Celerity acquisition in the second quarter of 2000, and an increase of $2.7 million from one-time Decision Manager for Medical Bill Review revenues, partially offset by a $7.2 million decline in Decision Manager for Medical Bill Review transactionally-based revenues and a $1.6 million decline in Decision Manager for Financial Applications revenues. The increase in our one-time Decision Manager for Medical Bill Review revenues was primarily attributable to four customer pricing changes which converted existing customer contracts from recurring transactionally-based fees to one-time fixed fees recognized in full during 2001. The increase in our Risk segment of $22.4 million was attributable primarily to incremental CardAlert Fraud Manager and Fraud Manager for Telecommunications revenues of $5.9 million, resulting primarily from our acquisitions of CardAlert and Systems/ Link in the third quarter of 2000, a $15.5 million increase in Falcon Fraud Manager and Falcon Fraud Manager for Merchants revenues and a $2.6 million increase in CompCompare/ ProviderCompare revenues, partially offset by a $1.7 million decrease in MIRA revenues. The increase in Falcon Fraud Manager and Fraud Manager for Telecommunications revenues included revenues related to two customer license pricing changes which converted existing customer contracts from recurring transactionally-based fees to one-time fixed fees that were recognized in full during 2001. The increase in CompCompare/ Provider Compare revenues was attributable to a change in customer payment terms from long-term fixed fee payments to a one-time upfront payment recognized in full during 2001. The increase in our Opportunity segment of $3.5 million was attributable primarily to a $3.3 million increase in Profitability Predictor revenues, which included our recognition of revenues related to termination fees from a customer that sold its credit card portfolio and therefore no longer had a use for our product. To the extent that our customers change from paying license fees on a recurring transactional basis to paying us one-time license fees, our recurring revenues for future quarters will decrease. The decrease in our Other segment revenues of $4.8 million was attributable primarily to a decline in revenues associated with our former Intelligent Response product line.

License and maintenance revenues in 2000 increased by $10.1 million, or 6.5%, compared with 1999. This increase consisted of a $20.9 million, or 19.0% increase within HNC, offset by a $10.7 million, or 23.4%

decline at Retek. The increase within HNC was primarily attributable to a $12.4 million, or 25.5% increase in our Efficiency segment and a $7.4 million, or 15.7% increase in our Risk segment. The increase within our Efficiency segment of $12.4 million was attributable primarily to growth from acquisitions, including incremental revenues of $12.0 million derived from our Decision Manager ASP, RoamEx and Connectivity Manager products, and to an increase in Decision Manager for Medical Bill Review revenues of $1.6 million, partially offset by a decline in Decision Manager for Financial Applications of $0.8 million and a decline in other product revenues of $0.4 million. The increase within our Risk segment of $7.4 million was attributable primarily to increased revenues of $12.0 million derived from our Falcon Fraud Manager and Falcon Fraud Manager for Merchants products, acquisition-related growth of $1.4 million derived from CardAlert Fraud Manager revenues, and other aggregate product growth totaling $1.5 million, offset by a decline in MIRA product revenues of $7.5 million resulting from the sale of fewer MIRA perpetual licenses in 2000 as compared to 1999.

Services and Other Revenues. Services and other revenues are comprised of installation and implementation revenues, remote hosted service operation revenues and revenues which are derived from consulting contracts, new product development contracts with commercial customers and, to a lesser extent, research and development contracts with the United States Government. Revenue from software installation and implementation and from contract services is generally recognized as the services are performed using the percentage of completion method based on costs incurred to date compared to total estimated costs at completion. Amounts received under contracts in advance of performance are recorded as deferred revenue and are generally recognized within one year from receipt. Contract losses are recorded as a charge to operations in the period any losses are first identified. Installation or setup fees associated with network service and internally hosted software agreements are recognized ratably over the longer of the customer contract period or estimated life of the customer relationship. Remote hosted service fees derived from the review and repricing of customers’ medical bills are recognized as revenue when the processing services are performed.

The following table presents our services and other revenues by segment for 2001, 2000 and 1999:

Services and other revenues in 2001 decreased by $30.8 million, or 34.7%, compared with 2000. This decrease consisted of a $6.1 million, or 9.5% decrease within HNC, along with the absence of Retek revenues in 2001, which totaled $24.7 million in 2000. The decrease within HNC was primarily attributable to an $8.5 million, or 20.4% decrease in our Efficiency segment and a $2.9 million, or 20.5% decrease in our Risk segment, partially offset by a $5.7 million, or 103.0% increase in our Opportunity segment. The decrease in our Efficiency segment of $8.5 million was attributable primarily to a lower volume of Decision Manager for Financial Applications software implementations along with a decline in customer bill review volumes associated with our Outsourced Bill Review Services, resulting in revenue declines of $6.9 million and $4.0 million, partially offset by a $1.7 million increase in Blaze Advisor consulting revenues and other miscellaneous service revenue increases. The decrease in our Risk segment of $2.9 million was attributable primarily to a $0.6 million decline in ProviderCompare/ CompCompare service revenues and a $0.4 million decline in Falcon Fraud Manager implementation revenues, along with an aggregate decline in various other Risk segment service and implementation revenues. The increase in our Opportunity segment of $5.7 million

was attributable primarily to an increase in Cross-Sell Optimizer service revenues, relating primarily to a full year of service revenues in 2001 from CASA, which we acquired in March of 2000, and also to incremental Marketing Service Provider revenues of $1.1 million resulting from our acquisition of the MSP business unit of Chordiant in September 2001.

Services and other revenues in 2000 increased $27.9 million, or 45.7%, compared to 1999. This increase consisted of a $26.4 million, or 69.9% increase within HNC and a $1.5 million, or 6.4% increase at Retek. The increase within HNC was primarily attributable to an $18.3 million, or 78.2% increase in our Efficiency segment, a $5.3 million, or 60.1% increase in our Risk segment, and a $4.5 million, or 453.8% increase in our Opportunity segment. The increase within our Efficiency segment of $18.3 million was attributable primarily to an increase in Decision Manager for Financial Applications software implementation revenues of $6.1 million along with a $13.0 million increase in Outsourced Bill Review Service revenues, including that related to the commencement of full-scale hosted service operations for a primary customer, partially offset by other miscellaneous revenue declines aggregating $0.8 million. The increase in our Risk segment of $5.3 million was attributable primarily to an increase in ProviderCompare/ CompCompare service revenues of $3.3 million, an increase in Payment Optimizer development revenues of $2.1 million and other miscellaneous revenue increases aggregating $1.8 million, partially offset by a decline in MIRA and Falcon Fraud Management product installation revenues of $1.2 million and $0.7 million, respectively. The increase in our Opportunity segment of $4.5 million was attributable primarily to a $3.7 million increase in Cross-Sell Optimizer service revenues, resulting from our acquisition of CASA in March 2000, and to a $0.9 million increase in Profit Manager installation revenues.

Revenues From Non-U.S. Regions. Revenues derived from international operations and export sales represented 18.1% of our total revenues in 2001, 19.4% of our total revenues in 2000 and 23.2% of our total revenues in 1999.

Sales denominated in currencies other than the U.S dollar represented 1.0%, 4.8% and 5.2% of our total revenues in 2001, 2000 and 1999. During 2001, the majority of our international revenues were derived from the sale of our Falcon Fraud Manager products in Western Europe and Canada. In September 2001, we acquired the UK-based Marketing Service Provider business unit of Chordiant Software Inc., and its revenues during the last three months of the year also contributed to international revenues. During 2000 and 1999, the majority of our international revenues were derived from Retek. We believe that international sales represent a significant opportunity for revenue growth and anticipate that our international sales may increase as a percentage of our total revenue in the future. However, our efforts to develop products, databases, and models for targeted international markets or in developing additional international sales and support channels might not be successful.

License and Maintenance Cost of Revenues. License and maintenance cost of revenues primarily consist of expenses for personnel engaged in customer support, travel to customer sites and documentation materials. Our license and maintenance cost of revenues totaled $44.7 million in 2001, $60.5 million in 2000 and

Our license and maintenance cost of revenues percentage in 2001 decreased by 9.9% compared to 2000. Of this decrease, 4.6% was attributable to decreases within our combined HNC and Retek operating segments and 5.3% of this decrease was attributable to a decline in stock-based compensation charges and non-recurring expenditures related to our Retek spin-off. For a further discussion regarding stock-based compensation charges and expenditures relating to our Retek spin-off, refer to the sections entitled “Stock-Based Compensation Expense” and “Expenses Related to Spin-Off of Retek” below. In 2001, the 4.6% license and maintenance cost of revenues percentage decline within our operating segments was attributable to a 1.5% decline at HNC and to the absence of Retek, which we spun off in September 2000. The decrease in HNC’s license and maintenance cost of revenues percentage was attributable primarily to the recognition of incremental license fees associated with customer pricing changes during 2001, including those related to Falcon Fraud Manager, Decision Manager for Medical Bill Review, Fraud Manager for Telecommunications and ProviderCompare/ CompCompare products, the recognition of Profitability Predictor termination fees associated with a customer that sold its credit card portfolio and therefore no longer had a use for our product and to an increase in RoamEx, Decision Manager ASP and recurring Falcon Fraud Manager product revenues which have lower associated costs, partially offset by increased customer support costs associated with recurring Decision Manager for Medical Bill Review product revenues.

Our license and maintenance cost of revenues percentage in 2000 increased by 9.8% compared to 1999. Of this increase, 4.6% was attributable to increases within our HNC and Retek operating segments and 5.2% was attributable to our recognition in 2000 of increased stock-based compensation charges and non-recurring expenditures relating to our Retek spin-off. For a further discussion regarding stock-based compensation charges and expenditures relating to our Retek spin-off, refer to the sections entitled “Stock-Based Compensation Expense” and “Expenses Related to Spin-Off of Retek” below. In 2000, the 4.6% license and maintenance cost of revenues percentage increase within our operating segments was attributable to a 3.7% decline at HNC, offset by a 28.9% increase at Retek. The decrease in HNC’s license and maintenance cost of revenues percentage was attributable primarily to our recognition of one-time, non-recurring license fees related to Falcon Fraud Manager product sales, which had minimal associated costs, increased license and maintenance revenues resulting from acquisitions with a lower percentage cost increase, including primarily RoamEx and Decision Manager ASP revenues, and increased revenues associated with former Intelligent Response e-commerce products having lower associated costs, partially offset by the sale of fewer MIRA perpetual licenses, with minimal associated costs, in 2000 versus 1999.

Services and Other Cost of Revenues. Services and other cost of revenues consist primarily of personnel and other expenses associated with providing installation and implementation services and performing development, consulting, and research development contracts, and the costs associated with hosted service operations. Our services and other cost of revenues totaled $42.5 million in 2001, $72.9 million in 2000 and

Our services and other cost of revenues percentage in 2001 decreased by 8.9% compared to 2000. This decrease was attributable primarily to a decline in stock-based compensation charges and non-recurring expenditures related to our Retek spin-off, partially offset by a 1.4% increase in our combined HNC and Retek operating segments. For a further discussion regarding stock-based compensation charges and expenditures relating to our Retek spin-off, refer to the sections entitled “Stock-Based Compensation Expense” and “Expenses Related to Spin-Off of Retek” below. In 2001, the 1.4% services and other cost of revenues percentage increase within our operating segments was attributable to a 4.0% increase at HNC, offset by the absence of Retek, which we spun off in September 2000. The increase in HNC’s services and other cost of revenues percentage was attributable primarily to the decline in Decision Manager for Financial Applications software implementation revenues, which have lower associated costs, increased costs associated with certain Falcon Fraud Manager implementation projects and reduced cost efficiencies due to a decline in customer bill review volumes associated with our Outsourced Bill Review Service operations, partially offset by an increase in lower cost Cross-Sell Optimizer revenues.

Our services and other cost of revenues percentage in 2000 increased by 14.4% compared to 1999. Of this increase, 4.7% was attributable to increases within our combined HNC and Retek operating segments and 9.7% of this increase was attributable to our recognition in 2000 of increased stock-based compensation charges and non-recurring expenditures relating to our Retek spin-off. For a further discussion regarding stock-based compensation charges and expenditures relating to our Retek spin-off, refer to the sections entitled “Stock-Based Compensation Expense” and “Expenses Related to Spin-Off of Retek” below. In 2000, the 4.7% services and other cost of revenues percentage increase within our operating segments was attributable to a 4.8% increase at HNC and a 6.7% increase at Retek. The increase within HNC was attributable primarily to the increased use of third party consultants, who have a higher average cost than internal resources, in connection with Decision Manager for Financial Applications software product implementations and to increased costs associated with Payment Optimizer and ProviderCompare/ CompCompare development work performed during the year, partially offset by improved cost efficiencies associated with the growth in our Outsourced Bill Review Service customer base.

Research and development expenses consist primarily of salaries and other personnel-related expenses, subcontracted development services, depreciation of development equipment and supplies. Research and development expenses included non-cash stock-based compensation expense of $0.1 million in 2001, $10.6 million in 2000 and $1.1 million in 1999, and also included nonrecurring expenses related to the Retek spin-off of $12.9 million in 2000. For a further discussion regarding stock-based compensation charges and expenditures relating to our Retek spin-off, refer to the sections entitled “Stock-Based Compensation Expense” and “Expenses Related to Spin-Off of Retek” below.

Research and development expense decreased from $89.1 million in 2000 to $45.7 million in 2001, primarily as a result of our spin-off of Retek in September 2000. Retek’s research and development expense in 2000 contributed to $30.1 million (including $3.9 million in stock-based compensation charges) of our total research and development expense in 2000. Excluding Retek’s research and development expense in 2000, and further excluding our stock-based compensation charges in 2001 and 2000 and expenses related to the Retek spin-off in 2000, our research and development expenses increased by $6.2 million, or 15.8%, from 2000 to 2001. This increase was attributable primarily to an increase in staffing and related costs to support new product development activities, including those resulting from acquisitions in 2000 and 2001, and was partially offset by a reduction in research and development personnel and third-party development costs associated with certain Efficiency segment research and development projects.

Research and development expense increased from $50.2 million in 1999 to $89.1 million in 2000. Research and development expense included Retek research and development expense totaling $30.1 million (including $3.9 million in stock-based compensation charges) in 2000 and $23.6 million (including $1.0 million in stock-based compensation charges) in 1999. Excluding Retek’s research and development expense in 2000 and 1999, and further excluding our stock-based compensation charges in 2000 and 1999 and expenses related to the Retek spin-off in 2000, our research and development expenses increased by $12.9 million, or 48.8%, from 1999 to 2000. This increase was attributable primarily to an increase in staffing and related costs to support new product development activities.

Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires capitalization of software development costs from the time technological feasibility is established until the product is available for general release to customers. Based on our product development process, technological feasibility is not established until completion of a working model. Costs we incur between completion of the working model and the point at which a product is ready for general release have been insignificant. As a result, no significant software development costs were capitalized through December 31, 2001. We anticipate that research and development expenses will increase in dollar amount and could increase as a percentage of total revenues for the foreseeable future.

Sales and marketing expenses consist primarily of salaries and benefits, commissions, travel, entertainment, trade shows and promotional expenses. Sales and marketing expenses included non-cash stock-based compensation expense of $0.1 million in 2001, $4.2 million in 2000 and $0.4 million in 1999, and also included nonrecurring expenses related to the Retek spin-off of $5.8 million in 2000.

Sales and marketing expense decreased from $76.4 million in 2000 to $44.6 million in 2001, primarily as a result of our spin-off of Retek in September 2000. Retek’s sales and marketing expense in 2000 contributed to $30.1 million (including $1.8 million in stock-based compensation charges) of our total sales and marketing expense in 2000. Excluding Retek’s sales and marketing expense in 2000, and further excluding our stock-based compensation charges in 2001 and 2000 and expenses related to the Retek spin-off in 2000, our sales and marketing expenses increased by $6.3 million, or 16.6%, from 2000 to 2001. This increase was attributable primarily to increases in staffing related to the expansion of direct sales and marketing staff, including those resulting from our acquisitions in 2000 and 2001. Also contributing to the increase were incremental costs related to the creation and deployment of a new corporate branding campaign along with other expenses to support our acquired businesses, offset by reduced expenditures associated with public relations, advertising and trade shows period over period.

Sales and marketing expense increased from $46.3 million in 1999 to $76.4 million in 2000. Sales and marketing expense included Retek sales and marketing expense totaling $30.1 million (including $1.8 million in stock-based compensation charges) during 2000 and $20.0 million (including $0.4 million in stock-based compensation charges) during 1999. Excluding Retek’s sales and marketing expense in 2000 and 1999, and further excluding our stock-based compensation charges in 2000 and 1999 and expenses related to the Retek spin-off in 2000, our sales and marketing expenses increased by $12.0 million, or 45.8%, from 1999 to 2000. The absolute dollar increase at HNC was attributable primarily to increases in staffing related to the expansion

of our direct sales and marketing staff, including that resulting from acquisitions. Also contributing to the increases were additional expenses for trade shows, advertising, corporate marketing programs and other expenses to support recently acquired businesses.

We expect sales and marketing expenses to continue to increase in absolute dollars for the foreseeable future. These expenses could also increase as a percentage of total revenues as we continue to develop a direct sales force in international markets and expand our domestic sales and marketing organization and increase the breadth of our product lines.

General and administrative expenses consist primarily of personnel costs for finance, contract administration, human resources and general management, as well as insurance and professional services expenses. General and administrative expenses included non-cash stock-based compensation expense of $0.3 million in 2001, $1.7 million in 2000 and $9.8 million in 1999, and also included nonrecurring expenses related to the Retek spin-off of $16.8 million in 2000.

General and administrative expense decreased from $53.3 million in 2000 to $30.1 million in 2001. General and administrative expenses included Retek general and administrative expenses totaling $8.7 million during 2000 (including $1.1 million in stock-based compensation charges). Excluding Retek’s general and administrative expense in 2000, and further excluding our stock-based compensation charges in 2001 and 2000 and expenses related to the Retek spin-off in 2000, our general and administrative expenses increased by $2.6 million, or 9.7%, from 2000 to 2001. This increase was attributable primarily to additional staffing and related expenses to support a higher volume of business, including that relating to our acquisitions in 2000 and 2001, and also to an increase in charges associated with our provision for doubtful accounts period over period, due to our assessment of the estimated impact of deteriorating economic conditions.

General and administrative expense increased from $33.8 million in 1999 to $53.3 million in 2000. General and administrative expenses included Retek general and administrative expenses totaling $8.7 million (including $1.1 million in stock-based compensation charges) during 2000 and $6.4 million (including $0.2 million in stock-based compensation charges) during 1999. Excluding Retek’s general and administrative expenses in 2000 and 1999, and further excluding our stock-based compensation charges in 2000 and 1999 and expenses related to the Retek spin-off in 2000, our general and administrative expenses increased by $9.4 million, or 53.2%, from 1999 to 2000. This increase was attributable primarily to additional staffing and related expenses to support a higher volume of business, resulting in part from our acquisitions.

Transaction-related amortization and costs primarily include acquisition-related amortization of goodwill and intangible assets during 2001, 2000 and 1999. Additional costs include $0.8 million related to the write-off of deferred offering costs during 2000 and $0.6 million related to the write-off of deferred merger costs during 1999. Transaction-related amortization and costs increased from $9.2 million in 1999 to $43.7 million in 2000 and to $56.6 million in 2001. These year-over-year increases are primarily attributable to incremental goodwill and intangible asset amortization charges as a result of our business acquisitions during 1999, 2000 and 2001, partially offset by the absence of Retek amortization beginning in the fourth quarter of 2000 as a result of our spin-off of this entity. In accordance with the amortization provisions of FAS 142 pertaining to acquisitions consummated after June 30, 2001, we did not amortize goodwill arising in connection with our acquisition of the UK-based Marketing Service Provider business of Chordiant Software Inc. in September 2001 or our acquisition of certain assets of the Blaze Advisor business unit of Brokat Technologies in August 2001. Further, as a result of our full adoption of FAS 142 effective January 1, 2002, we will no longer amortize goodwill in future periods. Rather, goodwill along with other intangible assets will be reviewed for impairment in accordance with FAS 142 on an annual basis, or more frequently if certain events were to occur. Goodwill amortization contributed to $37.6 million, $27.7 million and $4.4 million of total amortization during 2001, 2000 and 1999.

In process research and developments expense was $0.5 million in 2001, related to a one-time write-off in connection with the acquisition of certain assets of the Blaze Advisor business unit (“Blaze”) from Brokat Technologies in August 2001.

Blaze Advisor’s rules management technology is designed to help large organizations manage complex or frequently changing business rules. The classification of the technology as complete or under development was made in accordance with the guidelines of Statement of Financial Accounting Standards No. 86, Statement of Financial Accounting Standards No. 2 and Financial Accounting Standards Board Interpretation No. 4. At the time of the acquisition of its assets, Blaze Advisor had a major update of its product under development with new technologies related to decision algorithms and various presentation and development features.

We used an independent appraisal firm to assist us with our valuation of the fair value of the purchased assets of Blaze. Fair value is defined as the estimated amount at which an asset might be expected to be exchanged between a willing buyer and willing seller assuming the buyer continues to use the assets in its current operations. This in-process R&D project was valued through the use of a discounted cash flow analysis, taking into account projected future cash flows associated with this project once it achieves technological feasibility, its stage of completion as of the acquisition date, and the expected return requirements (i.e. discount rate) for determining the present value of the projected cash flows. Stage of completion was estimated by considering the time, cost, and complexity of tasks completed prior to the acquisition as a percentage of total time, cost and effort required for the total project up to achieving technological feasibility.

With respect to the projected financial information provided to the appraiser, Blaze/ HNC management prepared a detailed set of projections forecasting revenue for the Blaze business as well as gross profit and operating profit margins. These projections were made based on an assessment of customer needs and the expected pricing and cost structure. In addition, Blaze/ HNC management provided guidance for allocations of revenue and expenses between complete and in-process technology. With respect to the discount rates used in the valuation approach, the incomplete technology represents a mix of near and mid-term prospects for the business and imparts a level of uncertainty to its prospects. A reasonable expectation of return on the incomplete technology would be higher than that of completed technology due to these inherent risks. As a result, the earnings associated with incomplete technology were discounted at a rate of 24% based upon the following methodology: The Capital Asset Pricing Model was used to determine the cost of equity. It combines a risk free rate of return with an equity risk premium multiplied by a factor, referred to as Beta, which is based on the performance of common stock prices of similar publicly traded companies. Employing these data, the discount rate attributable to the business was 19%, which was used for valuing completed technology. Since incomplete technology would require a higher return than completed technology, the valuation report prepared by the appraiser used a rate of 24% to determine the present value of the cash flows (in excess of a return on other assets of the business) attributable to in-process research and development projects.

In-process research and development expense was $7.6 million in 2000, related to one-time write-offs in connection with the acquisitions of CASA ($1.4 million), Celerity ($1.1 million), HighTouch ($4.0 million), Systems/ Link ($0.7 million) and CardAlert ($0.4 million) in 2000.

CASA, acquired in the first quarter of 2000, is an advanced analytic solutions company that provides account optimization and precision marketing solutions. Prior to 2000, CASA primarily sold its Adaptive Dynamic Marketing solutions to businesses to improve revenue and customer retention. At the time of acquisition, CASA had a number of new technologies under development related to account management algorithms and pricing algorithms, which were estimated at the time of acquisition to achieve technological feasibility in 2000.

Celerity Technologies, acquired in the second quarter of 2000, is involved in developing and marketing electronic data interchange (EDI) solutions for the workers’ compensation industry. The company is a developer and provider of translation software, desktop software, and value-added network services in support of the claims handling process. Prior to our acquisition, Celerity Technologies primarily sold its software and network services to insurance carriers, third party administrators, managed care organizations, employers, and medical providers to facilitate the workers compensation claims handling process. At the time of acquisition, Celerity Technologies had a number of new technologies under development related to Web-enabling and EDI network technologies, which were estimated at the time of acquisition to achieve technological feasibility in 2000.

HighTouch, acquired in the second quarter of 2000 by Retek, is a provider of customized software and services relating to customer relationship management (CRM). Prior to our acquisition, HighTouch primarily sold customized software and services to a variety of customers in the retail industry. At the time of acquisition, HighTouch had technology under development relating to the creation of a fully integrated standardized off-the-shelf CRM product, which was estimated at the time of acquisition to achieve technological feasibility in 2000.

Systems/ Link, acquired in the third quarter of 2000, is a software developer that creates data management solutions for large telecommunications companies. The company provides applications for real-time data collection, call detail record exchange, fraud control and prepaid services for carriers. At the time of acquisition, Systems/ Link had a new technology under development related to a real-time roamer record exchange system for enhanced fraud control capabilities, which was estimated at the time of acquisition to achieve technological feasibility in 2001.

CardAlert, acquired in the third quarter of 2000, provides ATM and debit card risk management services to domestic financial institutions and debit card networks. The company’s accelerated detection technology analyzes daily ATM transactions for fraudulent activity. Prior to its acquisition, CardAlert primarily provided fraud detection services to large domestic debit card networks. At the time of acquisition, CardAlert had a new technology under development related to fraud detection for signature-based credit card activity, which was estimated at the time of acquisition to achieve technological feasibility in the third quarter of 2001.

We used an independent appraisal firm to assist us with our valuations of the fair market values of the purchased assets in connection with these acquisitions. Fair market value is defined as the estimated amount at which an asset might be expected to be exchanged between a willing buyer and willing seller assuming the buyer continues to use the assets in its current operations. The in-process research and development projects were valued through the use of a discounted cash flow analysis, taking into account projected future cash flows associated with these projects once they achieve technological feasibility, their stage of completion as of the acquisition date, and the expected return requirements (i.e. discount rates) for determining present values of the projected cash flows. Stages of completion were estimated by considering time, cost, and complexity of tasks completed prior to the acquisition as a percentage of total time, cost and effort required for the total project up to achieving technological feasibility.

With respect to the projected financial information provided to our appraiser pertaining to these acquisitions: CASA prepared a detailed set of projections forecasting revenue from the new algorithms as well as gross profit and operating profit margins; Celerity and HNC prepared a detailed set of projections forecasting revenue from the Web-enabling and EDI technology as well as gross profit and operating profit margins; Retek prepared a detailed set of projections forecasting revenue from the HighTouch CRM technology as well as gross profit and operating profit margins; Systems/ Link and HNC prepared a detailed set of projections forecasting revenue from the real-time roamer record exchange technology as well as gross profit and operating profit margins; and CardAlert and HNC prepared a detailed set of projections forecasting revenue from the credit card fraud detection technology as well as gross profit and operating profit margins. These projections were made based on an assessment of customer needs and the expected pricing and cost structure.

With respect to the discount rates used in the valuation approach, incomplete technology represents a mix of near and mid-term prospects for the acquired businesses and imparts a level of uncertainty as to their

prospects. A reasonable expectation of return on the incomplete technology would be higher than that of completed technology due to these inherent risks. As a result, the earnings associated with incomplete technology were discounted based upon the following methodologies: The Capital Asset Pricing Model was used to determine the cost of equity. It combines a risk free rate of return with an equity risk premium multiplied by a factor, referred to as Beta, which is based on the performance of common stock prices of similar publicly traded companies. Employing these data for CASA, Celerity, HighTouch, Systems/ Link and CardAlert, the discount rates attributable to the businesses were 22.0%, 19.3%, 21.2%, 21.0% and 21.0%, respectively, which were used for valuing completed technology. Since incomplete technology would require a higher return than completed technology, the valuation reports prepared by our appraiser utilized discount rates of 27.0%, 24.3%, 26.2%, 31.0% and 31.0% for CASA, Celerity, HighTouch, Systems/ Link and CardAlert, respectively, to determine the present value of the cash flows (in excess of a return on other assets of the business) attributable to in-process research and development projects.

In-process research and development expense was $1.5 million in 1999, related to a one-time write-off in connection with Retek’s acquisition of WebTrak in the fourth quarter of 1999. At the time of acquisition, certain WebTrak products were under development. The classification of the technology as complete or under development was made in accordance with the guidelines of Statement of Financial Accounting Standards No. 86, Statement of Financial Accounting Standards No. 2 and Financial Accounting Standards Board Interpretation No. 4.

Retek used an independent appraisal firm to assist in the valuation of the fair market values of the purchased assets of WebTrak. Fair market value is defined as the estimated amount at which an asset might be expected to be exchanged between a willing buyer and willing seller assuming the buyer continues to use the assets in its current operations. Retek provided assumptions by product line of revenue, cost of goods sold and operating expense to the appraiser to assist in the valuation. The in-process research and development projects were valued through the use of a discounted cash flow analysis, taking into account projected future cash flows associated with these projects once they achieve technological feasibility, their stage of completion as of the acquisition date, and the expected return requirements (i.e. discount rates) for determining present values of the projected cash flows. Stages of completion were estimated by considering time, cost, and complexity of tasks completed prior to the acquisition as a percentage of total time, cost and effort required for the total project up to achieving technological feasibility. Earnings associated with WebTrak’s incomplete technology were discounted at a rate of 26.4%

In April 2001, we announced and began to implement a reorganization that involved realigning our internal organization from a vertical market orientation to a horizontal product platform. This reorganization plan resulted in the elimination of various redundant corporate resources that existed in the previous vertical market organization structure. As a result of this reorganization, we incurred charges of $3.0 million during 2001, which included severance benefits for 41 terminated employees, the write-off of certain capitalized costs associated with internal-use software no longer being used, and charges for the closure of certain office locations.

During 2000, we recorded an impairment charge of $1.2 million related to the abandonment of a lease and associated property and equipment. The impairment charge consisted of the write-off of the remaining net book value of abandoned property and equipment that was deemed to have insignificant remaining value at the time of the disposal, as well as charges associated with future facility lease cash obligations, net of estimated sublease income. During 2001, we recorded an additional charge of $1.2 million associated with this leased facility, resulting from the default of a sublease tenant and resultant estimated future net lease costs expected to be borne by HNC. During 2001, we also committed to the closure of an additional office facility and recorded estimated lease exit charges of $0.5 million, consisting of future facility lease cash obligations, net of estimated sublease income.

These restructurings and impairments were consummated in a short period of time and did not have any adverse impact on our business while they were ongoing. As a result of these restructurings and impairments through December 31, 2001, we paid out cash severances totaling $0.4 million. The remaining aspects of these charges pertained primarily to the write-off of capitalized software costs associated with software not being used and office closure charges, as noted above. The office closure charges were determined based upon future facility lease cash obligations, net of estimated sublease income as determined through consultation with independent lease brokers, plus estimated lease brokerage fees. With the exception of our contractual future cash lease commitments associated with abandoned facilities, no future cash obligations are expected to arise in connection with these restructurings and impairments.

Interest income totaled $9.1 million in 2001, $12.9 million in 2000 and $6.3 million in 1999. The decrease in interest income in 2001 as compared to 2000 is attributable primarily to lower average cash and investment balances during 2001 as compared to 2000, and also to lower interest and investment income yields due to market conditions. The increase in interest income in 2000 compared to 1999 was attributable primarily to increased interest earned as a result of higher average cash and investment balances during 2000.

Interest expense totaled $3.2 million in 2001, $4.2 million in 2000 and $5.7 million in 1999. The majority of our interest expense during each of these years relates to our convertible subordinated notes that were outstanding during these periods (See Note 10 of Notes to the Consolidated Financial Statements). The decrease in interest expense in 2001 as compared to 2000 is attributable primarily to the reduced principal amount of our 4.75% convertible subordinated notes outstanding during 2001 due to the conversion of $83.6 million of such notes into our common stock during September 2000 and to the conversion of the remaining $16.4 million of such notes during the first quarter of 2001. The decrease was partially offset by increased interest expense in the third and fourth quarters of 2001 associated with our newly issued 5.25% convertible subordinated notes aggregating $150.0 million. The decrease in interest expense in 2000 compared to 1999 is attributable primarily to the reduced principal amount of our 4.75% convertible subordinated notes outstanding during 2000 due to the conversion of $83.6 million of such notes into our common stock during the third quarter of 2000, compared to a principal balance of $100.0 million in 1999.

In connection with the conversion of $83.6 million in 4.75% convertible subordinated notes into our common stock during 2000, we incurred and paid $12.7 million in conversion premiums to the note holders, which we recorded as a debt conversion expense.

Other expense, net totaled $6.2 million in 2001, $3.4 million in 2000 and $0.2 million in 1999. The increase in other expense, net period over period is attributable primarily to incremental charges associated with our write-down of certain equity investments in 2001 and 2000. During 2000, we recorded a $2.8 million charge related to the write-down of our investment in Network Commerce and during 2001 we further recorded charges totaling $6.0 million related to the write-down of our investments in Azure Capital Partners L.P., KeyLime Software, Qpass Inc., Burning Glass Technologies and Network Commerce. See Notes 6 and 7 of Notes to the Consolidated Financial Statements.

Minority interest in losses of consolidated subsidiaries totaled $7.6 million in 2000 and $0.7 million in 1999, and represents other stockholders’ share of the losses of our consolidated subsidiaries, including that relating to Retek in 2000 and 1999. Following our spin-off of Retek in September 2001, we have had no minority interest ownership in our consolidated subsidiaries.

The provision (benefit) for income taxes totaled $(6.3) million in 2001, $(33.1) million in 2000 and $0.5 million in 1999.

The differences between the benefit for income taxes recorded and that computed by applying taxes at statutory rates during 2001 and 2000 are attributable to the decrease in our pre-tax loss in these corresponding periods, adjusted to reflect the decrease of certain non-deductible expenses in 2001 as compared to 2000, including in-process research and development and stock-based compensation charges, offset by an increase in non-deductible goodwill amortization in 2001 as well as the decrease in deductible expenses associated with the minority interest in losses of consolidated subsidiaries.

The differences between the provision (benefit) for income taxes recorded and that computed by applying taxes at statutory rates during 2000 and 1999 are attributable primarily to the effect of non-deductible expenses, offset by the effect of Retek’s loss attributable to minority interest stockholders and the generation of tax credit carryforwards during each of these years. Significant non-deductible expenses in 2000 included the effect of one-time in-process research and development write-offs, stock-based compensation expense, acquisition related amortization, Retek spin-off costs and debt conversion expense. Significant non-deductible expenses in 1999 included the effect of a one-time in-process research and development write-off, stock-based compensation expense, acquisition related amortization and stock redemption charges.

Within our statement of operations, stock-based compensation expense has been classified as follows in 2001, 2000 and 1999:

During 2001, we recorded net stock-based compensation expense totaling $0.5 million, consisting of $0.2 million in amortization of unearned stock-based compensation and $0.3 million in one-time intrinsic value charges associated with option award modifications made during the year.

During 2000, we recorded net stock-based compensation expense totaling $21.7 million, consisting of $13.8 million in stock-based compensation charges attributable to our Retek spin-off, which are discussed separately below, and $7.9 million in additional net compensation expense. This additional net compensation expense relates primarily to the amortization of unearned stock-based compensation of $8.8 million (of which $8.3 million related to Retek) and also includes additional net compensation income of $0.9 million, primarily related to the reversal of compensation expense recorded in 1999 on variable awards, as a result of a decline in the fair values of these awards during 2000.

During 1999, Retek granted stock options to employees and directors to purchase Retek common stock at an exercise price of $10.00 per share when the deemed fair market value of Retek’s common stock was $13.00 per share. As a result, Retek recorded unearned stock-based compensation totaling $21.9 million representing the aggregate intrinsic value of the options on the date of grant. Additionally, during 2000, Retek recorded additional unearned stock-based compensation totaling $1.8 million related to an employee option grant having an exercise price below the fair value of Retek’s common stock on the date of grant. Amortization of Retek’s unearned stock-based compensation totaled $1.9 million during 1999 and $8.3 million during the

period from January 1, 2000 through the Retek spin-off date of September 29, 2000. Retek’s unearned stock-based compensation balance of $13.3 million at September 29, 2000, net of forfeiture reductions, was removed from our consolidated equity accounts in connection with the Retek spin-off.

During 1999, in addition to Retek’s amortization of unearned stock-based compensation as described above, we recorded stock-based compensation expense totaling $10.1 million. This compensation expense relates primarily to stock awards granted to former employees and non-employee consultants, of which $8.0 million was calculated at intrinsic value while the remainder related to variable awards measured at fair value. The intrinsic value charge consisted primarily of a one-time charge of $6.1 million related to a key employee severance agreement executed in the fourth quarter of 1999.

The fair values of HNC’s variable awards during 2000 and 1999 were estimated using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 0.0% for both years; risk-free interest rate of 5.02% and 5.23% in 2000 and 1999, respectively; volatility of 100% for both years; and expected lives from four months to one year according to the vesting date and subsequent exercise period of each option grant, and our stock prices on the various grant dates as well as on December 31, 2000 and 1999.

In August 2000, we accelerated the vesting of 25% of the outstanding stock options that would have been unvested as of the September 15, 2000 record date for the spin-off to afford our option holders the opportunity to participate in receipt of the Retek share dividend. As a result of this award modification, we recorded a non-cash stock-based compensation charge of $6.7 million during the third quarter of 2000 in accordance with Financial Accounting Standards Board Interpretation No. 44, or FIN 44. Additionally, as a result of the proportionate option repricing in connection with the Retek spin-off, certain options failed to qualify for fixed accounting treatment under FIN 44. As a result, we recorded a one-time charge to operations of $7.1 million related to the modification and cash repurchase of options in connection with the Retek spin-off.

During 2000, we incurred $48.2 million in non-recurring expenses associated with our spin-off of Retek, excluding stock-based compensation charges totaling $13.8 million that are discussed above. Within our statement of operations, these expenses were classified as follows in 2000:

These expenses consisted primarily of a $40.4 million charge related to the accrual of cash bonuses payable to employees and directors who held unvested stock options as of the record date for the Retek dividend, along with investment banking, legal, accounting and other non-recurring costs related to the Retek spin-off.

Segment contribution margin in 2001, 2000 and 1999 is reported in Note 13 of the Notes to Consolidated Financial Statements.

2001 Segment Contribution Margin Compared to 2000 Segment Contribution Margin

Segment contribution margin in our Efficiency segment increased from $38.1 million in 2000 to $47.4 million in 2001, and as a percentage of revenues increased from 37.0% to 42.6%. The absolute dollar

increase was attributable to increased segment revenues and to a decrease in direct segment operating expenses. The segment contribution margin percentage increase was attributable primarily to an increase in higher margin RoamEx and Decision Manager ASP product revenues and to our recognition of incremental license fees associated with Decision Manager for Medical Bill Review product customer pricing changes, offset by a decline in higher margin Decision Manager for Financial Applications product implementation services, reduced cost efficiencies due to a decline in customer bill review volumes associated with our Outsourced Bill Review Service operations and increased customer support costs associated with recurring Decision Manager for Medical Bill Review product license revenues.

Segment contribution margin for our Risk segment increased from $50.2 million in 2000 to $65.5 million in 2001, and as a percentage of revenues increased from 73.3% to 74.6%. The absolute dollar increase was attributable to increased segment revenues, offset by a proportionate increase in direct segment operating expenses, which yielded a relatively nominal net contribution margin percentage increase. The segment contribution margin percentage increase was attributable primarily to our recognition of incremental license fees associated with Falcon Fraud Manager, Fraud Manager for Telecommunications and CompCompare/ ProviderCompare product customer pricing changes, offset by increased direct segment costs associated with Falcon Fraud Manager implementation projects and increased research and development spending on Risk segment products. We expect that direct segment research and development costs in the Risk segment will increase in absolute dollar amount and could increase as a percentage of Risk segment revenues for the foreseeable future.

Segment contribution margin for our Opportunity segment increased from $2.6 million in 2000 to $9.7 million in 2001, and as a percentage of revenues increased from 17.8% to 40.8%. The absolute dollar increase was attributable to increased segment revenues, offset by an increase in direct segment operating expenses. The segment contribution margin percentage increase was attributable primarily to our recognition of Profitability Predictor termination fees associated with a customer that sold its credit card portfolio and therefore no longer had a use for our product and an increase in Cross-Sell Optimizer revenues that have lower associated direct segment costs, primarily from the March 2000 acquisition of CASA.

Segment contribution margin for our Other segment declined from a $1.2 million positive margin in 2000 to a $1.9 million negative margin in 2001, and as a percentage of revenues decreased from 13.9% to negative 52.0%. The absolute dollar decrease was attributable to decreased segment revenues, offset by a decrease in direct segment operating expenses. The segment contribution margin percentage decrease was attributable primarily to a decrease in our former Intelligent Response product revenues, offset by reductions in related direct product costs.

2000 Segment Contribution Margin Compared to 1999 Segment Contribution Margin

Segment contribution margin for our Efficiency segment increased from $21.6 million in 1999 to $38.1 million in 2000, and as a percentage of segment revenues increased from 29.9% to 37.0%. The absolute dollar increase was attributable to increased segment revenues, offset by an increase in direct segment operating expenses. The segment contribution margin percentage increase was attributable primarily to increased cost efficiencies related to the growth in our Outsourced Bill Review Service customer base along with higher margins associated with acquired products, including primarily RoamEx and Decision Manager ASP products, offset in part by a decrease in Decision Manager for Financial Applications product implementation margins due to the increased use of third party consultants, who have a higher average cost than internal resources. The contribution margin percentage was also reduced by increased research and development spending on Efficiency segment products.

Segment contribution margin for our Risk segment increased from $40.7 million in 1999 to $50.2 million in 2000, and as a percentage of segment revenues increased from 73.0% to 73.3%. The absolute dollar increase was attributable to increased segment revenues, offset by an increase in direct segment operating expenses. Although the overall segment contribution margin percentage remained relatively flat period over period, the margin increase was primarily due to the recognition of non-recurring license fees in 2000 related to Falcon Fraud Manager product sales, with minimal associated costs, offset by the sale of fewer MIRA product

perpetual licenses and increased development costs associated with Payment Optimizer and ProviderCompare/ CompCompare development work performed during the year. The contribution margin percentage was also reduced by increased research and development spending on Risk segment products.

Segment contribution margin for our Opportunity segment decreased from $4.2 million in 1999 to $2.6 million in 2000, and as a percentage of segment revenues decreased from 42.5% to 17.8%. The absolute dollar decrease was attributable to increased segment revenues, offset by a larger increase in direct segment operating expenses. The segment contribution margin percentage decrease was attributable primarily to an increase in Cross-Sell Optimizer service revenues resulting from our acquisition of CASA in the first quarter of 2000, which contributed to lower product margins during most of 2000, and to increased Profit Manager product development costs.

Segment contribution margin for our Other segment decreased from $3.0 million in 1999 to $1.2 million in 2000, and as a percentage of segment revenues decreased from 30.6% to 13.9%. The absolute dollar decrease was attributable to a decline in segment revenues along with an increase in direct segment operating expenses. The segment contribution margin percentage decrease was attributable primarily to a decline in perpetual license revenues associated with various products and to increased research and development expenditures in 2000 related to our former Intelligent Response product lines.

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Our significant accounting policies are described in Note 1 of Notes to the Consolidated Financial Statements on page F-39 of this report. The significant accounting policies that we believe are the most critical, because they can involve a higher degree of judgment and complexity, include the following:

Our revenue recognition accounting policy is described in Note 1 of Notes to the Consolidated Financial Statements. The aspects of our revenue recognition accounting policy that involve more significant judgments and estimates include the following:


	•	Software revenue is recognized upon meeting all of the following criteria: execution of a written license agreement, contract or purchase order; delivery of software and/or authorization keys; the license fee is fixed and determinable; and collectibility of the proceeds is assessed as being probable. Determination of whether license fees are fixed and determinable and whether collection of the related proceeds is considered probable involves management’s judgment. We assess whether license fees are fixed and determinable based on the payment terms associated with the transaction, including consideration of long-term payment terms and other factors when necessary. In instances where we determine the fee not to be fixed and determinable, we recognize revenue as the fees become due. We assess probability of collection based on a number of factors, including past transaction history and/or the creditworthiness of the customer. If we determine that collection of a fee is not probable, we defer recognition of the fee and recognize revenue at the time collection becomes probable, which is generally upon receipt of cash.

	•	We derive a substantial portion of our revenues from transactional-based fees under software license arrangements, network service and internally hosted software arrangements. Under these arrangements, we recognize revenue based on system usage or when fees based on system usage exceed monthly minimum amounts. To the extent that our customers do not submit monthly or quarterly transaction information to us in advance of our revenue cutoff dates, we estimate the amount of revenue attributable to such customers based upon our historical experience and other relevant factors. Actual fees earned could differ from our estimates.


	•	Revenue from software installations and implementations and from contract services is generally recognized as the services are performed using the percentage of completion method based on costs incurred to date compared to total estimated costs at completion. Contract losses are recorded as a charge to operations in the period any losses are first identified. Unbilled accounts receivable are stated at estimated realizable value. To the extent that installation, implementation and contract services are performed under fixed-price arrangements that are accounted for using the percentage of completion method, we make estimates regarding the cost, scope and duration of each engagement, and to make revisions to such estimates in the period in which changes become known. If we do not accurately estimate the resources required or the scope of work to be performed, or if we do not manage our projects properly within the planned periods of time or satisfy our obligations under the contracts, then future revenues and margins may be significantly and negatively impacted or losses on existing contracts may need to be recognized.

We make estimates regarding the collectibility of our accounts receivables. When we evaluate the adequacy of our allowance for doubtful accounts, we closely analyze specific accounts receivable balances, historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in our customer payment terms. Material differences may result in the amount and timing of expenses for any period if we were to make different judgments or utilize different estimates.

At December 31, 2001, all of our equity investments in privately-held companies were being accounted for under the cost method. We periodically review our investments for instances where fair value is less than cost and the decline in value is determined to be other than temporary. If the decline in value is judged to be other than temporary, the basis of the security is written down to fair value and the resulting loss is charged to operations. In evaluating the fair value of our equity investments our policy includes, but is not limited to, reviewing each of the entities’ cash positions, recent financing valuations, operational performance, revenue and earnings forecasts, liquidity forecasts and financing needs and general economic factors, as well as management and ownership trends. Our evaluation of the fair value of our investment in these entities is inherently subjective and may contribute to significant volatility in our reported results of operations based upon the timing and nature of write-downs recorded.

Our business acquisitions typically result in the recognition of goodwill and other intangible assets, and in certain cases one-time charges associated with the write-off of in-process research and development, which could affect the amount of current and future period charges and amortization expense. The determination of value of these components of a business combination, as well as associated useful asset lives, requires management to use its judgement to make various estimates and assumptions. Estimates using different, but each reasonable, assumptions could produce significantly different results.

We continually review the events and circumstances related to our financial performance and economic environment for factors that would provide evidence of the impairment of goodwill. If factors suggesting impairment exist, we use the market value method to determine the extent of the impairment. We will adopt the provisions of Statement of Financial Accounting Standards No. 142 in the first quarter of 2002, and as a result we will cease to amortize goodwill. In lieu of amortization, we will be required to perform an initial impairment review based on the estimated fair value of our goodwill and intangible assets in 2002 and on a periodic basis thereafter. We expect to perform the first of the required impairment tests, as of January 1, 2002, in the first quarter of 2002. There are many management assumptions and estimates underlying the determination of an impairment loss, and estimates using different, but each reasonable, assumptions could produce significantly different results. Therefore, the timing and recognition of impairment losses by us in the future, if any, may be highly dependent upon our estimates and assumptions. We have not yet determined whether any impairment loss will result from our initial impairment review in 2002.

We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves our estimation of actual current tax expense together with the assessment of temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $1.3 million as of December 31, 2001, due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily relating to ordering rules surrounding foreign tax credit carryforwards. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance, which could materially impact our financial position and results of operations.

Net cash provided by operating activities totaled $26.6 million in 2001, compared to net cash used in operating activities of $66.4 million in 2000. Cash provided by operations during 2001 reflects our net loss of $36.5 million, reduced by non-cash aspects of our net loss totaling $63.1 million. Significant non-recurring operational cash outflows during 2000 included $12.7 million in debt conversion expense as well as $40.1 million in cash payments related to bonuses paid and options repurchased in connection with the Retek spin-off.

Net cash used in investing activities totaled $154.0 million in 2001, compared to net cash used in investing activities of $72.7 million in 2000. Cash used in investing activities during 2001 included $115.1 million in net purchases of marketable securities, $25.5 million paid in connection with our business acquisitions, net of cash acquired, $12.5 million expended for the purchase of property and equipment and $0.9 million in other net cash flows used in financing activities.

Net cash provided by financing activities totaled $162.9 million in 2001, compared to net cash provided by financing activities of $73.1 million in 2000. Cash provided by financing activities during 2001 included $144.6 million in net proceeds from the issuance of $150.0 million in 5.25% Convertible Subordinated Notes, $24.6 million in proceeds resulting from stock option exercises and employee stock purchases under HNC plans, inclusive of the repayment of stockholder notes, and $0.5 million in proceeds from the sale of trade accounts receivable, partially offset by the payment of $6.9 million in investment banking fees during the first quarter of 2001 related to the Retek spin-off.

As of December 31, 2001, we had $313.7 million in cash and cash equivalents and marketable securities. We believe that these balances, including interest to be earned thereon, and borrowings available under our credit facility described below will be sufficient to fund our working and other capital requirements, including potential investments in other companies and other assets to support the strategic growth of our business, over the next twelve months. In the ordinary course of business, we evaluate opportunities to acquire businesses, products and technologies and we expect to use our cash to fund these types of activities in the future. In the event additional needs for cash arise, we may raise additional funds from a combination of sources including the potential issuance of debt or equity securities. Additional financing might not be available on terms favorable to us, or at all, particularly in light of the recent decline in the capital markets. If adequate funds were not available or were not available on acceptable terms, our ability to take advantage of unanticipated opportunities or respond to competitive pressures could be limited.

In August and September 2001, we issued $150.0 million of 5.25% convertible subordinated notes that mature on September 1, 2008. Interest on the notes is payable on March 1 and September 1 of each year, beginning March 1, 2002. The notes are convertible into shares of our common stock at any time prior to

maturity at a conversion price of $28.80 per share (subject to certain adjustments), and are subordinated in right of payment to all existing and future senior indebtedness, as defined in the indenture. We may redeem the notes on or after September 5, 2004, or earlier if the price of our common stock reaches certain levels. If we redeem the notes prior to September 1, 2007, we will also be required to pay a redemption premium as prescribed by the indenture. Net cash proceeds from the issuance of the notes totaled $144.6 million after deduction of related issuance costs.

We have a $15.0 million revolving line of credit with a bank through July 11, 2003. During 2001 and 2000, we had no amounts outstanding under this line of credit. Our agreement with the bank contains covenants that restrict our ability to pay cash dividends and make loans, advances or investments without the bank’s consent. As of December 31, 2001, we were in compliance with all covenants under this agreement. Borrowings under this line of credit bear interest at the rate of LIBOR plus 0.5%, payable monthly. The applicable interest rate would have been 2.38% at December 31, 2001. Beginning in 2002, we have adopted an executive home equity loan program under this line of credit. Under the program, and at our discretion, the bank will make loans directly to our employees and we will guarantee the loans. Our maximum allowable borrowings under this line of credit will be reduced by the outstanding balance of qualified employee home equity loans that we guarantee. The maximum amount of employee home equity loans that we may guarantee at one time is $4.0 million. Through December 31, 2001, there were no employee loan guarantees in place.

From time to time, we enter into agreements to sell an undivided interest in specifically identified trade accounts receivable to a financial institution for a fee, based principally upon defined short-term market rates. For further information, see Note 1 of Notes to the Consolidated Financial Statements.

We are a limited partner in Azure Capital Partners L.P., a venture capital investment management fund, and have invested an aggregate of $2.5 million into this fund through December 31, 2001. We have committed to invest an additional $2.5 million into this fund, which we expect to make in 2002.

In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, “Business Combinations” (“FAS 141”) and No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”). FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of FAS 142 applied immediately to goodwill and intangible assets acquired after June 30, 2001. We will adopt all other provisions of FAS 142 in the first quarter of 2002. We have not yet determined the impact that our full adoption of FAS 142 in the first quarter of 2002 will have on our consolidated financial position, results of operations or disclosures.

In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”). FAS 144 requires, among other things, the application of one accounting model for long-lived assets that are impaired or to be disposed of by sale. FAS 142 also revises the accounting for discontinued operations. We will adopt the provisions of FAS 144 in the first quarter of 2002. We do not expect the adoption of FAS 144 to have a significant impact on our consolidated financial position, results of operations or disclosures.

Our business faces significant risks. The factors discussed below are cautionary statements that identify important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements in this report and in forward-looking statements we may make after the date of this report. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations.

If any of the events or circumstances described in the following risks actually occur, our business, financial condition or results of operations could suffer, and the trading price of our common stock could decline.

Due to current slowdowns in the economy generally, we believe that many existing and potential customers are reassessing or reducing their planned technology investments and deferring purchasing decisions. As a result, there is increased uncertainty with respect to our expected revenues. Further delays or reductions in business spending for information technology could have a material adverse effect on our revenues and operating results. In addition, to the extent that our customers change from paying license fees on a recurring transactional basis to paying us one-time license fees, our recurring revenues and gross margins for future quarters will decrease, which will reduce our ability to predict total revenues in future periods. Further, we expect a slight decline in our total revenues due to our recent discontinuance of eight of our products.

We cannot predict the timing of the recognition of our revenues accurately because the length of our sales cycles makes it difficult for us to predict the quarter in which sales to expected customers will occur. The long sales cycle for our products may cause license revenue and operating results to vary significantly from period to period. The sales cycle to license our products can typically range from 60 days to 18 months. Customers are often cautious in making decisions to acquire our products, because purchasing our products typically involves a significant commitment of capital, and may involve shifts by the customer to a new software and/or hardware platform or changes in the customer’s operational procedures. Delays in completing sales can arise while customers complete their internal procedures to approve large capital expenditures and test and accept our applications. Consequently, we face difficulty predicting the quarter in which sales to expected customers will occur. This has contributed, and we expect it to continue to contribute, to fluctuations in our operating results.

Our sales cycle is subject to a number of significant risks, including customers’ budgetary constraints and internal acceptance reviews, over which we have little or no control. If sales expected from specific customers in a particular quarter are not realized in that quarter, we are unlikely to generate revenue from alternate

sources in time to compensate for the shortfall. As a result, and due to the relatively large size of a typical order, a lost or delayed sale could result in revenues that are lower than expected. Moreover, to the extent that significant sales occur earlier than anticipated, revenues for subsequent quarters may be lower than expected. In addition, we may incur substantial sales and marketing expenses and expend significant management effort while potential customers are evaluating our products and before they place an order with us. If the current economic downturn continues, the sales cycle for our products may become longer and we may require more resources to complete sales. If orders for our products are not received as anticipated, our operating results could be harmed.

During 2000, we completed the acquisition of seven businesses, one of which was acquired by our former subsidiary Retek, which we spun off in September 2000. In 2001 we acquired four additional businesses and product lines and to date in 2002 we have acquired one product line. We believe that our future growth will depend, in part, upon our ability to successfully complete future acquisitions of businesses and technologies. Integrating newly acquired organizations and technologies into our business could put a strain on our resources and be expensive and time consuming. In addition, we may not succeed in integrating acquired businesses or technologies and may not achieve anticipated revenue and cost benefits. Further, our acquisition strategy and future acquisitions could result in any of the following risks:


	•	increased competition for acquisition opportunities could inhibit our growth and our ability to complete suitable acquisitions, and could also increase the price we would have to pay to complete acquisitions, which might result in dilution to the equity interests of our stockholders;

	•	if we are unable to complete acquisitions successfully, we might not be able to successfully develop and market products for new industries or for markets with which we may not be familiar;

	•	we might not be able to coordinate the diverse operating structures, policies and practices of companies we acquire or to successfully integrate the employees of the acquired companies into our organization and culture, which could impair employee morale and productivity;

	•	despite due diligence reviews, acquired businesses may bring with them unanticipated liabilities, business or legal risks or operating costs that could harm our results of operations or business, reduce or eliminate any benefits of the acquisition or require unbudgeted expenses;

	•	to the extent we acquire businesses or products from financially distressed companies, we are subject to additional legal risks associated with transactions in that context, including potential creditors’ claims, business uncertainties and liabilities not discharged by the seller;

	•	to the extent we acquire distressed businesses, we may need to implement stringent budget and cost-cutting measures with these businesses to reduce or avoid losses from these acquired businesses;

	•	if we fail to retain the services of key employees of acquired companies for significant time periods after the acquisition of their companies, we may experience difficulty in managing the acquired company’s business and not realize the anticipated benefits of the acquisition;

	•	the accounting treatment of acquisitions can result in significant acquisition-related accounting charges and expenses that can reduce our reported results of operations both at the time of the acquisition and in future periods;

	•	additional acquisitions may require us to issue shares of our stock and stock options to owners of the acquired businesses, resulting in dilution to our stockholders; and

	•	in the current economic environment, we may be required to use more cash as consideration for acquisitions, which will reduce our working capital.

If we do not adequately address issues presented by growth through acquisitions, we may not fully realize the intended benefits, including any financial benefits, of these acquisitions and may incur increased costs and expenses.

Most of our expenses, such as employee compensation and rent, are relatively fixed in the short term. Moreover, our expense levels are based, in part, on our expectations regarding future revenue levels. As a result, if total revenues for a particular quarter are below expectations, we could not proportionately reduce operating expenses for that quarter. Therefore, this revenue shortfall would have a disproportionate effect on our expected operating results for that quarter.

Our revenues and margins depend in part upon the timing of implementation of our products and services. In most sales, we are involved in the installation of our products at the customer site. We recognize implementation revenue based on progress achieved toward completion and we recognize implementation costs as implementation services are performed. In addition, we do not begin to recognize maintenance revenue until implementation is complete. However, the timing of the commencement and completion of the installation process is subject to factors that may be beyond our control, as this process requires access to the customer’s facilities and coordination with the customer’s personnel after delivery of the software. In addition, customers could delay product implementations. If a product implementation is not completed or delayed, we might not be able to begin to recognize implementation revenue or maintenance revenue when expected or at all. Further, implementation typically involves working with sophisticated software, computing and communications systems. If we have difficulties with implementation or do not meet project milestones in a timely manner and within contracted fee budgets, we could be obligated to devote more customer support, engineering and other resources to a particular project. If customers have difficulty deploying our products or require significant amounts of support, our costs could increase, causing increased variability in our operating results.

Our ability to offer our products and services successfully in a rapidly evolving market requires an effective planning and management process. In recent years, we have experienced changes in our operations that have placed significant demands on our administrative, operational and financial resources. These demands, which are expected to continue to challenge our management and operations, include the following:


	•	growth and diversification of our customer base into new industries, most recently telecommunications;

	•	development and marketing of our Critical Action Technology Platform;

	•	expansion of our product lines into new technology mediums such as the delivery of services over the Internet through an ASP channel;

	•	increase in the number of our employees; and

	•	geographic dispersion of our operations and personnel, most recently the addition of offices in San Jose, California and Brentford, England.

These changes require us to manage an increasing number of relationships with customers and other third parties, as well as a larger workforce. In addition, we will need to adapt our operational and financial control systems, if necessary, to respond to changes in the size and diversification of our business, as well as any future acquisitions. If we fail to manage changes effectively, our employee-related costs and employee turnover could increase and we could face disruptions that negatively affect the quality of our products and our ability to respond to our customers.

The rate at which businesses have adopted our products has varied significantly by market and by product within each market, and we expect to continue to experience variations to the degree to which our products are accepted in our target markets in the future. In particular, the acceptance of our products may be limited by factors such as:


	•	the failure of prospective customers to perceive value in critical action software solutions;

	•	the reluctance of our prospective customers to replace their existing solutions with our products; and

	•	the emergence of new technologies that could cause our products to be less competitive or obsolete.

We must grow our customer base and generate repeat and expanded business from our current and future customers. In some cases, our customers initially make a limited purchase of our products and services for pilot programs. These customers may not purchase additional licenses to expand their use of our products. In addition, as we introduce new versions of our products or new products, our current customers might not require the functionality of our new products and might not ultimately license these products. Because the market for critical action software is still in a relatively early stage of development, we cannot accurately assess the size of the market, and we have limited insight into trends that may emerge and affect our business. For example, we may have difficulty in predicting customer needs and new technologies, developing products that could address those needs and technologies, and establishing a distribution strategy for these products. We may also have difficulties in predicting the competitive environment that will develop.

In our markets, technology changes rapidly, and there are continuous improvements in computer hardware, network operating systems, programming tools, programming languages, operating systems, database technology and the use of the Internet. If we fail to enhance our current products and develop new products in response to changes in technology or industry standards, our products could rapidly become less competitive or obsolete. For example, the rapid growth of the Internet environment creates new opportunities, risks and uncertainties for businesses, such as ours, which develop software that must also be designed to operate in Internet, intranet and other online environments. Our future success will depend, in part, upon our ability to:


	•	internally develop new and competitive technologies;

	•	use leading third-party technologies effectively;

	•	continue to develop our technical expertise;

	•	anticipate and effectively respond to changing customer needs;

	•	time new product introductions in a way that minimizes the impact of customers delaying purchases of existing products in anticipation of new product releases; and

	•	influence and respond to emerging industry standards and other technological changes.

The development of new, technologically advanced products is a complex and uncertain process that requires innovation, highly skilled personnel and accurate anticipation of technological and market trends. We have previously experienced significant delays in the development and introduction of new products and product enhancements, primarily due to difficulties with model development, which has in the past required multiple iterations, as well as difficulties with acquiring data and adapting to particular operating environments. The length of these delays has varied depending upon the size and scope of the project and the nature

of the problems encountered. If we are unable to meet the introduction schedules for our new products or product enhancements, customers may switch their allegiance to competitive products or refuse to purchase our software suites, which would harm our competitive position and our operating results.

Our Falcon Fraud Manager, Decision Manager for Medical Bill Review and Outsourced Bill Review products and services in the aggregate accounted for 46.8% of our total revenues in 2001 compared to 40.3% of our total revenues in 2000. Falcon Fraud Manager accounted for 24.9% of total revenues in 2001 compared to 16.8% in 2000 and our combined Decision Manager for Medical Bill Review products and Outsourced Bill Review services accounted for 21.9% of total revenues in 2001 compared to 23.5% in 2000. We expect these products and services will continue to account for a substantial portion of our total revenues for the foreseeable future. Our revenue will decline if the market does not continue to accept these products and services. Factors that might affect the market acceptance of Decision Manager for Medical Bill Review products and Outsourced Bill Review services include the following:


	•	simplification of state workers’ compensation fee schedules;

	•	changes in the overall payment system or regulatory structure for workers’ compensation claims;

	•	technological change;

	•	our inability to obtain or use state fee schedule or claims data;

	•	saturation of market demand;

	•	loss of key customers; and

	•	industry consolidation.

Demand for, or use of, Falcon Fraud Manager, could decline as a result of factors that reduce the effectiveness of fraud detection capabilities. For example, patterns of credit card fraud might change in a manner that the Falcon Fraud Manager product line would not detect. In addition, other methods of credit card fraud prevention such as smart cards may reduce customers’ need for the Falcon Fraud Manager product line. To the extent that credit and other payment cards cease to be prevailing payment methods, demand for Falcon Fraud Manager could decrease. Because many Falcon Fraud Manager customers are banks and related financial institutions, sales of our Falcon Fraud Manager products are subject to changes in the financial services industry such as fluctuations in interest rates and the general economic health of financial services companies, which affect their capital expenditure budgets. In addition, the financial services industry tends to be cyclical, which may result in variations in demand for our Falcon Fraud Manager products. There is a continuing trend toward consolidation in the financial services industry, which has reduced our customer base and may lead to lost or delayed sales and reduced demand for our Falcon Fraud Manager products. Industry consolidation also could affect our base of recurring revenues derived from contracts in which we are paid on a per-transaction basis, when consolidated customers combine their operations under one contract with us which, in some cases, could result in lower payments to us than those previously paid by our customers separately.

Most of our customers are relatively large enterprises, such as banks, insurance carriers and telecommunications carriers. Our future success will depend upon the timing and size of future licenses, if any, from these customers and new customers. Many of our customers and potential customers are significantly larger than we are and have sufficient bargaining power to demand reduced prices and favorable nonstandard terms. The loss of any major customer, or the delay of significant revenue from these customers, could reduce or delay our recognition of revenue.

The development, installation and support of our credit card fraud control and profitability management, loan underwriting and insurance products require periodic updates of our statistical models. To develop these updates, we must develop or obtain a reliable source of sufficient amounts of current and statistically relevant data to analyze transactions and update our models. In most cases, these data must be periodically updated and refreshed to enable our predictive products to continue to work effectively in a changing environment. We do not own or control much of the data that we require, most of which are collected privately and maintained in proprietary databases. Generally, our customers agree to provide us the data we require to analyze transactions, report results and build new predictive models. If we fail to maintain good relationships with these customers, we could lose access to required data and our products might become less effective. In addition, our Decision Manager for Medical Bill Review products use data from state workers’ compensation fee schedules adopted by state regulatory agencies. Third parties have previously asserted copyright interests in this data. These assertions, if successful, could prevent us from using the data. We might not be able to continue to obtain adequate amounts of statistically relevant data on time, in the required formats or on reasonable terms and conditions, whether from customers or commercial suppliers.

The market for predictive software solutions is intensely competitive and is constantly changing. Some of our competitors or potential competitors have substantially greater financial, technical and marketing resources than we do. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements. They may also devote greater resources to the development, promotion and sale of their products than we do. In addition, they may have the ability to sell products competitive to ours at lower prices as part of integrated suites of several related products that are vital to the customer’s computing infrastructure. This may cause customers to purchase products of our competitors that directly compete with our products in order to acquire other products of the competitor.

Our competitors vary in size and in the scope of the products and services they offer. We encounter competition from a number of sources, including:


	•	other application software companies, including enterprise software vendors;

	•	management information system departments of customers and potential customers, including financial institutions, insurance companies and telecommunications carriers;

	•	third-party professional services and consulting organizations;

	•	Internet companies;

	•	hardware suppliers that bundle or develop complementary software;

	•	network and telecommunications switch manufacturers, and service providers that seek to enhance their value-added services;

	•	neural network tool suppliers; and

	•	managed care organizations.

We expect to experience additional competition from other established and emerging companies, as well as from other technologies. For example, our Falcon Fraud Manager and Falcon Fraud Manager for Merchants products compete against other methods of preventing credit card fraud, such as credit card activation programs, credit cards that contain the cardholder’s photograph, smart cards and other card authorization techniques.

Increased competition, whether from other products or new technologies, could result in price reductions, fewer customer orders, loss of customers, reduced gross margins and loss of market share, any of which could

negatively impact our business. We expect to face increasing pricing pressures from our current competitors and new market entrants. Price reductions could negatively impact our margins and results of operations. Price competition could also harm our ability to obtain new long-term contracts and renewals of existing long-term contracts on favorable terms.

Furthermore, a number of our current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our prospective customers. As a result, new competitors or alliances among competitors may emerge and rapidly gain significant market share. We may not be able to compete effectively against current and potential competitors, especially those with significantly greater resources and market leverage.

If we lose key personnel, we might not be able to manage our business successfully.

Our future success depends to a significant degree upon the continued service of members of our senior management and other key research, development, sales and marketing personnel. We generally do not have employment agreements with our employees, and the few employment agreements we do have with a small number of our employees may not result in the retention of these employees. As a result, we have lost and in the future could lose one or more members of the management team on little or no advance notice. We could also lose the services of a key employee of a business we acquire before we have had adequate time to familiarize ourselves with the operating details of that business and obtain a suitably experienced replacement. Our future performance will also depend, in part, upon the ability of our officers to work together effectively. Our management personnel may not be successful in carrying out their duties or running our company. Any dissent among members of management could impair our ability to make strategic decisions quickly in a rapidly changing market.

Our future success depends upon our ability to attract, retain and motivate highly skilled employees. Competition for employees in our industry is intense. We have historically experienced difficulty in recruiting a sufficient number of qualified sales and technical employees. In addition, competitors and other businesses may be successful in attempts to recruit our key employees, particularly if they can offer more attractive stock options or other equity compensation packages. Many of our technical employees possess unique skills and are not easily replaceable, and loss of technical personnel could harm our product development efforts. We expect to continue to experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications.

We intend to continue to expand our operations outside the United States and to enter additional international markets, which will require significant management attention and financial resources. For more mature products, like Falcon Fraud Manager, we may need to increase our international sales in order to continue to expand our customer base. We have committed and continue to commit significant time and development resources to customizing and adapting our products for selected international markets, and to developing international sales and support channels. These international marketing efforts require us to incur increased sales, marketing, development and support expenses. If our efforts do not generate additional international sales on a timely basis, our margins and earnings would be harmed.

To the extent that our revenues from international operations represent an increasing portion of our total revenues, we will be subject to increased exposure to international risks. As a result, our future results could be affected by a variety of factors, including:


	•	changes in foreign currency exchange rates;

	•	changes in the political or economic conditions of a country or region, particularly in emerging markets;


	•	trade protection measures, such as tariffs, EU software directives and import or export licensing requirements;

	•	potentially negative consequences from changes in tax laws;

	•	potentially reduced protection for intellectual property rights;

	•	difficulty in managing widespread sales operations; and

	•	slower payment cycles from international customers.

Many of our customers must comply with a number of government regulations and other industry standards, and as a result, many of our key products must also be compliant. For example, our financial services products are affected by the Fair Credit Reporting Act, by Regulation B under the Equal Credit Opportunity Act, by regulations governing the extension of credit to consumers and by Regulation E under the Electronic Fund Transfers Act, as well as non-governmental VISA and MasterCard electronic payment standards. Fannie Mae and Freddie Mac regulations, among others, for conforming loans, affect our mortgage services products. Insurance-related regulations may in the future apply to our insurance products. If our products fail to comply with existing or future regulations and standards, our customers or we could be subject to legal action by regulatory authorities or by third parties, including actions seeking civil or criminal penalties, injunctions against our use of data or preventing use of our products or civil damages. In addition, we may also be liable to our customers for failure of our products to comply with regulatory requirements. If state-mandated workers’ compensation laws or regulations or state workers’ compensation fee schedules are simplified, these changes would diminish the need for, and the benefit provided by, Decision Manager for Medical Bill Review products and Outsourced Bill Review services. In many states, including California, there have been periodic legislative efforts to reform workers’ compensation laws in order to reduce the cost of workers’ compensation insurance and to curb abuses of the workers’ compensation system. Changes in workers compensation laws or regulations could adversely affect our insurance products by making them obsolete, or by requiring extensive changes in these products to reflect new workers’ compensation rules. To the extent that we sell new products targeted to markets that include regulated industries and businesses, our products will need to comply with these additional regulations.

Our success and ability to compete substantially depend upon our internally developed proprietary technologies, which we protect through a combination of patent, copyright, trademark and trade secret laws and confidentiality procedures. We also seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. Despite the measures we take to protect our intellectual property, it may be possible for a third party to copy or otherwise to obtain and use our products or technology without authorization, or to develop similar technology independently. In addition, patents may not be issued with respect to our pending or future patent applications, and our patents may not be upheld as valid or may not prevent the development of competitive products. To ensure that customers will not be harmed by an interruption in our business, we often place software source code for our products into escrow, which may increase the likelihood of misappropriation or other misuse of our intellectual property. Any disclosure, loss, invalidity of, or failure to protect, our intellectual property could negatively impact our competitive position, and ultimately, our business. We have developed technologies under research projects conducted under agreements with various United States Government agencies or subcontractors. Although we have acquired commercial rights to these technologies, the United States Government typically retains ownership of intellectual property rights and licenses in the technologies developed by us under these contracts, and in some cases can terminate our rights in these technologies if we fail to commercialize them on a timely basis. Under our contracts with the United States Government, the results of our research may be

In the past, we have received communications from third parties asserting that our trademarks infringe upon their trademarks, or that data we use is copyrighted by them, none of which has resulted in litigation or material losses. We have also been involved in patent litigation. Given our ongoing efforts to develop and market new technologies and products, we may from time to time be served with other claims from third parties asserting that our products or technologies infringe their intellectual property rights. Any litigation to determine the validity of these claims, including claims arising through our contractual indemnification of our customers and other business partners against infringement, regardless of their merit or resolution, would likely be costly and time consuming and divert the efforts and attention of our management and technical personnel. We cannot be certain we would prevail in this litigation given the complex technical issues and uncertainties inherent in intellectual property litigation. If this litigation resulted in an adverse ruling, we could be required to:


	•	pay substantial damages;

	•	cease the use or sale of infringing products;

	•	expend significant resources to develop non-infringing technology;

	•	discontinue the use of certain technology; or

	•	obtain a license under the intellectual property rights of the third party claiming infringement, which license may not be available on reasonable terms, or at all. A license, if obtained, might require that we pay substantial royalties or license fees that would reduce our margins.

Products as sophisticated as ours are likely to contain errors or failures when first introduced or as new versions are released. To the extent that we develop new products that operate in new environments, such as the Internet, the possibility for program errors and failures may increase due to factors including the use of new technologies or the need for more rapid product development that is characteristic of the Internet market. In the future, we may experience delays in releasing new products or product enhancements as problems are corrected. Errors or defects in our products that are significant, or are perceived to be significant, could result in the rejection of our products, damage to our reputation, lost revenues, diverted development resources and increased service and support costs and warranty claims. In addition, because our products are used in business-critical applications, any product errors or failures may give rise to substantial product liability claims.

The market price of our common stock has been, and will likely continue to be, subject to wide fluctuations. Many factors could cause the price of our securities to rise and fall, including:


	•	variations in our quarterly results;

	•	announcements of new products by us or our competitors;

	•	acquisitions of businesses or products by us or our competitors;

	•	recruitment or departure of key personnel;

	•	the gain or loss of significant orders;


	•	the gain or loss of significant customers;

	•	changes in the estimates of our operating performance or changes in recommendations by securities analysts; and

	•	market conditions in our industry, the industries of our customers and the economy as a whole.

In addition, stocks of technology companies have experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of these companies. Public announcements by companies in our industry about, among other things, their performance, accounting practices or legal problems could cause the market price of our common stock and our convertible notes to decline regardless of our actual operating performance.

In the past, securities class action litigation has often been brought against a company following a period of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources.

Under our certificate of incorporation, our board of directors is authorized to issue up to 4,000,000 shares of preferred stock without any further vote or action by our stockholders. The rights of the holders of our common stock will be subject to the rights of the holders of any preferred stock that we may issue in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. We implemented a stockholder rights plan in the first quarter of 2002 and created 1,000,000 shares of Series A Junior Participating Preferred Stock for issuance upon exercise of the rights. In addition, Section 203 of the Delaware General Corporation Law restricts business combinations with any “interested stockholder” as defined by the statute. The statute could make it more difficult for a third party to acquire us, even if an acquisition would benefit our stockholders.

The indenture under which we issued the notes does not restrict us or our subsidiaries from incurring additional debt, including senior indebtedness. It also does not restrict our ability to pay dividends or issue or repurchase our securities. If our subsidiaries or we were to incur additional debt or liabilities, we might not be able to pay our obligations under the notes.

The notes are general unsecured obligations of HNC and are subordinated in right of payment to all of our existing and future senior indebtedness. In the event of our bankruptcy, liquidation or reorganization or upon acceleration of the notes due to an event of default under the indenture and in certain other events, our assets will be available to pay obligations on the notes only after all senior indebtedness has been paid. The notes are also effectively subordinated to the liabilities, including trade payables, of our subsidiaries. As of December 31, 2001, we had no outstanding senior indebtedness for purposes of the indenture, while our subsidiaries had approximately $11.3 million of outstanding indebtedness or other liabilities to which the notes would have been effectively subordinated. As a result, there may not be sufficient assets remaining to pay amounts due on any or all of the outstanding notes. In addition, we will not make any payments on the notes in the event of payment defaults on our senior indebtedness or other specified defaults on our designated senior indebtedness.

We conduct a significant portion of our operations through subsidiaries. Our cash flow and therefore our ability to service our debt, including the notes, depends in part upon the earnings of our subsidiaries and the distribution of those earnings to us, or upon loans or other payments of funds to us by our subsidiaries. These subsidiaries are separate and distinct legal entities, and have no obligation to pay any amounts due under the notes or to make any funds available to meet our obligations under the notes, whether by dividends, distributions, loans or other payments. In addition, any of our subsidiaries may not be able to pay dividends or distributions to us or make loans and advances to us due to legal or contractual restrictions, the earnings of the subsidiary and various other business considerations. Any right we have to receive assets of our subsidiaries upon their liquidation or reorganization, and the right of the note holders to participate in these assets, is effectively subordinated to the claims of that subsidiary’s creditors, including trade creditors. If we were recognized as a creditor of one of our subsidiaries, our claims would be subordinate to any security interests in the subsidiary’s assets and any indebtedness of the subsidiary that is senior to ours. As a result, if we do not receive funds from our subsidiaries, we might not have sufficient funds to pay our obligations under the notes.

Upon a change in control, as defined in the indenture under which we issued the notes, note holders may require us to purchase all or a portion of their notes. If a change in control were to occur, we might not have enough funds to pay the purchase price for all tendered notes. Our credit facility provides that a change in control constitutes an event of default. Future credit agreements or other agreements relating to our indebtedness may also provide that a change in control constitutes an event of default and additionally may prohibit the repurchase or redemption of the notes. If a change in control occurs at a time when we are prohibited from purchasing the notes, we could seek the consent of our lenders to purchase the notes or could attempt to refinance this debt. If we do not obtain a consent, we could not purchase the notes. Our failure to purchase tendered notes would constitute an event of default under the indenture, which might constitute a default under the terms of our other debt. In such circumstances, or if a change in control would constitute an event of default under our senior indebtedness, the subordination provisions of the indenture would limit or prohibit payments to note holders. The term “change in control” is limited to certain specified transactions and may not include other events that might harm our financial condition. Our obligation to offer to purchase the notes upon a change in control would not necessarily protect note holders in the event of a highly leveraged transaction, reorganization, merger or similar transaction involving us.

Since the issuance of the notes, the initial purchasers have made a market in the notes. However, the initial purchasers are not obligated to make a market and may discontinue this market-making activity at any time without notice. In addition, market-making activity by the initial purchasers is subject to the limits imposed by the Securities Act and the Exchange Act. As a result, a market for the notes may not develop or, if one does develop, it may not be maintained. If an active market for the notes fails to develop or be sustained, the trading price of the notes could decline significantly.

In our opinion, the accompanying consolidated balance sheet of HNC Software Inc. and the related consolidated statements of operations, of cash flows and of changes in stockholders’ equity and comprehensive income (loss) present fairly, in all material respects, the financial position of HNC Software Inc. and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


(1)	Includes non-cash stock-based compensation expense of $51, $2,658, and $280 in 2001, 2000, and 1999 respectively. Also includes expenses related to the Retek spin-off of $6,086 in 2000.

(2)	Includes non-cash stock-based compensation expense of $2,548 and $354 in 2000 and 1999 respectively. Also includes expenses related to the Retek spin-off of $6,603 in 2000.

(3)	Includes non-cash stock-based compensation expense of $80, $10,629, and $1,121 in 2001, 2000, and 1999 respectively. Also includes expenses related to the Retek spin-off of $12,880 in 2000.

(4)	Includes non-cash stock-based compensation expense of $50, $4,167, and $441 in 2001, 2000, and 1999 respectively. Also includes expenses related to the Retek spin-off of $5,770 in 2000.

(5)	Includes non-cash stock-based compensation expense of $295, $1,668, and $9,789 in 2001, 2000, and 1999 respectively. Also includes expenses related to the Retek spin-off of $16,846 in 2000.

HNC is a provider of high-end analytics, decision management software and tools that enable global companies to manage customer interactions by converting data and business experiences into real-time recommendations. In this report, HNC Software Inc. is referred to as “we,” “our,” and “HNC.” Our former subsidiary Retek Inc., which we spun-off to our stockholders in September 2000, is referred to as “Retek.”

Our consolidated financial statements include our assets, liabilities, and results of operations, as well as those of our wholly-owned subsidiaries and Retek, which was a majority-owned subsidiary prior to its spin-off in September 2000. The ownership of other interest holders in Retek was reflected as minority interest. All significant inter-company balances and transactions have been eliminated.

The preparation of 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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Certain prior year amounts have been reclassified to conform to the current year presentation.

Software revenue is recognized upon meeting all of the following criteria: execution of a written license agreement, contract or purchase order; delivery of software and/or authorization keys; the license fee is fixed and determinable; and collectibility of the proceeds is assessed as being probable. For multiple-element agreements, total fees are allocated to each element based on vendor-specific objective evidence of fair value or using the residual method when applicable. Allocated fees are recognized separately for each element when it is delivered, providing other criteria referenced above are met. Vendor-specific objective evidence is generally based on the price charged when an element is sold separately, or if not yet sold separately, is established by authorized management. For perpetual license and maintenance arrangements, vendor-specific objective evidence for maintenance services is determined based on contractual renewal rates for those services. For term license and maintenance arrangements, vendor-specific objective evidence for maintenance services is also determined based on contractual renewal rates for those services, and license and maintenance fees are unbundled only if the maintenance term and renewal rates are considered to be substantive.

Revenue from perpetual and short-term periodic licenses of our software is generally recognized upon delivery. Transactional-based license fees under software license arrangements are recognized as revenue based on system usage or when fees based on system usage exceed monthly minimum license fees.

Software maintenance fees are recognized as revenue ratably over the maintenance periods.

Revenue from software installation and implementation and from contract services is generally recognized as the services are performed using the percentage of completion method based on costs incurred to date compared to total estimated costs at completion. Contract losses are recorded as a charge to operations in the period any losses are first identified. Unbilled accounts receivable are stated at estimated realizable value.

Transactional-based fees under network service or internally hosted software arrangements are recognized as revenue based on system usage or when fees based on system usage exceed monthly minimum license fees.

Installation or setup fees associated with network service and internally hosted software agreements are recognized ratably over the longer of the customer contract period or estimated life of the customer relationship.

Amounts received under contracts in advance of performance are recorded as deferred revenue and are generally recognized within one year from receipt.

Within our statement of operations, components of operating expenditures in 2001, 2000 and 1999 include stock-based compensation expense and non-recurring expenses related to our spin-off of Retek that have been classified as follows:

Cash and cash equivalents include amounts on deposit with financial institutions and investments in money market accounts and commercial paper purchased with maturities of three months or less from the date of purchase. The carrying amounts of cash and cash equivalents approximate fair value because of the short-term maturities of these financial instruments.

Management determines the appropriate classification of our investments in marketable debt and equity securities at the time of purchase, and re-evaluates this designation at each balance sheet date. We have classified all of our marketable securities as “available for sale” and carry them at fair value with unrealized gains or losses related to these securities included in other comprehensive income (loss). Realized gains and losses on the sale of investments available for sale are determined using the specific identification method. Losses resulting from other than temporary declines in fair value are charged to operations.

Our investments in equity securities of companies over which we do not have significant influence are accounted for under the cost method. We use the equity method to account for our investments in entities over which we have a voting interest of 20% to 50%, or over which we otherwise have the ability to exercise significant influence. Under the equity method, the investment is originally recorded at cost and adjusted to recognize our share of net earnings or losses of the investee, limited to the extent of our investment in, advances to, and financial guarantees for the investee. At December 31, 2001, all of our equity investments in other entities were accounted for under the cost method. Management periodically reviews cost-basis investments for instances where fair value is less than cost and the decline in value is determined to be other than temporary. If the decline in value is judged to be other than temporary, the cost basis of the security is written down to fair value and the resulting loss is charged to operations.

From time to time, we enter into agreements to sell an undivided interest in specifically identified trade accounts receivable. We sell these trade accounts receivable to a financial institution for a fee, based principally upon defined short-term market rates. Once sold, these receivables are not included in our trade accounts receivable balance on our consolidated balance sheet. During 2001, 2000 and 1999, we sold $500, $32,585 and $23,711 of receivables, respectively. Fees that we paid related to receivables sold totaled $10, $430 and $364 during 2001, 2000 and 1999, respectively, and are included in interest expense in our consolidated statement of operations. Effective April 1, 2001, we adopted Statement of Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“FAS 140”), issued in September 2000 by the Financial Accounting Standards Board. FAS 140 revises the standards for accounting and disclosures for securitizations and other transfers of financial assets and collateral. The adoption of this new standard did not have a significant impact on our consolidated financial position, results of operations or disclosures.

Property and equipment are recorded at cost less accumulated depreciation and amortization. Major renewals and improvements are capitalized, while repair and maintenance costs are expensed as incurred. Depreciation and amortization charges are calculated using the straight-line method over the estimated useful lives of the assets ranging from three to seven years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining term of the related lease. Depreciation and amortization expense related to property and equipment totaled $10,760, $11,753 and $8,215 during 2001, 2000 and 1999, respectively. The cost and accumulated depreciation for property and equipment sold, retired or otherwise disposed of are removed from the accounts and resulting gains or losses are recorded in operations.

Intangible assets include goodwill, acquired software development costs, customer base, customer contracts, assembled work force, covenants not to compete, and trademarks. These assets resulted from our acquisitions accounted for under the purchase method of accounting (see Note 4). Amortization expense

related to intangible assets totaled $56,444, $42,372 and $8,560 during 2001, 2000 and 1999, respectively. We amortize these assets using the straight-line method over their estimated useful lives as follows:

We continually review the events and circumstances related to our financial performance and economic environment for factors that would provide evidence of the impairment of enterprise-level goodwill. If such factors exist, suggesting impairment, we use the market value method to determine the extent of the impairment. We will adopt the provisions of FAS 142 in the first quarter of 2002 (see “New Accounting Pronouncements” below).

Development costs of software to be licensed or sold that are incurred from the time technological feasibility is established until the product is available for general release to customers are capitalized and reported at the lower of cost or net realizable value. Through December 31, 2001, no significant development costs were incurred after technological feasibility was reached.

Costs incurred to develop internal-use software during the application development stage are also capitalized and reported at the lower of cost or net realizable value. Application development stage costs generally include costs associated with internal-use software configuration, coding, installation and testing. Costs of significant upgrades and enhancements that result in additional functionality are also capitalized whereas costs incurred for maintenance and minor upgrades and enhancements are expensed as incurred.

We assess potential impairments to our long-lived and intangible assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the undiscounted cash flows expected to be generated by an asset (or group of assets) is less than its carrying amount. Any required impairment loss would be measured as the amount by which the asset’s carrying value exceeds its fair value, and would be recorded as a reduction in the carrying value of the related asset and a charge to operations.

Current income tax expense is the amount of income taxes expected to be payable for the current year, prior to the recognition of benefits from stock option deductions. A deferred income tax asset or liability is computed for the expected future impact of differences between the financial reporting and tax bases of assets and liabilities as well as the expected future tax benefit to be derived from tax loss and tax credit carry-forwards. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount

“more likely than not” to be realized in future tax returns. Tax rate changes and tax credit reinstatements are reflected in income during the period the changes are enacted.

We measure compensation expense for our employee stock-based compensation awards using the intrinsic value method, and provide pro forma disclosures of net loss and net loss per common share as if a fair value method had been applied. Therefore, compensation cost for employee stock awards is measured as the excess, if any, of the fair value of our common stock at the grant date over the amount an employee must pay to acquire the stock. Compensation expense is amortized over the related service periods using the accelerated methodology prescribed by Financial Accounting Standards Board Interpretation No. 28. Compensation expense for awards that are forfeited is reversed against compensation expense in the period of forfeiture.

Stock-based awards issued to non-employees are accounted for using a fair value method and are marked to fair value at each period end until the earlier of the date at which a performance commitment has been obtained or the awards are fully vested. Fair value of stock-based awards is determined using the Black-Scholes option pricing model with weighted average assumptions for dividend yield, risk-free interest rate, expected volatility, and contractual life.

Basic and diluted net loss per common share are computed as net loss divided by the weighted-average number of common shares outstanding during the period. For the computation of diluted net loss per common share, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.

The conversion of our 5.25% Convertible Subordinated Notes (see Note 10) outstanding during 2001 into 1,835 common shares were not included in the computation of diluted net loss per common share, as their effect in this period would have been anti-dilutive. Additionally, the conversion of our 4.75% Convertible Subordinated Notes (see Note 10) outstanding during 2000 and 1999 into 3,512 and 2,230 common shares, respectively, were not included in the computation of diluted net loss per common share, as their effect in such periods would be anti-dilutive.

For 2001, 2000 and 1999, weighted average options to purchase shares of common stock and Employee Stock Purchase Plan equivalents of 1,860, 2,260 and 6,547 shares of common stock, respectively, were not included in the computation of diluted net loss per common share as their effect in these periods would be anti-dilutive.

The financial statements of our international operations have been translated into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates during the period for revenues and expenses. Cumulative translation gains and losses are excluded from results of operations and recorded as a separate component of other comprehensive income (loss). Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than our entity’s local currency) are recorded in operations.

Comprehensive income (loss) is the change in our equity (net assets) during each period from transactions and other events and circumstances from non-owner sources. It includes net income (loss), foreign currency translation adjustments and unrealized gains and losses, net of tax, on our investments in marketable securities.

Our financial instruments that potentially expose us to concentrations of risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable, which are generally not collateralized. Our policy is to place our cash, cash equivalents, and marketable securities with high credit quality financial institutions, commercial companies and government agencies in order to limit the amount of credit exposure. We enter into software license and installation agreements and commercial development contracts primarily with large customers in the services industries (financial, insurance and telecommunications). We do not require collateral from our customers, but our credit extension and collection policies include analyzing the financial condition of potential customers, establishing credit limits, monitoring payments, and aggressively pursuing delinquent accounts. We maintain allowances for potential credit losses.

Our operating segments are presented consistently with the way that our management organizes and evaluates financial information for making internal operating decisions and assessing performance. Certain prior year segment information has been reclassified to conform to the current year presentation (see Note 13).

Advertising and promotion costs are expensed as incurred. Advertising and promotion costs totaled $3,033, $8,006 and $3,651 in 2001, 2000 and 1999, respectively, and are included in sales and marketing expense in our consolidated statement of operations.

In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”). FAS 144 requires, among other things, the application of one accounting model for long-lived assets that are impaired or to be disposed of by sale. FAS 144 also revises the accounting for discontinued operations. We will adopt the provisions of FAS 144 in the first quarter of 2002. We do not expect the adoption of FAS 144 to have a significant impact on our consolidated financial position, results of operations or disclosures.

On September 10, 1999, Retek filed a registration statement with the Securities and Exchange Commission relating to an initial public offering of Retek’s common stock. The offering was consummated in November 1999. In the offering, Retek sold 6,325 shares of its common stock. Prior to the offering, we transferred to Retek all of the shares of our wholly owned subsidiary, Retek Information Systems, Inc.

On August 7, 2000, HNC’s board of directors declared a dividend of all of the shares of Retek common stock held by HNC, or 40,000 shares, to complete the spin-off of our Retek subsidiary. We received a private letter ruling from the Internal Revenue Service that HNC’s dividend of its shares of Retek common stock would be tax-free to HNC and our stockholders for U.S. federal income tax purposes. This dividend was paid on September 29, 2000 to all HNC stockholders of record as of September 15, 2000 using a distribution ratio of approximately 1.243 shares of Retek common stock for each share of HNC common stock held. Cash was paid in lieu of fractional shares. The shares of Retek common stock that we distributed in the Retek spin-off constituted all the Retek shares owned by HNC and represented approximately 83.9% of Retek’s outstanding shares as of the September 29, 2000 distribution date. As a result of our distribution of our Retek common shares, Retek is no longer affiliated with HNC. In connection with this spin-off, we eliminated net assets totaling $121,213 from our consolidated balance sheet, including cash and cash equivalents of $30,463. Additionally, we eliminated the minority interest associated with Retek of $14,491 and net equity totaling $106,722.

In connection with the spin-off of our Retek subsidiary, we accelerated the vesting of 25 percent of the outstanding HNC stock options that would have been unvested as of the September 15, 2000 record date in order to afford our option holders the opportunity to participate in receipt of the dividend. Additionally, we offered option holders the opportunity to exercise a portion of their vested options prior to the record date through the issuance of secured, full recourse promissory notes payable to HNC (the “Stockholder Notes”). The Stockholder Notes bear interest at the rate of 10.0% per annum, and are collateralized by the underlying shares of stock. Loans totaling $11,857 were originally extended to option holders. At December 31, 2000, stockholder notes receivable totaled $9,049, net of repayments, and have been recorded as a reduction to stockholders’ equity. Such notes were repaid in 2001. In connection with the Retek dividend, we also adjusted the exercise price of all HNC stock options that were outstanding immediately following payment of the dividend. The adjusted stock option exercise prices were calculated by multiplying the pre-dividend option exercise price by the price of HNC common stock immediately after payment of the dividend, and dividing that product by the price of HNC common stock immediately before payment of the dividend. The vesting acceleration of HNC stock options and the adjustment to HNC stock option exercise prices that were greater than the closing price of HNC common stock on September 29, 2000 resulted in stock-based compensation charges (see Note 14).

Because the adjustment to the exercise price of HNC options described above was less than the change in value of unvested HNC stock options resulting from the Retek distribution, we paid cash bonuses to employees and directors who held unvested stock options as of the record date, and recorded a related charge to operations in the amount of $40,427. These bonuses were paid out in October 2000 and January 2001.

In April 2001, we announced and began to implement a reorganization that involved realigning our internal organization from a vertical market orientation to a horizontal product platform. This reorganization plan resulted in the elimination of various redundant corporate resources that existed in the previous vertical market organization structure. As a result of this reorganization, we incurred charges of $2,960 during 2001, which included severance benefits for 41 terminated employees, the write-off of certain capitalized costs associated with internal-use software no longer being used, and charges for the closure of certain office locations.

During 2000, we recorded an impairment charge of $1,172 related to the abandonment of a lease and associated property and equipment. The impairment charge consisted of the write-off of the remaining net book value of abandoned property and equipment that was deemed to have insignificant remaining value at the time of the disposal, as well as charges associated with future facility lease cash obligations, net of estimated sublease income. During 2001, we recorded an additional charge of $1,157 associated with this leased facility,

resulting from the default of a sublease tenant and resultant estimated future net lease costs expected to be borne by HNC. During 2001, we also committed to the closure of an additional office facility and recorded estimated lease exit charges of $525, consisting of future facility lease cash obligations, net of estimated sublease income.

Restructuring, impairment and related charges expensed during the 2001 and 2000 were comprised of the following:

No restructuring or impairment charges were recorded in 1999. As of December 31, 2001, the remaining accrual of $1,751 consists primarily of future facility lease cash obligations, net of estimated sublease income, and other accrued expenses. Such facility lease commitments extend through 2004.

In September 2001, we acquired the UK-based Marketing Service Provider business unit of Chordiant Software Inc., in exchange for approximately $2,000 in cash. The MSP business unit provides marketing campaign and other customer data management services to its customers. We applied the purchase method of accounting for this acquisition, which resulted in a purchase price of $2,413, of which $1,566 was allocated to identified intangibles and goodwill as follows: $448 to customer contracts and $1,118 to goodwill. We applied FAS 142 in the recording of goodwill and identifiable intangibles. Accordingly, goodwill related to the acquisition of the Chordiant business unit will not be amortized. The goodwill and intangibles were reviewed for impairment in accordance with APB Opinion No. 17, “Intangible Assets” through December 31, 2001, prior to the adoption of FAS 142 in its entirety in 2002.

In August 2001, we acquired certain assets of the Blaze Advisor business unit of Brokat Technologies in exchange for approximately $18,500 in cash and the assumption of certain liabilities. Blaze Advisor’s rules management technology is designed to help large organizations manage complex or frequently changing business rules. We applied the purchase method of accounting for this acquisition, which resulted in a purchase price of $21,751. The purchase price included $2,000 in restricted cash retained by HNC to provide recourse for potential future indemnification obligations of Brokat to HNC and $1,500 in assumed severance obligations, along with accrued acquisition costs. The release date of the restricted cash to Brokat is expected to occur not later than August 2002, subject to reduction by indemnification obligations of Brokat to HNC, if any. The excess of the purchase price over net liabilities assumed was $22,093, of which $487 was allocated to in-process research and development and $21,606 was allocated to identified intangibles and goodwill as follows: $10,247 to software development costs, $1,525 to customer contracts, $364 to patents and trademarks, and $9,470 to goodwill. We applied FAS 142 in the recording of goodwill and identifiable intangibles. Accordingly, goodwill related to the acquisition of Blaze will not be amortized. The goodwill and intangibles were reviewed for impairment in accordance with APB Opinion No. 17, “Intangible Assets” through December 31, 2001, prior to the adoption of FAS 142 in its entirety in 2002.

In June 2001, we acquired two workers’ compensation compliance-reporting products and related customer base from ecDataFlow.com Inc. (“ecDataFlow”) in exchange for approximately $3,600 in cash. From ecDataFlow, we acquired OASIS, a client/ server EDI connectivity program for transmitting injury

reports, medical bills, and insurance claims, and NIIDS, an ASP-based connectivity product that integrates with OASIS. We applied the purchase method of accounting to this acquisition, which resulted in a purchase price of $3,682, all of which was allocated to identified intangible assets and goodwill as follows: $850 to customer base, $200 to covenants not to compete, and $2,632 to goodwill.

In April 2001, we acquired ClaimPort, Inc. (“ClaimPort”) in exchange for approximately $3,200 in cash. ClaimPort is an electronic data interchange vendor providing Web-enabled workers’ compensation injury reporting and proof of coverage services for insurance carriers, third party administrators, self-insured employers and state agencies that support workers’ compensation insurance claims processing. We applied the purchase method of accounting to this acquisition, which resulted in a purchase price of $3,474. The excess of this amount over the net liabilities assumed was $3,988, all of which was allocated to intangible assets and goodwill as follows: $220 to assembled workforce, $354 to customer base, $56 to software development costs, and $3,258 to goodwill.

In September 2000, we acquired all of the outstanding stock and other securities of Systems/ Link Corporation (“Systems/ Link”) in exchange for the issuance of 634 shares of our common stock, including 40 underlying shares associated with stock options we exchanged, and $5,512 in cash. We placed 142 of the shares issued and $1,275 of the cash portion of the purchase price into escrow, to secure indemnification obligations of the former Systems/ Link stockholders. Systems/ Link is a software developer that creates data management solutions for large telecommunications companies, providing applications for real-time data collection, call detail record exchange, fraud control and prepaid services to carriers. We applied the purchase method of accounting for the acquisition of Systems/ Link, which resulted in a purchase price of $42,549. The excess of this amount over the net liabilities assumed was $56,416, of which $730 was allocated to in-process research and development and $55,686 was allocated to identified intangible assets and goodwill as follows: $17,060 to software development costs, $1,710 to customer base, $2,758 to assembled workforce, $310 to trademarks, $370 to covenants not to compete, and $33,478 to goodwill.

In September 2000, we acquired all of the outstanding stock and other securities of CardAlert Services, Inc. (“CardAlert”) in exchange for the issuance of 208 shares of our common stock. We placed 42 of the shares issued into escrow to secure indemnification obligations of the former CardAlert stockholders, which we released fully in 2001. CardAlert provides ATM and debit card risk management services to domestic financial institutions and debit card networks. We applied the purchase method of accounting for the acquisition of CardAlert, which resulted in a purchase price of $12,608. The excess of this amount over the net liabilities assumed was $12,976, of which $421 was allocated to in-process research and development and $12,555 was allocated to identified intangible assets and goodwill as follows: $1,659 to software development costs, $1,220 to customer base, $1,141 to assembled workforce, $240 to covenants not to compete, and $8,295 to goodwill.

In May 2000, Retek acquired all of the outstanding stock and other securities of HighTouch Technologies, Inc. (“HighTouch”) in exchange for the issuance of 389 shares of Retek’s common stock and $18,000 in cash. HighTouch is a provider of customized software and services relating to customer relationship management. Retek applied the purchase method of accounting for the acquisition of HighTouch, which resulted in a purchase price of $26,308. The excess of this amount over the net liabilities assumed was $30,558, of which $4,000 was allocated to in-process research and development and $26,558 was allocated to identified intangible assets and goodwill as follows: $4,800 to software development costs, $900 to customer base, $520 to assembled workforce, $1,000 to covenants not to compete, and $19,338 to goodwill.

In April 2000, we acquired all of the outstanding stock and other securities of Celerity Technologies, Inc. (“Celerity”) in exchange for the issuance of 220 shares of our common stock and $2,400 in cash. We placed 33 of the shares issued into escrow to secure indemnification obligations of the former Celerity shareholders, which we released fully in 2001. Celerity develops and markets electronic data interchange solutions for the workers’ compensation industry. We applied the purchase method of accounting for the acquisition of

Celerity, which resulted in a purchase price of $18,591. The excess of this amount over the net liabilities assumed was $20,769, of which $1,050 was allocated to in-process research and development and $19,719 was allocated to identified intangible assets and goodwill as follows: $860 to software development costs, $1,510 to customer base, $710 to assembled workforce, $100 to contracts, $200 to covenants not to compete, and $16,339 to goodwill.

In March 2000, we acquired all of the outstanding stock and other securities of Onyx Technologies, Inc. (“Onyx”) in exchange for the issuance of 382 shares of our common stock, including 30 underlying shares associated with stock options we exchanged, and $1,500 in cash. We placed 105 of the shares issued and $450 of the cash portion of the purchase price into escrow to secure indemnification obligations of the former Onyx shareholders. We fully released all cash and shares from escrow during 2000 and 2001. Onyx is a provider of online data access and customer acquisition analysis for telecommunications, financial and retail service companies. We applied the purchase method of accounting for the acquisition of Onyx, which resulted in a purchase price of $49,555, of which $3,500 represented our initial 1999 investment in Onyx. The excess of this amount over the net liabilities assumed of $51,163 was allocated to identified intangible assets and goodwill as follows: $10,060 to software development costs, $3,700 to customer base, $504 to assembled workforce, $920 to covenants not to compete, and $35,979 to goodwill.

In March 2000, we acquired all of the outstanding stock and other securities of the Center for Adaptive Systems Applications, Inc. (“CASA”) in exchange for the issuance of 226 shares of our common stock, including 80 underlying shares associated with stock options we exchanged. CASA is an advanced analytics solutions company that develops and markets account optimization and precision marketing solutions. We placed 38 of the shares issued into escrow to secure indemnification obligations of the former CASA stockholders, which we fully released in 2001. We applied the purchase method of accounting for the acquisition of CASA, which resulted in a purchase price of $23,756. The excess of this amount over the net liabilities assumed was $27,260, of which $1,400 was allocated to in-process research and development and $25,860 was allocated to identified intangible assets and goodwill as follows: $6,395 in software development costs, $898 to customer base, $700 to assembled workforce, $642 in contracts, $340 to covenants not to compete, and $16,885 to goodwill.

In March 2000, we acquired all of the outstanding stock and other securities of Adaptive Systems Applications, Inc. (“AIM”) in exchange for 9 shares of our common stock, including 0.4 underlying shares associated with stock options we exchanged. AIM provides marketing process automation, campaign execution software, and client-to-vendor data management to direct marketers of enhancement services. We applied the purchase method of accounting for the acquisition of AIM, which resulted in a purchase price of $1,656, of which $750 represents our initial 1999 investment in AIM. The excess of this amount over the net liabilities assumed of $1,785 was allocated to identified intangible assets and goodwill as follows: $300 to assembled workforce, $300 to covenants not to compete, and $1,185 to goodwill.

In October 1999, Retek acquired WebTrak Limited (“WebTrak”) for a cash payment of $5,333 and the issuance of a $2,667 convertible note, which was subsequently converted into shares of Retek common stock. WebTrak is a United Kingdom company that develops, markets and sells business-to-business products that enable users to publish and share a critical path on the Internet, and allow Web-based collaboration to improve the new product design and development process. The application of the purchase method of accounting for the acquisition resulted in an excess of cost over net liabilities assumed of $8,131, of which $1,480 was allocated to in-process research and development and $6,651 was allocated to identified intangible assets and goodwill as follows: $4,940 to software development costs, $180 to customer base, $240 to assembled workforce, $80 to trademarks, $1,150, to covenants not to compete, and $61 to goodwill.

In-process research and development recorded in connection with the above-mentioned purchase transactions represents the present value of the estimated after-tax cash flows expected to be generated by purchased technologies that, as of the acquisition dates, had not yet reached technological feasibility. The cash

flow projections for revenues were based on estimates of relevant market sizes and growth factors, expected industry trends, the anticipated nature and timing of new product introductions, product sales cycles and the estimated life of each product’s underlying technology. Estimated operating expenses and income taxes were deducted from estimated revenue projections to arrive at estimated after-tax cash flows. Projected operating expenses include costs of revenues, marketing and selling expenses, general and administrative expenses, and research and development, including estimated costs to maintain the products once they have been introduced into the market and are generating revenue. We made our assessment of whether acquired technologies in these acquisitions were complete or under development in accordance with the guidelines prescribed by Statement of Financial Accounting Standards No. 86, Statement of Financial Accounting Standards No. 2, and Financial Accounting Standards Board Interpretation No. 4.

The following table summarizes in the aggregate, for all purchase acquisitions during 2001, 2000 and 1999, the goodwill and identified intangible assets recorded:

The unaudited pro forma results of operations below present the impact on our results of operations as if the Chordiant, Blaze, ecDataFlow.com and ClaimPort acquisitions had occurred on January 1, 2000, and as if the Systems/ Link, CardAlert, HighTouch, Celerity, Onyx, CASA and AIM acquisitions had occurred on January 1, 1999, instead of on their respective acquisition dates:

Unbilled accounts receivable represent revenue recorded in excess of amounts billable pursuant to contract provisions and generally become billable at contractually specified dates or upon the attainment of milestones. Unbilled amounts are expected to be realized within one year. During 2001, 2000, and 1999, we reserved $5,768, $6,205, and $5,112, wrote off $5,084, $3,661, and $1,049 and recovered $148, $104, and $0 of our allowance for doubtful accounts and sales returns, respectively. During 2001 and 2000, we also increased our allowance for doubtful accounts by $578 and $300, respectively, for amounts recorded in connection with acquisitions. Additionally, in connection with the spin-off of Retek on September 29, 2000, we removed Retek’s allowance for doubtful accounts and sales returns of $5,787 from our consolidated balance sheet.

The carrying amounts of accrued liabilities approximate fair value because of the short-term maturities of these financial instruments.

At December 31, 2001 and 2000, our investments in marketable securities were as follows:

At December 31, 2001 and 2000, all foreign corporate debt investments were denominated in U.S. dollars.

During 2000, we assessed the impairment in value of our $3,000 investment in Network Commerce Inc. to be other than temporary and, accordingly, we wrote this investment down to $250 as of December 31, 2000, representing the aggregate fair value of our investment in this entity based on the closing market price of this publicly traded security on December 31, 2000. During 2001, we assessed another other than temporary impairment in value of this investment and wrote it down to $12, representing the aggregate fair value of our investment in this entity based on the closing market price of this security on June 30, 2001. As a result of these write-downs, we recorded losses in 2001 and 2000 of $238 and $2,750, respectively, that are included in other expense, net in our statement of operations.

During 2001, we assessed the impairment in value of our investments in Burning Glass Technologies, Keylime Software and Qpass Inc. to be other than temporary and, accordingly, we wrote down such investments by $1,000, $2,000 and $2,000, respectively. Our assessment of the impairment in these investments was based upon current market conditions, liquidity and financing issues, and other business factors specific to these entities. The losses associated with these investment write-downs are included in other expense, net, in our statement of operations. Prior to their write-down, we accounted for these investments using the cost method. Our original investment in Burning Glass Technologies was made in 2000 while our original investments in Keylime Software and Qpass Inc. were made in 1999.

In July 2000, we became a limited partner in Azure Capital Partners L.P., a venture capital investment management fund, through an initial investment of $2,250. We invested an additional $250 into this fund during 2001 and have committed to invest an additional $2,500 into this fund, which will likely be made in 2002. Our commitment to this fund will not exceed 2% of total fund ownership. This investment is being accounted for using the cost method. During 2001, we assessed the impairment in value of our investment in this fund to be other than temporary and, accordingly, we wrote it down by $750 to $1,750. Our assessment of the impairment in this investment was based principally on investment data provided by the fund managers, including reserve estimates provided by the fund. The loss associated with this investment write-down is included in other income (expense), net, in our statement of operations.

In March 2000, we invested $1,500 to maintain our approximate 6% ownership interest in Open Solutions Inc. (“OSI”). In April 1999, we had previously invested $5,969 to purchase an approximate 6% interest in OSI. OSI is a developer of client/server core data processing solutions for community banks and credit unions. This investment is being accounted for using the cost method.

At December 31, 2001, our remaining equity investments include our $1,750 investment in the Azure Capital Partners Venture Fund and our $7,469 investment in OSI.

We have a Credit Agreement with a financial institution that provides for a $15,000 revolving line of credit through July 11, 2003. During 2001 and 2000, we had no amounts outstanding under this revolving line of credit. The agreement contains covenants that restrict our ability to pay cash dividends and make loans, advances or investments without the bank’s consent. As of December 31, 2001, we were in compliance with all covenants under this agreement. Borrowings under this agreement bear interest at the rate of LIBOR plus 0.5%, payable monthly. The applicable interest rate would have been 2.38% at December 31, 2001. Beginning in 2002, our maximum allowable borrowings under this facility will be reduced by the outstanding balance of qualified employee home equity loans made directly by the financial institution to our employees and guaranteed by us, if any and at our discretion, pursuant to an executive home equity loan guarantee program that we have adopted. The maximum amount of employee home equity loans that we may guarantee at one time is $4,000. Through December 31, 2001, there were no employee loan guarantees in place.

At December 31, 2001 we are obligated through 2007 under non-cancelable operating leases for our facilities and equipment as follows:

Our corporate headquarters lease provides for scheduled rent increases and an option to extend the lease for five years with changes to the terms of the lease agreement and a refurbishment allowance. Rent expense under operating leases totaled $7,232, $8,520 and $6,172 during 2001, 2000 and 1999, respectively, net of sublease income of $1,002, $555 and $1,286, respectively.

In August and September 2001, we issued $150,000 of 5.25% Convertible Subordinated Notes (the “2001 Notes”) that mature on September 1, 2008. Interest on the 2001 Notes is payable on March 1 and September 1 of each year, beginning March 1, 2002. The 2001 Notes are convertible by the holders into shares of our common stock at any time prior to maturity at a conversion price of $28.80 per share (subject to certain adjustments), and are subordinated in right of payment to all existing and future senior indebtedness, as defined in the indenture governing the 2001 Notes. We may redeem the 2001 Notes on or after September 5, 2004, or earlier if the price of our common stock reaches certain levels. If we redeem the 2001 Notes prior to September 1, 2007, we will also be required to pay a redemption premium as prescribed by the indenture. Net cash proceeds from the issuance of the 2001 Notes totaled $144,628 after deduction of related issuance costs including commissions, which we have capitalized and are amortizing to interest expense over the term of the 2001 Notes.

In March 1998, we completed an offering of $100,000 of 4.75% Convertible Subordinated Notes (the “1998 Notes”), due on March 1, 2003. The 1998 Notes were originally convertible into our common stock at any time prior to the close of business on the maturity date at a conversion rate of 22.30 shares per $1,000 principal amount of the 1998 Notes (equivalent to a conversion price of $44.85 per share). We also had the right to redeem the 1998 Notes, in whole or in part, on or after March 6, 2001, at specified redemption prices (plus accrued interest). This offering resulted in net proceeds to us of $97,000 after the payment of underwriters’ commissions but before the deduction of offering expenses. During 2000, $83,643 of the 1998 Notes were converted into HNC common stock at the original conversion rate. In connection with these note conversions, we issued 1,872 shares of our common stock. Additionally, we paid $12,676 in conversion premiums to the converting note holders, which we recorded as a debt conversion charge. As of December 31, 2000, $16,357 of the 1998 Notes remained outstanding. In connection with the spin-off of our Retek subsidiary, the indenture governing the 1998 Notes required an adjustment to the conversion price of the remaining outstanding 1998 Notes. This conversion price was based upon a formula that calculated an adjusted conversion rate using the relative per common share values of HNC and Retek as of the date of the spin-off. As a result of this adjustment, the remaining 1998 Notes became convertible into our common stock

at a conversion rate of 100.20 shares per $1,000 principal amount of the 1998 Notes (equivalent to a conversion price of $9.98 per share). In March 2001, all remaining outstanding 1998 Notes were converted into 1,639 shares of our common stock.

Cash amounts paid for interest related to both the 2001 and 1998 Notes totaled $380, $4,750 and $4,750 during 2001, 2000 and 1999 respectively. The aggregate fair value of the 2001 Notes at December 31, 2001 approximated their carrying amount of $150,000, as determined based upon quoted PORTAL market prices.

During 2000, we repurchased 250 shares of our outstanding common stock for treasury at a cost of $18,616. During 1999, we repurchased 2,266 shares of our outstanding common stock for treasury at a cost of $50,383.

Our Board of Directors is authorized to issue up to 4,000 shares of preferred stock and to determine the rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of common stockholders will be superceded by the rights of any preferred stock holders, if preferred stock is issued in the future.

Income before income tax provision (benefit) was taxed under the following jurisdictions:

A reconciliation of the income tax provision (benefit) to the amount computed by applying the statutory federal income tax rate to income before income tax provision (benefit) is summarized as follows:

During 2001, 2000 and 1999, we realized certain tax benefits related to nonqualified and incentive stock options in the amounts of $7,006, $36,392 and $16,993, respectively. The tax benefits from these stock option tax deductions were credited directly to paid-in capital.

During 2001, we established a valuation allowance of $1,318 on certain of our deferred tax assets with an offsetting entry to additional paid-in capital because of uncertainty regarding their realization. The valuation allowance is primarily due to the ordering rules on the use of foreign tax credits that require net operating loss carryforwards, including those generated from exercises of employee stock options, and current year foreign tax credits to be utilized before foreign tax credit carryforwards may be utilized. These ordering rules, combined with the relatively short five-year carryforward period for foreign tax credits, make it more likely than not that some of our foreign tax credit carryforwards will not be utilized before they expire. If utilized, the tax benefit of these deferred assets will be recognized as a credit to stockholders’ equity in the period of utilization. During 2001, we also recorded a $5,344 reduction to deferred tax assets with an offsetting reduction to additional paid-in capital resulting from the finalization of the allocation of certain Retek tax attributes in connection with the filing of our consolidated income tax return for calendar year 2000.

At December 31, 2001, we had gross federal and state net operating loss carryforwards totaling $137,956 and $94,042, respectively. The gross federal net operating loss carryforwards include $9,542 that expires from 2005 to 2010. The balance will expire from 2018 to 2021. The gross state net operating loss carryforwards include $49,751 of gross California net operating loss carryforwards that expire from 2002 to 2006.

At December 31, 2001, we also had $3,399 of federal research credit carryforwards that expire from 2002 to 2021, $2,378 of state research credit carryforwards that have no expiration dates, $5,113 of foreign tax credit carryforwards that expire from 2002 to 2006, and federal and state alternative minimum tax credits of $299 and $5, respectively, that have no expiration dates. Some of the acquired net operating loss and research credit carryforwards are subject to annual limitations. Should a substantial change in our ownership occur, as defined by the Tax Reform Act of 1986, there will be additional annual limitations on our utilization of net operating loss and tax credit carryforwards.

We paid $2,026, $484 and $6,312 of income taxes, net of refunds received, during 2001, 2000, and 1999 respectively.

In April 2001, we announced and began to implement a reorganization that involved realigning our internal organization from a vertical market orientation to a horizontal product platform. As a result, our reportable segments were changed to reflect the new method in which management primarily organizes and evaluates internal financial information to make operating decisions and assess performance, based upon the product suites of our Critical Action Technology Platform. Segment information for the years ended December 31, 2000 and 1999 has been restated to conform to our current segment presentation.

Our Critical Action Technology Platform consists of our Efficiency, Risk and Opportunity Suites. Our Efficiency Suite enables companies to make instant, automated decisions regarding customer applications for loans, credit or services, including the ability to identify and determine customer creditworthiness. This allows companies to simultaneously reduce costs and increase the speed of the customer acquisition process. In addition, it allows companies to process large quantities of applications and claims in real time through multiple acquisition and delivery channels. Our Risk Suite enables companies to analyze the risks associated with acquiring, managing and retaining customers by analyzing patterns in customer transactions, and includes analysis of fraud, churn and bad debt. Our Opportunity Suite enables companies to analyze the opportunities associated with acquiring, managing and retaining customers by analyzing patterns in customer transactions. The Opportunity Suite can maximize customer profitability by providing cross-sell and up-sell activities and focusing marketing efforts on more profitable customers. Additionally, our “Other” segment category includes our Advanced Technology Solutions group, which primarily conducts research and development for the United States Government and other internally funded projects, as well as other miscellaneous products. Retek, which we spun-off to stockholders effective September 29, 2000, is also presented separately below.

We do not identify or allocate our assets by operating segment. Accordingly, segment asset information is not disclosed.

Segment revenues and contribution margins for 2001, 2000 and 1999 are as follows:


(1)	Direct segment operating expenses include direct costs such as direct labor costs related to product research and development, sales, and marketing activities, direct support and installation costs, and other product-specific costs of sales. Direct costs reflect only direct controllable expenses associated with each segment’s line of business.

(2)	Indirect operating expenses consist of costs not directly attributable to a segment, such as general and administrative expenses, corporate marketing expenses, depreciation and amortization, facilities expenses, information technology overhead costs, and other indirect, non-product specific costs.

(3)	Includes Retek revenues of $0, $59,915 and $69,159 for the years ended December 31, 2001, 2000 and 1999, respectively.

During 2001, 2000 and 1999, one product in the Risk Suite segment accounted for 24.9%, 16.8% and 15.4% of our total revenues, respectively. During those same periods, revenues from licenses and services related to one product in the Efficiency Suite segment accounted for 21.9%, 23.5% and 20.9% of our total revenues, respectively. During 1999, one product in the Retek segment accounted for 10.1% of our total revenues.

Our foreign revenues are derived from export sales out of the Unites States as well as sales generated directly by our foreign offices. Our total foreign revenues, derived primarily from Western Europe, Japan and Canada, represented 18.1%, 19.4% and 23.2% of total revenues in 2001, 2000 and 1999, respectively.

We apply the intrinsic value method of accounting for our stock-based compensation. Had compensation cost for our stock-based compensation awards been determined based on the fair value at the grant dates of

awards, our net loss and basic and diluted pro forma net loss per common share would have increased to the pro forma amounts indicated below:

We administer several employee benefit plans, both active and inactive. Our active plans include our 1995 Equity Incentive Plan, our 1995 Directors Stock Option Plan, our 1995 Employee Stock Purchase Plan, our 1998 Stock Option Plan, and our 2001 Equity Incentive Plan. Our inactive plans include our original 1987 Stock Option Plan and various plans that we acquired in conjunction with our acquisitions. These assumed plans were amended to convert their respective options into HNC options as of the respective acquisition or merger dates. While subsequent to the assumption of these plans the acquired employees participated in our own stock option plans and are subject to our plans’ terms and conditions, options issued prior to the acquisition or merger dates are subject to their respective plan terms and conditions. Our inactive plans are not discussed herein. For purposes of the discussion regarding our active plans below, “fair market value” means the closing price of our common stock on the NASDAQ National Market on the grant date.

Our 1995 Directors Stock Option Plan (“Directors Plan”), as amended, provides for the issuance of up to 600 nonqualified stock options to our outside directors. Under the provisions of the Directors Plan, nonqualified options to purchase a minimum of 16 and a maximum of 40 shares of our common stock are granted to outside directors upon their respective dates of becoming members of the Board of Directors, and nonqualified options to purchase 16 shares of our stock will be granted on each anniversary date. Options under the Directors Plan are to be granted at the fair market value of the stock at the grant date and vest at specific times over a four-year period. As of December 31, 2001, 187 shares remained available for future grant under this plan.

Our 1995 Equity Incentive Plan (“Incentive Plan”) as amended, provides for the issuance of up to 9,338 shares of our common stock in the form of nonqualified or incentive stock options, restricted stock or stock bonuses. Nonqualified stock options and restricted stock may be awarded at a price not less than 85% of the fair market value of the stock at the date of the award. Incentive stock options must be awarded at a price not less than 100% of the fair market value of the stock at the date of the award. Options granted under the Incentive Plan may have a term of up to ten years. We have the discretion to provide for restrictions, and the lapse of restrictions, in respect of restricted stock awards. Prior to August 1, 2001, options typically vested at the rate of 25% of the total grant per year over a four-year period; however, beginning August 1, 2001, options granted typically vest at the rate of 25% of the total grant after the first year and thereafter on a monthly ratable basis over three years. We may, at our discretion, implement a different vesting schedule with respect to any new stock option grant. At December 31, 2001, 504 shares remained available for future grant under this plan.

Our 1998 Stock Option Plan (“1998 Plan”), as amended, provides for the issuance of up to 2,980 shares of our common stock in the form of nonqualified stock options to our employees, officers, consultants and independent advisors. Options granted under the 1998 Plan may have a term of up to ten years and through August 1, 2001 typically vested at the rate of 25% of the total grant per year over a four-year period. Beginning

August 1, 2001 options granted under this plan typically vest at the rate of 25% of the total grant after the first year and thereafter on a monthly ratable basis over three years; however, we may, at our discretion, implement a different vesting schedule with respect to any new stock option grant. At December 31, 2001, 825 shares remained available for future grant under this plan.

Our 2001 Equity Incentive Plan (“2001 Plan”) provides for the issuance of up to 1,400 shares of our common stock in the form of nonqualified or incentive stock options, restricted stock or stock bonuses. All options granted must be awarded at a price not less than 100% of the fair market value of the stock at the date of the award. Options granted under the Incentive Plan may have a term of up to ten years. We have the discretion to provide for restrictions, and the lapse of restrictions, in respect of restricted stock awards. Options typically vest at the rate of 25% of the total grant after the first year and thereafter on a monthly ratable basis over three years; however, we may, at our discretion, implement a different vesting schedule with respect to any new stock option grant. At December 31, 2001, 829 shares remained available for future grant under this plan.

Our 1995 Employee Stock Purchase Plan (“Stock Purchase Plan”), as amended, provides for the issuance of a maximum of 1,527 shares of common stock. Each purchase period, eligible employees may designate between 2% and 10% of their cash compensation, up to legally permitted amounts, to be deducted from their compensation for the purchase of common stock under the Stock Purchase Plan. The purchase price of the shares under the Stock Purchase Plan is equal to 85% of the lesser of the fair market value per share on the first day of the twelve-month offering period or the last day of each six-month purchase period. During 2001, 2000 and 1999, 459, 106 and 115 shares of our common stock were issued under the Stock Purchase Plan at an average price of $8.19, $29.55 and $24.46 per share, respectively. As of December 31, 2001, 280 shares were reserved for future issuance under the Stock Purchase Plan.

Option transactions under HNC’s plans during the three years ended December 31, 2001 are summarized as follows:


(a)	On September 29, 2000, in connection with the spin-off of Retek, we adjusted the exercise price of all outstanding stock options in accordance with the distribution ratio discussed in Note 2. The weighted average exercise price of options outstanding at September 29, 2000 after consummation of the spin-off was $11.21.

The fair value of each option grant under our HNC plans was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for grants during 2001, 2000 and 1999, respectively: dividend yield of 0.0% for all three years; risk-free interest rates of 4.36%, 6.21% and 5.47%; expected volatilities of 100% for all three years; and expected lives of 4.4, 4.1 and 4.1 years. The weighted average fair value of options granted under HNC plans during 2001, 2000 and 1999 was $16.54, $37.61 and $23.15, respectively. The fair value of the employees’ purchase rights issued pursuant to the Stock Purchase Plan were estimated using the Black-Scholes option pricing model with the following weighted average assumptions during 2001, 2000 and 1999, respectively: dividend yield of 0.0% for all three years; risk-free interest rates of 3.29%, 6.18% and 4.98%; expected volatilities of 100% for all three years; and an expected life of 6 months for all three years. The weighted average fair value of those purchase rights granted in 2001, 2000 and 1999 was $11.91, $7.29 and $16.66, respectively.

Employee stock options exercisable under HNC’s plans at December 31, 2001, 2000 and 1999 were 1,298, 900, and 986, respectively. The following table summarizes information about employee stock options outstanding at December 31, 2001 under HNC’s plans:

During 1999, Retek adopted the 1999 Equity Incentive Plan, the 1999 Director Stock Option Plan and the Employee Stock Option Exchange Program, under which options to purchase common stock in our former

subsidiary Retek had been granted. During 1999, Retek also adopted the 1999 Employee Stock Purchase Plan, which provides for the issuance of Retek’s common stock to eligible employee participants at a purchase price equal to 85% of the lesser of the fair market value per share on the first day of the two-year offering period and the date of purchase. As a result of our September 2000 spin-off of Retek, HNC is no longer affiliated with any Retek stock compensation plans.

During the period from January 1, 2000 through the Retek spin-off date of September 29, 2000, 464 shares of Retek common stock were issued under Retek’s employee stock purchase plan at an average price of $12.75 per share. No shares were issued under this plan during 1999. Option activity under Retek’s option plans during 1999 and during the period from January 1, 2000 through the spin-off date, is summarized as follows:


(a)	As a result of the Retek spin-off, HNC has no further affiliation with Retek’s plans or underlying options, including those outstanding as of the September 29, 2000 spin-off date.

The fair value of each option granted under Retek’s plans was estimated on the date of grant using the Black-Scholes option pricing model and the following weighted average assumptions used for grants during the period from January 1, 2000 through the September 29, 2000 spin-off date and during 1999, respectively: dividend yield of 0.0% for both years; risk-free interest rates of 5.12% and 5.47%; expected volatility of 130% and 100%; and expected lives of 4.4 and 4.1 years. The weighted average fair value of options granted under Retek plans during the period from January 1, 2000 through September 29, 2000, and during 1999, was $24.49 and $7.62, respectively. The fair value of the employees’ purchase rights issued pursuant to Retek’s stock purchase plan in 2000 were estimated using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 0.0%; risk-free interest rate of 5.50%; expected volatility of 130%; and an expected life of 6 months. The weighted average fair value of those purchase rights granted was $8.33.

During 2000, we recorded net stock-based compensation expense totaling $21,670, consisting of $13,762 in stock-based compensation charges attributable to our Retek spin-off, which are discussed separately below, and $7,908 in additional net compensation expense. This additional net compensation expense relates primarily to the amortization of unearned stock-based compensation of $8,772 (of which $8,266 related to Retek) and also includes additional net compensation income of $864, primarily related to the reversal of

compensation expense recorded in 1999 on variable awards, as a result of a decline in the fair values of these awards during 2000.

During 1999, Retek granted stock options to employees and directors to purchase Retek common stock at an exercise price of $10.00 per share when the deemed fair market value of Retek’s common stock was $13.00 per share. As a result, Retek recorded unearned stock-based compensation totaling $21,886 representing the aggregate intrinsic value of the options on the date of grant. Additionally, during 2000, Retek recorded additional unearned stock-based compensation totaling $1,750 related to an employee option grant having an exercise price below the fair value of Retek’s common stock on the date of grant. Amortization of Retek’s unearned stock-based compensation totaled $1,908 during 1999 and $8,266 during the period from January 1, 2000 through the Retek spin-off date of September 29, 2000. Retek’s unearned stock-based compensation balance of $13,255 at September 29, 2000, net of forfeiture reductions, was removed from our consolidated equity accounts in connection with the Retek spin-off.

During 1999, in addition to Retek’s amortization of unearned stock-based compensation as described above, we recorded stock-based compensation expense totaling $10,077. This compensation expense relates primarily to stock awards granted to former employees and non-employee consultants, of which $7,972 was calculated at intrinsic value while the remainder related to variable awards measured at fair value. The intrinsic value charge consisted primarily of a one-time charge of $6,064 related to a key employee severance agreement executed in the fourth quarter of 1999.

In August 2000, we accelerated the vesting of 25 percent of the outstanding stock options that would have been unvested as of the September 15, 2000 record date to afford our option holders the opportunity to participate in receipt of the Retek share dividend. As a result of this award modification, we recorded a non-cash stock-based compensation charge of $6,688 during the third quarter of 2000 in accordance with Financial Accounting Standards Board Interpretation No. 44 (“FIN 44”). Additionally, as a result of the proportionate option repricing in connection with the Retek spin-off, certain options failed to qualify for fixed accounting treatment under FIN 44. As a result, we recorded a one-time charge to operations of $7,074 related to the modification and cash repurchase of options in connection with the Retek spin-off.

Various claims arising in the course of business, seeking monetary damages and other relief, are pending. We believe that these claims will not result in a material negative impact on our results of operations, liquidity or financial condition. However, the amount of the liability associated with these claims, if any, cannot be determined with certainty.

In January 2002, we acquired the Virdix software product line from Trajecta, Inc., a wholly owned subsidiary of Pavilion Technologies Inc., for a cash purchase price of $6,000 plus additional cash consideration if certain financial performance criteria are met with respect to this product during the twelve-month period following the acquisition. Virdix is an integrated analytics framework for data visualization and optimization modeling that enables businesses to develop the most optimal actions to take to maximize lifetime customer value.

On February 26, 2002, our Board of Directors adopted a stockholder rights plan designed to protect the long-term value of HNC for its stockholders during any future unsolicited acquisition attempt. Under the rights plan, the Board declared a dividend of one preferred share purchase right for each share of the Company’s common stock outstanding on March 21, 2002 and further directed the issuance of one such right with respect to each share of our common stock that is issued after that date, except in certain circumstances.

In March 2002, we executed an asset purchase agreement with ieWild, Inc. (“ieWild”) pursuant to which we purchased all of ieWild’s right, title and interest associated with its ieTarget software product and all related documentation and intellectual property rights for a cash purchase price of $1,000. ieTarget is a software platform that enables businesses to allocate large volumes of consumer financial products, as well as consumer merchandise, to retail consumers for the purpose of executing cross sell campaigns through telemarketing or direct mail. The asset purchase agreement was executed concurrent with the execution of a settlement agreement whereby the Company and ieWild agreed to fully dismiss and release all claims against each other pertaining to previously filed lawsuits. In May 2001, we had filed a lawsuit against ieWild for, among other things, trade secret misappropriation and inducing breach of contract based on allegations that certain of our former employees have provided ieWild with certain of our intellectual property, and in June 2001 ieWild had filed a cross-complaint against us seeking attorneys’ fees and alleging that our action was brought in bad faith.

(1)

Results of operations in 2001 include: i) a $0.5 million charge related to the write-off of in-process research and development in the third quarter; ii) a $4.9 million charge related to the write-down of our investments in Azure Capital Partners L.P, Keylime Software, Qpass, Inc., and Burning Glass Technologies in the third quarter; iii) a $3.0 million restructuring charge in connection with a corporate reorganization in the second quarter; and iv) a $1.7 million impairment charge associated with leased facilities in the third quarter.


(2)	Results of operations in 2000 include: i) charges of $1.4 million, $5.0 million and $1.2 million related to the write-off of in-process research and development in the first, second and third quarters, respectively; ii) $12.7 million in non-recurring debt conversion expense and $48.2 million in non-recurring Retek spin-off charges in the third quarter; and iii) a $2.8 million charge relating to the write-down of our investment in Network Commerce and a $1.2 million impairment charge related to the abandonment of a lease and associated property and equipment in the fourth quarter.

(3)	Results of operations in 2000 exclude Retek’s results of operations in the fourth quarter, as a result of our spin-off of Retek on September 29, 2000.

(4)	Net loss per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly net loss amounts per share do not equal the total for the year.


**	Confidential treatment has been granted for portions of this exhibit. These portions have been omitted from this exhibit and have been filed separately with the Commission.

(1)	Management contract or compensatory plan or arrangement.

F-70 EX-4.01 3 a80186ex4-01.txt EXHIBIT 4.01 EXHIBIT 4.01 NUMBER SHARES FBU COMMON STOCK HNC Inc. INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR THE STATE OF DELAWARE CERTAIN DEFINITIONS CUSIP 40425P 10 7 This Certifies that is the record holder of FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $0.001 PAR VALUE PER SHARE OF HNC Software Inc. transferable on the books of the Corporation in person or by duly authorized attorney on surrender of this Certificate properly endorsed. This Certificate shall not be valid unless countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the signatures of its duly authorized officers. Dated /s/ Kenneth J. Saunders /s/ John Mutch SECRETARY CHIEF EXECUTIVE OFFICER [Corporate Seal] COUNTERSIGNED AND REGISTERED: EQUISERVE TRUST COMPANY, N.A. TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE The Corporation shall furnish without charge to each stockholder who so requests a statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock of the Corporation or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Such request shall be made to the Corporation's Secretary at the principal office of the Corporation. THIS CERTIFICATE ALSO EVIDENCES AND ENTITLES THE HOLDER HEREOF TO CERTAIN RIGHTS (THE "RIGHTS") AS SET FORTH IN A RIGHTS AGREEMENT BETWEEN HNC SOFTWARE INC. (THE "COMPANY") AND EQUISERVE TRUST COMPANY, N.A., AS RIGHTS AGENT, DATED AS OF MARCH 6, 2002, AS SUCH MAY SUBSEQUENTLY BE AMENDED (THE "RIGHTS AGREEMENT"), THE TERMS OF WHICH ARE HEREBY INCORPORATED HEREIN BY REFERENCE AND A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY. UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS AGREEMENT, SUCH RIGHTS WILL BE EVIDENCED BY SEPARATE CERTIFICATES AND WILL NO LONGER BE EVIDENCED BY THIS CERTIFICATE. THE COMPANY WILL MAIL TO THE HOLDER OF THIS CERTIFICATE A COPY OF THE RIGHTS AGREEMENT WITHOUT CHARGE AFTER RECEIPT OF A WRITTEN REQUEST THEREFOR. AS DESCRIBED IN SECTION 7(f) OF THE RIGHTS AGREEMENT, RIGHTS BENEFICIALLY OWNED BY ANY PERSON WHO BECOMES AN ACQUIRING PERSON (AS DEFINED IN THE RIGHTS AGREEMENT) AND CERTAIN OTHER PERSONS SHALL BECOME NULL AND VOID. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as through they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common TEN ENT -- as tenants by the entireties JT TEN -- as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -- ______________ Custodian _____________ (Cust) (Minor) under Uniform Gifts to Minors Act __________________________________ (State) UNIF TRF MIN ACT -- _______ Custodian (until age _________) (Cust) _______________ under Uniform Transfers (Minor) to Minors Act ________________________ (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, ________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE __________________________________________ __________________________________________ ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ _________________________________________________________________________ Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _______________________________________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated _____________________ X_______________________________________ X_______________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. Signature(s) Guaranteed By ___________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-10.07 4 a80186ex10-07.txt EXHIBIT 10.07 EXHIBIT 10.07 HNC SOFTWARE INC. 1995 EMPLOYEE STOCK PURCHASE PLAN As Adopted May 4, 1995 As Amended January 23, 1998, March 18, 1999, March 30, 2000, January 1, 2001 and January 1, 2002 1. ESTABLISHMENT OF PLAN. HNC Software Inc., a Delaware corporation (the "COMPANY"), proposes to grant options for purchase of the Company's Common Stock, $0.001 par value, to eligible employees of the Company and its Subsidiaries (as hereinafter defined) pursuant to this Employee Stock Purchase Plan (this "PLAN"). For purposes of this Plan, "PARENT CORPORATION" and "SUBSIDIARY" (collectively, "SUBSIDIARIES") shall have the same meanings as "parent corporation" and "subsidiary corporation" in Sections 424(e) and 424(f), respectively, of the Internal Revenue Code of 1986, as amended (the "CODE"). The Company intends this Plan to qualify as an "employee stock purchase plan" under Section 423 of the Code (including any amendments to or replacements of such Section), and this Plan shall be so construed. Any term not expressly defined in this Plan but defined for purposes of Section 423 of the Code shall have the same definition herein. A total of 1,527,147 shares of the Company's Common Stock is reserved for issuance under this Plan. In addition, on each January 1, the aggregate number of shares of the Company's Common Stock reserved for issuance under this Plan shall be increased automatically by a number of shares equal to one percent (1%) of the total outstanding shares of the Company as of the immediately preceding December 31; provided, however, that the automatic annual increase shall not operate to increase the shares available for issuance under the Plan above 15,000,000 Shares which is the maximum number of Shares available for issuance under the Plan.. Such Share numbers shall be subject to adjustments effected in accordance with Section 14 of this Plan. Such number shall be subject to adjustments effected in accordance with Section 14 of this Plan. 2. PURPOSE. The purpose of this Plan is to provide employees of the Company and Subsidiaries designated by the Board of Directors of the Company (the "BOARD") as eligible to participate in this Plan with a convenient means of acquiring an equity interest in the Company through payroll deductions, to enhance such employees' sense of participation in the affairs of the Company and Subsidiaries, and to provide an incentive for continued employment. 3. ADMINISTRATION. This Plan shall be administered by a committee appointed by the Board (the "COMMITTEE") consisting of at least two (2) members of the Board, each of whom is a Disinterested Person as defined in Rule 16b-3(d) of the Securities Exchange Act of 1934 (the "EXCHANGE ACT"). As used in this Plan, references to the "Committee" shall mean either such committee or the Board if no committee has been established. After registration of the Company under the Exchange Act, Board members who are not Disinterested Persons may not vote on any matters affecting the administration of this Plan, but any such member may be counted for determining the existence of a quorum at any meeting of the Board. Subject to the provisions of this Plan and the limitations of Section 423 of the Code or any successor provision in the Code, all questions of interpretation or application of this Plan shall be determined by the Board and its decisions shall be final and binding upon all participants. Members of the Board shall receive no compensation for their services in connection with the administration of this Plan, other than standard fees as established from time to time by the Board for services rendered by Board members serving on Board committees. All expenses incurred in connection with the administration of this Plan shall be paid by the Company. 4. ELIGIBILITY. Any employee of the Company or the Subsidiaries is eligible to participate in an Offering Period (as hereinafter defined) under this Plan except the following: (a) employees who are not employed by the Company or Subsidiaries one (1) month before the beginning of such Offering Period; (b) employees who are customarily employed for less than twenty (20) hours per week; (c) employees who are customarily employed for less than five (5) months in a calendar year; HNC Software Inc. 1995 Employee Stock Purchase Plan As Amended Through January 1, 2002 (d) employees who, together with any other person whose stock would be attributed to such employee pursuant to Section 424(d) of the Code, own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Subsidiaries or who, as a result of being granted an option under this Plan with respect to such Offering Period, would own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Subsidiaries. 5. OFFERING DATES. The offering periods of this Plan (each, an "OFFERING PERIOD") shall be of twelve (12) months duration commencing on February 1 and August 1 of each year and ending on January 31 and July 31, respectively, thereafter; provided, however, that notwithstanding the foregoing, the first such Offering Period shall commence on the first business day after the date on which the registration statement filed by the Company with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as amended (the "SECURITIES ACT") registering the initial public offering of the Company's Common Stock is declared effective by the SEC (the "FIRST OFFERING DATE") and shall end on January 31, 1996. Each Offering Period shall consist of two (2) six-month purchase periods (individually, a "PURCHASE PERIOD") during which payroll deductions of the participants are accumulated under this Plan. The first business day of each Offering Period is referred to as the "OFFERING DATE". The last business day of each Purchase Period is referred to as the "PURCHASE DATE". The Board shall have the power to change the duration of Offering Periods or Purchase Periods with respect to future offerings without stockholder approval if such change is announced at least fifteen (15) days prior to the scheduled beginning of the first Offering Period or Purchase Period to be affected. 6. PARTICIPATION IN THIS PLAN. Eligible employees may become participants in an Offering Period under this Plan on the first Offering Date after satisfying the eligibility requirements by delivering a subscription agreement to the Company's treasury department (the "TREASURY DEPARTMENT") not later than the 15th day of the month before such Offering Date unless a later time for filing the subscription agreement authorizing payroll deductions is set by the Board for all eligible employees with respect to a given Offering Period. An eligible employee who does not deliver a subscription agreement to the Treasury Department by such date after becoming eligible to participate in such Offering Period shall not participate in that Offering Period or any subsequent Offering Period unless such employee enrolls in this Plan by filing a subscription agreement with the Treasury Department not later than the 15th day of the month preceding a subsequent Offering Date. Once an employee becomes a participant in an Offering Period, such employee will automatically participate in the Offering Period commencing immediately following the last day of the prior Offering Period unless the employee withdraws or is deemed to withdraw from this Plan or terminates further participation in the Offering Period as set forth in Section 11 below. Such participant is not required to file any additional subscription agreement in order to continue participation in this Plan. 7. GRANT OF OPTION ON ENROLLMENT. Enrollment by an eligible employee in this Plan with respect to an Offering Period will constitute the grant (as of the Offering Date) by the Company to such employee of an option to purchase on the Purchase Date up to that number of shares of Common Stock of the Company determined by dividing (a) the amount accumulated in such employee's payroll deduction account during such Purchase Period by (b) the lower of (i) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Offering Date (but in no event less than the par value of a share of the Company's Common Stock), or (ii) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Purchase Date (but in no event less than the par value of a share of the Company's Common Stock); provided, however, that the number of shares of the Company's Common Stock subject to any option granted pursuant to this Plan shall not exceed the lesser of (a) the maximum number of shares set by the Board pursuant to Section 10(c) below with respect to the applicable Offering Period, or (b) the maximum number of shares which may be purchased pursuant to Section 10(b) below with respect to the applicable Offering Period. The fair market value of a share of the Company's Common Stock shall be determined as provided in Section 8 hereof. 8. PURCHASE PRICE. The purchase price per share at which a share of Common Stock will be sold in any Offering Period shall be eighty-five percent (85%) of the lesser of: (a) The fair market value on the Offering Date; or 2 (b) The fair market value on the Purchase Date; provided, however, that in no event may the purchase price per share of the Company's Common Stock be below the par value per share of the Company's Common Stock. For purposes of this Plan, the term "FAIR MARKET VALUE" on a given date shall mean the fair market value of the Company's Common Stock as determined by the Board in its sole discretion, exercised in good faith; provided, however, that where there is a public market for the Common Stock, the fair market value per share shall be the average of the last reported bid and asked prices of the Common Stock on the last trading day prior to the date of determination (or the average closing price over the number of consecutive trading days preceding the date of determination as the Board shall deem appropriate), or, in the event the Common Stock is listed on a stock exchange or on the Nasdaq National Market, the fair market value per share shall be the closing price on such exchange or quotation system on the last trading date prior to the date of determination (or the average closing price over the number of consecutive trading days preceding the date of determination as the Board shall deem appropriate); and provided further, that notwithstanding the foregoing, the fair market value of the Company's Common Stock on the First Offering Date (which is the first business day of the first Offering Period under this Plan) shall be deemed to be the price per share at which shares of the Company's Common Stock are initially offered for sale to the public in the Company's initial public offering of its Common Stock pursuant to a registration statement filed with the SEC under the Securities Act 9. PAYMENT OF PURCHASE PRICE; CHANGES IN PAYROLL DEDUCTIONS; ISSUANCE OF SHARES. (a) The purchase price of the shares is accumulated by regular payroll deductions made during each Offering Period. The deductions are made as a percentage of the participant's compensation in one percent (1%) increments not less than two percent (2%), nor greater than ten percent (10%) or such lower limit set by the Committee. Compensation shall mean all W-2 compensation, including, but not limited to base salary, wages, commissions, overtime, shift premiums and bonuses, plus draws against commissions; provided, however, that for purposes of determining a participant's compensation, any election by such participant to reduce his or her regular cash remuneration under Sections 125 or 401(k) of the Code shall be treated as if the participant did not make such election. Payroll deductions shall commence on the first payday following the Offering Date and shall continue to the end of the Offering Period unless sooner altered or terminated as provided in this Plan. (b) A participant may lower (and, effective for Offering Periods commencing on or after February 1, 1998, increase) the rate of payroll deductions during an Offering Period by filing with the Treasury Department a new authorization for payroll deductions, in which case the new rate shall become effective for the next payroll period commencing more than fifteen (15) days after the Treasury Department's receipt of the authorization and shall continue for the remainder of the Offering Period unless changed as described below. Such change in the rate of payroll deductions may be made at any time during an Offering Period, but not more than one (1) change may be made effective during any Offering Period. A participant may increase or decrease the rate of payroll deductions for any subsequent Offering Period by filing with the Treasury Department a new authorization for payroll deductions not later than the 15th day of the month before the beginning of such Offering Period. (c) All payroll deductions made for a participant are credited to his or her account under this Plan and are deposited with the general funds of the Company. No interest accrues on the payroll deductions. All payroll deductions received or held by the Company may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. (d) On each Purchase Date, so long as this Plan remains in effect and provided that the participant has not submitted a signed and completed withdrawal form before that date which notifies the Company that the participant wishes to withdraw from that Offering Period under this Plan and have all payroll deductions accumulated in the account maintained on behalf of the participant as of that date returned to the participant, the Company shall apply the funds then in the participant's account to the purchase of whole shares of Common Stock reserved under the option granted to such participant with respect to the Offering Period to the extent that such option is exercisable on the Purchase Date. The purchase price per share shall be as specified in Section 8 of this Plan. Any cash remaining in a participant's account after such purchase of shares shall be refunded to such participant in cash, without interest. In the 3 HNC Software Inc. 1995 Employee Stock Purchase Plan As Amended Through January 1, 2002 event that this Plan has been oversubscribed, all funds not used to purchase shares on the Purchase Date shall be returned to the participant, without interest. No Common Stock shall be purchased on a Purchase Date on behalf of any employee whose participation in this Plan has terminated prior to such Purchase Date. (e) As promptly as practicable after the Purchase Date, the Company shall arrange the delivery to each participant of a certificate representing the shares purchased upon exercise of his option. (f) During a participant's lifetime, such participant's option to purchase shares hereunder is exercisable only by him or her. The participant will have no interest or voting right in shares covered by his or her option until such option has been exercised. Shares to be delivered to a participant under this Plan will be registered in the name of the participant or in the name of the participant and his or her spouse. 10. LIMITATIONS ON SHARES TO BE PURCHASED. (a) No employee shall be entitled to purchase stock under this Plan at a rate which, when aggregated with his or her rights to purchase stock under all other employee stock purchase plans of the Company or any Subsidiary, exceeds $25,000 in fair market value, determined as of the Offering Date (or such other limit as may be imposed by the Code) for each calendar year in which the employee participates in this Plan. (b) No more than two hundred percent (200%) of the number of shares determined by using eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Offering Date as the denominator may be purchased by a participant on any single Purchase Date. (c) No employee shall be entitled to purchase more than the Maximum Share Amount (as defined below) on any single Purchase Date. Not less than thirty (30) days prior to the commencement of any Offering Period, the Board may, in its sole discretion, set a maximum number of shares which may be purchased by any employee at any single Purchase Date (hereinafter the "MAXIMUM SHARE AMOUNT"). In no event shall the Maximum Share Amount exceed the amounts permitted under Section 10(b) above. If a new Maximum Share Amount is set, then all participants must be notified of such Maximum Share Amount not less than fifteen (15) days prior to the commencement of the next Offering Period. Once the Maximum Share Amount is set, it shall continue to apply with respect to all succeeding Purchase Dates and Offering Periods unless revised by the Board as set forth above. (d) If the number of shares to be purchased on a Purchase Date by all employees participating in this Plan exceeds the number of shares then available for issuance under this Plan, then the Company will make a pro rata allocation of the remaining shares in as uniform a manner as shall be reasonably practicable and as the Board shall determine to be equitable. In such event, the Company shall give written notice of such reduction of the number of shares to be purchased under a participant's option to each participant affected thereby. (e) Any payroll deductions accumulated in a participant's account which are not used to purchase stock due to the limitations in this Section 10 shall be returned to the participant as soon as practicable after the end of the applicable Purchase Period, without interest. 11. WITHDRAWAL. (a) Each participant may withdraw from an Offering Period under this Plan by signing and delivering to the Treasury Department a written notice to that effect on a form provided for such purpose. Such withdrawal may be elected at any time at least fifteen (15) days prior to the end of an Offering Period. (b) Upon withdrawal from this Plan, the accumulated payroll deductions shall be returned to the withdrawn participant, without interest, and his or her interest in this Plan shall terminate. In the event a participant voluntarily elects to withdraw from this Plan, he or she may not resume his or her participation in this Plan during the same Offering Period, but he or she may participate in any Offering Period under this Plan which commences on a date subsequent to such withdrawal by filing a new authorization for payroll deductions in the same manner as set forth above for initial participation in this Plan. 4 HNC Software Inc. 1995 Employee Stock Purchase Plan As Amended Through January 1, 2002 (c) If the purchase price on the first day of any current Offering Period in which a participant is enrolled is higher than the purchase price on the first day of any subsequent Offering Period, the Company will automatically enroll such participant in the subsequent Offering Period. A participant does not need to file any forms with the Company to automatically be enrolled in the subsequent Offering Period. 12. TERMINATION OF EMPLOYMENT. Termination of a participant's employment for any reason, including retirement, death or the failure of a participant to remain an eligible employee, immediately terminates his or her participation in this Plan. In such event, the payroll deductions credited to the participant's account will be returned to him or her or, in the case of his or her death, to his or her legal representative, without interest. For purposes of this Section 12, an employee will not be deemed to have terminated employment or failed to remain in the continuous employ of the Company in the case of sick leave, military leave, or any other leave of absence approved by the Board; provided that such leave is for a period of not more than ninety (90) days or reemployment upon the expiration of such leave is guaranteed by contract or statute. 13. RETURN OF PAYROLL DEDUCTIONS. In the event a participant's interest in this Plan is terminated by withdrawal, termination of employment or otherwise, or in the event this Plan is terminated by the Board, the Company shall promptly deliver to the participant all payroll deductions credited to such participant's account. No interest shall accrue on the payroll deductions of a participant in this Plan. 14. CAPITAL CHANGES. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each option under this Plan which has not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under this Plan but have not yet been placed under option (collectively, the "RESERVES"), as well as the price per share of Common Stock covered by each option under this Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued and outstanding shares of Common Stock of the Company resulting from a stock split or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of issued and outstanding shares of Common Stock effected without receipt of any 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"; and provided further, that the price per share of Common Stock shall not be reduced below its par value per share. Such adjustment shall be made by the Board, whose determination 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 of Common Stock subject to an option. In the event of the proposed dissolution or liquidation of the Company, the Offering Period will 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 options under this Plan shall terminate as of a date fixed by the Board and give each participant the right to exercise his or her option as to all of the optioned stock, including shares which would not otherwise be exercisable. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger or consolidation of the Company with or into another corporation, each option under this Plan shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the participant shall have the right to exercise the option as to all of the optioned stock. If the Board makes an option exercisable in lieu of assumption or substitution in the event of a merger, consolidation or sale of assets, the Board shall notify the participant that the option shall be fully exercisable for a period of twenty (20) days from the date of such notice, and the option will terminate upon the expiration of such period. 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 of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, or in the event of the Company being consolidated with or merged into any other corporation; provided, that the price per share of Common Stock shall not be reduced below its par value per share. 5 HNC Software Inc. 1995 Employee Stock Purchase Plan As Amended Through January 1, 2002 15. NONASSIGNABILITY. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under this Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 22 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be void and without effect. 16. REPORTS. Individual accounts will be maintained for each participant in this Plan. Each participant shall receive promptly after the end of each Purchase Period a report of his or her account setting forth the total payroll deductions accumulated, the number of shares purchased, the per share price thereof and the remaining cash balance, if any, carried forward to the next Purchase Period or Offering Period, as the case may be. 17. NOTICE OF DISPOSITION. Each participant shall notify the Company if the participant disposes of any of the shares purchased in any Offering Period pursuant to this Plan if such disposition occurs within two (2) years from the Offering Date or within one (1) year from the Purchase Date on which such shares were purchased (the "NOTICE PERIOD"). Unless such participant is disposing of any of such shares during the Notice Period, such participant shall keep the certificates representing such shares in his or her name (and not in the name of a nominee) during the Notice Period. The Company may, at any time during the Notice Period, place a legend or legends on any certificate representing shares acquired pursuant to this Plan requesting the Company's transfer agent to notify the Company of any transfer of the shares. The obligation of the participant to provide such notice shall continue notwithstanding the placement of any such legend on the certificates. 18. NO RIGHTS TO CONTINUED EMPLOYMENT. Neither this Plan nor the grant of any option hereunder shall confer any right on any employee to remain in the employ of the Company or any Subsidiary, or restrict the right of the Company or any Subsidiary to terminate such employee's employment. 19. EQUAL RIGHTS AND PRIVILEGES. All eligible employees shall have equal rights and privileges with respect to this Plan so that this Plan qualifies as an "employee stock purchase plan" within the meaning of Section 423 or any successor provision of the Code and the related regulations. Any provision of this Plan which is inconsistent with Section 423 or any successor provision of the Code shall, without further act or amendment by the Company or the Board, be reformed to comply with the requirements of Section 423. This Section 19 shall take precedence over all other provisions in this Plan. 20. NOTICES. All notices or other communications by a participant to the Company under or in connection with this Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. TERM; STOCKHOLDER APPROVAL. After this Plan is adopted by the Board, this Plan will become effective on the date that is the First Offering Date (as defined above); provided, however, that if the First Offering Date does not occur on or before December 31, 1995, this Plan will terminate as of December 31, 1995 having never become effective. This Plan shall be approved by the stockholders of the Company, in any manner permitted by applicable corporate law, within twelve (12) months before or after the date this Plan is adopted by the Board. No purchase of shares pursuant to this Plan shall occur prior to such stockholder approval. Thereafter, no later than twelve (12) months after the Company becomes subject to Section 16(b) of the Exchange Act, the Company will comply with the requirements of Rule 16b-3 with respect to stockholder approval. This Plan shall continue until the earlier to occur of (a) termination of this Plan by the Board (which termination may be effected by the Board at any time), (b) issuance of all of the shares of Common Stock reserved for issuance under this Plan, or (c) ten (10) years from the adoption of this Plan by the Board. 22. DESIGNATION OF BENEFICIARY. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under this Plan in the event of such participant's death subsequent to the end of an 6 HNC Software Inc. 1995 Employee Stock Purchase Plan As Amended Through January 1, 2002 Purchase Period but prior to delivery to him 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 this Plan in the event of such participant's death prior to a Purchase Date. (b) Such designation of beneficiary may be changed by the participant 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 this Plan who is living at the time of such participant's death, the Company shall deliver such shares 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 Company), the Company, in its discretion, may deliver such shares 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. 23. CONDITIONS UPON ISSUANCE OF SHARES; LIMITATION ON SALE OF SHARES. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or automated quotation system upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. 24. APPLICABLE LAW. The Plan shall be governed by the substantive laws (excluding the conflict of laws rules) of the State of Delaware. 25. AMENDMENT OR TERMINATION OF THIS PLAN. The Board may at any time amend, terminate or the extend the term of this Plan, except that any such termination cannot affect options previously granted under this Plan, nor may any amendment make any change in an option previously granted which would adversely affect the right of any participant, nor may any amendment be made without approval of the stockholders of the Company obtained in accordance with Section 21 hereof within twelve (12) months of the adoption of such amendment (or earlier if required by Section 21) if such amendment would: (a) increase the number of shares that may be issued under this Plan; (b) change the designation of the employees (or class of employees) eligible for participation in this Plan; or (c) constitute an amendment for which stockholder approval is required in order to comply with Rule 16b-3 (or any successor rule) of the Exchange Act. 7 EX-10.31 5 a80186ex10-31.txt EXHIBIT 10.31 EXHIBIT 10.31 January 2, 2002 Bruce E. Hansen Poway, CA 92064 Dear Bruce: As we've discussed, the purpose of this letter agreement between you and HNC Software Inc. ("HNC") is to confirm the current terms and conditions of your employment with HNC, including certain modifications to your revised employment offer letter with HNC dated March 1, 2000, a copy of which is attached to this letter as Appendix 1 (the "OFFER LETTER"). In consideration of our mutual agreements set forth below in this letter, you and HNC hereby agree as follows: 1. Your employment with HNC will continue to be on an "at will" basis, as provided in the second full paragraph on page 2 of the Offer Letter. This means that your employment with HNC may be terminated at any time, with or without cause or prior notice, for any reason or no reason; provided, however, that HNC will not terminate your employment prior to March 1, 2002 without Cause (as defined in Section 3 below). You agree that, if at any time during the course of your employment you are requested by HNC to work at home and/or not to work in HNC's offices for any period of time, then during that period of time you will not perform any services at, nor will you work at, enter onto or appear at, HNC's offices unless you are expressly requested to do so by HNC's Chief Executive Officer. 2. You agree to perform the duties requested of you by HNC's Board of Directors or any committee thereof (the "BOARD") and/or by HNC's Chief Executive Officer (the "CEO"). These duties will include active performance of your existing duties as HNC's President, such as providing day-to-day financial management of HNC's operations, staff oversight and JOOP strategy and policy setting. In particular, you agree that you will, as directed by the Board and/or the CEO, actively assist HNC in: (a) recruiting persons designated by the Board and/or the CEO to serve as officers or management team members; (b) training and orienting any persons hired by HNC as officers or management team members in order to facilitate an orderly, stable and successful transition in HNC's business and management organization; (c) achieving management's "buy in" to HNC's strategic direction as determined by the Board and the CEO; and (d) maintaining stability in HNC's management team, such as working to ensure that the roles and responsibilities of HNC management team members are suitably matched. 3. If your employment with HNC is terminated by HNC at any time for any reason other than "Cause" (as defined below in this Section 3), then, subject to your first executing and delivering to HNC a settlement agreement and general release satisfactory to HNC and in substantially the form attached to this letter as Appendix 2 and such release becoming irrevocable and binding upon you: (a) HNC will pay you a cash severance payment in an amount equal to one (1) year of your then-current base salary (the "SEVERANCE PAYMENT"), with such Severance Payment to be paid to you in approximately equal monthly installments (net of all applicable payroll and tax withholdings) upon each of HNC's regular payroll periods during the one (1) year period immediately following the effective date of the termination of your employment other than for Cause (the "TERMINATION DATE"); (b) You will also become entitled to receive a cash bonus under the HNC bonus program in which you are participating during the fiscal year in which the Termination Date occurs, to the extent that such bonus has been earned by you under the terms of such bonus program as of the Termination Date; provided however, that in no event will the amount of such bonus be less than the greater of: (i) sixty percent (60%) of your maximum target bonus for that fiscal year under such bonus program; or (ii) the average percentage of the maximum target bonus actually earned by members of the JOOP in that fiscal year (the "JOOP" being comprised of HNC's CEO and the members of HNC's "Office of the President"). Such bonus will be paid to you when the amount of similar bonuses payable to members of the JOOP for the fiscal year in question are determined and paid by HNC. (c) On the Termination Date, the vesting of your right to exercise the outstanding HNC common stock options then held by you (your "OPTIONS") will accelerate by one (1) year (and no more) and will cease to vest thereafter (that is, on the Termination Date your Options will vest and become exercisable to the extent that they would have been vested if you had remained continuously employed by HNC until one (1) year after the Termination Date). (d) Your Options will continue to be exercisable by you, to the extent they are vested pursuant to subparagraph (c) above, for a period of one (1) year after the Termination Date; (e) HNC will execute and deliver to you a limited release in substantially the form attached to this letter as Appendix 3;. (f) HNC will reimburse you for any verified COBRA payments that you make in order to continue your coverage under HNC's health and medical insurance benefit plans during the Continuation Period (as defined below); and (g) At its expense, during the Continuation Period HNC will continue your coverage under any life insurance benefits in which you are participating in your capacity as an HNC employee immediately prior to the Termination Date (if any), to the extent permitted under any such life insurance benefit plan(s). The "CONTINUATION PERIOD" means that time period beginning on the Termination Date and ending upon the earlier to occur of (i) one (1) year after the Termination Date or (ii) the first date on or after the Termination Date on which you commence employment with any other party. As used in this letter, the term "CAUSE" means: (a) your commission of a crime, an intentional tort, an act of violence or other willful misconduct that adversely affects the reputation or assets of HNC, any of its affiliates or any customer, licensee, licensor or supplier of HNC or any of its affiliates; (b) your commission of any crime or any act of fraud or dishonesty against HNC or any of its affiliates; (c) your intentional destruction, damage or misappropriation or conversion of any property (including without limitation technology, software or trade secrets) of HNC or any of its affiliates; (d) your habitual neglect of your duties to HNC; (e) your willful disregard or disobedience in any material respect of any of the stated policies of HNC that is not susceptible to cure or that is not cured within two (2) business days after the Board or CEO give you written notice of such disregard or disobedience; (f) a material breach by you of this Agreement or your Employee Invention Assignment and Confidentiality Agreement with HNC (including without limitation a breach by you of any of your agreements or obligations under Section 1 of this Agreement); or (g) your voluntary termination of employment with, or your voluntary resignation from, HNC prior to March 1, 2002. You agree with HNC that the provisions of this Section 3 entirely replace and supersede the fifth paragraph on page 1 of the Offer Letter (regarding severance). 4. You hereby confirm and agree that HNC has fully performed and satisfied all its obligations to you as provided in the second paragraph of page 1 of the Offer Letter and Attachment A thereto (regarding relocation assistance and reimbursement for temporary housing). You further confirm and agree with HNC that you have repaid in full to HNC the entire amount of principal and interest payable by you to HNC under: (a) that certain Loan and Security Agreement dated as of June 2, 2000 among HNC, you and your spouse, Jody A. Hansen, as amended by that certain First Amendment to Loan and Security Agreement made and entered into as of December 1, 2000 among HNC, you and Jody A. Hansen (collectively, the "LOAN AND SECURITY AGREEMENT"); and (b) the Secured Full Recourse Promissory Note dated as of June 2, 2000 in the principal amount of Six Hundred Thousand Dollars ($600,000) made and given by you and Jody A. Hansen to HNC (the "SECURED NOTE"). 5. You agree that during your employment with HNC, and for a period of one (1) year after termination of your employment with HNC, you will not for any reason, whether directly or indirectly: (a) solicit, recruit, take away or attempt to take away, any employee or consultant of HNC or any of its affiliates, or induce (or attempt to induce) any employee or consultant of HNC or any of its affiliates to terminate his or its employment or services with HNC or any of HNC's affiliates; or (b) use any confidential or proprietary information of HNC or any of it is affiliates to, directly or indirectly, solicit any customer of HNC or any of its affiliates or induce any customer of HNC or its affiliates to terminate its relationship with HNC or any HNC affiliate. You and HNC agree that the foregoing provisions of this Section 5 will entirely supersede and replace the provisions of Sections 10 and 12 of your Employee Invention Assignment and Confidentiality Agreement with HNC, which you entered into upon becoming an HNC employee (the "INVENTION ASSIGNMENT /CONFIDENTIALITY AGREEMENT"), and that Sections 10 and 12 of the Invention Assignment / Confidentiality Agreement are hereby terminated and will be of no further force or effect. 6. We agree that any dispute or claim, whether based on contract, tort or otherwise, relating to or arising out of your employment with HNC, or relating to the Offer Letter and/or to this letter agreement shall be subject to final and binding arbitration as provided in the final paragraph of the Offer Letter and the Agreement to Arbitrate Claims between you and HNC which you signed and dated as of March 1, 2000 (the "ARBITRATION AGREEMENT"); provided, however, that notwithstanding the foregoing or anything to the contrary in the Arbitration Agreement, you acknowledge and agree with HNC that, in the event of a breach or threatened breach by you or HNC of your Invention Assignment / Confidentiality Agreement or the provisions of Section 5 of this letter agreement, the non-breaching party would suffer irreparable harm in an amount that could not be readily determined, and therefore the non-breaching party will be entitled to the remedies of injunctive relief, specific performance and other equitable remedies to enforce such provisions and will be entitled to seek such relief and remedies from a court without the need for arbitration. 7. Except as otherwise expressly set forth in, or amended by, this letter agreement, the terms of your employment with HNC as set forth in the Offer Letter will continue in full force and effect. In addition, you confirm and agree that you will continue to be bound by and subject to all the terms and conditions of your Invention Assignment / Confidentiality Agreement, as modified by this letter agreement. Bruce, if you agree to all of the foregoing provisions of this letter agreement, please confirm and indicate your agreement by signing this letter in the signature block provided for you below. HNC has agreed to the foregoing provisions of this letter agreement as evidenced by my signature below. Sincerely, HNC SOFTWARE INC. By: /s/ John Mutch 1/14/2002 ------------------------------------ John Mutch, Chief Executive Officer ACCEPTED AND AGREED: /s/ Bruce E. Hansen - ------------------------- Bruce E. Hansen ATTACHMENTS: - ----------- Appendix 1: Revised Employment Offer Letter dated March 1, 2000 Appendix 2: Settlement Agreement and General Release Appendix 3: Limited Release APPENDIX 1 REVISED EMPLOYMENT OFFER LETTER DATED MARCH 1, 2000 APPENDIX 1 [HNC letterhead] March 1, 2000 Revision to Offer Letter dated Feb. 16, 2000 Bruce E. Hansen 1105 Mansion Ridge Road Santa Fe, NM 87501 Dear Bruce: On behalf of HNC Software Inc. (HNC) we are pleased to offer you a position as President, Financial Solutions in our Financial Solutions division reporting to John Mutch, President & CEO. Your salary will initially be $20,833.34 per month. In addition, you will be eligible to participate in our bonus program. This program will enable you to receive a cash bonus in 2000 (prorated based on the number of months worked in 2000) of up to $100,000 based upon goals to be determined and your performance relative to those goals. Your total target compensation on an annual basis is $350,000. This offer is contingent upon completing and receiving satisfactory references and a background check. HNC will provide you with relocation assistance as defined in Attachment A. In addition, HNC will either reimburse you for temporary housing in San Diego for you and your family prior to your relocation (assuming a summer relocation date). Or, if you prefer, we will reimburse you for your actual commuting expenses, until the relocation is completed, with a periodic trip for your family to San Diego. You will be eligible to participate in the employee benefits program established by HNC for its employees, generally effective the first day of the month following your date of hire. These benefits are listed in the enclosed information sheet and are subject to the participation conditions stated therein. Upon your acceptance of this offer, we will recommend to the compensation committee of the HNC board that you be granted an option for seven (7) years to purchase 100,000 shares of HNC Common Stock at the current fair market value which will be the closing NASDAQ price on your date of hire or the date of the compensation committee meeting, whichever is later. If approved, the option shares will vest over a four (4) year period (based on your date of hire, or the date the compensation committee approves the grants, whichever is later) at the rate of 25% of the option shares per year, subject to your continued employment. The options will have a term of seven years, subject to your continued employment. If you are terminated for reason other than cause, HNC agrees to pay you severance in the amount of one year base salary, and upon your signing of a separation and general release agreement. Upon your employment, you will be required to sign a standard Invention Assignment and Confidentiality Agreement agreeing to hold in confidence any proprietary information received as an employee of HNC and to assign to HNC any inventions that you may make while employed by HNC. We wish to impress upon you that you are not to bring with you any confidential or Bruce Hansen March 1, 2000 Page 2 proprietary material of any former employer or to violate any other obligation to your former employers. In addition, you will be required to sign an Arbitration Agreement and a Code of Ethics Policy. All three documents are enclosed. Upon your hire you are also required to provide the Company with legally required proof of your identity and authorization to work in the United States. Please bring appropriate documentation with you on your date of hire. If you are unsure of what constitutes appropriate documentation, please contact our Human Resources Department prior to your start date. Your employment with HNC, should you accept this offer, will not be for any specific term and may be terminated at any time, with or without cause and with or without notice, by you or by the Company for any reason. Any contrary representations or agreements which may have been made to you are superseded by this offer. The at-will nature of your employment described in this offer letter shall constitute the entire agreement between you and HNC concerning the duration of your employment and the circumstances under which either you or the Company may terminate the agreement that changes the at will status of employment with HNC. The at-will term of your employment with HNC can only be changed in a writing signed by you and the President and CEO of HNC Software Inc., which expressly states the intention to modify the at will term of your employment. By signing the offer below, you acknowledge and agree that length of employment, promotions, positive performance reviews, pay increases, bonuses, increases in job duties or responsibilities and other changes during employment will not change the at will term of your employment with HNC and will not create any implied contract requiring cause for termination of employment. As an employee of HNC, you will be required to comply with all Company policies and procedures. In particular, you will be required to familiarize yourself with and to comply with HNC's policy prohibiting unlawful harassment and discrimination and the policy concerning drugs and alcohol. Violations of these policies may lead to immediate termination of employment. Bruce, we sincerely appreciate your interest in HNC and hope that you will accept our offer. If you wish to accept this offer, please sign below and return the fully executed letter to us, along with the executed Invention Assignment & Confidentiality Agreement, the Arbitration Agreement and the Code of Ethics Policy. You should keep one copy of this letter for your own records. This offer, if not accepted, will expire on March 1, 2000. Sincerely, Marlene Maher Senior Vice President, Human Resources enclosures APPENDIX 2 SETTLEMENT AGREEMENT AND GENERAL RELEASE APPENDIX 2 SETTLEMENT AGREEMENT AND GENERAL RELEASE THIS SETTLEMENT AGREEMENT AND GENERAL RELEASE is made and entered into by and between BRUCE E. HANSEN (hereinafter referred to as "EMPLOYEE") and HNC SOFTWARE INC., a Delaware corporation (hereinafter referred to as the "COMPANY"), for and on behalf of the Company and its subsidiaries and affiliated entities. Whereas, as a condition precedent to Employee receiving certain substantial severance benefits from the Company pursuant to a letter agreement dated as of January 2, 2002 between Employee and the Company, Employee has agreed to enter into this Settlement Agreement and General Release in order to fully and finally settle all differences between Employee and the Company and to grant the Company a general release of claims, including, but in no way limited to, any differences or claims that might arise out of Employee's employment with the Company, and the termination of Employee's employment with the Company; NOW THEREFORE, in consideration of the premises and the mutual promises contained in this Agreement, the parties hereby agree as follows: 1. Employee releases and discharges the Company, its successors and assigns, subsidiaries, affiliates, and the employees, officers, directors, stockholders, agents, attorneys and representatives of the Company and its subsidiaries and affiliates (the Company, together with its successors, subsidiaries, affiliates, and such employees, officers, directors, stockholders, agents, attorneys and representatives being collectively referred to as the "COMPANY RELEASEES") from all claims, liabilities, demands and causes of action known or unknown, fixed or contingent, which Employee has or may hereafter have arising out of or in any way connected with his employment with the Company, including the termination of his employment with the Company; provided, however, that the foregoing release and discharge will not release or discharge the Company from any of its unperformed express obligations to Employee under (i) Section 3 of that certain letter agreement between the Company and Employee dated as of January 2, 2002 which sets forth and amends terms of Employee's employment with the Company (the "LETTER AGREEMENT"); or (ii) this Agreement. 2. This Settlement and General Release shall not in any way be construed as an admission by the Company or any Company Releasee that it has acted wrongfully with respect to the Employee or any other person, that the Employee has acted wrongfully, or that the Employee has any rights whatsoever against the Company or any Company Releasee. The Company specifically disclaims any liability to Employee or any wrongful acts against Employee or any other person, on the part of itself, its employees, agents and all Company Releasees. Rather, the parties have entered into this settlement and release in order to lend greater certainty to the existing state of affairs in exchange for the promises and considerations herein. 3. Employee represents, understands and agrees that his employment with the Company will terminate on _________, 200_. 4. Employee understands that various federal, state and local laws prohibit age, sex, race or other forms of discrimination and that these laws are enforced through the U.S. Equal Employment Opportunity Commission, and state and local human rights agencies. Employee understands that if he believed his treatment by the Company or any Company Releasee has been discriminatory, he has had the right to consult with these agencies and to file a charge with them. Employee has decided voluntarily to enter into this Settlement Agreement and General Release, and waive the right to recover any amounts to which he may have been entitled under such laws. 5. Employee represents and agrees that he will keep the terms and amount of this Settlement Agreement and General Release completely confidential, and that he will not disclose any information concerning this Settlement Agreement and General Release to anyone, other than his spouse and tax preparer, if any, or as required by legal process or applicable law; provided however, that Employee will first notify the Company if such disclosure is sought, allowing the Company the opportunity to object to such disclosure. In addition, Employee may disclose any information contained in this Settlement Agreement and General Release which the Company has previously made public disclosure of. 6. It is agreed that the benefits contained in this Settlement Agreement and General Release which flow to Employee from the Company are subject to termination, reduction or cancellation in the event that Employee takes any action or engages in any conduct deemed by the Company to be in violation of this Agreement. 7. Employee represents and agrees that this Settlement Agreement and General Release is binding upon himself, his estate, heirs, successors and assigns. 8. Employee represents and agrees that the Company has advised him to consult with an attorney regarding aspects of this Settlement Agreement and General Release and that to the extent, if any, that he desired, Employee has availed himself of this right, that he has carefully read and fully understands all of the provisions of this Settlement Agreement and General Release, and that he is voluntarily entering into this Settlement Agreement and General Release. 9. Employee agrees not to engage in conduct or undertake speech derogatory about, disparaging of or detrimental to the Company or any Company Releasee or its reputation, its board of directors, officers, management, practices or procedures, or business operations. 10. Employee agrees further that if any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable as a result of a claim, demand or cause of action Employee has brought, the Company, at its option, will be entitled to recover payments made to Employee, or on Employee's behalf, pursuant to the Letter Agreement. Any such legal action by the Company shall not be considered retaliatory. 11. Employee represents and acknowledges that he has carefully read and fully understands all of the provisions of this Settlement Agreement and General Release which sets forth the entire agreement between the parties. Except for the Letter Agreement, and the Employee Invention Assignment and Confidentiality Agreement of Employee with the Company dated February 22, 2000, as such has been amended and partially superseded by the Letter Agreement, this Settlement Agreement and General Release supersedes any and all prior agreements or understandings between the parties and all corporate policies, practices or procedures pertaining to the subject matter of this Settlement Agreement and General Release. 12. Employee understands that various federal, state and local laws prohibit age, sex, race, disability, benefits, pension, health and other forms of discrimination and that these laws can be enforced through the U.S. Equal Employment Opportunity Commission, California state and local human rights agencies and federal and state courts. Employee understands that if he believes his treatment by the Company or any Company Releasee was discriminatory, he has had the right to consult with these agencies and to file a charge with them or file a lawsuit. Employee has decided voluntarily to enter into this Agreement, and waive the right to recover any amounts to which he may have been entitled under such laws, including, but not limited to: the Age Discrimination in Employment Act, 29 U.S.C. Section 621 et seq. (as amended by the Older Workers' Benefit Protection Act, 29 U.S.C. Section 626(f)); the California Fair Employment and Housing Act, California Government Code Section 12900 et seq.; the Employee Retirement Income Security Act (ERISA), 29 U.S.C. Section 1001 et seq.; Title VII of the Civil Rights Act of 1964, 42 U.S.C. Section 2000e et seq.; the Americans with Disabilities Act, and 42 U.S.C. Section 1981. In addition, this release covers all statutory, common law, constitutional and other claims, including but not limited to, all claims for wrongful discharge in violation of public policy, breach of contract, express or implied, breach of covenant of good faith and fair dealing, intentional or negligent misrepresentation, any tort, personal injury, or violation of law which Employee may now have, or has ever had. The parties agree that any past or future claims for money damages, loss of wages, earnings and benefits, both past and future, medical expenses, attorneys' fees and costs, reinstatement and other equitable relief, are all released by this Agreement. Accordingly, to the fullest extent permitted by law, at no time subsequent to the execution of this Agreement will Employee pursue, or cause or knowingly permit the prosecution, in any state, federal or foreign court, or before any local, state, federal or foreign administrative agency, or any other tribunal, any charge, claim or action of any kind, nature and character whatsoever, known or unknown, which he may now have, has ever had, or may in the future have against the Company and/or any officer, director, employee or agent of the Company, which is based in whole or in part on any matter covered by this Agreement. 13. Employee expressly waives any right or benefit available to him in any capacity under the provisions of section 1542 of the Civil Code of California, which provides: "A RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." 14. Employee represents and acknowledges that he has not relied upon any representations or statements, written or oral, not set forth in this document. 15. Employee understands that he has twenty-one (21) days in which to consider whether he should sign this Agreement; and that he further understands that if he signs this Agreement, he will be given seven (7) days following the date on which he signs this Agreement to revoke it and that this Agreement will not be effective until after this seven (7) day period had lapsed. 16. This Agreement shall become effective on the eighth (8th) day following the date it is signed by Employee. It is understood that Employee may revoke his approval of this Agreement in the seven (7) day period following the date he signs this Agreement. PLEASE READ CAREFULLY. THIS SETTLEMENT AGREEMENT AND GENERAL RELEASE INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. Executed at ______________, California, this ____ day of _____________, 200_. By: ______________________________ Bruce E. Hansen Executed at ______________, California, this ____ day of _________, 200_ . HNC SOFTWARE INC. By: _____________________________________ [name] [title] APPENDIX 3 LIMITED RELEASE ______, 200__ Bruce E. Hansen Poway, CA 92064 Re: Limited Release Dear Bruce: HNC Software Inc. ("HNC") is executing and delivering this letter agreement to you, Bruce E. Hansen ("YOU") pursuant to the provisions of Section 3(e) of that certain letter agreement between You and HNC dated as of January 2, 2002 concerning terms of your employment with HNC (the "LETTER AGREEMENT"). This letter is the "Limited Release" referred to in the Letter Agreement. HNC hereby agrees with You as follows 1. Subject to the terms and conditions of this letter, HNC releases and discharges You and your heirs and successors (collectively referred to as the "HANSEN RELEASEES") from all claims, liabilities, demands and causes of action known or unknown, fixed or contingent, which HNC has or may hereafter have against You arising out of or in any way connected with Your employment with HNC, including the termination of Your employment with HNC; provided, however, that notwithstanding the foregoing, the foregoing release and discharge will NOT release or discharge You from any of Your obligations, duties or liabilities to HNC or any of its subsidiaries or affiliates under, or arising from: (a) the Letter Agreement, (b) Your revised employment offer letter with HNC dated March 1, 2000, as such was amended by the Letter Agreement; (c) Your Employee Invention Assignment and Confidentiality Agreement with HNC, which You entered into upon becoming an HNC employee, as such was amended by the Letter Agreement; (d) the Settlement Agreement and General Release being entered into by You and HNC concurrently herewith; (e) any act or omission by You that constitutes or involves Your (i) fraud, (ii) criminal conduct; (iii) willful misconduct, malfeasance or breach of fiduciary duty with respect to HNC, any of its subsidiaries or affiliates or any director, officer, stockholder, employee, agent, attorney or representative of HNC or any of its subsidiaries or affiliates; (iv) wrongful disclosure, misuse or misappropriation of any confidential or proprietary information of HNC or any of its subsidiaries or affiliates, or (v) wrongful disclosure, misuse, misappropriation or infringement of any software, technology or intellectual property rights of HNC or any of its subsidiaries or affiliates. 2. This Settlement and General Release shall not in any way be construed as an admission by You or by any Hansen Releasee that You have acted wrongfully with respect to HNC or any other person, that HNC has acted wrongfully, or that HNC has any rights whatsoever against You or any Hansen Releasee. Rather, the parties have entered into this release in order to lend greater certainty to the existing state of affairs in exchange for the promises and considerations herein. 3. HNC agrees not to engage in conduct or undertake speech that is affirmatively derogatory about, disparaging of or detrimental to You or Your reputation as it relates to Your employment with HNC. Executed at ______________, California, this ____ day of _________, 200_. By: ______________________________ Bruce E. Hansen Executed at ______________, California, this ____ day of _________, 200_. HNC SOFTWARE INC. By: _____________________________________ [name] [title] EX-10.38 6 a80186ex10-38.txt EXHIBIT 10.38 EXHIBIT 10.38 FIFTH AMENDMENT TO CREDIT AGREEMENT AND FIRST AMENDMENT TO SECURITY AGREEMENT: SECURITIES ACCOUNT THIS FIFTH AMENDMENT TO CREDIT AGREEMENT AND FIRST AMENDMENT TO AGREEMENT: SECURITIES ACCOUNT (this "Amendment") is entered into as of January 11, 2002, by and between HNC SOFTWARE INC., a Delaware corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITALS WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of July 11, 1997, as amended from time to time ("Credit Agreement"). WHEREAS, in connection with the Credit Agreement, Borrower has executed and delivered to Bank a Security Agreement: Securities Account and Addendum thereto (collectively, the Security Agreement") dated as of March 15, 2000. WHEREAS, Bank and Borrower have agreed to certain changes in the terms and conditions set forth in the Credit Agreement and Security Agreement and have agreed to amend the Credit Agreement and Security Agreement to reflect said changes. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Credit Agreement and Security Agreement shall be amended as follows: 1. Section 1.1(c) of the Credit Agreement is hereby amended to read as follows: "(c) Borrowing and Repayment. Borrower may from time to time during the term of the Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; provided however, that the total outstanding borrowings under the Line of Credit (including without limitation, the amount available to be drawn under outstanding Letters of Credit) shall not at any time exceed (i) the maximum principal amount available thereunder, as set forth above, less (ii) the PCS Credit Exposure. The term "PCS Credit Exposure" means the aggregated principal amount outstanding from time to time of loans made by Bank's Private Client Services Division ("PCS") under its Executive Home Equity Loan Program to Borrower's directors, officers or employees, which loans are guaranteed by Borrower, provided, however, that the PCS Credit Exposure shall not exceed $4,000,000.00. Nothing herein obligates Bank (including PCS) to make any such or other loans to Borrower's directors, officers or employees." 2. The first sentence of Section 1.4 of the Credit Agreement (added in the Third Amendment to Credit Agreement) is hereby amended to read as follows: "As security for all indebtedness of Borrower to Bank subject hereto and under Borrower's guaranties of the PCS Credit Exposure, Borrower hereby grants to Bank security interests of first priority in Borrower's Custody Account No. 358-214459 maintained with Bank, and Borrower's deposit account No. 4091-382226 maintained -1- with Bank. All references to deposit account No. 4417-802659 in any Security Agreement previously executed by Borrower in favor of Bank are hereby deemed to read deposit account No. 4091-382226." 3. The term "Indebtedness" as defined and used in the Security Agreement shall include, without limitation, (a) all indebtedness of Borrower to Bank under or in connection with the Credit Agreement and the Loan Documents (as such term is defined in the Credit Agreement) and (b) Borrower's guaranties of the PCS Credit Exposure, as defined above. 4. Except as specifically provided herein, all terms and conditions of the Credit Agreement remain in full force and effect, without waiver or modification. All terms defined in the Credit Agreement shall have the same meaning when used in this Agreement. This Amendment and the Credit Agreement shall be read together, as one document. 5. Borrower hereby remakes all representations and warranties contained in the Credit Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of the Amendment there exists no Event of Default as defined in the Credit Agreement, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute any such Event of Default. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above. WELLS FARGO BANK, HNC SOFTWARE INC. NATIONAL ASSOCIATION By: /s/ JOHN MUTCH By: /s/ ALVA DIAZ ------------------------- ----------------------- John Mutch Alva Diaz Chief Executive Officer Vice President By: /s/ KENNETH J. SAUNDERS ------------------------- Kenneth J. Saunders Chief Financial Officer -2- EX-10.45 7 a80186ex10-45.txt EXHIBIT 10.45 EXHIBIT 10.45 INDUSTRIAL BUILDING LEASE BETWEEN COPPELL COMMERCE CENTER, LTD. ("LANDLORD") AND HNC INSURANCE SOLUTIONS, INC., A CALIFORNIA CORPORATION ("TENANT") DATE OF LEASE: DECEMBER 13, 2000 BUILDING: COPPELL COMMERCE CENTER TABLE OF CONTENTS

i 34. ENTIRE AGREEMENT....................................................22 35. LIMITATION OF LIABILITY.............................................22 EXHIBIT A-OUTLINE AND LOCATION OF PREMISES EXHIBIT A-1-LEGAL DESCRIPTION OF LAND EXHIBIT B-RULES AND REGULATIONS EXHIBIT C-PAYMENT OF BASIC COSTS EXHIBIT D-WORK LETTER EXHIBIT E-ADDITIONAL PROVISIONS EXHIBIT F-COMMENCEMENT LETTER EXHIBIT G-GUARANTY OF LEASE ii INDUSTRIAL BUILDING LEASE AGREEMENT This Industrial Building Lease Agreement (THE "LEASE"), made and entered into as of the 13th day of December, 2000, between Coppell Commerce Center Ltd., a Texas limited partnership ("LANDLORD") and HNC Insurance Solutions, Inc., a California corporation ("TENANT"). W I T N E S S E T H: 1. DEFINITIONS. The following are definitions of some of the defined terms used in this Lease. The definition of other defined terms are found throughout this Lease. A. "BUILDING" shall mean the industrial building at 1221 S. Beltline Road, County of Dallas, State of Texas, currently known as Coppell Commerce Center, and located on the land described in EXHIBIT A-1. B. "BASE RENT": Base Rent will be paid according to the following schedule, subject to the provisions of Section 5. hereof. For the purposes of this Section 1.B., "LEASE YEAR" shall mean the twelve (12) month period commencing on the Commencement Date, and on each anniversary of the Commencement Date. MONTHLY INSTALLMENTS PERIOD ANNUAL BASE RENT OF BASE RENT FIRST LEASE YEAR $174,240.00 $14,520.00 SECOND LEASE YEAR $174,240.00 $14,520.00 THIRD LEASE YEAR $174,240.00 $14,520.00 FOURTH LEASE YEAR $174,240.00 $14,520.00 FIFTH LEASE YEAR $174,240.00 $14,520.00

The Base Rent due for the first month during the Lease Term (hereinafter defined) shall be paid by Tenant to Landlord contemporaneously with Tenant's execution hereof. C. "ADDITIONAL RENT": shall mean Tenant's Pro Rata Share of Basic Costs (hereinafter defined) and any other sums (exclusive of Base Rent) that are required to be paid to Landlord by Tenant hereunder, which sums are deemed to be Additional Rent under this Lease. Additional Rent and Base Rent are sometimes collectively referred to herein as "Rent." D. "BASIC COSTS" shall mean all direct and indirect costs and expenses incurred in connection with the Building as more fully defined in EXHIBIT C attached hereto. TENANT AGREES TO ESCROW WITH LANDLORD AN AMOUNT EQUAL TO 1/12 OF THE ESTIMATED ANNUAL COSTS OF ITS PROPORTIONATE SHARE OF SUCH BASIC COSTS WITH TENANT'S MONTHLY BASE RENT PAYMENT. LANDLORD CURRENTLY ESTIMATES TENANT'S ANNUAL COST TO BE $2.20 PER SQUARE FOOT. E. "SECURITY DEPOSIT" shall mean the sum of Fourteen Thousand Five Hundred Twenty and No/100 Dollars ($14,520.00). The Security Deposit shall be paid by Tenant to Landlord contemporaneously with Tenant's execution hereof. F. "COMMENCEMENT DATE", "LEASE TERM" and "TERMINATION DATE" shall have the meanings set forth in subsection 1.F.(1): (1) The "LEASE TERM" shall mean a period of sixty (60) months commencing on the earlier to occur (a) MARCH 1, 2001 (the "TARGET COMMENCEMENT DATE") and (b) the date upon which Landlord's Work in the Premises has been substantially completed as such date is determined pursuant to Section 3.A. hereof (the earlier to occur of such dates being defined as the "COMMENCEMENT DATE"). THE DATE WHICH IS SIXTY (60) MONTHS AFTER THE COMMENCEMENT DATE (the "TERMINATION DATE") shall, unless sooner terminated as provided herein, mean the last day of the Lease Term. Notwithstanding the foregoing, if the Termination Date, as determined herein, does not occur on the last day of a calendar month, the Lease Term shall be extended by the number of days necessary to cause the Termination Date to occur on the last day of the last calendar month of the Lease Term. Tenant shall pay Base Rent and Additional Rent for such additional days at the same rate payable for the portion of the last calendar month immediately preceding such extension. The Commencement Date, Lease Term (including any extension by Landlord pursuant to this subsection 1.F.(1) and Termination Date shall be set forth in a Commencement Letter prepared by Landlord and executed by Tenant in accordance with the provisions of Section 3.A. hereof. G. "PREMISES" shall mean the space located within the Building and outlined on EXHIBIT A to this Lease. H. "APPROXIMATE RENTABLE AREA IN THE PREMISES" shall mean the area contained within the demising walls of the Premises and any other area designated for the exclusive use of Tenant plus an allocation of the Tenant's pro rata share of the square footage of the "Common Areas" and the "Service Areas" (as defined below). For purposes of the Lease it is agreed and stipulated by both Landlord and Tenant that the Approximate Rentable Area in the Premises is 14,400 square feet. I. The "APPROXIMATE RENTABLE AREA IN THE BUILDING" is 105,600 square feet. The Approximate Rentable Area in the Premises and the Approximate Rentable Area in the Building as set forth herein may be revised at Landlord's election if Landlord's architect determines such estimate to be inaccurate in any material degree after examination of the final drawings of the Premises and the Building. J. "TENANT'S PRO RATA SHARE" shall mean 13.6364 percent (13.6364%) which is the quotient (expressed as a percentage), derived by dividing the Approximate Rentable Area in the Premises by the Approximate Rentable Area in the Building. K. "PERMITTED USE" shall mean SALES, TRAINING AND ADMINISTRATION, CUSTOMER SERVICE AND SUPPORT, CUSTOMER DATA REVIEW, AND ANY OTHER LEGAL USE INCIDENTAL TO THE FOREGOING WHICH IS CONSISTENT WITH THE CHARACTER OF THE BUILDING and no other use or purpose. L. Intentionally Omitted. M. "GUARANTOR" shall mean HNC Software, Inc. and any other party that agrees in writing to guarantee Tenant's obligations under this Lease. N. "BROKER" shall mean CB Richard Ellis. O. "BUILDING MANAGER" shall mean Transwestern Commercial Services or such other company as Landlord shall designate from time to time. P. "BUILDING STANDARD", shall mean the type, brand, quality and/or quantity of materials Landlord designates from time-to-time to be the minimum quality and/or quantity to be used in the Building or the exclusive type, grade, quality and/or quantity of material to be used in the Building. Q. "BUSINESS DAY(S)" shall mean Mondays through Fridays exclusive of the normal business holidays of New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day ("HOLIDAYS"). Landlord, from time to time during the Lease Term, shall have the right to designate additional Holidays, provided such additional Holidays are commonly recognized by other industrial buildings in the area where the Building is located. R. "COMMON AREAS" shall mean those areas located within the Building or on the Property used for corridors, elevator foyers, mail rooms, restrooms, mechanical rooms, elevator mechanical rooms, property management office, janitorial closets, electrical and telephone closets, vending areas, and lobby areas (whether at ground level or otherwise), entrances, exits, sidewalks, skywalks, tunnels, driveways, parking areas and parking garages and landscaped areas and other similar facilities provided for the common use or benefit of tenants generally and/or the public. S. "DEFAULT RATE" shall mean the lower of (i) the Prime Rate plus FOUR PERCENT (4%) or (ii) the Maximum Rate. T. "MAXIMUM RATE" shall mean the highest rate of interest from time-to-time permitted under applicable federal and state law. U. "NORMAL BUSINESS HOURS" for the Building shall mean 8:00 a.m. to 6:00 p.m. Mondays through Fridays, and 8:00 a.m. to 1:00 p.m. on Saturdays, exclusive of Holidays. V. "PRIME RATE" shall mean the per annum interest rate announced by and quoted in the Wall Street Journal from time-to-time as the prime or base rate. W. "PROPERTY" shall mean the Building and the parcel(s) of land on which it is located, other improvements located on such land, adjacent parcels of land that Landlord operates jointly with the Building, and other buildings and improvements located on such adjacent parcels of land. X. "SERVICE AREAS" shall mean those areas within the Building used for stairs, elevator shafts, flues, vents, stacks, pipe shafts and other vertical penetrations (but shall not include any such areas for the exclusive use of a particular tenant). Y. "NOTICE ADDRESSES" shall mean the following addresses for Tenant and Landlord, respectively: 2 Tenant: HNC Insurance Solutions, Inc. 1221 S. Beltline Road Coppell, TX 75019 Attention: Don Dougherty or Service Center Manager with a copy to: HNC Insurance Solutions, Inc. 110 Theory Irvine, CA 92612 Attention: Chief Financial Officer Landlord: Transwestern Commercial Services 17111 Preston Road, Suite 140 Dallas, TX 75248 Attn: Property Manager with a copy to: Transwestern Investment Company 150 North Wacker Drive, Suite 800 Chicago, IL 60606 Attn: Owner's Representative Payments of Rent only shall be made payable to the order of: Transwestern Commercial Services at the following address: P.O. Box 797544 Dallas, TX 75379-7544 or such other name and address as Landlord shall, from time to time, designate. 2. LEASE GRANT. Subject to and upon the terms herein set forth, Landlord leases to Tenant and Tenant leases from Landlord the Premises together with the right, in common with others, to use the Common Areas. 3. ADJUSTMENT OF COMMENCEMENT DATE/POSSESSION. A. If the Lease Term, Commencement Date and Termination Date are to be determined in accordance with Section 1.F.1. above, the Lease Term shall not commence until the earlier to occur of the Target Commencement Date and the date that Landlord has substantially completed the work to be performed by Landlord as set forth in the Work Letter Agreement attached hereto as EXHIBIT D ("LANDLORD'S WORK"); provided, however, that if Landlord shall be delayed in substantially completing the Landlord Work as a result of the occurrence of any of the following (a "DELAY"): (1) Tenant's failure to furnish information in accordance with the Work Letter Agreement or to respond to any request by Landlord for any approval of information within any time period prescribed, or if no time period is prescribed, then within two (2) Business Days of such request; or (2) Tenant's insistence on materials, finishes or installations that have long lead times after having first been informed by Landlord that such materials, finishes or installations will cause a Delay. AS OF THE DATE OF THIS LEASE, TO LANDLORD'S KNOWLEDGE, BUILDING STANDARD MATERIALS DO NOT HAVE LONG LEAD TIMES WHICH WOULD BE LIKELY TO CAUSE A DELAY; or (3) Changes in any plans and specifications requested by Tenant; or (4) The performance or nonperformance by a person or entity employed by on or behalf of Tenant in the completion of any work in the Premises (all such work and such persons or entities being subject to prior approval of Landlord); or (5) Any request by Tenant that Landlord delay the completion of any of the Landlord's Work; or 3 (6) Any breach or default by Tenant in the performance of Tenant's obligations under this Lease; or (7) Any delay resulting from Tenant's having taken possession of the Premises for any reason prior to substantial completion of the Landlord's Work; or (8) Any other delay chargeable to Tenant, its agents, employees or independent contractors; then, for purposes of determining the Commencement Date, the date of substantial completion shall be deemed to be the day that said Landlord's Work would have been substantially completed absent any such Delay(s). The Landlord's Work shall be deemed to be substantially completed on the date that Landlord's Work has been performed (or would have been performed absent any Delay(s), other than any details of construction, mechanical adjustment or any other matter, the noncompletion of which does not materially interfere with Tenant's use of the Premises. The adjustment of the Commencement Date and, accordingly, the postponement of Tenant's obligation to pay Base rent and other sums due hereunder shall be tenant's sole remedy and shall constitute full settlement of all claims that tenant might otherwise have against Landlord by reason of the Premises not being ready for occupancy by Tenant on the Target Commencement Date. Promptly after the determination of the Commencement Date, Landlord and Tenant shall enter into a letter agreement (the "COMMENCEMENT LETTER") on the form attached hereto as EXHIBIT F setting forth the Commencement Date, the termination Date and any other dates that are affected by the adjustment of the Commencement Date. If this Lease requires Landlord to perform Landlord's work in the Premises, the Commencement Letter shall identify any minor incomplete items of the Landlord's Work as reasonably determined by Landlord's architect (the "PUNCHLIST ITEMS"), which Punchlist Items Landlord shall promptly remedy. Tenant, within five (5) days after receipt thereof from Landlord, shall execute the Commencement Letter and return the same to Landlord. Notwithstanding anything herein to the contrary, Landlord may elect, by written notice to Tenant, not to adjust the Commencement Date as provided above if such adjustment wold cause Landlord to be in violation of the existing right granted to any other tenant of the Building. If Landlord elects not to adjust the Commencement Date, the Commencement Date shall be the target Commencement Date, provided that Base Rent and Additional Rent shall not commence until the date that Landlord's Work has been substantially completed (or would have been substantially completed absent any Delays). B. Subject to Paragraph 21 below, by taking possession of the Premises, Tenant is deemed to have accepted the Premises and agreed that the Premises is in good order and satisfactory condition, with no representation or warranty by Landlord as to the condition of the Premises or the Building or suitability thereof for Tenant's use. LANDLORD COVENANTS THAT THE HVAC AND MECHANICAL, ELECTRICAL AND PLUMBING SYSTEM AND EQUIPMENT SERVICING THE PREMISES WILL BE DELIVERED IN GOOD WORKING CONDITION. C. Notwithstanding anything to the contrary contained in this Lease, Landlord shall not be obligated to tender possession of any portion of the Premises or other space leased by Tenant from time to time hereunder that, on the date possession is to be delivered, is occupied by a tenant or other occupant or that is subject to the rights of any other tenant or occupant, nor shall Landlord have any other obligations to Tenant under this Lease with respect to such space until the date Landlord: (1) recaptures such space from such existing tenant or occupant; and (2) regains the legal right to possession thereof. This Lease shall not be affected by any such failure to deliver possession and Tenant shall have no claim for damages against Landlord as a result thereof, all of which are hereby waived and released by tenant. If Landlord is prevented from delivering possession of the Premises to Tenant due to the holding over in possession of the Premises by tenant or other occupant thereof, Landlord shall use reasonable efforts to regain possession of the Premises in order to deliver the same to Tenant. If the Lease Term is to be determined pursuant to Section 1.F.(1), the Commencement Date and Termination Date shall be determined as provided in section 3.A. above. D. If Tenant takes possession of the Premises prior to the Commencement Date, such possession shall be subject to all the terms and conditions of the Lease and Tenant shall pay Base Rent and Additional Rent to Landlord for each day of occupancy prior to the Commencement Date. Notwithstanding the foregoing, if Tenant, with Landlord's prior approval, takes possession of the Premises prior to the Commencement Date for the sole purpose of performing any Landlord-approved improvements therein or installing furniture, equipment or other personal property of Tenant, such possession shall be subject to all of the terms and conditions of the Lease, except that Tenant shall not be required to pay Rent with respect to the period of time prior to the Commencement Date during which Tenant performs such work. Nothing herein shall be construed as granting Tenant the right to take possession of the Premises prior to the Commencement Date, whether for construction, fixturing or any other purpose, without the prior consent of Landlord. 4. USE. The Premises shall be used for the Permitted Use and for no other purpose. Tenant agrees not to use or permit the use of the Premises for any purpose which is illegal, dangerous to life, limb or property or which, in Landlord's sole judgement, creates a nuisance or which would increase the cost of insurance 4 coverage with respect to the Building. Tenant will conduct its business and control its agents, servants, employees, customers, licensees, and invitees in such a manner as not to interfere with, annoy or disturb other tenants or Landlord in the management of the Building and the Property. Tenant will maintain the Premises in a clean and healthful condition, and comply with all laws, ordinances, orders, rules and regulations of any governmental entity with reference to the use, condition, configuration or occupancy of the Premises. Tenant, within ten (10) days after the receipt thereof, shall provide Landlord with copies of any notices it receives with respect to a violation or alleged violation of any such laws, ordinances, orders, rules and regulations. Tenant, at its expense, will comply with the rules and regulations of the Building attached hereto as EXHIBIT B and such other rules and regulations adopted and altered by Landlord from time-to-time and will cause all of its agents, employees, invitees and visitors to do so. All such changes to rules and regulations will be reasonable PROVIDED, HOWEVER, THAT IN NO EVENT SHALL ANY SUCH RULES AND REGULATIONS MATERIALLY AND ADVERSELY CHANGE ANY PROVISION OF THIS LEASE, and shall be sent by Landlord to Tenant in writing. 5. BASE RENT. A. Tenant covenants and agrees to pay to Landlord during the Lease Term, without any setoff or deduction except as otherwise expressly provided herein, the full amount of all Base Rent and Additional Rent due hereunder and the full amount of all such other sums of money as shall become due under this Lease (including, without limitation, any charges for replacement of electric lamps and ballasts and any other services, goods or materials furnished by Landlord at Tenant's request), all of which hereinafter may be collectively called "RENT." In addition Tenant shall pay and be liable for, as Additional Rent, all rent, sales and use taxes or other similar taxes, if any, levied or imposed by any city, state, county or other governmental body having authority, such payments to be in addition to all other payments required to be paid to Landlord by Tenant under the terms and conditions of this Lease. Any such payments shall be paid concurrently with the payments of the Rent on which the tax is based. The Base Rent and Additional Rent for each calendar year or portion thereof during the Lease Term, shall be due and payable in advance in monthly installments of the first day of each calendar month during the Lease Term and any extensions or renewals hereof, and Tenant hereby agrees to pay such Base Rent and Additional Rent to Landlord without demand. If the Lease Term commences on a day other than the first day of a month or terminates on a day other than the last day of a month, then the installments of Base Rent and Additional Rent for such month or months shall be prorated, based on the number of days in such month. No payment by Tenant or receipt or acceptance by Landlord of a lesser amount than the correct installment of Rent due under this Lease shall be deemed to be other than a payment on account of the earliest Rent due hereunder, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance or pursue any other available remedy. The acceptance by Landlord of an installment of Rent on a date after the due date of such payment shall not be construed to be a waiver of Landlord's right to declare a default for any other late payment. All amounts received by Landlord from Tenant hereunder shall be applied first to the earliest accrued and unpaid Rent then outstanding. Tenant's covenant to pay Rent shall be independent of every other covenant set forth in this Lease. B. To the extent allowed by law, all installments of Rent not paid when due shall bear interest at the Default Rate from the date due until paid. In addition, if Tenant fails to pay any installment of Base Rent and Additional Rent or any other item of Rent when due and payable hereunder, a "LATE CHARGE" equal to five percent (5%) of such unpaid amount will be due and payable immediately by Tenant to Landlord. C. The Additional Rent payable hereunder shall be adjusted from time-to-time in accordance with the provisions of EXHIBIT C attached hereto and incorporated herein for all purposes. 6. SECURITY DEPOSIT. The Security Deposit shall be held by Landlord without liability for interest and as security for the performance by Tenant of Tenant's covenants and obligations under this Lease including but not limited to those set forth in Section 10 hereof, it being expressly understood that the Security Deposit shall not be considered an advance payment of Rent or a measure of Tenant's liability for damages in case of default by Tenant. Landlord shall have no fiduciary responsibilities or trust obligations whatsoever with regard to the Security Deposit and shall not assume the duties of a trustee for the Security Deposit. Landlord may, from time-to-time, without prejudice to any other remedy and without waiving such default, use the Security Deposit to the extent necessary to cure or attempt to cure, in whole or in part, any DEFAULT BEYOND ANY APPLICABLE CURE AND NOTICE PERIODS, default to Tenant hereunder. Following any such application of the Security Deposit, Tenant shall pay to Landlord on demand the amount so applied in order to restore the Security Deposit to its original amount. IF TENANT IS NOT IN DEFAULT AT THE TERMINATION OF THIS LEASE, LANDLORD SHALL RETURN ANY UNAPPLIED BALANCE OF THE SECURITY DEPOSIT TO TENANT WITHIN FORTY FIVE (45) DAY(S) AFTER TENANT SURRENDERS THE PREMISES TO LANDLORD IN ACCORDANCE WITH THE TERMS OF THIS LEASE. IN ADDITION TO ANY OTHER DEDUCTIONS LANDLORD IS ENTITLED TO MAKE PURSUANT TO THE TERMS HEREOF, LANDLORD SHALL HAVE THE RIGHT TO MAKE GOOD FAITH ESTIMATE OF ANY UNRECONCILED BASIC COSTS AS OF THE TERMINATION DATE AND TO DEDUCT ANY ANTICIPATED SHORTFALL FROM THE SECURITY DEPOSIT, SUCH ESTIMATE TO BE RECONCILED WHEN THE FINAL BASIC COSTS ARE KNOWN. 5 If Landlord transfers its interest in the Premises during the term of this Lease, Landlord may assign the Security Deposit to the transferee and thereafter shall have no further liability for the return of such Security Deposit. Tenant agrees to look solely to such transferee or assignee or successor thereof for the return of the Security Deposit. Landlord and its successors and assigns shall not be bound by any actual or attempted assignment or encumbrance of the Security Deposit by Tenant. Landlord shall not be required to keep the Security Deposit separate from its other accounts. 7. SERVICES TO BE FURNISHED BY LANDLORD. A. Landlord agrees to furnish Tenant the following services: (1) Water for use in the lavatories on the floor(s) on which the Premises is located. If Tenant desires water in the Premises for any approved reason, including a private lavatory or kitchen, cold water shall be supplied, at Tenant's sole cost and expense, from the Building water main through a line and fixtures installed at Tenant's sole cost and expense with the prior reasonable consent of Landlord. If Tenant desires hot water in the Premises, Tenant, at its sole cost and expense and subject to the prior reasonable consent of Landlord, may install a hot water in the Premises. Tenant shall be solely responsible for the maintenance and repair of any such water heater. (2) Maintenance and repair of all Common Areas in the manner and to the extent reasonably deemed by Landlord to be standard for buildings of similar class, age and location. (3) Electricity to the Premises in accordance with and subject to the terms and conditions of Section 11. of this Lease. (4) GAS TO THE PREMISES IN ACCORDANCE WITH AND SUBJECT TO THE TERMS AND CONDITIONS OF SECTION D BELOW. B. If Tenant requests any other utilities or building services in addition to those identified above, or any of the above utilities or building services in frequency, scope, quality or quantities substantially greater than the standards set by Landlord for the Building, then Landlord shall use reasonable efforts to attempt to furnish Tenant with such additional utilities or building services. Landlord may impose a reasonable charge for such additional utilities or building services, which shall be paid monthly by Tenant as Additional Rent on the same day that the monthly installment of Base Rent is due. C. Except as otherwise expressly provided herein, the failure by Landlord to any extent to furnish, or the interruption or termination of these defined services in whole or in part, resulting from adherence to laws, regulations and administrative orders, wear, use, repairs, improvements alterations or any causes beyond the reasonable control of Landlord shall not render Landlord liable in any respect nor be construed as a constructive eviction of Tenant, nor give rise to an abatement of Rent, nor relieve Tenant from the obligation to fulfill any covenant or agreement hereof. Should any of the equipment or machinery used in the provision of such services for any cause cease to function properly, Landlord shall use reasonable diligence to repair such equipment or machinery. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS ARTICLE 7, IF: (i) LANDLORD CEASES TO FURNISH ANY SERVICE IN THE BUILDING FOR A PERIOD IN EXCESS OF FIVE (5) CONSECUTIVE DAYS AFTER TENANT NOTIFIES LANDLORD OF SUCH CESSATION (THE "INTERRUPTION NOTICE"); (ii) SUCH CESSATION DOES NOT ARISE AS A RESULT OF AN ACT OR OMISSION OF TENANT; (iii) SUCH CESSATION IS NOT CAUSED BY A FIRE OR OTHER CASUALTY (IN WHICH CASE ARTICLE 19 SHALL CONTROL); (iv) THE RESTORATION OF SUCH SERVICE IS REASONABLY WITHIN THE CONTROL OF LANDLORD; AND (v) AS A RESULT OF SUCH CESSATION, THE PREMISES OR A MATERIAL PORTION THEREOF, IS RENDERED UNTENANTABLE (MEANING THAT TENANT IS UNABLE TO USE THE PREMISES IN THE NORMAL COURSE OF ITS BUSINESS) AND TENANT IN FACT CEASES TO USE THE PREMISES, OR MATERIAL PORTION THEREOF, THEN TENANT, AS ITS SOLE REMEDY SHALL BE ENTITLED TO RECEIVE AN ABATEMENT OF BASE RENT PAYABLE HEREUNDER DURING THE PERIOD BEGINNING ON THE SIXTH (6TH) CONSECUTIVE DAY OF SUCH CESSATION AND ENDING ON THE DAY WHEN THE SERVICE IN QUESTION HAS BEEN RESTORED. IN THE EVENT THE ENTIRE PREMISES HAS NOT BEEN RENDERED UNTENANTABLE BY THE CESSATION IN SERVICE, THE AMOUNT OF ABATEMENT THAT TENANT IS ENTITLED TO RECEIVE SHALL BE PRORATED BASED UPON THE PERCENTAGE OF THE PREMISES SO RENDERED UNTENANTABLE AND NOT USED BY TENANT. D. LANDLORD SHALL PROVIDE GAS SERVICE TO THE BUILDING IN A LOCATION AS DETERMINED BY THE LANDLORD, GAS PROVIDER AND GOVERNING AUTHORITIES. DISTRIBUTION AND RELATED WORK SHALL BE PERFORMED BY TENANT IN ACCORDANCE WITH THE TERMS OF THIS LEASE. TENANT SHALL ARRANGE FOR AND PAY FOR ALL CHARGES FOR GAS USED OR SUPPLIED UPON OR IN CONNECTION WITH THE PREMISES AND SHALL BE RESPONSIBLE FOR ARRANGING FOR THE CONNECTION AND INSTALLATION OF ALL METERS IN CONNECTION THEREWITH. TENANT SHALL PROMPTLY PAY ALL BILLS FOR SAID UTILITIES AND THE COST OF INSTALLING METERS OR SUBMETERS. IN THE EVENT THAT ANY UTILITIES ARE FURNISHED TO THE PREMISES BY LANDLORD, WHETHER SUB-METERED OR OTHERWISE, THEN IN THAT EVENT, TENANT SHALL PAY LANDLORD FOR SUCH UTILITIES. 8. LEASEHOLD IMPROVEMENTS/TENANT'S PROPERTY. All fixtures, equipment, improvements and appurtenances attached to, or built into, the Premises at the commencement of or during the Lease Term, whether or not by, or at the expense of, Tenant ("LEASEHOLD IMPROVEMENTS"), shall be and remain a part of the Premises; shall be the property of Landlord; and shall not be removed by Tenant except as expressly 6 provided herein. All unattached and moveable partitions, trade fixtures, moveable equipment or furniture located in the Premises and acquired by or for the account of Tenant, without expense to Landlord, which can be removed without structural damage to the Building or Premises, and all personalty brought into the Premises by Tenant ("TENANT'S PROPERTY") shall be owned and insured by Tenant. Landlord may, nonetheless, at any time prior to, or within one (1) month after, the expiration or earlier termination of this Lease or Tenant's right to possession, require Tenant to remove any Leasehold Improvements performed by or for the benefit of Tenant and all electronic, phone and data cabling as are designated by Landlord (the "REQUIRED REMOVABLES") at Tenant's sole cost. In the event that Landlord so elects, Tenant shall remove such Required Removables within ten (10) days after notice from Landlord, provided that in no event shall Tenant be required to remove such Required Removables prior to the expiration or earlier termination of this Lease or Tenant's right to possession. In addition to Tenant's obligation to remove the Required Removables, Tenant shall repair any damage caused by such removal and perform such other work as is reasonably necessary to restore the Premises to a "move in" condition. If Tenant fails to remove any specified Required Removables or to perform any required repairs and restoration within the time period specified above, Landlord, at Tenant's sole cost and expense, may remove the Required Removables (and repair any damage occasioned thereby) and dispose thereof or deliver the Required Removables to any other place of business of Tenant, or warehouse the same, and Tenant shall pay the cost of such removal, repair, delivery, or warehousing of the Required Removables within five (5) days after demand from Landlord. NOTWITHSTANDING THE FOREGOING, TENANT MAY REQUEST IN WRITING AT THE TIME IT SUBMITS ITS PLANS AND SPECIFICATIONS FOR AN ALTERATION, ADDITION OR IMPROVEMENT, THAT LANDLORD ADVISE TENANT WHETHER LANDLORD WILL REQUIRE TENANT TO REMOVE, AT THE TERMINATION OF THIS LEASE OR THE TERMINATION OF TENANT'S RIGHT TO POSSESSION HEREUNDER, SUCH ALTERATION, ADDITION OR IMPROVEMENT, OR ANY PARTICULAR PORTION THEREOF; AND LANDLORD SHALL ADVISE TENANT WITHIN TWENTY (20) DAYS AFTER RECEIPT OF TENANT'S REQUEST AS TO WHETHER LANDLORD WILL REQUIRE REMOVAL OF SUCH ALTERATION, ADDITION OR IMPROVEMENT. 9. SIGNAGE. Landlord shall provide and install, at Tenant's cost, all letters or numerals on the exterior of the Premises; all such letters and numerals shall be in the standard graphics for the Building and no others shall be used or permitted on the Premises without Landlord's prior written consent. 10. REPAIRS AND ALTERATIONS BY TENANT. A. Except to the extent such obligations are imposed upon Landlord hereunder, Tenant shall, at its sole cost and expense, maintain the Premises in good order, condition and repair throughout the entire Lease Term, ordinary wear and tear expected. Tenant agrees to keep the areas visible from outside the Premises in a neat, clean and attractive condition at all times. Tenant shall be responsible for all repairs replacements and alterations in and to the Premises, Building and Property and the facilities and systems thereof, the need for which arises out of (1) Tenant's use or occupancy of the Premises, (2) the installation, removal, use or operations of Tenant's Property (as defined in Section 8. above), (3) the moving of Tenant's Property into or out of the Building, or (4) the act, omission, misuse or negligence of Tenant, its agents, contractors, employees or invitees. Tenant shall be responsible for repair, maintenance and replacement, if necessary, of the HVAC system and equipment exclusively serving the Premises. All such repairs, replacements or alterations shall be performed in accordance with Section 10.B. below and the rules, policies and procedures reasonably enacted by Landlord from time to time for the performance of work in the Building. If Tenant fails to maintain the Premises in good order, condition and repairs, Landlord shall give Tenant notice to perform such acts as are reasonably required to so maintain the Premises. If Tenant fails to promptly commence such work and diligently pursue it to its completion, then Landlord may, at its option, make such repairs, and Tenant shall pay the cost thereof to Landlord on demand as Additional Rent, together with an administration charge in an amount equal to ten percent (10%) of the cost of such repairs. Landlord shall, at its expense (except as included in Basic Costs) keep and maintain in good repair and working order and make all repairs to and perform necessary maintenance upon: (a) all structural elements of the Building; and (b) all mechanical, electrical and plumbing systems that serve the Building in general; and (c) the Building facilities common to all tenants including but not limited to, the ceilings, walls and floors in the Common Areas. NOTWITHSTANDING THE FOREGOING TO THE CONTRARY, IN THE EVENT THE HVAC SYSTEM AND EQUIPMENT EXCLUSIVELY SERVING THE PREMISES NEED TO BE REPLACED DURING THE TERM AND SUCH REPLACEMENT IS NOT CAUSED BY THE ACTS, OMISSIONS OR NEGLIGENCE OF TENANT, ITS AGENTS OR EMPLOYEES, THEN THE COST TO REPLACE THE SYSTEM AND EQUIPMENT SHALL BE AMORTIZED ON A STRAIGHT-LINE BASIS OVER THEIR USEFUL LIFE AND TENANT SHALL BE RESPONSIBLE FOR PAYMENT OF THAT PORTION WHICH IS AMORTIZED DURING THE REMAINING BALANCE OF THE TERM. B. PROVIDED THE REPAIRS, ADDITIONS OR ALTERATIONS ARE LESS THAN $5,000.00 AND ARE NON-STRUCTURAL, NON-ELECTRICAL, NOT VISIBLE FROM THE EXTERIOR OF THE BUILDING, AND DO NOT ADVERSELY AFFECT THE VALUE OF THE BUILDING, TENANT SHALL ONLY HAVE TO PROVIDE NOTICE TO LANDLORD. Tenant shall not make or allow to be made any alterations, additions or improvements to the Premises, without first obtaining the written consent of Landlord in each such instance, which consent may be refused or given on such conditions as Landlord may REASONABLY elect. Prior to commencing any such work and as a condition to obtaining Landlord's consent, Tenant must furnish Landlord with plans and specifications acceptable to Landlord; names and addresses of contractors reasonably acceptable to Landlord; copies of contracts; necessary permits and approvals; evidence of contractor's and subcontractor's insurance in accordance with Section 15. hereof; and a payment bond or other security, all in form and amount satisfactory to Landlord. Tenant shall be responsible 7 for insuring that all such persons procure and maintain insurance coverage against such risks, in such amounts and with such companies as Landlord may require, including, but not limited to, Builder's Risk and Worker's Compensation insurance. All such improvements, alterations or additions shall be constructed in a good and workmanlike manner using Building Standard materials or other new materials of equal or greater quantity. Landlord, to the extent reasonably necessary to avoid any disruption to the tenants and occupants of the Building, shall have the right to designate the time when any such alterations, additions and improvements may be performed and to otherwise designate reasonable rules, regulations and procedures for the performance of work in the Building. Upon completion, Tenant shall furnish "as-build" plans, contractor's affidavits and full and final waivers of lien and receipted bills covering all labor and materials. All improvements, alterations and additions shall comply with the insurance requirements, codes, ordinances, laws and regulations, including without limitation, the Americans with Disabilities Act. Tenant shall reimburse Landlord upon demand for all sums, if any, expended by Landlord for third party examination of the architectural, mechanical, electrical and plumbing plans for any alterations, additions or improvements. In addition, if Landlord so requests, Landlord shall be entitled to oversee the construction of any alterations, additions or improvements that may affect the structure of the Building or any of the mechanical, electrical, plumbing or life safety systems of the Building. In the event Landlord elects to oversee such work, Landlord shall be entitled to receive a fee for such oversight in an amount equal to FIVE PERCENT (5%) of the cost of such alterations, additions or improvements. Landlord's approval of Tenant's plans and specifications for any work performed for on behalf of Tenant shall not be deemed to be representation by Landlord that such plans and specifications comply with applicable insurance requirements, building codes, ordinances, laws or regulations or that the alterations, additions and improvements constructed in accordance with such plans and specifications will be adequate for Tenant's use. 11. USE OF ELECTRICAL SERVICES BY TENANT. A. All electricity used by Tenant in the Premises shall, at Landlord's option, be paid for by Tenant either: (1) through inclusion in Base Rent and Basic Costs (except as provided in Section 11.B. below with respect to excess usage); or (2) by a separate charge billed directly to Tenant by Landlord and payable by Tenant as Additional Rent within ten (10) days after billing; or (3) by a separate charge or charges billed by the utility company(ies) providing electrical service and payable by Tenant directly to such utilities company(ies). Landlord shall have the right at any time and from time-to-time during the Lease Term to contract for electricity service from such providers of such services as Landlord shall elect (each being an "ELECTRIC SERVICE PROVIDER"). Tenant shall cooperate with Landlord, and the applicable Electric Service Provider, at all times and, as reasonably necessary, shall allow Landlord and such Electric Service Provider reasonable access to the Building's electric lines, feeders, risers, wiring, and any other machinery within the Premises. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS ARTICLE 7, IF: (i) LANDLORD CEASES TO FURNISH ANY SERVICE IN THE BUILDING FOR A PERIOD IN EXCESS OF FIVE (5) CONSECUTIVE DAYS AFTER TENANT NOTIFIES LANDLORD OF SUCH CESSATION (THE "INTERRUPTION NOTICE"); (ii) SUCH CESSATION DOES NOT ARISE AS A RESULT OF AN ACT OR OMISSION OF TENANT; (iii) SUCH CESSATION IS NOT CAUSED BY A FIRE OR OTHER CASUALTY (IN WHICH CASE ARTICLE 19 SHALL CONTROL); (iv) THE RESTORATION OF SUCH SERVICE IS REASONABLY WITHIN THE CONTROL OF LANDLORD; AND (v) AS A RESULT OF SUCH CESSATION, THE PREMISES OR A MATERIAL PORTION THEREOF, IS RENDERED UNTENANTABLE (MEANING THAT TENANT IS UNABLE TO USE THE PREMISES IN THE NORMAL COURSE OF ITS BUSINESS) AND TENANT IN FACT CEASES TO USE THE PREMISES, OR MATERIAL PORTION THEREOF, THEN TENANT, AS ITS SOLE REMEDY, SHALL BE ENTITLED TO RECEIVE AN ABATEMENT OF BASE RENT PAYABLE HEREUNDER DURING THE PERIOD BEGINNING ON THE SIXTH (6TH) CONSECUTIVE DAY OF SUCH CESSATION AND ENDING ON THE DAY WHEN THE SERVICE IN QUESTION HAS BEEN RESTORED. IN THE EVENT THE ENTIRE PREMISES HAS NOT BEEN RENDERED UNTENANTABLE BY THE CESSATION IN SERVICE, THE AMOUNT OF ABATEMENT THAT TENANT IS ENTITLED TO RECEIVE SHALL BE PRORATED BASED UPON THE PERCENTAGE OF THE PREMISES SO RENDERED UNTENANTABLE AND NOT USED BY TENANT. Landlord shall in no way be liable or responsible for any loss, damage, or expense that Tenant may sustain or incur by reason of any change, failure, interference, disruption, or defect in the supply or character of the electric energy furnished to the Premises, or if the quantity or character of the electric energy supplied by the Electric Service Provider is no longer available or suitable for Tenant's requirements, and no such change, failure, defect, unavailability, or unsuitability shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under the Lease. B. Tenant's use of electrical services furnished by Landlord shall not exceed in voltage, rated capacity, or overall load that which is standard for the Building. In the event Tenant shall request that it be allowed to consume electrical services in excess of Building Standard, Landlord may refuse to consent to such usage or may consent upon such conditions as Landlord reasonably elects (including the installation of utility service upgrades, submeters, air handlers or cooling units), and all such additional usage (to the extent permitted by law), installation and maintenance thereof shall be paid for by Tenant as Additional Rent. Landlord, at any time during the Lease Term, shall have the right to separately meter electrical usage for the Premises or to measure electrical usage by survey or any other method that Landlord, in its reasonable judgment, deems appropriate. 8 12. ENTRY BY LANDLORD. Tenant shall permit Landlord or its agents or representatives to enter into and upon any part of the Premises to inspect the same, or to show the Premises to prospective purchasers, mortgagees, tenants (during the last (9) nine months of the Lease Term or earlier in connection with a potential relocation) or insurers, or to clean or make repairs, alterations, or additions thereto, including any work that Landlord deems necessary for the safety, protection or preservation of the Building or any occupants thereof, or to facilitate repairs, alterations or additions to the Building or any other tenant's premises. Except for any entry by Landlord in an emergency situation or to provide normal cleaning and janitorial service, Landlord shall provide Tenant with reasonable prior notice of any entry into the Premises, which notice may be given verbally. Landlord shall have the right to temporarily close the Premises or the Building to perform repairs, alterations or additions in the Premises or the Building, provided that Landlord shall use reasonable efforts to perform all such work on weekends and after Normal Business Hours. Entry by Landlord hereunder shall not constitute a constructive eviction or entitle Tenant to any abatement or reduction of Rent by reason thereof. 13. ASSIGNMENT AND SUBLETTING. A. Except in connection with a Permitted Transfer (defined in Section 13.E. below), Tenant shall not assign, sublease, transfer or encumber any interest in this Lease or allow any third party to use any portion of the Premises (collectively or individually, a "TRANSFER") without the prior written consent of Landlord, which consent shall not be unreasonably withheld CONDITIONED OR DELAYED. Without limitation, it is agreed that Landlord's consent shall not be considered unreasonably withheld if: (1) the proposed transferee's financial condition does not meet the criteria Landlord uses to select Building tenants having similar leasehold obligations; (2) the proposed transferee's business is not suitable for the Building considering the business of the other tenants and the Building's prestige, or would result in a violation of another tenant's rights; (3) the proposed transferee is a governmental agency or occupant of the Building; (4) Tenant is in default beyond any applicable notice and cure period; or (5) any portion of the Building or the Premises would likely become subject to additional or different laws as a consequence of the proposed Transfer. Any attempted Transfer in violation of this Section 13, shall, exercisable in Landlord's sole and absolute discretion, be voidable. Consent by Landlord to one or more Transfer(s) shall not operate as a waiver of Landlord's rights to approve any subsequent Transfer(s). IN NO EVENT SHALL ANY TRANSFER OR PERMITTED TRANSFER RELEASE OR RELIEVE TENANT FROM ANY OBLIGATION UNDER THIS LEASE OR ANY LIABILITY HEREUNDER. B. If Tenant requests Landlord's consent to a Transfer, Tenant shall submit to Landlord financial statements for the proposed transferee, a complete copy of the proposed assignment, sublease and other information as Landlord may reasonably request. Landlord shall within TWENTY (20) DAYS after Landlord's receipt of the required information and documentation either: (1) consent or reasonably refuse consent to the Transfer in writing; (2) in the event of a proposed assignment of this Lease or a proposed sublease of the entire Premises for the entire remaining term of this Lease, terminate this Lease effective the first to occur of ninety (90) days following written notice of such termination or the date that the proposed Transfer would have come into effect. If Landlord shall fail to notify Tenant in writing of its decision within such thirty (30) days period after the later of the date Landlord is notified in writing of the proposed Transfer or the date Landlord has received all required information concerning the proposed transferee and the proposed Transfer, Landlord shall be deemed to have refused to consent to such Transfer, and to have elected to keep this Lease in full force and effect. Tenant shall pay Landlord a review fee of FIVE HUNDRED ($500.00) for Landlord's review of any Permitted Transfer or requested Transfer. In addition, Tenant shall reimburse Landlord for its actual reasonable costs and expenses (including without limitation reasonable attorney's fees) incurred by Landlord in connection with Landlord's review of such requested Transfer or Permitted Transfer. C. Tenant shall pay to Landlord fifty percent (50%) of all cash and other consideration which Tenant receives as a result of a Transfer that is in excess of the rent payable to Landlord (NET OF TENANT'S REASONABLE OUT-OF-POCKET MARKETING, BROKERAGE, AND BUILD-OUT CONCESSIONS GRANTED TO THE SUBTENANT WHICH ARE ASSOCIATED WITH PROCURING SUCH SUBTENANT HEREUNDER) for the portion of the Premises and Term covered by the Transfer within ten (10) days following receipt thereof by Tenant. If Tenant is in Monetary Default (defined in Section 22. below), Landlord may require that all sublease payments be made directly to Landlord, in which case Tenant shall receive a credit against rent in the amount of any payments received (less Landlord's share of any excess). D. Except as provided below with respect to a Permitted Transfer, if Tenant is a corporation, limited liability company, partnership or similar entity, and the entity which owns or controls a majority of the voting shares/rights at the time changes for any reason (including but not limited to a merger, consolidation or reorganization), such change of ownership or control shall constitute a Transfer. The foregoing shall not apply so long as Tenant is an entity whose outstanding stock is listed on a nationally recognized security exchange, or if at least eighty percent (80%) of its voting stock is owned by another entity, the voting stock of which is so listed. E. Tenant may assign its entire interest under this Lease or sublet the Premises to any entity controlling or controlled by or under common control with Tenant or to any successor to Tenant by purchase, merger, consolidation or reorganization (hereinafter, collectively, referred to as "PERMITTED TRANSFER") without the consent of Landlord, provided: (1) Tenant is not in default BEYOND ANY 9 APPLICABLE CURE AND NOTICE PERIODS under this Lease; (2) if such proposed transferee is a successor to Tenant by purchase, said proposed transferee shall acquire all or substantially all of the stock or assets of Tenant's business or, if such proposed transferee shall acquire all or substantially all of the stock or assets of Tenant's business or, if such proposed transferee is a successor to Tenant by merger, consolidation or reorganization, the continuing or surviving corporation shall own all or substantially all of the assets of Tenant; (3) such proposed transferee shall have a net worth which would be reasonably acceptable to Landlord if such entity were entering into a new lease with Landlord for the Premises as evidenced to Landlord's reasonable satisfaction; (4) such proposed transferee operates the business in the Premises for the Permitted Use and no other purpose; and (5) Tenant shall give Landlord written notice at least thirty (30) days prior to the effective date of the proposed purchase, merger, consolidation or reorganization. F. Tenant agrees that in the event Landlord withholds its consent to any Transfer contrary to the provisions of this Section 13, Tenant's sole remedy shall be to seek an injunction in equity or compel performance by Landlord to give its consent and Tenant expressly waives any right to damages in the event of such withholding by Landlord of its consent. 14. MECHANIC'S LIENS. Tenant will not permit any mechanic's liens or other liens to be placed upon the Premises, the Building, or the Property and nothing in this Lease shall be deemed or construed in any way as constituting the consent or request of Landlord, express or implied, by inference or otherwise, to any person for the performance of any labor or the furnishing of any materials to the Premises, the Building, or the Property or any part thereof, nor as giving Tenant any right, power, or authority to contract for or permit the rendering of any services or the furnishing of any materials that would give rise to any mechanic's or other liens against the Premises, the Building, or the Property. In the event any such lien is attached to the Premises, the Building, or the Property, then, in addition to any other right or remedy of Landlord, Landlord may, but shall not be obligated to, discharge the same. Any amount paid by Landlord for any of the aforesaid purposes including, but not limited to, reasonable attorneys' fees, shall be paid by Tenant to Landlord promptly on demand as Additional Rent. Tenant shall within ten (10) days of receiving such notice of lien or claim (a) have such lien or claim released or (b) deliver to Landlord a bond in form, content, amount and issued by surety, satisfactory to Landlord, indemnifying, protecting, defending and holding harmless the Indemnities against all costs and liabilities resulting from such lien or claim and the foreclosure or attempted foreclosure thereof. Tenant's failure to comply with the provisions of the foregoing sentence shall be deemed an Event of Default under Section 22. hereof entitling Landlord to exercise all of its remedies therefor without the requirement of any additional notice or cure period. 15. INSURANCE. A. Landlord shall maintain such insurance on the Building and the Premises (other than on Tenant's Property or on any additional improvements constructed in the Premises by Tenant), and such liability insurance in such amounts as Landlord elects. The cost of such insurance shall be included as a part of the Basic Costs, and payments for losses thereunder shall be made solely to Landlord or the mortgagees of Landlord as their interests shall appear. B. Tenant shall maintain at its expense, (1) in an amount equal to full replacement cost, special form (formerly known as all risk) property insurance on all of its personal property, including removable trade fixtures and leasehold and tenant improvements, and Tenant's Property located in the Premises and in such additional amounts as are required to meet Tenant's obligations pursuant to Section 18 hereof and with deductibles in an amount reasonably satisfactory to Landlord, and (ii) a policy or policies of commercial general liability insurance (including endorsement or separate policy for owned or non-owned automobile liability) with respect to its activities in the Building and on the Property, with the premiums thereon fully paid on or before the due date, in an amount of not less than $2,000,000 per occurrence per person coverage for bodily injury, property damage, personal injury or combination thereof (the term "personal injury" as used herein means, without limitation, false arrest, detention or imprisonment, malicious prosecution, wrongful entry, liable and slander), provided that if only single limit coverage is available it shall be for at least $2,000,000 per occurrence with an umbrella policy of at least $5,000,000 combined single limit per occurrence. Tenant's insurance policies shall name Landlord and Building Manager as additional insureds and shall include coverage for the contractual liability of Tenant to indemnify Landlord and Building Manager pursuant to Section 16 of this Lease and shall have deductibles in an amount reasonably satisfactory to Landlord. Prior to Tenant's taking possession of the Premises, Tenant shall furnish evidence satisfactory to Landlord of the maintenance and timely renewal of such insurance, and Tenant shall obtain and deliver to Landlord a written obligation on the part of each insurer to notify Landlord at least thirty (30) days prior to the modification, cancellation or expiration of such insurance policies. In the event Tenant shall not have delivered to Landlord a policy or certificate evidencing such insurance at least thirty (30) days prior to the expiration date of each expiring policy, Landlord may obtain such insurance as Landlord may reasonably require to protect Landlord's interest (which obtaining of insurance shall not be deemed to be a waiver of Tenant's default hereunder). The cost to Landlord of obtaining such policies, plus an administrative fee in the amount of fifteen percent (15%) of the cost of such policies shall be paid by Tenant to Landlord as Additional Rent upon demand. 10 C. The insurance requirements set forth in this Section 15 are independent of the waiver, indemnification, and other obligations under this Lease and will not be construed or interpreted in any way to restrict, limit or modify the waiver, indemnification and other obligations or to in any way limit any party's liability under this Lease. In addition to the requirements set forth in Sections 15 and 16, the insurance required of Tenant under this Lease must be issued by an insurance company with a rating of no less than A-VIII in the current Best's Insurance Guide, or A- in the current Standard & Poor Insurance Solvency Review, or in that is otherwise acceptable to Landlord, and admitted to engage in the business of insurance in the state in which the Building is located; be primary insurance for all claims under it and provide that any insurance carried by Landlord and Landlord's lenders is strictly excess, secondary and noncontributing with any insurance carried by Tenant; and provide that insurance may not be cancelled, nonrenewed or the subject of material change in coverage of available limits of coverage, except upon thirty (30) days prior written notice to Landlord and Landlord's lenders. Tenant will deliver either a duplicate original or a legally enforceable certificate of insurance on all policies procured by Tenant in compliance with Tenant's obligations under this Lease, together with evidence satisfactory to Landlord of the payment of the premiums therefor, to Landlord on or before the date Tenant first occupies any portion of the Premises, at least thirty (30) days before the expiration date of any policy and upon the renewal of any policy. Landlord must give its prior written approval to all deductibles and self-insured retentions under Tenant's policies. Tenant may comply with its insurance coverage requirements through a blanket policy, provided Tenant, at Tenant's sole expense, procures a "per location" endorsement, or equivalent reasonably acceptable to Landlord, so that the general aggregate and other limits apply separately and specifically to the Premises. Notwithstanding the foregoing, the foregoing "per location" limit shall be waived as long as Tenant maintains commercial general or umbrella/excess liability insurance coverage limits of $25,000,000 or greater. D. If Tenant's business operations, conduct or use of the Premises or any other part of the Property causes an increase in the premium for any insurance policy carried by Landlord, Tenant will, within ten (10) days after receipt of notice from Landlord, reimburse Landlord for the entire increase. E. Neither Landlord nor Tenant shall be liable (by way of subrogation or otherwise) to the other party (or to any insurance company insuring the other party) for any personal injury or loss or damage to any of the property of Landlord or Tenant, as the case may be, with respect to their respective property, the Building, the Property or the Premises or any addition or improvements thereto, or any contents therein, to the extent covered by insurance carried or required to be carried by a party hereto even though such loss might have been occasioned by the negligence or willful acts or omissions of the Landlord or Tenant or their respective employees, agents, contractors, or invitees. Since this mutual waiver will preclude the assignment of any such claim by subrogation (or otherwise) to an insurance company (or any other person), Landlord and Tenant each agree to give each insurance company which has issued, or on the future may issue, policies of insurance, with respect to the items covered by this waiver, written notice of the terms of this mutual waiver, and to have such insurance policies properly endorsed, if necessary, to prevent the invalidation of any of the coverage provided by such insurance policies by reason of such mutual waiver. For the purpose of the foregoing waiver, the amount of any deductible applicable to any loss or damage shall be deemed covered by, and recoverable by the insured under the insurance policy to which such deductible relates. In the event that Tenant is permitted to and self-insures any risk for which insurance is required to be carried under this Lease, or if Tenant fails to carry any insurance required to be carried by Tenant pursuant to this Lease, then all loss or damage to Tenant, its leasehold interest, its business, its property, the Premises or any additions or improvements thereto or contents thereof shall be deemed covered by and recoverable by Tenant under valid and collectible policies of insurance. Notwithstanding anything to the contrary herein, Landlord shall not be liable to the Tenant or any insurance company (by way of subrogation or otherwise) insuring the Tenant for any loss or damage to any property, or bodily injury or personal injury or any resulting loss of income or losses from worker's compensation laws and benefits, even though such loss or damage might have been occasioned by the negligence of Landlord, its agents or employees, or Building Manager, if any such loss or damage was required to be covered by insurance pursuant to this Lease. 16. INDEMNITY. To the extent not expressly prohibited by law, neither Landlord nor Building Manager nor any of their respective officers, directors, employees, members, managers, or agents shall be liable to Tenant, or to Tenant's agents, servants, employees, customers, licensees, or invitees for any injury to person or damage to property caused by any act, omission, or neglect of Tenant, its agents, servants, employees, customers, invitees, licensees or by any other person entering the Building or upon the Property under the invitation of Tenant or arising out of the use of the Property, Building or Premises by Tenant and the conduct of its business or out of a default by Tenant in the performance of its obligations hereunder. Tenant hereby indemnifies and holds Landlord and Building Manager and their respective officers, directors, employees, members, managers and agents ("INDEMNITEES"), harmless from all liability and claims for any property damage, or bodily injury or death of, or personal injury to, a person in or on the Premises, or at any place, including the Property or the Building to the extent caused, in whole or in part by Tenant, its employees, agents, servants, customers, invitees or licensees and this indemnity shall be enforceable to the full extent whether or not such liability and claims are the result of the sole, joint or concurrent acts, negligent or intentional, or otherwise, of Tenant, or its employees, agents, servants, customers, invitees or licensees. SUCH INDEMNITY FOR THE BENEFIT OF INDEMNITIEES 11 SHALL BE ENFORCEABLE EVEN IF INDEMNITEES, OR ANY ONE OR MORE OF THEM HAVE OR HAS CAUSED OR PARTICIPATED IN CAUSING SUCH LIABILITY AND CLAIMS BY THEIR JOINT OR CONCURRENT ACTS, NEGLIGENT OR INTENTIONAL, OR OTHERWISE. Notwithstanding the terms of this Lease to the contrary, the terms of this Section shall survive the expiration or earlier termination of this Lease. THE FOREGOING PROVISIONS OF THIS SECTION SHALL NOT HOWEVER BE DEEMED TO EXCULPATE LANDLORD FROM DAMAGES, COSTS OR LIABILITIES RESULTING FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF LANDLORD, ITS EMPLOYEES, AGENTS OR CONTRACTORS (COLLECTIVELY, "LANDLORD'S PARTIES")." 17. DAMAGES FROM CERTAIN CAUSES. To the extent not expressly prohibited by law, Landlord shall not be liable to Tenant or Tenant's employees, contractors, agents, invitees or customers, for any injury to person or damage to property sustained by Tenant or any such party or any other person claiming through Tenant resulting from any accident or occurrence in the Premises or any other portion of the Building caused by the Premises or any other portion of the Building becoming out of repair or by defect in or failure of equipment, pipes, or wiring, or by broken glass, or by the backing up of drains, or by gas, water, steam, electricity, or oil leaking, escaping or flowing into the Premises (except where due to Landlord's willful failure to make repairs required to be made pursuant to other provisions of this Lease, after the expiration of a reasonable time after written notice to Landlord of the need for such repairs), nor shall Landlord be liable to Tenant for any loss or damage that may be occasioned by or through the acts or omissions of other tenants of the Building or of any other persons whomsoever, including, but not limited to riot, strike, insurrection, war, court order, requisition, order of any governmental body or authority, acts of God, fire or theft. 18. CASUALTY DAMAGE. If the Premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give prompt written notice thereof to Landlord. In case the Building shall be so damaged that substantial alteration or reconstruction of the Building shall, in Landlord's sole opinion, be required (whether or not the Premises shall have been damaged by such casualty) or in the event there is less than two (2) years of the Lease Term remaining or in the event Landlord's mortgagee should require that the insurance proceeds payable as a result of a casualty be applied to the payment of the mortgage debt or in the event of any material uninsured loss to the Building, Landlord may, at its option, terminate this Lease by notifying Tenant in writing of such termination within ninety (90) days after the date of such casualty. If Landlord does not thus elect to terminate this Lease, Landlord shall commence and proceed with reasonable diligence to restore the Building, and the improvements located within the Premises, if any, for which Landlord had financial responsibility pursuant to the Work Letter Agreement attached hereto as EXHIBIT D (except that Landlord shall not be responsible for delays not within the control of Landlord) to substantially the same condition in which it was immediately prior to the happening of the casualty. Notwithstanding the foregoing, Landlord's obligation to restore the Building, and the improvements located within the Premises, if any, for which Landlord had financial responsibility pursuant to the Work Letter Agreement, shall not require Landlord to expend for such repair and restoration work more than the insurance proceeds actually received by the Landlord as a result of the casualty and Landlord's obligation to restore shall be further limited so that Landlord shall not be required to expend for the repair and restoration of the improvements located within the Premises, if any, for which Landlord had financial responsibility pursuant to the Work Letter Agreement, more than the dollar amount of the Allowance, if any, described in the Work Letter Agreement. When the repairs described in the preceding two sentences have been completed by Landlord, Tenant shall complete the restoration of all improvements, including furniture, fixtures and equipment, which are necessary to permit Tenant's reoccupancy of the Premises. Except as set forth above, all cost and expense of reconstructing the Premises shall be borne by Tenant, and Tenant shall present Landlord with evidence satisfactory to Landlord of Tenant's ability to pay such costs prior to Landlord's commencement of repair and restoration of the Premises. Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from such damage or the repair thereof, except that, subject to the provisions of the next sentence, Landlord shall allow Tenant a fair diminution of Rent during the time and to the extent the Premises are unfit for occupancy. If the Premises or any other portion of the Property is damaged by fire or other casualty resulting from the fault or negligence of Tenant or any of Tenant's agents, employees, or invitees, the rent hereunder shall not be diminished during the repair of such damage and Tenant shall be liable to Landlord for the cost of the repair and restoration of the Property caused thereby to the extent such cost and expense is not covered by insurance proceeds. 19. CONDEMNATION. If the whole or any substantial part of the Premises or if the Building or any portion thereof which would leave the remainder of the Building unsuitable for use as an industrial building comparable to its use on the Commencement Date, or if the land on which the Building is located or any material portion thereof, shall be taken or condemned for any public or quasi-public use under governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, then Landlord may, at its option, terminate this Lease and the rent shall be abated during the unexpired portion of this Lease, effective when the physical taking of said Premises or said portion of the Building or land shall occur. In the event this Lease is not terminated, the rent for any portion of the Premises so taken or condemned shall be abated during the unexpired term of this Lease effective when the physical taking of said portion of the Premises shall occur. All compensation awarded for any such taking or condemnation, or sale proceeds in lieu thereof, shall be the property of Landlord, and Tenant shall have no claim thereto, the same being hereby expressly waived by Tenant, except for any portions of such award or proceeds which are specifically allocated by the condemning or purchasing party for the taking of 12 or damage to trade fixtures of Tenant, which Tenant specifically reserves to itself. IN ADDITION, TENANT MAY FILE A CLAIM AT ITS SOLE COST AND EXPENSE AND RECEIVE AN AWARD FOR THE TENANT'S PROPERTY, TENANT'S BUSINESS GOODWILL AND REASONABLE RELOCATION EXPENSES, PROVIDED THE FILING OF ANY CLAIM FOR RELOCATION EXPENSES DOES NOT ADVERSELY AFFECT OR DIMINISH THE AWARD WHICH WOULD OTHERWISE HAVE BEEN RECEIVED BY LANDLORD HAD TENANT NOT FILED SUCH A CLAIM AND RECEIVED SUCH AWARD. 20. HAZARDOUS SUBSTANCES. A. Tenant hereby represents and covenants to Landlord the following: No toxic or hazardous substances or wastes, pollutants or contaminants (including, without limitation, asbestos, urea formaldehyde, the group of organic compounds known as polychlorinated biphenyls, petroleum products including gasoline, fuel oil, crude oil and various constituents of such products, radon, and any hazardous substance as defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. 9601-9657, as amended ("CERCLA") (collectively, "ENVIRONMENTAL POLLUTANTS") other than customary office supplies and cleaning supplies stored and handled within the Premises in accordance with all applicable laws, will be generated, treated, stored, released or disposed of, or otherwise placed, deposited in or located on the Property, and no activity shall be taken on the Property, by Tenant, its agents, employees, invitees or contractors, that would cause or contribute to (i) the Property or any part thereof to become a generation, treatment, storage or disposal facility within the meaning of or otherwise bring the Property within the ambit of the Resource Conservation and Recovery Act of 1976 ("RCRA"), 42 U.S.C. 5901 et. seq., or any similar state law or local ordinance, (ii) a release or threatened release of toxic or hazardous wastes or substances, pollutants or contaminants, from the Property or any part thereof within the meaning of, or otherwise result in liability in connection with the Property within the ambit of CERCLA, or any similar state law or local ordinance, or (iii) the discharge of pollutants or effluents into any water source or system, the dredging or filling of any waters, or the discharge into the air of any emissions, that would require a permit under the Federal Water Pollution Control Act, 33 U.S.C. 1251 et. seq., or the Clean Air Act, 42 U.S.C. 7401 et. seq., or any similar state law or local ordinance. B. Tenant expressly waives, to the extent allowed by law, any claims under federal, state or other law that Tenant might otherwise have against Landlord relating to the condition of such Property or the Premises or the Leasehold Improvements or personal property located thereon or the presence in or contamination of the Property or the Premises by hazardous materials. Tenant agrees to indemnify and hold Indemnitees (as defined in Section 16) harmless from and against and to reimburse Indemnitees with respect to, any and all claims, demands, causes of action, loss, damage, liabilities, costs and expenses (including attorneys' fees and court costs) of any and every kind or character, known or unknown, fixed or contingent, asserted against or incurred by Landlord at any time and from time-to-time by reason of or arising out of the breach of any representation or covenant contained in Section 20.A above. C. Tenant shall immediately notify Landlord in writing of any release or threatened release of toxic or hazardous wastes or substances, pollutants or contaminants of which Tenant has knowledge whether or not the release is in quantities that would require under law the reporting of such release to a governmental or regulatory agency. D. Tenant shall also immediately notify landlord in writing of, and shall contemporaneously provide Landlord with a copy of: (1) Any written notice of release of hazardous wastes or substances, pollutants or contaminants on the Property that is provided by Tenant or any subtenant or other occupant if the Premises to a governmental or regulatory agency; (2) Any notice of a violation, or a potential or alleged violation, of any Environmental Law (hereinafter defined) that is received by Tenant or any subtenant or other occupant of the premises from any governmental or regulatory agency; (3) Any inquiry, investigation, enforcement, cleanup, removal, or other action that is instituted or threatened by a governmental or regulatory agency against Tenant or any subtenant or other occupant of the Premises and that relates to the release or discharge of hazardous wastes or substances, pollutants or contaminants on or from the Property; (4) Any claim that is instituted or threatened by any third-party against Tenant or any subtenant or other occupant of the Premises and that relates to any release or discharge of hazardous wastes or substances, pollutants or contaminants on or from the Property; and (5) Any notice of the loss of any environmental operating permit by Tenant or any subtenant or other occupant of the Premises. E. As used herein "Environmental Laws" mean all present and future federal, state and municipal laws, ordinances, rules and regulations applicable to environmental and ecological conditions, and the 13 rules and regulations of the U.S. Environmental Protection Agency, and any other federal, state or municipal agency, or governmental board or entity relating to environmental matters. F. AS OF THE DATE OF THIS LEASE AND TO THE ACTUAL KNOWLEDGE OF HENRY KNAPEK (LANDLORD'S EMPLOYEE WHOSE RESPONSIBILITIES INCLUDE THE MANAGEMENT OR SUPERVISION OF THE MANAGEMENT OF THE BUILDING), LANDLORD HAD NOT RECEIVED ANY WRITTEN NOTICE FROM ANY GOVERNMENTAL ENTITY AND HAVE NO ACTUAL KNOWLEDGE THAT THE PROPERTY OR THE BUILDING IS CURRENTLY IN BREACH OF ANY ENVIRONMENTAL LAWS. G. Notwithstanding anything to the contrary contained herein, Tenant shall not have any liability with respect to any hazardous wastes or substances, pollutants or contaminants (i) existing in or on the Premises on the Commencement Date, or (ii) brought into or on the Premises after the Commencement Date by Landlord or Landlord's employees, agents or contractors. 21. AMERICANS WITH DISABILITIES ACT. Landlord agrees to deliver the Premises to Tenant in compliance with the Title III of the ADA (hereinafter defined); provided that the foregoing agreement shall not apply to any (i) cubicles, (ii) furniture and fixtures (including countertops thereon), or (iii) other installations and/or property brought into the Premises by Tenant or on behalf of Tenant or installed by or on behalf of Tenant (other than installations on behalf of Tenant made by Landlord's contractors under Exhibit "D"). In the event of Landlord's failure to deliver the Premises in such condition, Landlord shall take such action as is necessary to bring the Premises in compliance therewith. From and after the Commencement Date, Tenant agrees to comply with all requirements of the Americans with Disabilities Act (Public Law (July 26, 1990) ("ADA") applicable to the Premises and such other current acts or other subsequent acts, (whether federal or state) addressing like issues as are enacted or amended. LANDLORD SHALL BE RESPONSIBLE FOR COMPLIANCE WITH ADA IN THE COMMON AREAS; PROVIDED HOWEVER, TENANT SHALL BE RESPONSIBLE FOR COMPLIANCE WITH ADA IN THE APPLICABLE COMMON AREAS IN THE EVENT (i) THE CONDUCT OF TENANT'S BUSINESS IS UNIQUE TO THAT OF OTHER TENANTS IN THE BUILDING AND NECESSITATES SPECIAL REQUIREMENTS, OR (ii) TENANT'S IMPROVEMENTS IN THE PREMISES THEREBY NECESSITATE COMPLIANCE WITH ADA IN THE COMMON AREAS. Tenant agrees to indemnify and hold Landlord harmless from any and all expenses, liabilities, costs or damages suffered by Landlord as a result of additional obligations which may be imposed on the Building or the Property under of such acts by virtue of Tenant's operations and/or occupancy, including the alleged negligence of the Landlord. Tenant acknowledges that it will be wholly responsible for any provision of the Lease which could arguably be construed as authorizing a violation of the ADA. Any such provision shall be interpreted in a manner which permits compliance with the ADA and is hereby amended to permit such compliance. 22. EVENTS OF DEFAULT. A. The following events shall be deemed to be "EVENTS OF DEFAULT" under this Lease: (1) With respect to the first two (2) failures within any twelve (12) month period during the Lease Term, the failure of Tenant to pay to Landlord when due any Base Rent, Additional Rent or other amount payable by Tenant to Landlord under this Lease and the continuance of such failure for five (5) Business Days after receipt of written notice from Landlord that such amount was not paid when due. With respect to any other payment of Base Rent, Additional Rent or other amount payable by Tenant to Landlord under this Lease, the failure of Tenant to pay Landlord such amount WITHIN FIVE (5) DAYS WHEN DUE (hereinafter sometimes referred to as a "MONETARY DEFAULT"). (2) Any failure by Tenant (other than a Monetary Default) to comply with any term, provision or covenant of this Lease, which failure is not cured within thirty (30) days after delivery to Tenant of notice of the occurrence of such failure provided, however, that if the term, condition, covenant or obligation to be performed by Tenant is of such nature that the same cannot reasonably be performed within such thirty-day period, such default shall be deemed to have been cured if Tenant commences such performance within said thirty-day period and thereafter diligently undertakes to complete the same, and in fact, completes same within ninety (90) days after notice. (3) Any failure by Tenant to observe or perform any of the covenants with respect to (a) assignment and subletting set forth in Section 13, (b) mechanic's liens set forth in Section 14, or (c) insurance set forth in Section 15. (4) Tenant or any Guarantor shall (a) become insolvent, (b) make a transfer in fraud of creditors (c) make an assignment for the benefit of creditors, (d) admit in writing its inability to pay its debts as they become due, (e) file a petition under any section or chapter of the United States Bankruptcy Code, as amended, pertaining to bankruptcy, or under any similar law or statute of the United States or any State thereof, or Tenant or any Guarantor shall be adjudged bankrupt or insolvent in proceedings filed against Tenant or any Guarantor thereunder; or a petition or answer proposing the adjudication of Tenant or any Guarantor as a bankrupt or its reorganization under any present or future federal or state bankruptcy or similar law shall be filed in any court and such 14 petition or answer shall not be discharged or denied within sixty (60) days after the filing thereof. (5) A receiver or trustee shall be appointed for all or substantially all of the assets of Tenant or any Guarantor or of the Premises or of any of Tenant's property located thereon in any proceeding brought by Tenant or any Guarantor, or any such receiver or trustee shall be appointed in any proceeding brought against Tenant or any Guarantor and shall not be discharged within sixty (60) days after such appointment or Tenant or such Guarantor shall consent to or acquiesce in such appointment. (6) The leasehold estate hereunder shall be taken on execution or other process of law in any action against Tenant. (7) Tenant shall abandon or vacate any substantial portion of the Premises. UNLESS TENANT CONTINUES TO PAY RENT AND PERFORM IT'S OTHER OBLIGATIONS UNDER THE LEASE. (8) Tenant shall fail to take possession of and occupy the Premises within thirty (30) days following the Commencement Date and thereafter continuously conduct its operations in the Premises for the Permitted Use as set forth in Section 4 hereof. (9) The liquidation, termination, dissolution, forfeiture of right to do business or death of Tenant or any Guarantor. 23. REMEDIES. A. Upon the occurrence of any Event of Default, Landlord shall have the following rights and remedies, in addition to those allowed by law or equity, any one or more of which may be exercised without further notice to or demand upon Tenant and which may be pursued successively or cumulatively as Landlord may elect: (1) Landlord may re-enter the Premises and cure any default of Tenant, in which event Tenant shall, upon demand, reimburse Landlord as Additional Rent for any cost and expenses which Landlord may incur to cure such default; and Landlord shall not be liable to Tenant for any loss or damage which Tenant may sustain by reason of Landlord's action, regardless of whether caused by Landlord's negligence or otherwise. (2) Landlord may terminate this Lease by giving to Tenant notice of Landlord's election to do so, in which event the Term shall end, and all right, title and interest of Tenant hereunder shall expire, on the date stated in such notice; (3) Landlord may terminate the right of Tenant to possession of the Premises without terminating this Lease by giving notice to Tenant that Tenant's right to possession shall end on the date stated in such notice, whereupon the right of Tenant to possession of the Premises or any part thereof shall cease on the date stated in such notice; and (4) Landlord may enforce the provisions of this Lease and may enforce and protect the rights of Landlord hereunder by a suit or suits in equity or at law for the specific performance of any covenant or agreement contained herein, or for the enforcement of any other appropriate legal or equitable remedy, including recovery of all moneys due or to become due from Tenant under any of the provisions of this Lease. Landlord shall not be required to serve Tenant with any notices or demands as a prerequisite to its exercise of any of its rights or remedies under this Lease, other than those notices and demands specifically required under this Lease. In order to regain possession of the Premises and to deny Tenant access thereto, Landlord or its agent may, at the expense and liability of the Tenant, alter or change any or all locks or other security devices controlling access to the Premises without posting or giving notice of any kind to Tenant and Landlord shall have no obligation to provide Tenant a key to new locks installed in the Premises or grant Tenant access to the Premises. Tenant shall not be entitled to recover possession of the Premises, terminate this Lease, or recover any actual, incidental, consequential, punitive, statutory or other damages or award of attorneys' fees, by reason of Landlord's alteration or change of any lock or other security device and the resulting exclusion from the Premises of the Tenant or Tenant's agents, servants, employees, customers, licensees, invitees or any other persons from the Premises. Landlord may, without notice, remove and either dispose of or store, at Tenant's expense, any property belonging to Tenant that remains in the Premises after Landlord has regained possession thereof. Tenant acknowledges that the provisions of this subparagraph of this Lease supersedes the Texas Property Code and Tenant further warrants and represents that it hereby knowingly waives any rights it may have thereunder. B. If Landlord exercises either of the remedies provided in Sections 23.A.(2) or 23.A.(3), Tenant shall surrender possession and vacate the Premises and immediately deliver possession thereof to Landlord, and Landlord may re-enter and take complete and peaceful possession of the Premises, with process of law, full and complete license to do so being hereby granted to Landlord, and 15 Landlord may remove all occupants and property therefrom, using such force as may be necessary to the extent allowed by law, without being deemed guilty in any manner of trespass, eviction or forcible entry and detainer and without relinquishing Landlord's right to Rent or any other right given to Landlord hereunder or by operation of law. C. If Landlord terminates the right of Tenant to possession of the Premises without terminating this Lease, Landlord shall have the right to immediate recovery of all amounts then due hereunder. Such termination of possession shall not release Tenant, in whole or in part, from Tenant's obligation to pay Rent hereunder for the full Term, and Landlord shall have the right, from time to time, to recover from Tenant, and Tenant shall remain liable for, all Base Rent, Additional Rent and any other sums accruing as they become due under this Lease during the period from the date of such notice of termination of possession to the stated end of the Term. In any such case, Landlord may relet the Premises or any part thereof for the account of Tenant for such rent, for such time (which may be for a term extending beyond the Term) and upon such terms as Landlord shall determine and may collect the rents from such reletting. Landlord shall not be required to accept any tenant offered by Tenant or to observe any instructions given by Tenant relative to such reletting. Also, in any such case, Landlord may make repairs, alterations and additions in or to the Premises and redecorate the same to the extent deemed by Landlord necessary or desirable and in connection therewith change the locks to the Premises, and Tenant upon demand shall pay the cost of all of the foregoing together with Landlord's expenses of reletting. The rents from any such reletting shall be applied first to the payment of the expenses of reentry, redecoration, repair and alterations and the expenses of reletting and second to the payment of Rent herein provided to be paid by Tenant. Any excess or residue shall operate only as an offsetting credit against the amount of Rent due and owing as the same thereafter becomes due and payable hereunder, and the use of such offsetting credit to reduce the amount of Rent due Landlord, if any, shall not be deemed to give Tenant any right, title or interest in or to such excess or residue and any such excess or residue shall belong to Landlord solely, and in no event shall Tenant be entitled to a credit on its indebtedness to Landlord in excess of the aggregate sum (including Base Rent and Additional Rent) which would have been paid by Tenant for the period for which the credit to Tenant is being determined, had no Event of Default occurred. No such reentry or repossession, repairs, alterations and additions, or reletting shall be construed as an eviction or ouster of Tenant or as an election on Landlord's pat to terminate this Lease, unless a written notice of such intention is given to Tenant, or shall operate to release Tenant in whole or in part from any of Tenant's obligations hereunder, and Landlord, at any time and from time to time, may sue and recover judgment for any deficiencies remaining after the application of the proceeds of any such reletting. D. If this Lease is terminated by Landlord pursuant to Section 23.A.(2), Landlord shall be entitled to recover from Tenant all Rent accrued and unpaid for the period up to and including such termination date, as well as all other additional sums payable by Tenant, or for which Tenant is liable or for which Tenant has agreed to indemnify Landlord under any of the provisions of this Lease, which may be then owing and unpaid, and all costs and expenses, including without limitation court costs and attorneys' fees incurred by Landlord in the enforcement of its rights and remedies hereunder, and, in addition, Landlord shall be entitled to recover as damages for loss of the bargain and not as a penalty (i) the unamortized portion of any concessions offered by Landlord to Tenant in connection with this Lease, including without limitation Landlord's contribution to the cost of tenant improvements and alterations, if any, installed by either Landlord or Tenant pursuant to this Lease or any work letter in connection with this Lease, (ii) the aggregate sum which at the time of such termination represents the excess, if any, of the present value of the aggregate rents which would have been payable after the termination date had this Lease not been terminated, including, without limitation, Base Rent at the annual rate or respective annual rates for the remainder of the Term provided for in this Lease and the amount projected by Landlord to represent Additional Rent for the remainder of the Term over the then present value of the then aggregate fair rent value of the Premises for the balance of the Term, such present worth to be computed in each case on the basis of a ten percent (10%) per annum discount from the respective dates upon which such Rents would have been payable hereunder had this Lease not been terminated, and (iii) any damages in addition thereto, including without limitation reasonable attorneys' fees and court costs, which Landlord sustains as a result of the breach of any of the covenants of this Lease other than for the payment of Rent. E. Landlord shall use commercially reasonable efforts to mitigate any damages resulting from an Event of Default by Tenant under this Lease. Landlord's obligation to mitigate damages after an Event of Default by Tenant under this Lease shall be satisfied in full if Landlord undertakes to lease the Premises to another tenant (a "SUBSTITUTE TENANT") in accordance with the following criteria: (1) Landlord shall have no obligations to solicit or entertain negotiations with any other prospective tenants for the Premises until Landlord obtains full and complete possession of the Premises including, without limitation, the final and unappealable legal right to relet the Premises free of any claim of Tenant; (2) Landlord shall not be obligated to lease or show the Premises, on a priority basis, offer the Premises to a prospective tenant when other premises in the Building suitable for that prospective tenant's use are (or soon will be) available; 16 (3) Landlord shall not be obligated to lease the Premises to a Substitute Tenant for a Rent less than the current fair market Rent then prevailing for similar uses in comparable buildings in the same market area as the Building, nor shall Landlord be obligated to enter into a new lease under other terms and conditions that are unacceptable to Landlord under Landlord's then current leasing policies for comparable space in the Building; (4) Landlord shall not be obligated to enter into a lease with a Substitute Tenant whose use would: (i) violate any restriction, covenant, or requirement contained in the lease of another tenant of the Building; (ii) adversely affect the reputation of the Building; or (iii) be incompatible with the operation of the Building as an industrial building; (5) Landlord shall not be obligated to enter into a lease with any proposed Substitute Tenant which does not have, in Landlord's reasonable opinion, sufficient financial resources to operate the Premises in a first class manner; and (6) Landlord shall not be required to expend any amount of money to alter, remodel, or otherwise make the Premises suitable for use by a proposed Substitute Tenant unless: (i) Tenant pays any such sum to Landlord in advance of Landlord's execution of a lease with such tenant (which payment shall not be in lieu of any damages or other sums to which Landlord may be entitled as a result of Tenant's default under this Lease); or (ii) Landlord, in Landlord's reasonable discretion, determines that any such expenditure is financially justified in connection with entering into any such substitute lease. F. All property of Tenant removed from the Premises by Landlord pursuant to any provision of this Lease or applicable law may be handled, removed or stored by Landlord at the cost and expense of Tenant, and Landlord shall not be responsible in any event for the value, preservation or safekeeping thereof. Tenant shall pay Landlord for all expenses incurred by Landlord with respect to such removal and storage so long as the same is in Landlord's possession or under Landlord's control. All such property not removed from the Premises or retaken from storage by Tenant within thirty (30) days after the end of the Term or the termination of Tenant's right to possession of the Premises, however terminated, at Landlord's option, shall be conclusively deemed to have been conveyed by Tenant to Landlord as by bill of sale without further payment or credit by Landlord to Tenant. G. Tenant hereby grants to Landlord a first lien upon the interest of Tenant under this Lease to secure the payment of moneys due under this Lease, which lien may be enforced in equity, and Landlord shall be entitled as a matter of right to have a receiver appointed to take possession of the Premises and relet the same under order of court. H. If Tenant is adjudged bankrupt, or a trustee in bankruptcy is appointed for Tenant, Landlord and Tenant, to the extent permitted by law, agree to request that the trustee in bankruptcy determine within sixty (60) days thereafter whether to assume or to reject this Lease. I. The receipt by Landlord of less than the full rent due shall not be construed to be other than a payment on account of rent then due, nor shall any statement on Tenant's check or any letter accompanying Tenant's check be deemed an accord and satisfaction, and Landlord may accept such payment without prejudice to Landlord's right to recover the balance of the rent due or to pursue any other remedies provided in this lease. The acceptance by Landlord of rent hereunder shall not be construed to be a waiver of any breach by Tenant of any term, covenant or condition of this Lease. No act or omission by Landlord or its employees or agents during the term of this Lease shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept such a surrender shall be valid unless in writing and signed by Landlord. J. In the event of any litigation between Tenant and Landlord to enforce any provision of this Lease or any right of either party hereto, the unsuccessful party to such litigation shall pay to the successful party all costs and expenses, including reasonable attorney's fees, incurred therein. Furthermore, if Landlord, without fault, is made a party to any litigation instituted by or against Tenant, Tenant shall indemnify Landlord against, and protect, defend, and save it harmless from, all costs and expenses, including reasonable attorney's fees, incurred by it in connection therewith. If Tenant, without fault, is made party to any litigation instituted by or against Landlord, Landlord shall indemnify Tenant against, and protect, defend, and save it harmless from, all costs and expenses, including reasonable attorney's fees, incurred by it in connection therewith. 17 24. NO WAIVER. Failure of Landlord to declare any default immediately upon its occurrence, or delay in taking any action in connection with an event of default, shall not constitute a waiver of such default, nor shall it constitute an estoppel against Landlord, but Landlord shall have the right to declare the default at any time and take such action as is lawful or authorized under this Lease. Failure by Landlord to enforce its rights with respect to any one default shall not constitute a waiver of its rights with respect to any subsequent default. 25. PEACEFUL ENJOYMENT. Tenant shall, and may peacefully have, hold, and enjoy the Premises, subject to the other terms hereof, provided that Tenant pays the Rent and other sums herein recited to be paid by Tenant and timely performs all of Tenant's covenants and agreements herein contained. This covenant and any and all other covenants of Landlord shall be binding upon Landlord and its successors only with respect to breaches occurring during its or their respective periods of ownership of the Landlord's interest hereunder. 26. SUBSTITUTION. Landlord at its sole discretion shall be entitled to cause Tenant to relocate from the Premises to a comparably-sized space, of comparable design and tenant improvements (the "Relocation Space") within the Building or adjacent buildings within the same Property at any time upon sixty (60) days' prior written notice to Tenant if such notice is given prior to the Commencement Date and upon ninety (90) days' prior written notice to Tenant if such notice is given on or after the Commencement Date. The reasonable costs actually incurred in connection with the physical relocation of the Tenant to the Relocation Space shall be at the expense of Landlord and all other costs, if any, involved with such relocation shall be borne by Tenant. Such a relocation shall not terminate or otherwise affect or modify this Lease except that from and after the date of such relocation, "Premises" shall refer to the Relocation Space into which Tenant has been moved, rather than the original Premises as herein defined and the Base Rent shall be adjusted so that immediately following such relocation the Base Rent for the Relocation Space on a per square foot of Rentable Area basis shall be the same as the Base Rent immediately prior to such relocation for the original Premises on a per square foot of Rentable Area basis. Tenant's Pro Rata Share also be adjusted in accordance with the formula set forth in the Lease. Notwithstanding the foregoing, from and after the Commencement Date, Landlord shall not be entitled to relocate Tenant more than one (1) time during the initial Lease Term. Therefore, if prior to the Commencement Date Landlord notifies Tenant of its election to relocate Tenant, Landlord shall still be entitled to relocate Tenant one additional time during the initial Lease Term. 27. HOLDING OVER. In the event of holding over by Tenant after expiration or other termination of this Lease or in the event Tenant continues to occupy the Premises after the termination of Tenant's right of possession pursuant to Section 23.A(3) hereof, occupancy of the Premises subsequent to such termination or expiration shall be that of a tenancy at sufferance and in no event for month-to-month or year-to-year. Tenant shall, throughout the entire holdover period, be subject to all the terms and provisions of this Lease and shall pay for its use and occupancy an amount (on a per month basis without reduction for any partial months during any such holdover) equal to ONE AND ONE HALF THE SUM OR (150%) of (a) the greater of then current market rate, or (b) the Base Rent and Additional Rent which would have been applicable had the Lease Term continued through the period of such holding over by Tenant. No holding over by Tenant or payments of money by Tenant to Landlord after the expiration of the Lease Term shall be construed to extend the Lease Term or prevent Landlord from recovery of immediate possession of the Premises by summary proceedings or otherwise unless Landlord has sent written notice to Tenant that Landlord has elected to extend the Lease Term. In addition to the obligation to pay the amounts set forth above during any such holdover period, Tenant shall also be liable to Landlord for all damages, including, without limitation, any consequential damages, which Landlord may suffer by reason of any holding over by Tenant and Tenant shall also indemnify Landlord against any and all claims made by any other tenant or prospective tenant against Landlord for delay by Landlord in delivering possession of the Premises to such other tenant or prospective tenant IN THE EVENT THE HOLDOVER CONTINUES FOR MORE THAN THIRTY (30) DAYS. 28. SUBORDINATION TO MORTGAGE/ESTOPPEL CERTIFICATE. Tenant accepts this Lease subject and subordinate to any mortgage, deed of trust or other lien presently existing or hereafter arising upon the Premises, or upon the Building and/or the Property and to any renewals, modifications, refinancings and extensions thereof, but Tenant agrees that any such mortgagee shall have the right at any time to subordinate such mortgage, deed of trust or other lien to this Lease on such terms and subject to such conditions as such mortgagee may deem appropriate in its discretion. The provisions of the foregoing sentence shall be self-operative and no further instrument of subordination shall be required. However, Landlord is hereby irrevocably vested with full power and authority to subordinate this Lease to any mortgage, deed of trust or other lien now existing or hereafter placed upon the Premises, or the Building and/or the property and Tenant agrees within ten (10) days after demand to execute such further instruments subordinating this Lease or attorning to the holder of any such liens as Landlord may request. The terms of this Lease are subject to approval by the Landlord's existing lender(s) and any lender(s) who, at the time of the execution of this Lease, have committed or are considering committing to Landlord to make a loan secured by all or any portion of the Property, and such approval is a condition precedent to Landlord's obligations hereunder. In the event that Tenant should fail to execute any subordination or other agreement required by this Section promptly as requested, Tenant hereby irrevocably constitutes Landlord as its attorney-in-fact to execute such instrument in Tenant's name, place and stead, it being agreed that such power is one coupled with an interest in Landlord and is accordingly irrevocable. Tenant agrees that it will from time-to-time upon request by Landlord execute and deliver to such persons as 18 Landlord shall request a statement in recordable form certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as so modified), stating the dates to which rent and other charges payable under this Lease have been paid, stating that Landlord is not in default hereunder (or if Tenant alleges a default stating the nature of such alleged default) and further stating such other matters as Landlord shall reasonably require. Tenant agrees periodically to furnish within ten (10) days after so requested by Landlord, ground lessor or the holder of any deed or trust, mortgage or security agreement covering the Building, the Property, or any interest of Landlord therein, a certificate signed by Tenant certifying (a) that this Lease is in full force and effect and unmodified (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications), (b) as to the Commencement Date and the date through which Base Rent and Tenant's Additional Rent have been paid, (c) that Tenant has accepted possession of the Premises and that any improvements required by the terms of this Lease to be made by Landlord have been completed to the satisfaction of Tenant, (d) that except as stated in the certificate no rent has been paid more than thirty (30) days in advance of its due date, (e) that the address for notices to be sent to Tenant is as set forth in this Lease (or has been changed by notice duly given and is as set forth in the certificate), (f) that except as stated in the certificate, Tenant, as of the date of such certificate, has no charge, lien, or claim of offset against rent due or to become due, (g) that except as stated in the certificate, Landlord is not then in default under this Lease, (h) as to the amount of the Approximate Rentable Area of the Premises then occupied by Tenant, (i) that there are no renewal or extension options, purchase options, rights of first refusal or the like in favor of Tenant except as set forth in this Lease, (j) the amount and nature of accounts payable to Landlord under terms of this Lease, and (k) as to such other matters as may be requested by Landlord or ground lessor or the holder of any such deed of trust, mortgage or security agreement. Any such certificate may be relied upon by any ground lessor, prospective purchaser, secured party, mortgagee or any beneficiary under any mortgage, deed of trust on the Building or the Property or any part thereof or interest of Landlord therein. NOTWITHSTANDING THE FOREGOING, UPON WRITTEN REQUEST BY TENANT, LANDLORD WILL USE REASONABLE EFFORTS TO OBTAIN A NON-DISTURBANCE, SUBORDINATION AND ATTORNMENT AGREEMENT FROM LANDLORD'S THEN CURRENT MORTGAGEE ON SUCH MORTGAGEE'S THEN CURRENT STANDARD FORM OF AGREEMENT WITHIN THIRTY (30) DAYS OF TENANT'S WRITTEN REQUEST. "REASONABLE EFFORTS" OF LANDLORD SHALL NOT REQUIRE LANDLORD TO INCUR ANY COST, EXPENSE OR LIABILITY TO OBTAIN SUCH AGREEMENT, IT BEING AGREED THAT TENANT SHALL BE RESPONSIBLE FOR ANY FEE OR REVIEW COSTS CHARGED BY THE MORTGAGEE. UPON REQUEST OF LANDLORD, TENANT WILL EXECUTE THE MORTGAGEE'S FORM OF NON-DISTURBANCE, SUBORDINATION AND ATTORNMENT AGREEMENT AND RETURN THE SAME TO LANDLORD FOR EXECUTION BY THE MORTGAGEE. LANDLORD'S FAILURE TO OBTAIN A NON-DISTURBANCE, SUBORDINATION AND ATTORNMENT AGREEMENT FOR TENANT SHALL HAVE NO EFFECT ON THE RIGHTS, OBLIGATIONS AND LIABILITIES OF LANDLORD AND TENANT OR BE CONSIDERED TO BE A DEFAULT BY LANDLORD HEREUNDER. 29. NOTICE. Any notice required or permitted to be given under this Lease or by law shall be deemed to have been given if it is written and delivered in person or mailed by Registered or Certified mail, postage prepaid, RETURN RECEIPT REQUESTED or sent by a nationally recognized overnight delivery service to the party who is to receive such notice at the address specified in Section 1.Y. of this Lease. When so mailed, the notice shall be deemed to have been given two (2) business days after the date it was mailed. When sent by overnight delivery service, the notice shall be deemed to have been given on the next business day after deposit with such overnight delivery service. The address specified in Section 1.Y. of this Lease may be changed from time to time by giving written notice thereof to the other party. 30. LANDLORD'S LIEN. Intentionally Omitted. 31. SURRENDER OF PREMISES. Upon the termination, whether by lapse of time or otherwise, or upon any termination of Tenant's right to possession without termination of the Lease, Tenant will at once surrender possession and vacate the Premises, together with all Leasehold Improvements (except those Leasehold Improvements Tenant is required to remove pursuant to Section 8 hereof), to Landlord in good condition and repair, ordinary wear and tear excepted; conditions existing because of Tenant's failure to perform maintenance, repairs or replacements as required of Tenant under this Lease shall not be deemed "reasonable wear and tear." Tenant shall surrender to Landlord all keys to the Premises and make known to Landlord the explanation of all combination locks which Tenant is permitted to leave on the Premises. Subject to the Landlord's rights under Section 23 hereof, if Tenant fails to remove any of Tenant's Property within one (1) day after the termination of this Lease, or Tenant's right to possession hereunder, Landlord, at Tenant's sole cost and expenses, shall be entitled to remove and/or store such Tenant's Property and Landlord shall be in no event be responsible for the value, preservation or safekeeping thereof. Tenant shall pay Landlord, upon demand, any and all reasonable expenses caused by such removal and all storage charges against such property so long as the same shall be in possession of Landlord or under the control of Landlord. In addition, if Tenant fails to remove any Tenant's Property from the Premises or storage, as the case may be, within ten (10) days after written notice from Landlord, Landlord, at its option, may deem all or any part of such Tenant's Property to have been abandoned by Tenant and title thereof shall immediately pass to Landlord under this Lease as by a bill of sale. 32. RIGHTS RESERVED TO LANDLORD. Landlord reserves the following rights, exercisable without notice, except as provided herein, and without liability to Tenant for damage or injury to property, person or business and without affecting an eviction or disturbance of Tenant's use or possession or giving rise to any claim for setoff or abatement of rent or affecting any of Tenant's obligations under this Lease: (1) upon thirty (30) days prior notice to change the name or street address of the Building; (2) to install and maintain signs on the exterior and interior of the Building; (3) to designate and approve window coverings to present 19 a uniform exterior appearance; (4) to make any decorations, alterations, additions, improvements to the Building or Property, or any part thereof (including, with prior notice, the Premises) which Landlord shall desire, or deem necessary for the safety, protection, preservation or improvement of the Building or Property, or as Landlord may be required to do by law; (5) to have access to the Premises at reasonable hours to perform its duties and obligations and to exercise its rights under this Lease; (6) to retain at all times and to use in appropriate instances, pass keys to all locks within and to the Premises; (7) to approve the weight, size, or location of heavy equipment, or articles within the Premises; (8) to close or restrict access to the Building at all times other than Normal Business Hours subject to Tenant's right to admittance at all times under such regulations as Landlord may prescribe from time to time, or to close (temporarily or permanently) any of the entrances to the Building; provided Landlord shall the right to restrict or prohibit access to the Building or the Premises at any time Landlord determines it is necessary to do so to minimize the risk of injuries or death to persons or damage to property; (9) to change the arrangement and/or location of entrances of passageways, doors and doorways, corridors, elevators, stairs, toilets and public part of the Building or Property; (10) to regulate access to telephone, electrical and other utility closets in the Building and to require use of designated contractors for any work involving access to the same; (11) if Tenant has vacated the Premises during the last six (6) months of the Lease Term, to perform additions, alterations and improvements to the Premises in connection with a reletting or anticipated reletting thereof without being responsible or liable for the value or preservation of any then existing improvements to the Premises; and (12) to grant to anyone the exclusive right to conduct any business or undertaking in the Building provided Landlord's exercise of its rights under this clause 12, shall not be deemed to prohibit Tenant from the operation of its business in the Premises and shall not constitute a constructive eviction. TENANT AGREES THAT, AS BETWEEN TENANT AND LANDLORD, LANDLORD HAS THE SOLE AND ABSOLUTE RIGHT TO CONTEST TAXES LEVIED AGAINST THE PREMISES AND THE PROJECT (OTHER THAN TAXES LEVIED DIRECTLY AGAINST TENANT'S PERSONAL PROPERTY WITHIN THE PREMISES). THEREFORE, TENANT, TO THE FULLEST EXTENT PERMITTED BY LAW, IRREVOCABLY WAIVES ANY AND ALL RIGHTS THAT TENANT MAY HAVE TO RECEIVE FROM LANDLORD A COPY OF NOTICES RECEIVED BY LANDLORD REGARDING THE APPRAISAL OR REAPPRAISAL, FOR TAX PURPOSES, OF ALL OR ANY PORTION OF THE PREMISES OR THE PROJECT (INCLUDING, WITHOUT LIMITATION, ANY RIGHTS SET FORTH IN SECTION 41.413 OF THE TEXAS PROPERTY TAX CODE, AS SUCH MAY BE AMENDED FROM TIME TO TIME). ADDITIONALLY, TENANT, TO THE FULLEST EXTENT PERMITTED BY LAW, HEREBY IRREVOCABLY ASSIGNS TO LANDLORD ANY AND ALL RIGHTS OF TENANT TO PROTEST OR APPEAL ANY GOVERNMENTAL APPRAISAL OR REAPPRAISALS OF THE VALUE OF ALL OR ANY PORTION OF THE PREMISES OR THE PROJECT (INCLUDING, WITHOUT LIMITATION, ANY RIGHTS SET FORTH IN SECTION 41.413 AND SECTION 42.015 OF THE TEXAS PROPERTY TAX CODE, AS SUCH MAY BE AMENDED FROM TIME TO TIME). TENANT AGREES WITHOUT RESERVATION THAT IT WILL NOT PROTEST OR APPEAL ANY SUCH APPRAISAL OR REAPPRAISAL BEFORE A GOVERNMENTAL TAXING AUTHORITY WITHOUT THE EXPRESS WRITTEN AUTHORIZATION OF LANDLORD. 33. MISCELLANEOUS A. If any term or provision of this Lease, or the application thereof to any person or circumstance shall, to any extent, be invalid or enforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and enforced to the fullest extent permitted by law. B. Tenant agrees not to record this Lease or any short form or memorandum hereof. C. This Lease and the rights and obligations of the parties hereto shall be interpreted, construed, and enforced in accordance with the laws of the state in which the Building is located. D. Events of "FORCE MAJEURE" shall include strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations or restrictions, or any other cause whatsoever beyond the control of Landlord or Tenant, as the case may be. Whenever a period of time is herein prescribed for the taking of any action by Landlord or Tenant (other than the payment of Rent and all other such sums of money as shall become due hereunder), such party shall not be liable or responsible for, there shall be excluded from the computation of such period of time, any delays due to events of Force Majeure. E. Except as expressly otherwise herein provided, with respect to all required acts of Tenant, time is of the essence of this Lease. F. Landlord shall have the right to transfer and assign, in whole or in part, all of its rights and obligations hereunder and in the Building and Property referred to herein, and in such event and upon such transfer Landlord shall be released from any further obligations hereunder, and Tenant agrees to look solely to such successor in interest of Landlord for the performance of such obligations. G. Tenant hereby represents to Landlord that it has dealt directly with and only with the Broker as a broker in connection with this Lease. Landlord and Tenant hereby indemnify and hold each other harmless against any loss, claim, expense or liability with respect to any commissions or brokerage fees claimed on account of the execution and/or renewal of this Lease due to any action of the indemnifying party. 20 H. If there is more than one Tenant, or it the Tenant as such is comprised of more than one person or entity, the obligations hereunder imposed upon Tenant shall be joint and several obligations of all such parties. All notices, payments, and agreements given or made by, with or to any one of such persons or entities shall be deemed to have been given or made by, with or to all of them. I. The individual signing this Lease on behalf of Tenant represents (1) that such individual is duly authorized to execute or attest and deliver this Lease on behalf of Tenant in accordance with the organizational documents of Tenant; (2) that this Lease is binding upon Tenant; (3) that Tenant is duly organized and legally existing in the state of its organization, and is qualified to do business in the state in which the Premises is located. J. Tenant acknowledges that the financial capability of Tenant to perform its obligations hereunder is material to Landlord and that Landlord would not enter into this Lease but for its belief, based on its review of Tenant's financial statements, that Tenant is capable of performing such financial obligations. Tenant hereby represents, warrants and certifies to Landlord that its financial statements previously furnished to Landlord were at the time given true and correct in all material respects and that there have been no material subsequent changes thereto as of the date of this Lease. K. Notwithstanding anything to the contrary contained in this Lease, the expiration of the Lease Term, whether by lapse of time or otherwise, shall not relieve Tenant from Tenant's obligations accruing prior to the expiration of the Lease Term, and such obligations shall survive any such expiration or other termination of the Lease Term. L. Landlord has delivered a copy of this Lease to Tenant for Tenant's review only, and the delivery hereof does not constitute an offer to Tenant or an option. This Lease shall not be effective until an original of this Lease executed by both Landlord and Tenant and an original Guaranty, if applicable, executed by each Guarantor is delivered to and accepted by Landlord, and this Lease has been approved by Landlord's mortgages, if required. M. Landlord and Tenant understand, agree and acknowledge that (i) this Lease has been freely negotiated by both parties; and (ii) in any controversy, dispute or contest over the meaning, interpretation, validity, or enforceability of this Lease or any of its terms or conditions, there shall be not inference, presumption, or conclusion drawn whatsoever against either party by virtue of that party having drafted this Lease or any portion thereof. N. The headings and titles to the paragraphs of this Lease are for convenience only and shall have no affect upon the construction or interpretation of any part hereof. O. Receipt by Landlord of Tenant's keys to the Premises shall not constitute an acceptance of surrender of the Premises. P. Except in the case of an emergency, all repairs performed by Landlord shall be at a time and in a manner so as not to unreasonably interfere with Tenant's normal business operations PROVIDED, HOWEVER, LANDLORD SHALL NOT BE REQUIRED TO PAY OVERTIME IN CONNECTION WITH SUCH WORK AND IF TENANT WANTS SUCH WORK TO BE PERFORMED OUTSIDE NORMAL BUSINESS HOURS, TENANT SHALL BE RESPONSIBLE FOR SUCH EXCESS COSTS. Notwithstanding any provision set forth in the Lease to the contrary, if Tenant provides written notice (or oral notice in the event of an emergency such as damage or destruction to or of the Building Structure and/or the Building Systems WHERE THERE IS A RISK OF IMMINENT INJURY TO PERSON OR PROPERTY) to Landlord of an event or circumstance which requires the action of Landlord with respect to repair and/or maintenance, and Landlord fails to COMMENCE such action within a reasonable period of time, given the circumstances, after the receipt of such notice, AND DILIGENTLY PROCEED TO COMPLETE SAME, then Tenant may proceed to take the required action to ELIMINATE THE RISK OF INJURY upon delivery of an additional ten (10) business days' notice to Landlord specifying that Tenant is taking such required action (provided, however, that such additional notice shall not be required in the event of an emergency), and if such action was required under the terms of the Lease to be taken by Landlord and was not taken by Landlord within such ten (10) day period, OR SUCH ADDITIONAL TIME AS ANY BE REASONABLE UNDER THE CIRCUMSTANCES, then Tenant shall be entitled to prompt reimbursement by Landlord of Tenant's reasonable costs and expenses in taking such action plus interest thereon at the Interest Rate. In the event Tenant takes such action, and such work will affect the Building Structure and/or the Building Systems, Tenant shall use only those contractors used by Landlord in the Building for work on such Building Structure or Building Systems unless such contractors are unwilling or unable to perform, or timely perform such work, in which event Tenant may utilize the services of any other qualified contractor which normally and regularly performs similar work in comparable buildings. Furthermore, if Landlord does not deliver a detailed written objection to Tenant within thirty (30), day after receipt of an invoice by Tenant of its costs of taking action which Tenant claims should have been taken by Landlord, and if such invoice from Tenant sets forth a reasonably particularized breakdown of its costs and expenses in connection with taking such action on behalf of Landlord, then Tenant shall be entitled to deduct from BASE Rent payable by Tenant under the Lease, the amount set forth in such invoice NOT TO EXCEED THE SUM OF $10,000. 21 34. ENTIRE AGREEMENT. This Lease, including the following Exhibits: Exhibit A -- Outline and Location of Premises Exhibit B -- Rules and Regulations Exhibit C -- Payment of Basic Costs Exhibit D -- Work Letter Exhibit E -- Additional Provisions (if required) Exhibit F -- Commencement Letter (Sample) Exhibit G -- Guaranty of Lease constitutes the entire agreement between the parties hereto with respect to the subject matter of this Lease and supersedes all prior agreements and understandings between the parties related to the Premises, including all lease proposals, letters of intent and similar documents. Tenant expressly acknowledges and agrees that Landlord has not made and is not making, and Tenant, in executing and delivering this Lease, is not relying upon, any warranties, representations, promises or statements, except to the extent that the same are expressly set forth in this Lease. All understandings and agreements heretofore had between the parties are merged in this Lease which alone fully and completely expresses the agreement of the parties, neither party relying upon any statement or representation not embodied in this Lease. This Lease may be modified only be a written agreement signed by Landlord and Tenant. Landlord and Tenant expressly agree that there are and shall be no implied warranties of merchantability, habitability, suitability, fitness for a particular purpose or of any other kind arising out of this Lease, all of which are hereby waived by Tenant, and that there are no warranties which extend beyond those expressly set forth in this Lease. 35. LIMITATION OF LIABILITY EXCEPT TO THE EXTENT SPECIFICALLY ADDRESSED HEREIN, TENANT SHALL NOT HAVE THE RIGHT TO AN ABATEMENT OF RENT OR TO TERMINATE THIS LEASE AS A RESULT OF LANDLORD'S DEFAULT AS TO ANY COVENANT OR AGREEMENT CONTAINED IN THIS LEASE OR AS A RESULT OF THE BREACH OF ANY PROMISE OR INDUCEMENT IN CONNECTION HEREWITH, WHETHER IN THIS LEASE OR ELSEWHERE AND TENANT HEREBY WAIVES SUCH REMEDIES OF ABATEMENT OF RENT AND TERMINATION. TENANT HEREBY AGREES THAT TENANT'S REMEDIES FOR DEFAULT HEREUNDER OR IN ANY WAY ARISING IN CONNECTION WITH THIS LEASE INCLUDING ANY BREACH OF ANY PROMISE OR INDUCEMENT OR WARRANTY, EXPRESSED OR IMPLIED, SHALL BE LIMITED TO SUIT FOR DIRECT AND PROXIMATE DAMAGES PROVIDED THAT TENANT HAS GIVEN THE NOTICES AS HEREINAFTER REQUIRED. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS LEASE, THE LIABILITY OF LANDLORD TO TENANT FOR ANY DEFAULT BY LANDLORD UNDER THIS LEASE SHALL BE LIMITED TO THE INTEREST OF LANDLORD IN THE BUILDING AND THE PROPERTY AND TENANT AGREES TO LOOK SOLELY TO LANDLORD'S INTEREST IN THE BUILDING AND THE PROPERTY FOR THE RECOVERY OF ANY JUDGMENT AGAINST THE LANDLORD, IT BEING INTENDED THAT LANDLORD SHALL NOT BE PERSONALLY LIABLE FOR ANY JUDGMENT OR DEFICIENCY. TENANT HEREBY COVENANTS THAT, PRIOR TO THE FILING OF ANY SUIT FOR DIRECT AND PROXIMATE DAMAGES, IT SHALL GIVE LANDLORD AND ALL MORTGAGEES WHOM TENANT HAS BEEN NOTIFIED HOLD MORTGAGES OR DEED OF TRUST LIENS ON THE PROPERTY, BUILDING OR PREMISES ("LANDLORD MORTGAGEES") NOTICE AND REASONABLE TIME TO CURE ANY ALLEGED DEFAULT BY LANDLORD. Execution Page to Follow 22 IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease in multiple original counterparts as of the day and year first above written. WITNESS/ATTEST LANDLORD: Coppell Commerce Center, Ltd., a Texas limited partnership By: Transwestern Beltline, L.P. a Delaware limited partnership, a general partner By: Transwestern Beltline GP I, L.L.C., a Delaware limited liability company, its general partner By: /s/ Jeanine M. Valdez By: /s/ Randal S. Bessolo -------------------------------- ------------------------------ Name: Jeanine M. Valdez Name: Randal S. Bessolo ------------------------------ ------------------------------ Title: Administrative Associate Title: Managing Director ----------------------------- --------------------------- WITNESS/ATTEST TENANT: HNC Insurance Solutions, Inc., a California corporation By: /s/ Kristine Westbury By: /s/ John Falliars -------------------------------- ------------------------------ Name: Kristine Westbury Name: John Falliars ------------------------------ ------------------------------ Title: Manager, Legal Affairs Title: CFO ----------------------------- --------------------------- EXHIBIT A OUTLINE AND LOCATION OF PREMISES This Exhibit is attached to and made a part of the Lease dated December 13, 2000 by and between Coppell Commerce Center, Ltd. ("Landlord") and HNC Insurance Solutions, Inc., a California corporation ("Tenant") for space in the Building located at Coppell Commerce Center. [SITE PLAN] A-1 EXHIBIT A-1 LEGAL DESCRIPTION OF LAND BEING a tract of land situated in the Cordelia Bowen Survey, Abstract No. 56, City of Coppell, Dallas County, Texas, and being part of a tract of land described in Deed to Transwestern Beltline, L.P. as recorded in Vol. 98248, Pg. 721, and also being described in Deed to Brazos Beltline Development, Inc. as recorded in Vol. 95248, Pg. 0546, and also being part of "Tract 1" as described by Deed to MCDLF Holding Company, recorded in Volume 90150, Page 1511 of the Deed Records, Dallas County, Texas and being more particularly described as follows: COMMENCING at a 1/2 inch found iron rod for the intersection of the West line of Beltline Road (a variable width right-of-way) and the North line of Lakeshore Drive (a 90 foot right-of-way at this point), a dedicated street in the Northlake 635 Business Park, an addition to the City of Coppell, Texas according to the plat recorded in Volume 85056, Page 3358, Deed Records, Dallas County, Texas: THENCE North 10 degrees 48 minutes 36 seconds West, a distance of 56.09 feet, along said West line of Beltline Road, to a 1/2 inch found iron rod with yellow plastic cap stamped "Halff Assoc., Inc." (hereinafter referred to as "with cap") for a corner; THENCE North 00 degrees 30 minutes 00 seconds East, continuing along said west line a distance of 495.58 feet to the POINT OF BEGINNING of the herein described tract. THENCE North 89 degrees 30 minutes 00 seconds West, departing said west line a distance of 1248.15 feet, to a point on said East Line of Lakeshore Drive (a 60 foot right-of-way at this point), said point being on a circular curve to the right having a radius of 320.00 feet, and whose chord bears North 06 degrees 01 minutes 01 seconds West, 72.64 feet; THENCE along said curve in a Northerly direction along said East line of Lakeshore Drive, through a central angle of 13 degrees 02 minutes 03 seconds an arc distance of 72.80 feet, to a 1/2 inch found iron rod for the point of tangency; THENCE North 00 degrees 30 minutes 00 seconds East, a distance of 556.13 feet to a 1/2 inch found iron rod with cap for a corner at the intersection of said East line of Lakeshore Drive and a line 5 feet North of and parallel to the North line of a 50 foot Open Channel Drainage Easement, a dedicated easement in said Northlake 635 Business Park; THENCE South 89 degrees 30 minutes 00 seconds East, departing said East line and along said parallel line, a distance of 629.41 feet to a 1/2 inch found iron rod with plastic cap for the point of curvature of circular curve to the left, having a central angle of 27 degrees 17 minutes 51 seconds and a radius of 470.00 feet; THENCE with said curve in an easterly direction, continuing along said parallel line, an arc distance of 223.92 feet to a 1/2 inch found iron rod with cap for the point of reverse curvature of a circular curve to the right, having a central angle of 27 degrees 17 minutes 51 seconds and a radius of 530.00 feet; THENCE with said curve in an Easterly direction, continuing along with said parallel line an arc distance of 252.51 feet to a 1/2 inch found iron rod with cap for the point of tangency; THENCE South 89 degrees 30 minutes 00 seconds East, continuing along said parallel line a distance 168.37 feet to a 1/2 inch found iron rod with cap for a corner at the intersection of said parallel line and the said West line of Beltline Road, said point bears North 00 degrees 30 minutes 00 seconds East, a distance of 30.00 feet from a 1/2 inch found iron rod with cap at the intersection of the center line of said 50 foot Easement and the said West line of Beltline Road; THENCE South 00 degrees 30 minutes 00 seconds West, a distance of 739.68 feet, with the said West line of Beltline Road to the POINT OF BEGINNING AND CONTAINING 834,014 square feet or 19.146 acres of land, more or less. A-1-1 EXHIBIT B RULES AND REGULATIONS The following rules and regulations shall apply, where applicable, to the Premises, the Building, the parking garage associated therewith (if any), the Property and the appurtenances thereto: 1. Sidewalks, entrances, passageways, courts, corridors, vestibules, halls, elevators and stairways in and about the Building shall not be obstructed nor shall objects be placed against glass partitions, doors or windows which would be unsightly from the Building's corridors from the exterior of the Building. 2. Plumbing, fixtures and appliances shall be used for only the purpose for which they were designed and no foreign substance of any kind whatsoever shall be thrown or placed therein. Damage resulting to any such fixtures or appliances from misuse by Tenant or its agents, employees or invitees, shall be paid for by Tenant and Landlord shall not in any case be responsible therefor. 3. Any sign, lettering, picture, notice, advertisement installed within the Premises which is visible from the public corridors within the Building shall be installed in such manner, and be of such character and style, as Landlord shall approve, in writing in its reasonable discretion. No sign, lettering, picture, notice or advertisement shall be placed on any outside window or door or in a position to be visible from outside the Building. No nails, hooks or screws (except for customary artwork or wall hangings) shall be driven or inserted into any part of the Premises or Building except by Building maintenance personnel, nor shall any part of the Building be defaced or damaged by Tenant. 4. Tenant shall not place any additional lock or locks on any door in the Premises or Building without Landlord's prior written consent. A reasonable number of keys to the locks on the doors in the Premises shall be furnished by Landlord to Tenant at the cost of Tenant, and Tenant shall not have any duplicate keys made. All keys and passes be returned to Landlord at the expiration or earlier termination of this Lease. 5. Tenant shall refer all contractors, contractors representatives and installation technicians for Landlord for Landlord's supervision, approval and control before the performance of any contractual services. This provision shall apply to all work performed in the Building including, but not limited to installation of telephones, telegraph equipment, electrical devices and attachments, doors, entranceways, and any and all installations of every nature affecting floors, walls, woodwork, window trim, ceilings, equipment and any other physical portion of the Building. Tenant shall not waste electricity, water or air conditioning. All controls shall be adjusted only by Building personnel. 6. All corridor doors, when not in use, shall remain closed. Tenant shall cause all doors to the Premises to be closed and securely locked before leaving the Building at the end of the day. 7. Tenant shall keep all electrical and mechanical apparatus owned by Tenant free of vibration, noise and airwaves which may be transmitted beyond the Premises. 8. Canvassing, soliciting and peddling in or about the Building or Property is prohibited. Tenant shall cooperate and use its best effort to prevent the same. 9. Tenant shall not use the Premises in any manner which would overload the standard heating, ventilating or air conditioning systems of the Building. 10. Tenant shall not utilize any equipment or apparatus in such manner as to create any magnetic fields or waves which adversely affect or interfere with the operation of any systems or equipment in the Building or Property. 11. Bicycles and other vehicles are not permitted inside or on the walkways outside the Building, except in those areas specifically designated by Landlord for such purposes. 12. Tenant shall not operate or permit to be operated on the Premises any coin or token operated vending machine or similar device (including, without limitation, telephones, lockers, toilets, scales, amusements devices and machines for sale of beverages, foods, candy, cigarettes or other goods), except for those vending machines or similar devices which are for the sole and exclusive use of Tenant's employees, and then only if such operation does not violate the lease of any other tenant in the Building. 13. Tenant shall utilize the termite and pest extermination service designated by Landlord to control termites and pests in the Premises. Except as included in Basic Costs, Tenant shall bear the cost and expense of such extermination services. 14. To the extent permitted by law, Tenant shall not permit picketing or other union activity involving its employees or agents in the Building or on the Property, except in those locations and subject to time B-1 and other constraints as to which Landlord may give its prior written consent, which consent may be withheld in Landlord's sole discretion. 15. Tenant shall comply with all applicable laws, ordinances, governmental orders or regulations and applicable orders or directions from amy public office or body having jurisdiction, with respect to the Premises, the Building, the Property and their respective use or occupancy thereof. Tenant shall not make or permit any use of the Premises, the Building or the Property, respectively, which is directly or indirectly forbidden by law, ordinance, governmental regulation or order, or direction of applicable public authority, or which may be dangerous to person or property. 16. Tenant shall not use or occupy the Premises in any manner or for any purpose which would injure the reputation or impair the present or future value of the Premises, the Building or the Property; without limiting the foregoing, Tenant shall not use or permit the Premises or any portion thereof to be used for lodging, sleeping or for any illegal purpose. 17. Tenant shall carry out Tenant's permitted repair, maintenance, alterations, and improvements in the Premises only during times agreed to in advance by Landlord and in a manner which will not interfere with the rights of other tenants in the Building. 18. Landlord may from time to time adopt appropriate systems and procedures for the security or safety of the Building, its occupants, entry and use, or its contents. Tenant, Tenant's agents, employees, contractors, guests and invitees shall comply with Landlord's reasonable requirements thereto. 19. Landlord shall have the right to prohibit the use of the name of the Building or any other publicity by Tenant that in Landlord's opinion may tend to impair the reputation of the Building or its desirability for Landlord or its other tenants. Upon written notice from Landlord, Tenant will refrain from and/or discontinue such publicity immediately. 20. Neither Tenant nor any of its employees, agents, contractors, invitees or customers shall smoke in any area designated by Landlord (whether through the posting of a "no smoking" sign or otherwise) as a "no smoking" area. In no event shall Tenant or any of its employees, agents, contractors, invitees or customers smoke in the hallways or bathrooms of the Building. Landlord reserves the right to designate, from time to time, additional areas of the Building and the Property as "no smoking" areas and to designate the entire Building and the Property as a "no smoking" area. B-2 EXHIBIT C PAYMENT OF BASIC COSTS (USE FOR NET DEALS) This Exhibit is attached to and made a part of the Lease dated December 13, 2000 by and between Coppell Commerce Center, Ltd. ("LANDLORD") and HNC Insurance Solutions, Inc., ("TENANT") for space in the Building located at Coppell Commerce Center. A. During each calendar year, or portion thereof, falling within the Lease Term, Tenant shall pay to Landlord as Additional Rent hereunder Tenant's Pro Rata Share of Basic Costs (as defined below) for the applicable calendar year. Prior to January 1 of each calendar year during the Lease Term, or as soon thereafter as practical, Landlord shall make a good faith estimate of Basic Costs for the applicable full or partial calendar year and Tenant's Pro Rata Share thereof. On or before the first day of each month during such calendar year, Tenant shall pay Landlord, as Additional Rent, a monthly installment equal to one-twelfth of Tenant's Pro Rata Share of Landlord's estimate of Basic Costs. Landlord shall have the right from time to time during any such calendar year to revise the estimate of Basic Costs for such year and provide Tenant with a revised statement therefor (provided, however, Landlord agrees that Landlord shall not issue a revised statement more than twice in any calendar year), and thereafter the amount Tenant shall pay each month shall be based upon such revised estimate. If Landlord does not provide Tenant with an estimate of the Basic Costs by January 1 of any calendar year, Tenant shall continue to pay a monthly installment based on the previous year's estimate until such time as Landlord provides Tenant with an estimate of Basic Costs for the current year. Upon receipt of such current year's estimate, an adjustment shall be made for any month during the current year with respect to which Tenant paid monthly installments of Additional Base Rent based on the previous years estimate. Tenant shall pay Landlord for any underpayment upon demand. Any overpayment in excess of the equivalent of one (1) month's Base Rent shall, at Landlord's option, be refunded to Tenant or credited against the installment(s) of Additional Rent next coming due under the Lease. Any overpayment in an amount equal to or less than the equivalent of one (1) month's Base Rent shall, at Landlord's option, be refunded to Tenant or credited against the installment of Additional Rent due for the month immediately following the furnishing of such estimate. Any amount paid by Tenant based on any estimate shall be subject to adjustment pursuant to Paragraph B below, when actual Basic Costs are determined for such calendar year. B. As soon as is practical following the end calendar year during the Lease Term, Landlord shall furnish to Tenant a statement of Landlord's actual Basic Costs for the previous calendar year. If for any calendar year the Additional Rent collected for the prior year, as a result of Landlord's estimate of Basic Costs, is in excess of Tenant's actual Pro Rata Share of Basic Costs for such prior year, then Landlord shall refund to Tenant any overpayment (or at Landlord's option apply such amount against Additional Base Rent due or to become due hereunder). Likewise, Tenant shall pay to Landlord, on demand, any underpayment with respect to the prior year whether or not the Lease has terminated prior to receipt by Tenant of a statement for such underpayment, it being understood that this clause shall survive the expiration of the Lease. C. Basic Costs shall mean all direct and indirect costs, expenses paid and disbursements of every kind (subject to the limitations set forth below) which Landlord incurs, pays or becomes obligated to pay in each calendar year in connection with operating, maintaining, repairing, owning and managing the Building and the Project including but not limited to, the following: (1) All labor costs for all persons performing services required or utilized in connection with the operation, repair, replacement and maintenance of and control of access to the Building and the Project, including but not limited to amounts incurred for wages, salaries and other compensation for services, professional training, payroll, social security, unemployment and other similar taxes, workers' compensation insurance, uniforms, training, disability benefits, pensions, hospitalization, retirement plans, group insurance or any other similar or like expenses or benefits. IN THE EVENT ANY COSTS ARE INCURRED WHICH ARE ATTRIBUTABLE, IN PART, TO THE BUILDING AND THE PARCEL OF LAND ON WHICH IT IS LOCATED, AND, IN PART, TO OTHER REAL PROPERTY OWNED OR MANAGED BY LANDLORD OR AN AFFILIATE OF LANDLORD, THEN BASIC COSTS SHALL ONLY INCLUDE THE PORTION THEREOF RELATING TO THE OPERATION, MANAGEMENT AND/OR MAINTENANCE OF THE BUILDING AND THE PARCEL OF LAND ON WHICH IT IS LOCATED, AS REASONABLY DETERMINED BY LANDLORD ON A FAIR AND EQUITABLE BASIS. (2) All management fees, accounting services, legal fees not attributable to leasing and collection activity, and all other administrative costs relating to the Building and the Property. (3) All Rent and/or purchase costs of materials, supplies, tools and equipment used in the operation, repair, replacement and maintenance and the control of access to the Building and the Property. (4) All amounts charged to Landlord by contractors and/or suppliers for services, replacement parts, components, materials, equipment and supplies furnished in connection with the operation, repair, maintenance, replacement and control of access to any part of the Building, or the Property generally, including skylights, plumbing, electrical, and equipment of the Building EXCEPT TO THE EXTENT THAT LANDLORD IS REIMBURSED BY INSURANCE PROCEEDS. Major repair items SHALL C-1 be amortized PER GAAP over THE USEFUL LIFE. (5) All premiums and deductibles paid by Landlord for fire, flood and extended insurance coverage, earthquake and extended coverage insurance, liability and extended coverage insurance, Rent loss insurance and other insurance customarily carried from time to time by landlords of comparable industrial buildings or required to be carried by Landlord's mortgagee. (6) Charges for all utilities, including but not limited to water, electricity, gas and sewer, but excluding those electrical charges for which tenants are individually responsible. (7) "Taxes", which for purposes hereof, shall mean (a) all real estate taxes and assessments on the Property, the Building or the Premises, and taxes and assessments levied in substitution or supplementation in whole or in part of such taxes, (b) all personal property taxes for the Building's personal property, including license expenses, (c) all taxes imposed on services of Landlord's agents and employees, (d) all sales, use or other tax, excluding state and/or federal income tax now or hereafter imposed by any governmental authority upon Rent received by Landlord, (e) all other taxes, fees or assessments now or hereafter levied by any governmental authority on the Property, the Building or its contents or on the operation and use thereof (except as relate to specific tenants), and (f) all costs and fees incurred in connection with seeking reductions in or refunds in Taxes including, without limitation, any costs incurred by Landlord to challenge the tax valuation of the Building or Property, but excluding income taxes PROVIDED TENANT'S PRO RATA SHARE OF SAID REDUCTIONS ARE PASSED THROUGH TO TENANT FOR ANY PERIOD FOR WHICH TENANT WAS RESPONSIBLE FOR PAYMENT FOR SUCH TAXES. Estimates of real estate taxes and assessments for any calendar year during the Lease Term shall be determined based on Landlord's good faith estimate of the real estate taxes and assessments. Taxes and assessments hereunder are those accrued with respect to such calendar year, as opposed to the real estate taxes and assessments paid or payable for such calendar year. (8) All landscape expenses and costs of repairing, resurfacing and striping of the parking areas of the Property, if any. (9) Cost of all maintenance service agreements, including those for equipment, alarm service, window cleaning, metal refinishing, pest control and landscaping. (10) Cost of all other repairs, replacements and general maintenance of the Property and Building neither specified above nor directly billed to tenants, including the cost of maintaining all Common Areas. (11) The amortized cost of capital improvements made to the Building or the Property which are (a) primarily for the purpose of reducing operating expense costs or otherwise improving the operating efficiency of the Property or Building; or (b) required to comply with any laws, rules or regulations of any governmental authority or a requirement of Landlord's insurance carrier. The cost of such capital improvements shall be amortized PER GAAP over THE USEFUL LIFE (at Landlord's option), and shall, at Landlord's option, include interest at a rate that is reasonably equivalent to the interest rate that Landlord would be required to pay to finance the cost of the capital improvement in question as of the date such capital improvement is performed, provided if the payback period for any capital improvement is less than five (5) years, Landlord may amortize the cost of such capital improvement over the payback period. (12) Any other charges or expense of any nature whatsoever which, in accordance with general industry practice with respect to the operation of a first class industrial building, would be construed as an operating expense. D. Basic Costs shall not include repairs and general maintenance paid from proceeds of insurance or by a tenant or other third parties, and alterations attributable solely to individual tenants of the Property. Further, Basic Costs shall not include the cost of capital improvements (except as above set forth), depreciation, interest (except as provided above with respect to the amortization of capital improvements), lease commissions, and principal payments on mortgage and other non-operating debts of Landlord. Capital improvements are more specifically defined as: (1) Costs incurred in connection with the original construction of the Property or with any major changes to same, including but no limited to, additions or deletions of corridor extensions, renovations and improvements of the Common Areas beyond the costs caused by normal wear and tear, and upgrades or replacement of major Property systems; and (2) Costs of correcting defects (including latent defects), including any allowances for same, in the construction of the Property or its related facilities; and (3) Costs incurred in renovating or otherwise improving, designing, redesigning, decorating or redecorating space for tenants or other occupants of the Property or other space leased or held for lease in the Property. C-2 IN WITNESS WHEREOF, Landlord and Tenant have executed this exhibit as of the day and year first above written. WITNESS/ATTEST LANDLORD: Coppell Commerce Center, Ltd., a Texas limited partnership By: Transwestern Beltline, L.P. a Delaware limited partnership, a general partner By: Transwestern Beltline GP I, L.L.C., a Delaware limited liability company, its general partner By: /s/ Jeanine M. Valdez By: /s/ Randal S. Bessolo -------------------------------- ------------------------------ Name: Jeanine M. Valdez Name: Randal S. Bessolo ------------------------------ ------------------------------ Title: Administrative Associate Title: Managing Director ----------------------------- --------------------------- WITNESS/ATTEST TENANT: HNC Insurance Solutions, Inc., a California corporation By: /s/ Kristine Westbury By: /s/ John Falliars -------------------------------- ------------------------------ Name: Kristine Westbury Name: John Falliars ------------------------------ ------------------------------ Title: Manager, Legal Affairs Title: CFO ----------------------------- --------------------------- EXHIBIT D WORK LETTER (Landlord completes worth within an Allowance) This Exhibit is attached to and made a part of the Lease dated December 13, 2000 by and between Coppell Commerce Center, Ltd. ("LANDLORD") and HNC Insurance Solutions, Inc. ("TENANT") for space in the Building located at Coppell Commerce Center. This Work Letter shall set forth the obligations of Landlord and Tenant with respect to the preparation of the Premises for Tenant's occupancy. All improvements described in this Work Letter to be constructed in and upon the Premises by Landlord are hereinafter referred to as the "LANDLORD'S WORK." Landlord and Tenant acknowledge that Plans (hereinafter defined) for the Landlord's Work have not yet been prepared and, therefore, it is impossible to determine the exact cost of the Landlord's Work at this time. Accordingly, Landlord and Tenant agree that Landlord's obligation to pay for the cost of Landlord's Work shall be limited to $25.00 per square foot in the Premises (the "MAXIMUM AMOUNT") and that Tenant shall be responsible for the cost of Landlord Work to the extent that it exceeds the Maximum Amount. THE TENANT IMPROVEMENTS SHALL BE COMPETITIVELY BID TO AT LEASE THREE (3) LANDLORD AND TENANT APPROVED GENERAL CONTRACTORS. LANDLORD AND TENANT WILL REVIEW ALL BIDS AND MUTUALLY ACCEPT A QUALIFIED BIDDER WITH WHOM Landlord shall enter into a direct contract for the Landlord Work. In addition, Landlord shall have the right to select and/or approve of any subcontractors used in connection with the Landlord's Work. Space planning, architectural and engineering (mechanical, electrical and plumbing) drawings for the Landlord's Work shall be included in the cost of Landlord's Work for purposes of determining if the Maximum Amount is exceeded. The space planning, architectural and mechanical drawings are collectively referred to herein as the "PLANS". TENANT SHALL BE ALLOWED TO ALLOCATE UP TO $1.00 PER SQUARE FOOT OF THE MAXIMUM AMOUNT TOWARDS THE COSTS OF PLANS, TENANT HIRED ARCHITECT AND/OR CONSTRUCTION MANAGEMENT COMPANY, VERIFIABLE THIRD PARTY MOVING COSTS AND TELECOMMUNICATIONS OR DATA CABLING COSTS RELATED TO THE PREMISES. Tenant shall furnish any requested information and approve or disapprove any preliminary or final layout, drawings, or plans within two (2) Business Days after written request. Any disapproval shall be in writing and shall specifically set forth the reasons for such disapproval. TENANT AND TENANT'S ARCHITECT shall devote such time in consultation with Landlord and Landlord's engineer as may be required to provide all information Landlord deems necessary in order to enable Landlord's Architect and engineer to complete, and obtain Tenant's written approval of the Plans for the Landlord Work by not later than TWO WEEKS AFTER LEASE EXECUTION (the "PLANS DUE DATE"). In the event that Tenant fails to approve the Plans by the Plans Due Date, Tenant shall be responsible for one (1) day of Delay (as defined in the Lease) for each day during the period beginning on the day following the Plans Due Date and ending on the date Tenant approves the Plans. Prior to commencing any construction of Landlord Work, Landlord shall submit to Tenant a written estimate setting forth the anticipated cost of the Landlord Work, included but not limited to labor and materials, contractor's fees and permit fees. Within three (3) Business Days thereafter, Tenant shall either notify Landlord in writing of its approval of the cost estimate, or specify its objections thereto and any desired changes to the proposed Landlord Work. In the event Tenant notifies Landlord of such objections and desired changes, Tenant shall work with Landlord to reach a mutually acceptable alternative cost estimate. In the event Landlord's estimate and/or the actual cost of construction shall exceed the Maximum Amount (such amounts exceeding the Maximum Amount being herein referred to as the "EXCESS COSTS"), Tenant shall pay to Landlord such Excess Costs upon demand. The statements of costs submitted to Landlord by Landlord's contractors shall be conclusive for purposes of determining the actual cost of the items described therein. The amounts payable hereunder constitute Rent payable pursuant to the Lease, and the failure to timely pay same constitutes an event of default under the Lease. If Tenant shall request any change, addition or alteration in any of the Plans after approval by Landlord, Landlord shall have such revisions to the drawings prepared, and Tenant shall reimburse Landlord for the cost thereof upon demand to the extent that the cost of performing such revision cause the cost of Landlord Work to exceed the Maximum Amount. Promptly upon completion of the revisions, Landlord shall notify Tenant in writing of the increased cost, if any, which will be chargeable to Tenant by reason of such change, addition or deletion. Tenant shall, within one (1) Business Day, notify Landlord in writing whether it desires to proceed with such change, addition or deletion. In the absence of such written authorization, Landlord shall have the option to continue work on the Premises disregarding the requested change, addition or alteration, or Landlord may elect to discontinue work on the Premises until it receives notice of Tenant's decision, in which event Tenant shall be responsible for any Delay in completion of the Premises resulting therefrom. In the event such revisions result in a higher estimate of the cost of construction and/or higher actual construction costs which exceed the Maximum Amount, such increased D-1 estimate or costs shall be deemed Excess Costs pursuant to Paragraph 5 hereof and Tenant shall pay such Excess Costs upon demand. Following approval of the Plans and the payment by Tenant of the required portion of the Excess Costs, if any, Landlord shall cause the Landlord Work to be constructed substantially in accordance with the approved Plans. Landlord shall notify Tenant of substantial completion of the Landlord Work. IF TENANT IS NOT IN DEFAULT BEYOND EXPIRATION OF ANY APPLICABLE NOTICE AND CURE PERIODS, TENANT MAY ELECT TO ACCEPT AN ADDITIONAL SUM NOT TO EXCEED $6.00 PER SQUARE FOOT OF RENTABLE AREA IN THE PREMISES TO BE ADDED TO THE ALLOWANCE UPON THE CONDITION THAT LANDLORD AND TENANT ENTER INTO A LEASE AMENDMENT INCREASING THE BASE RENTAL BY SUCH AMOUNT AS NECESSARY TO AMORTIZE EVENLY SUCH ADDITIONAL ALLOWANCE, TOGETHER WITH INTEREST THEREON AT TWELVE PERCENT (12%) PER ANNUM, OVER THE PORTION OF THE LEASE TERM REMAINING AFTER THE DATE OF SUCH AMENDMENT. This EXHIBIT D shall not be deemed applicable to any additional space added to the original Premises at any time or from time to time, whether by any options under the Lease or otherwise, or to any portion of the original Premises or any additions to the Premises in the event of a renewal or extension of the original Term of this Lease, whether by any options under the Lease or otherwise, unless expressly so provided in the Lease or any amendment or supplement to the Lease. LANDLORD WILL NOT CHARGE A CONSTRUCTION SUPERVISION FEE TO TENANT FOR TENANT IMPROVEMENTS. Notwithstanding anything to the contrary set forth in this Lease, as a result of a failure of the Building shell or the Common Areas of the Property to comply with any applicable law, Landlord cannot obtain any required permits, approvals or certificates, then Landlord shall, at Landlord's sole cost and expense, promptly cause the Building shell or the Common Areas of the Property, as the case may be, to comply with such applicable law or laws to the extent necessary to enable Landlord to obtain such permits, approvals or certificates. IN WITNESS WHEREOF, Landlord and Tenant have entered into this EXHIBIT D as of the day and year first above written. WITNESS/ATTEST LANDLORD: Coppell Commerce Center, Ltd., a Texas limited partnership By: Transwestern Beltline, L.P. a Delaware limited partnership, a general partner By: Transwestern Beltline GP I, L.L.C., a Delaware limited liability company, its general partner By: /s/ Jeanine M. Valdez By: /s/ Randal S. Bessolo -------------------------------- ------------------------------ Name: Jeanine M. Valdez Name: Randal S. Bessolo ------------------------------ ------------------------------ Title: Administrative Associate Title: Managing Director ----------------------------- --------------------------- WITNESS/ATTEST TENANT: HNC Insurance Solutions, Inc., a California corporation By: /s/ Kristine Westbury By: /s/ John Falliars -------------------------------- ------------------------------ Name: Kristine Westbury Name: John Falliars ------------------------------ ------------------------------ Title: Manager, Legal Affairs Title: CFO ----------------------------- --------------------------- EXHIBIT E ADDITIONAL PROVISIONS This exhibit is attached to and made a part of the Lease dated December 13, 2000 by and between Coppell Commerce Center, Ltd. ("LANDLORD") and HNC Insurance Solutions, Inc., a California corporation ("TENANT") for space in the Building located at Coppell Commerce Center. 1. RENEWAL OPTION A. Tenant shall have the right to extend the Lease Term for one additional period of five (5) years (the "RENEWAL OPTION") commencing on the day following the Termination Date of the initial Lease Term. 1. Landlord receives notice of exercise of the Renewal Option ("Initial Renewal Notice") not less than NINE (9) full calendar months prior to the expiration of the initial Lease Term and not more than twelve (12) full calendar months prior to the expiration of the initial Lease Term; and 2. Tenant is not in default under the Lease beyond any applicable cure periods at the time that Tenant delivers its Initial Renewal Notice or at the time Tenant delivers its Binding Renewal Notice; and 3. EXCEPT AS PROVIDED FOR IN SECTION 13 E OF SAID LEASE, no part of the Premises is sublet at the time that Tenant delivers its Initial Renewal Notice or at the time Tenant delivers its Binding Renewal Notice; and 4. The Lease has not been assigned prior to the date that Tenant delivers its Initial Renewal Notice or prior to the date Tenant delivers its Binding Renewal notice; and 5. Tenant executes and returns the Renewal Amendment (hereinafter defined) within fifteen (15) days after its submission to Tenant. B. The initial Base Rental rate per rentable square foot for the Premises during the Renewal Term shall equal the Prevailing Market (hereinafter defined) rate per rentable square foot for the Premises. C. Tenant shall pay Additional Rent (i.e. Basic Costs) for the Premises during the Renewal Term in accordance with Article 5. of the Lease. D. Within thirty (30) days after receipt of Tenant's Initial Renewal Notice, Landlord shall advise Tenant of the applicable PREVAILING MARKET BASE RENTAL rate for the Premises for the Renewal Term. Tenant, within fifteen (15) days after the date on which Landlord advises Tenant of the applicable PREVAILING MARKET rate for the Renewal Term, shall either (i) give Landlord final binding written notice ("Binding Notice") of Tenant's Exercise of its option, or (ii) if Tenant disagrees with Landlord's determination, provide Landlord with written notice of rejection (the "Rejection Notice") or (iii) GIVE LANDLORD WRITTEN NOTICE THAT TENANT ELECTS TO HAVE THE PREVAILING MARKET RATE DETERMINED PURSUANT TO THIS SECTION AND SET FORTH TENANT'S DETERMINATION OF THE PREVAILING MARKET RATE (THE "ARBITRATION NOTICE"). If Tenant fails to provide Landlord with either a Binding Notice, Rejection NOTICE OR ARBITRATION Notice within such fifteen (15)-day period, Tenant's Renewal Option shall be null and void and of no further force and effect. If Tenant provides Landlord with a Binding Notice, Landlord and Tenant shall enter into the Renewal Amendment upon the terms and conditions set forth herein. If Tenant provides Landlord with a Rejection Notice, Landlord and Tenant shall work together in good faith to agree upon the Prevailing Market RATE for the Premises during the Renewal Term AND IN THE EVENT THE PARTIES REACH agreement, Tenant shall provide Landlord with Binding Notice and Landlord and Tenant shall enter into the Renewal Amendment in accordance with the terms and conditions hereof. Notwithstanding the foregoing, if Landlord and Tenant are unable to agree upon the Prevailing Market rate for the Premises within thirty (30) days after the date on which Tenant provides Landlord with a REJECTION Notice, Tenant's Renewal Option shall be null and void and of no force and effect. IF TENANT PROVIDES LANDLORD WITH AN ARBITRATION NOTICE, SUCH DISPUTE SHALL BE DETERMINED BY A SINGLE ARBITRATOR APPOINTED IN ACCORDANCE WITH THE AMERICAN ARBITRATION ASSOCIATION REAL ESTATE VALUATION ARBITRATION PROCEEDING RULES. THE ARBITRATOR SHALL BE IMPARTIAL AND SHALL HAVE NOT LESS THAN 10 YEARS' EXPERIENCE IN THE CITY OF DALLAS IN A CALLING RELATED TO THE LEASING OF COMMERCIAL SPACE IN BUILDINGS COMPARABLE TO THE BUILDING, AND THE FEES OF THE ARBITRATOR SHALL BE SHARED EQUALLY BY LANDLORD AND TENANT. WITHIN 15 DAYS FOLLOWING THE APPOINTMENT OF THE ARBITRATOR, LANDLORD AND TENANT SHALL ATTEND A HEARING BEFORE THE ARBITRATOR AT WHICH EACH PARTY SHALL SUBMIT A REPORT SETTING FORTH ITS DETERMINATION OF THE PREVAILING MARKET RATE FOR THE SPACE AND TERM IN QUESTION, TOGETHER WITH SUCH INFORMATION ON COMPARABLE RENTALS AND SUCH OTHER EVIDENCE AS SUCH PARTY SHALL DEEM RELEVANT. THE ARBITRATOR SHALL, WITHIN 30 DAYS FOLLOWING SUCH HEARING AND SUBMISSION OF EVIDENCE, RENDER HIS OR HER DECISION BY SELECTING THE DETERMINATION OF PREVAILING MARKET RATE SUBMITTED BY EITHER LANDLORD OR TENANT WHICH, IN THE JUDGMENT OF THE ARBITRATOR, MOST E-1 NEARLY REFLECTS THE PREVAILING MARKET RATE FOR THE SPACE AND TERM IN QUESTION. THE ARBITRATOR SHALL HAVE NO POWER OR AUTHORITY TO SELECT ANY PREVAILING MARKET RENT OTHER THAN A PREVAILING MARKET RENT SUBMITTED BY LANDLORD OR TENANT, THE DECISION OF THE ARBITRATOR SHALL BE FINAL AND BINDING UPON LANDLORD AND TENANT AND THE PARTIES SHALL ENTER INTO THE RENEWAL AMENDMENT IN ACCORDANCE WITH THE TERMS AND CONDITIONS HEREOF. EACH PARTY SHALL PAY THE FEES AND EXPENSES OF ITS COUNSEL AND WITNESSES AND SHALL SHARE EQUALLY THE FEES OF THE ARBITRATOR. E. If Tenant is entitled to and properly exercises its Renewal Option, Landlord shall prepare an amendment (the "Renewal Amendment") to reflect changes in the Base Rental, Lease Term, Termination Date and other appropriate terms. The Renewal Amendment shall be: 1. sent to Tenant within a reasonable time after receipt of the Renewal Notice; and 2. executed by Tenant and returned to Landlord in accordance with paragraph A.5 above. An otherwise valid exercise of the Renewal Option shall, at Landlord's Option, be fully effective whether or not the Renewal Amendment is executed. F. For purpose hereof, "Prevailing Market" shall mean the arms length fair market annual rental rate per rentable square foot under renewal leases and amendments entered into on or about the date on which the Prevailing Market is being determined hereunder for space comparable to the Premises in the Building and office buildings comparable to the Building in the DFW Airport submarket. The determination of Prevailing Market shall take into account any material economic differences between the terms of this Lease and any comparison lease, such as rent abatements, construction costs and other concessions and the manner, if any, in which the Landlord under any such lease is reimbursed for operating expenses and taxes. The Prevailing Market rate determined in accordance with this paragraph shall reflect any adjustment necessary at the time of such determination to account for any anticipated adjustment in the Prevailing Market rate at the time such rate shall become effective under this Lease. G. Notwithstanding anything to the contrary set fort above, Tenant's renewal option shall be subject and subordinate to the right of any tenant in the Project leasing more space in the Project than Tenant on the date Tenant delivers its notice to renew to elect to lease the Premises upon the expiration of the initial Lease Term of Tenant's lease. Landlord agrees to notify Tenant within 60 days after receipt of Tenant's notice to renew the Lease whether another tenant in the Project leasing more space in the Project than Tenant desires to lease such space, and in the event another tenant does elect to lease such space, Tenant's right to renew the Lease shall terminate. During such 60 day period, Landlord and Tenant shall proceed to determine the Prevailing Market rate as set forth in Section D above. 2. PARKING ALLOCATION Tenant shall have access to non-exclusive free surface parking at a ratio of five parking spaces for every 1,000 square feet leased in the Premises. In the event Tenant exceeds this amount of allocated parking, it shall be deemed an event of default. 3. RIGHT OF FIRST REFUSAL Subject to this rights in existence on the date of this Lease and provided that no event of default has ever occurred under any term or provision contained in this Lease and no condition exists which with the passage of time or the giving of notice or both would constitute an event of default pursuant to this Lease and provided that Tenant has continuously occupied the Premises for the Permitted Use during the Lease Term, Tenant (but not any assignee or subtenant) IN THE EVENT TENANT RENEWS THIS LEASE, SHALL HAVE THE RIGHT DURING the initial twelve (12) months of the renewal term, WHICH RIGHT SHALL BE SUBORDINATE TO THE RIGHTS OF ANY OTHER TENANT TO SUCH SPACE, subject to the terms and conditions set forth below, to lease the vacant space (if such space is available) CONTAINING 5,000 square feet on the first floor of the Building immediately adjacent and to the east of the Premises (the "Right of First Refusal Space") before it is leased to any third party. In the event any third party expresses interest in leasing all or any portion of the Right of First Refusal Space during the period specified above ("Third Party Interest"), Landlord shall offer the entire Right of First Refusal Space to Tenant upon the same terms, covenants and conditions as provided in the Lease for the renewed Premises, given that the base rental, the length of lease term, the expense stop, and the tenant improvement allowance shall be the same as the terms included in a bone fide third party offer for the Right of First Refusal Space which are acceptable to Landlord. Except for the tenant allowance contained in the aforementioned offer, tenant shall accept the space "As Is," and Tenant shall have no further rights with respect to the Right of First Refusal Space. If Tenant notifies Landlord in writing of the acceptance of such offer within five (5) BUSINESS days after Landlord has delivered such offer to Tenant, Landlord and Tenant shall enter into a written agreement modifying and supplementing the Lease and specifying that such Right of First Refusal Space accepted by Tenant is a part of the Premises demised pursuant to the Lease for the remainder of the Lease Term and any renewal thereof, if applicable and containing other appropriate terms and conditions relating to the addition of the Right of First Refusal Space to this Lease (including specifically any increase or adjustment of the rent as a result of such E-2 addition). In the event that Tenant does not notify Landlord in writing of its acceptance of such offer in such five (5) BUSINESS day period, then Tenant's rights under this paragraph with respect to the Right of First Refusal Space shall terminate and Landlord shall thereafter be able to lease the Right of First Refusal Space or any portion thereof to any third party. Any termination of the Lease shall terminate all rights of Tenant with respect to the Right of First Refusal Space. The rights of Tenant with respect to the Right of First Refusal Space shall not be severable from the Lease, nor may such rights be assigned or otherwise conveyed in connection with any permitted assignment of the Lease. Landlord's consent to any assignment of the Lease shall not be construed as allowing an assignment or a conveyance of such rights to any assignee. Nothing herein contained should be construed so as to limit or abridge Landlord's ability to deal with the Right of First Refusal Space or to lease the Right of First Refusal Space to other tenants, Landlord's sole obligation being to offer, and if such offer is accepted, to deliver the Right of First Refusal Space to Tenant in accordance with this provision. The Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting from any delay in delivering possession of the Right of First Refusal Space to Tenant, but abatement of the Base Rental attributable to the Right of First Refusal Space from the date of Tenant's acceptance of Landlord's offer with respect to the Right of First Refusal Space to the date of actual delivery of the Right of First Refusal Space shall constitute full settlement of all claims that Tenant might have against Landlord by reason of the Right of First Refusal not being delivered upon the date of Tenant's acceptance of Landlord's offer. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first written above. WITNESS/ATTEST LANDLORD: Coppell Commerce Center, Ltd., a Texas limited partnership By: Transwestern Beltline, L.P. a Delaware limited partnership, a general partner By: Transwestern Beltline GP I, L.L.C., a Delaware limited liability company, its general partner By: /s/ Jeanine M. Valdez By: /s/ Randal S. Bessolo -------------------------------- ------------------------------ Name: Jeanine M. Valdez Name: Randal S. Bessolo ------------------------------ ------------------------------ Title: Administrative Associate Title: Managing Director ----------------------------- --------------------------- WITNESS/ATTEST TENANT: HNC Insurance Solutions, Inc., a California corporation By: /s/ Kristine Westbury By: /s/ John Falliars -------------------------------- ------------------------------ Name: Kristine Westbury Name: John Falliars ------------------------------ ------------------------------ Title: Manager, Legal Affairs Title: CFO ----------------------------- --------------------------- EXHIBIT F COMMENCEMENT LETTER Date ____________ Tenant __________ Address _________ _________________ Re: Commencement Letter with respect to that certain Lease dated December 13, 2000 by and between Coppell Commerce Center, Ltd. as Landlord and HNC Insurance Solutions, Inc. a California Corporation as Tenant for an Approximate Rentable Area in the Premises of 14,400 square feet in Building located at 1221 South Beltline Road, Coppell, Texas. Dear __________: In accordance with the terms and conditions of the above referenced Lease; Tenant hereby accepts possession of the premises and agrees as follows: The Commencement Date of the Lease is ___________________ ; The Termination Date of the Lease is ____________________ . Landlord agrees to complete the work in the Premises identified in the punchlist jointly prepared by Landlord and Tenant dated _____________ . Please acknowledge your acceptance of possession and agreement to the terms set forth above by signing all three (3) copies of this Commencement Letter in the space provided and returning two (2) fully executed copies of the same to my attention. Sincerely, XXXXXXXXX Property Manager Agreed and Accepted: TENANT: HNC Insurance Solutions, Inc. By: ________________________________ Name: ______________________________ Title: _____________________________ F-1 EXHIBIT "G" GUARANTY OF LEASE The following provisions form a part of and constitute the basis for this Guaranty of Lease (herein referred to as the "Guaranty"): WHEREAS, a certain Industrial Building Lease Agreement dated as of December 13, 2000 (herein referred to as the "Lease") has been executed by and between Coppell Commerce Center, Ltd, as Landlord (herein referred to as "Landlord", and HNC Insurance Solutions, Inc., a California corporation, as Tenant (herein referred to as "Tenant"), covering certain Premises located at Coppell Commerce Center in Coppell, County of Dallas, State of Texas, as more particularly described in the Lease; WHEREAS, as a condition to Landlord's entering into the Lease, Landlord requires the undersigned to guarantee the full performance of all of the obligations of Tenant accruing under the Lease; WHEREAS, the undersigned desires to induce Landlord to enter into the Lease with Tenant; NOW, THEREFORE, in consideration of the execution of the Lease by Landlord, and other good and valuable consideration, the receipt of which is hereby acknowledged, the undersigned hereby agrees that: 1. The undersigned unconditionally, absolutely and to the same extent as if the undersigned had signed the Lease as Tenant, assumes all liabilities, obligations and duties of Tenant accruing under the Lease, and guarantees to Landlord and Landlord's successors and assigns the full, prompt and complete performance of each and all of the terms, covenants, conditions and provisions of the Lease to be kept and performed by Tenant or Tenant's successors or assigns, including the payment of all rental and other charges to accrue thereunder and all damages that may arise as a consequence of the nonperformance thereof. 2. The liability of the undersigned under the Guaranty shall be unconditional and primary, and in relation to any right of action which shall accrue to Landlord under the Lease, Landlord may, at its option, proceed from time-to-time solely against the undersigned or jointly against the undersigned and any other person or entity without regard to Tenant's ability to perform and without first commencing any action, exhausting any remedy, obtaining any judgment or proceeding in any way against Tenant or any other person or entity; and suit may be brought and maintained against the undersigned by Landlord to enforce any liability, duty or obligation guaranteed hereby without joinder of Tenant or any other person or entity. 3. This Guaranty shall continue during the entire term of the Lease and any renewals or extensions thereof and thereafter until Tenant and Tenant's successors or assigns have fully discharged all of their obligations under the Lease. 4. From and after an event of default under the Lease which is not cured within applicable notice and cure periods, the undersigned: (a) shall have no right of subrogation or any other right to enforce any remedy against Tenant or Tenant's successors or assigns by reason of any payment or performance thereunder by the undersigned, and (b) shall subordinate any liability or indebtedness of Tenant or Tenant's successors or assigns then or thereafter held by the undersigned to all obligations of Tenant or Tenant's successors or assigns to Landlord under the Lease. 5. The undersigned agrees that the undersigned's obligations under the terms of this Guaranty shall not be released, diminished, impaired, reduced or affected by any limitation of liability or recourse under the Lease or by the occurrence of any one or more of the following events: (a) the taking or accepting of any other security or guaranty in connection with the Lease; (b) any release, surrender, exchange, subordination, or loss of any security at any time existing or purported or believed to exist in connection with the Lease; (c) the death, insolvency, bankruptcy, disability, dissolution, termination, receivership, reorganization or lack of corporate, partnership or other power of Tenant, the undersigned, or any party at any time liable for payment or performance pursuant to the Lease, whether now existing or hereafter occurring; (d) any assignment or subletting by Tenant or Tenant's successors or assigns whether or not permitted pursuant to the terms of the Lease or otherwise approved by Landlord, except an assignment whereby the Landlord accepts the performance of the assignee in lieu of Tenant and expressly discharges the Tenant and Guarantor in writing from further liability under the Lease; (e) amendment of the Lease or any renewal, extension, modification or rearrangement of the terms of payment or performance pursuant to the Lease either with or without notice to or consent of the undersigned, or any adjustment, indulgence, forbearance, or compromise that may be granted or given by Landlord to Tenant, the undersigned or any other party at any time liable for payment or performance pursuant to the Lease; provided, however, the Guarantor shall not be responsible for any additional liability which may be created pursuant to this subsection 5(e) if an amendment or modification of the Lease is entered into after the date hereof to the extent (i) the term of the Lease is extended beyond its originally scheduled expiration date which expiration date shall be deemed to include any extension or option rights contained in the Lease (it being understood that an amendment of the Lease extending the term thereof shall not be deemed to increase Guarantor's liability to the extent the extended term is contained within the period Initialed: ----------------------- ----------------------- G-1 the term would have been extended had such option been exercised) or (ii) increases the size of the Premises (except to the extent such increase is effectuated pursuant to any expansion rights which may be contained in the Lease) which results in an increase in the rent payable under the Lease in excess of 110% of the rent which would otherwise be payable thereunder; (f) any neglect, delay, omission, failure, or refusal of Landlord to take or prosecute any action for the collection or enforcement of the Lease or to foreclose or take or prosecute any action in connection with the Lease; (g) any failure of Landlord to notify the undersigned of any renewal, extension, rearrangement, modification, assignment of the Lease or subletting of the Premises or any part thereof, or of the release of or change in any security or of any other action taken or refrained from being taken by Landlord against Tenant or of any new agreement between Landlord and Tenant, it being understood that Landlord shall not be required to give the undersigned any notice of any kind under any circumstances with respect to or in connection with the Lease; or (h) any payment by Tenant to Landlord being held to constitute a preference under the bankruptcy laws or for any other reason Landlord being required to refund such payment or pay the amount thereof to someone else. Notwithstanding anything contained herein or in the Lease to contrary, Tenant shall have the right to assign the Lease or sublet the Premises to Guarantor upon at least 15 days' prior written notice to (but not the necessity of obtaining consent from) Landlord, with a copy of the appropriate documentation evidencing such sublease or assignment; provided, however, nothing contained herein shall relieve Tenant from its obligations under the Lease in the event of such sublease or assignment. Anything herein or in the Lease to the contrary notwithstanding, Guarantor hereby acknowledges and agrees that any security deposit or other credit in favor of the Tenant may be applied to cure any Tenant default or offset any damages incurred by Landlord under the Lease, as Landlord determines in its sole and absolute discretion, and Landlord shall not be obligated to apply any such deposit or credit to any such default or damages before bringing any action or pursuing any remedy available to Landlord against Guarantor. Guarantor further acknowledges that its liability under this Guaranty shall not be affected in any manner by such deposit or credit, or Landlord's application thereof. 6. In the event suit or action is brought upon or in connection with the enforcement of this Guaranty, the non-prevailing party shall pay the reasonable attorneys' fees and all other reasonable expenses and court costs incurred by the prevailing party in connection therewith. 7. This Guaranty shall be binding upon the heirs, legal representatives, successors and assigns of the undersigned and shall inure to the benefit of the heirs, legal representatives, successors and assigns of Landlord. 8. The undersigned represents that the undersigned is the owner of a direct or indirect interest in Tenant and that the undersigned will receive a direct or indirect benefit from the Lease. IN WITNESS WHEREOF, the undersigned has executed this Guaranty as of the 13th day of December, 2000. GUARANTOR: HNC SOFTWARE, INC., a ____________ corporation By: _________________________________________________ Name (print): _______________________________________ STATE OF _______________ COUNTY OF ______________ This instrument was acknowledged before me on this the _____ day of __________, 2000 by ________________________, the ______________________of HNC Software, Inc., a _________________ corporation. ______________________________________ Notary Public in and for (S E A L) The State of__________________________ Initialed: ________ ________ G-2 EX-10.46 8 a80186ex10-46.txt EXHIBIT 10.46 EXHIBIT 10.46 SUBLEASE SUBLEASE, dated as of October 31, 2001 ("Effective Date"), between FEDERAL INSURANCE COMPANY, an Indiana corporation, having an address at 15 Mountain View Road, Post Office Box 1615, Warren, New Jersey 07059 ("Sublandlord"), and HNC SOFTWARE INC., a Delaware corporation ("Subtenant"), having an address at 5935 Cornerstone Court West, San Diego, California 92121; Attn: Ken Andrews, Esq. WITNESSETH: WHEREAS, by lease dated as of November 18, 1992 (the "Overlease") Metropolitan Life Insurance Company ("Overlandlord") leased to Sublandlord certain space (the "Leased Space") containing approximately 24,059 rentable square feet on the 6th and 7th floors of the building located at 181 Metro Drive, San Jose, California (the "Building") in accordance with the terms of the Overlease; WHEREAS, a copy of the Overlease is annexed hereto as Exhibit A; and WHEREAS, Sublandlord has previously entered into a sublease agreement with Sunup Design Systems, Inc. ("Sunup") dated as of March 19, 1998, for the entire Leased Space, which sublease has been amended by that certain First Amendment to Sublease dated August 1, 2001 (as so amended, the "Sunup Sublease"). WHEREAS, the Sunup Sublease provides for Sunup to surrender possession of the Leased Space in the event Sublandlord locates a Replacement Subtenant (as defined in the Sunup Sublease) for all or part of the Leased Space. WHEREAS, Sublandlord and Subtenant desire Subtenant to be a Replacement Subtenant. WHEREAS, subject to the terms hereof, Subtenant desires to sublease from Sublandlord, and Sublandlord desires to demise to Subtenant, the entire Leased Space (the "Subleased Space"). NOW, THEREFORE, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby covenant and agree as follows: 1. Subleasing. (a) Sublandlord hereby subleases to Subtenant, and Subtenant hereby hires from Sublandlord, the Subleased Space on the terms and conditions hereinafter set forth. The parties hereto agree that for all purposes of this Sublease, the Subleased Space contains 24,059 rentable square feet. (b) Sublandlord and Subtenant acknowledge and agree that the Subleased Space is presently occupied by Sunup pursuant to the provisions of the Sunup Sublease. Pursuant to the provisions of the Sunup Sublease, as amended, Sunup has agreed to surrender possession of the Subleased Space to Sublandlord within thirty (30) days following Sublandlord's delivery to Sunup of a Replacement Notice (as defined in the Sunup Sublease). Sublandlord and Subtenant agree that this Sublease and all the terms and conditions stated herein, are contingent upon Sublandlord obtaining a (i) termination of the Sunup Sublease, (ii) exclusive possession of the Subleased Space form Sunup in accordance with the provisions of the Sunup Sublease, as amended and (iii) making the Subleased Space available exclusively to Subtenant in accordance with the terms and subjects to the conditions stated herein and (iv) Sublandlord obtaining Overlandlord's consent to the Sublease. Subtenant further acknowledges and agrees that Sublandlord has made no express or implied representations or warranties to Subtenant regarding the Sublandlord's ability to obtain the termination of the Sunup Sublease, exclusive possession of the Subleased Space from Sunup or the timing of the Commencement Date of this Sublease or the ability of Sublandlord to obtain Overlandlord's consent to the Sublease; provided, however, that Sublandlord covenants to use good faith and commercially reasonable efforts to diligently cause Sunup to vacate the Subleased Space as soon as reasonably possible under applicable law and local court rules. If the Commencement Date does not occur by December 15, 2001 (the "Outside Commencement Date") for any reason, Subtenant may, at its option, by notice in writing to Sublandlord (which shall be delivered no later than fifteen (15) days after the Outside Commencement Date), cancel this Sublease, in which event the parties shall be discharged from all obligations hereunder; provided, however, that if such written notice of Subtenant is not received by Sublandlord within said 15-day period, Subtenant's right to cancel this Sublease hereunder shall terminate and be of no further force or effect. Subtenant and Sublandlord agree that Sublandlord shall not be required to give the Replacement Notice to Sunup until this Sublease agreement has been executed and delivered by both parties. (c) If Sublandlord cannot deliver possession of the Sublease Space on or before December 3, 2001, Subtenant shall have the right to cancel this Sublease by providing Sublandlord written notice at any time after December 3, 2001; provided, however, that Sublandlord, at Sublandlord's sole election, can avoid the cancellation of the Sublease by paying to Subtenant a delivery penalty equal to One Thousand and 00/100 Dollars ($1,000.00) per day ("Delivery Penalty") until the earlier of (i) that date on which the Sublease Space is delivered in the condition set forth in Section 15 below or (ii) the Outside Commencement Date, at which time either party has the ability to terminate the lease. In the event Sublandlord elects to pay Subtenant the Delivery Penalty and Sunup does not vacate the Sublease Space and the Sublease is terminated by either Sublandlord or Subtenant, Sublandlord shall still be obligated to pay the Delivery Penalty to Subtenant (maximum of Fourteen Thousand and 00.100 Dollars ($13,000.00)). 2. Term. (a) The term of this Sublease shall commence on the Commencement Date (as that term is hereinafter defined) and shall end on March 15, 2003 or on such earlier date upon which said term may expire or be terminated pursuant to any of the provisions of this Sublease or the Overlease or pursuant to law (the "Expiration Date"). 2 The term "Commencement Date" as used in this Sublease means the later to occur of (i) two (2) days following the date on which Sublandlord gives Subtenant notice that the Subleased Space is in the Delivery Condition (as hereinafter defined), if such notice is sent Subtenant on a Monday, Tuesday, Wednesday or Thursday; (ii) five (5) days following the date on which Sublandlord gives Subtenant notice that the Subleased Space is in the Delivery Condition (as hereinafter defined), if such notice is sent to Subtenant on a Friday, Saturday or Sunday; or (iii) the next business day following the date on which Sublandlord obtains Overlandlord's consent to this Sublease. Sublandlord anticipates that the Commencement Date will occur no later than the Outside Commencement Date. For the purposes of this Paragraph 2(a), "Delivery Condition" of the Subleased Space shall mean: Sunup has vacated the Subleased Space, and the Subleased Space is in the physical condition required under this Sublease for delivery to Subtenant, clean and free of any occupants (including, but not limited to, Sunup) and any personal property of Sublandlord and any prior sublessee or occupant of the Subleased Space (except for the Personal Property described in Section 20 hereof, or as otherwise previously authorized by Subtenant in writing). (b) Except as provided in Paragraph 1 (c) above, Subtenant hereby agrees that Sublandlord shall have no liability to Subtenant, and the terms and conditions of this Sublease will not be impaired or affected in any manner, if the Commencement Date is delayed beyond the Outside Commencement Date. Sublandlord agrees, upon request from Subtenant from time to time, to advise Subtenant of the status of the vacation of the Subleased Space by Sunup. Upon the occurrence of the Commencement Date, Sublandlord and Subtenant shall, upon the request of either of them, execute a statement, in commercially reasonable form and content, setting forth the Commencement Date. (c) If Subtenant holds over the Expiration Date, with or without the express or implied consent of Sublandlord, then at the option of Sublandlord, Subtenant will become and be only a month-to-month tenant at a rental rate equal to (1) $1,643.84 per day on a per diem basis, for any holdover occupancy expiring on or before March 31, 2003; and (2) commencing on April 1, 2003, one hundred and twenty five percent (125%) of the holdover rent payable by Sublandlord under Section 18.2 of the Overlease; and otherwise upon the terms, covenants and conditions herein specified, provided, however, that (A) if Subtenant holds over beyond the Expiration Date, Subtenant shall be deemed to have assumed Sublandlord's surrender obligations under Section 18.1 of the Overlease, (B) Sublandlord expressly reserves the right to require Subtenant to surrender possession of the Subleased Premises on the Expiration Date and the right to assert any remedy at law or in equity to evict Subtenant, and (C) Subtenant shall indemnify, defend and hold Sublandlord harmless from and against any and all liabilities, claims, demands, actions, losses, damages, obligations, costs, and expenses, including, without limitation, reasonable attorneys' fees and costs incurred or suffered by Sublandlord by reason of Subtenant's failure to surrender the Subleased Premises on the Expiration Date. 3. Fixed Rent; Terms Applicable to Fixed Rent and Additional Rent. (a) During the period from the Commencement Date through March 15, 2003, Subtenant shall pay fixed rent to Sublandlord in the amount of $40,000.00 per 3 month. Such monthly fixed rent shall be payable in gross and shall include all costs of occupancy of the Subleased Premises pursuant to the Overlease, except as otherwise provided in Section 4 hereof. (b) The monthly fixed rent shall be payable in advance on the first day of each and every calendar month, except that if the Commencement Date is a day other than the first day of a calendar month, or if the Expiration Date is a day other than the last day of a calendar month, the monthly installments for the months in which occur the Commencement Date and/or the Expiration Date shall be prorated accordingly at a per diem rate of $1,315.07. (c) Upon the Commencement Date, Subtenant shall deliver to Sublandlord the first month's fixed rent payment pursuant to subsection 3(a) above as such payment may be prorated in accordance with subsection 3(b) above. (d) The fixed rate, additional rent and other charges reserved and payable under this Sublease shall be paid by Subtenant to Sublandlord at the address herein provided or at such other place as Sublandlord may designate, in lawful money of the United States of America, when the same shall become due and payable, without demand therefor and without any deduction, set-off or abatement whatsoever, except as expressly set forth herein. (e) In the event the payment of any fixed or additional rent shall become overdue beyond the date on which they are due and payable as provided in this Sublease, then a delinquency service charge equal to five percent (5%) of the amounts overdue shall become immediately due and payable, as additional rent, to Sublandlord as delinquency service charge (not as a penalty) for Subtenant's failure to make prompt payment; provided, however, that the first delinquent payment by Subtenant hereunder shall not be subject to a delinquency service charge if such failure is cured by Subtenant within five (5) days following Subtenant's receipt of written notice that such payment was not received by Sublandlord when due. Furthermore, in the event that any payment of fixed rent or additional rent shall become overdue beyond five (5) days from the date on which they are payable, as provided in this Sublease, then, Subtenant shall pay Sublandlord, on demand, interest at a rate equal to two percent (2%) above the so-called annual prime rate of interest established and quoted by Citibank, N.A., New York, New York, from time to time, as its interest rate charged for unsecured loans to its most creditworthy corporate customers on the amounts overdue from the date on which they became due and payable until the date they are paid, which interest shall be considered additional rent. No failure by Sublandlord to insist upon the strict performance by Subtenant of Subtenant's obligations to pay delinquency service charges and interest shall constitute a waiver by Sublandlord of its rights to enforce the provisions of this Section in any instance thereafter occurring. The provisions of this Section shall not be construed in any way to extend any time period provided for in this Sublease. 4. Additional Rent. 4 (a) Subtenant and Sublandlord hereby agree that the fixed rent payable by Subtenant hereunder shall include all Operating Costs and Taxes payable under the Overlease. Notwithstanding the foregoing, if Subtenant desires any services that are in excess of the basic services set forth in Section 12.1 of the Overlease, Subtenant shall arrange for the delivery of such services directly with Overlandlord and shall pay Overlandlord directly the additional rent under the Overlease relating to such additional services, including, without limitation, after-hours air-conditioning (as described in Section 12(b) of the Overlease), and excess electrical usage (as described in Section 12(c) of the Overlease). If Overlandlord is not willing to provide such additional services to Subtenant, Subtenant shall have all of its rights under Section 12 below to obtain delivery thereof; and if Overlandlord is unwilling to bill Subtenant directly for the additional rent relating to such additional services, Subtenant shall reimburse Sublandlord for such additional rent as hereinafter provided. Subtenant shall pay or reimburse to Sublandlord, as additional rent hereunder without deduction or setoff, within fifteen (15) days after demand from Sublandlord, one hundred percent (100%) of (a) the costs and expenses which accrue after the Commencement Date arising from the Subtenant's use of additional or excess services and utilities in excess of the basic services set forth in Section 12.1 of the Overlease, including, but not limited to, additional rent payable under the Overlease in excess of the amount Sublandlord is currently charged for services and utilities, and (b) all amounts incurred by Sublandlord as a result of Subtenant's failure to timely comply with its obligations under this Sublease (and the Overlease to the extent incorporated herein), including, without limitation, additional rent and other sums payable by Sublandlord pursuant to the following Sections/Articles of the Overlease: Section 3.8.2, Section 4.7, Article 6, Article 9, Article 12, Article 16, Article 17 and Article 18. (b) Subtenant shall be responsible to pay directly for the cost of all of its personal property taxes relating to the Subleased Premises, including, without limitation, the Personal Property (as defined in Section 20 of this Sublease). (c) Upon making any demand for payment pursuant to this Section 4, Sublandlord shall provide Subtenant with copies of any statements or notices that Sublandlord has received from Overlandlord upon which Sublandlord bases said demand for payment; provided, however, the failure to provide any such statement or notice shall not relieve Subtenant of its obligation to pay all amounts due hereunder. (d) Subtenant's obligations to pay the additional rent provided for in this Section 4 shall survive the Expiration Date. The parties hereto hereby agree that Sublandlord shall have all of the rights and remedies with respect to the nonpayment by Subtenant of additional rent and all other costs, charges and expenses to be paid by Subtenant in this Sublease as are provided for in this Sublease or by law in the case of nonpayment of fixed rent provided for hereunder. (e) Subtenant shall have no right to challenge Sublandlord regarding the propriety of any additional rent or other sums charged by Overlandlord under the Overlease. Any dispute by Subtenant regarding the propriety of such additional rent or other sums charged by Overlandlord shall be brought by Subtenant, at Subtenant's sole 5 cost and expense, only against Overlandlord and subject to and in accordance with the provisions of Section 12 hereof; provided, however, Subtenant shall have no right to bring or maintain any action against Overlandlord concerning the propriety of additional rent or other amounts charged by Overlandlord unless Subtenant pays to Sublandlord when due all disputed amounts and all other amounts due and payable under this Sublease. In the event that any such dispute is finally and conclusively resolved in Subtenant's favor, a reconciliation shall be made by credit against additional rent or by payment from Sublandlord, as the case may be, to correspond with the credit or payment actually received by Sublandlord from Overlandlord on account of the resolution of the dispute. 5. Use. (a) Subtenant shall use and occupy the Leased Space solely for sales, design and administrative offices for Subtenant's computer software business. 6. Assignment and Subletting. (a) Subject to the terms of subsection 6(d) hereof, Subtenant may not assign this Sublease, sublet the Subleased Space or any part thereof, suffer or permit the occupancy of the Subleased Space, or any part thereof by any party other than Subtenant, or in any other manner encumber this Sublease, without the prior written consent of Sublandlord. Sublandlord shall not unreasonably withhold, condition or delay its consent to any sublease or assignment. The consent by Sublandlord to any assignment or to any sublease or occupancy of the Subleased Space, or any part thereof, or any sublease or assignment not requiring Sublandlord's consent, shall not be deemed to relieve or release (i) Subtenant from the full performance and observance by Subtenant of all of its obligations under this Sublease or (ii) Subtenant or any assignee or sublessee of Subtenant from the obligation of obtaining the consent in writing of Sublandlord and Overlandlord to any further assignment, sublease or occupancy. Subtenant shall pay, upon demand, (x) any cost, expense or fee of Overlandlord which is required to be paid in connection with any assignment, subletting or occupancy pursuant to this Section 6, and (y) any reasonable cost or expense of Sublandlord which is incurred by Sublandlord in connection with any request for consent to any assignment, subletting or occupancy pursuant to this Section 6. (b) In the event that Subtenant shall desire Sublandlord's consent to an assignment of this Sublease or to a subletting of all or any part of the Leased Space, Subtenant shall request such consent in writing by submitting to Sublandlord a proposal ("Consent Notice") setting forth the terms and conditions of the assignment or sublease and financial information with respect to the assignee or sublessee, and such other information as Sublandlord may reasonably require. Sublandlord shall promptly respond to such request by providing Sublandlord's written consent, or written notice of the reasons for Sublandlord's withholding of such consent, within thirty (30) days after Sublandlord's receipt of Subtenant's written request for such consent. Failure by Sublandlord to so respond within such 30-day period shall be deemed Sublandlord's consent if Subtenant's Consent Notice contains the following words in bold-type capital 6 letters at the top of the first page: "FAILURE BY SUBLANDLORD TO RESPOND TO THIS REQUEST WITHIN 30 DAYS SHALL BE DEEMED SUBLANDLORD'S CONSENT." (c) In the event that Sublandlord and Overlandlord shall grant their consent to subletting all or part of the Subleased Space or an assignment of this Sublease or in the event of any sublease or assignment not requiring Sublandlord's consent pursuant to the terms hereof, Subtenant shall, in consideration therefor, promptly pay to Sublandlord as additional rent, as and when received by Subtenant, fifty percent (50%) of the Profit (as hereinafter defined), if any, and deliver to Sublandlord an executed copy of such assignment or sublease. (d) The term "Profit" shall mean (i) in the case of a sublease, the amount by which the amounts payable to Subtenant by any subtenant of Subtenant for rent and additional rent or other consideration paid under the sublease (including, but not limited to, sums paid for the sale or rental of Subtenant's fixtures, leasehold improvements, equipment, or the Personal Property), less reasonable brokerage commissions and reasonable legal fees incurred by Subtenant pursuant to such sublease, exceed the amounts payable by Subtenant to Sublandlord for fixed rent and additional rent in connection with the sublet portion of the Leased Space, and (ii) in case of an assignment, an amount equal to any amounts paid by any assignee of Subtenant, to Subtenant, as consideration for said assignment (including, but not limited to, sums paid for the sale or rental of Subtenant's fixtures, leasehold improvements, equipment or the Personal Property), less reasonable brokerage commissions and reasonable legal fees incurred by Subtenant pursuant to such assignment. (e) If this Sublease shall be assigned or if the Subleased Space, or any part thereof, shall be sublet or occupied by any person or persons other than Subtenant, whether or not such assignment, sublet or occupancy was made with the consent of Sublandlord, Sublandlord may, after default by Subtenant, collect rent from the assignee, subtenant or occupant and apply the net amount collected to the rent herein reserved, but no such assignment, subletting, occupancy or collection of rent shall be deemed a waiver of any of the covenants, terms of provisions contained in this Section 6, nor shall it be deemed an acceptance of the assignee, subtenant or occupant as subtenant hereunder, or a release of Subtenant from the full performance and observance by Subtenant of all of the covenants and obligations contained in this Sublease on the part of Subtenant to be performed or observed. (f) Subject to the terms and conditions of the Overlease, Subtenant shall have the right to (i) assign this Sublease or sublet all or part of the Leased Space to any affiliate (as hereinafter defined) of Subtenant without Sublandlord's consent, or (ii) assign this Sublease, without Sublandlord's consent, to the surviving entity in connection with a merger, consolidation or other reorganization involving Subtenant, or to the acquiring entity in connection with a sale or all or substantially all of the assets of Subtenant, or in connection with a transfer of the majority of the outstanding capital stock of Subtenant, provided, however, that as of the date of the assignment or sublet Subtenant is not in default under any of the terms and conditions of this Sublease or the Overlease. 7 An "affiliate" shall mean any entity which directly or indirectly controls, is controlled by, or is under common control with, Subtenant. For the purposes of this Sublease, "control" shall mean the possession directly or indirectly of the power to direct or cause the direction of the management or policies of said entity. Any such assignment or sublet shall not be permitted, however, unless prior to the assignment or sublet (a) Subtenant complies with the terms and conditions of the Overlease, including obtaining any necessary consent of Overlandlord, (b) Subtenant notifies Sublandlord of the assignment or sublet and provides Sublandlord with any information reasonably requested by Sublandlord to verify that the sublease or assignment is permitted under the terms of this subsection (f), and (c) Subtenant complies with all other applicable terms and conditions of this Sublease. Notwithstanding anything to the contrary contained herein, to the extent required by Overlandlord under the provisions of the Overlease, Subtenant shall obtain Overlandlord's consent for any assignment of this Sublease or subletting of all or part of provisions of this Subsection 6(f). 7. Incorporation of Overlease; Exclusions and Modifications. (a) Except as herein otherwise expressly provided, all of the obligations, terms, covenants, agreements and conditions in the Overlease to be performed, complied with or satisfied by tenant thereunder during the term of this Sublease are hereby incorporated in, and made a part of this Sublease so that such obligations, terms, covenants, agreements and conditions are hereby imposed upon Subtenant and Subtenant hereby assumes and agrees to perform, comply with and satisfy said obligations, terms, covenants, agreements and conditions as if Subtenant were substituted for the tenant named in the Overlease and as if Sublandlord were substituted for the landlord named in the Overlease; provided, however, that Subtenant shall not be liable for any such obligations, terms, covenants, agreements and conditions to the extent they accrued prior to the Commencement Date. Subtenant further agrees that all of the rights and privileges in the Overlease to be exercised by the landlord thereunder are hereby granted to Sublandlord and Subtenant agrees to comply with and abide by Sublandlord's exercise of said rights and privileges as if Subtenant were substituted for the tenant named in the Overlease and as if Sublandlord were substituted for the landlord named in the Overlease. For the purposes of such incorporation, (i) references in the Overlease to the "Premises" shall be deemed to refer to the "Subleased Space" hereunder; (ii) references in the Overlease to the "Landlord" shall be deemed to refer to the "Sublandlord" hereunder; (iii) references in the Overlease to the "Tenant" shall be deemed to refer to "Subtenant" hereunder; (iv) references in the Overlease to "Rent" or "rent" shall be deemed to refer to the "fixed rent" and "additional rent" hereunder; and, (v) references in the Overlease to the "Term" shall be deemed to refer to the "term of this Sublease." It is further understood that where reference is made in the Overlease to "this Lease" the same shall be deemed to refer to "this Sublease." (b) In the event of any inconsistencies between the terms and provisions of the Overlease and the terms and provisions of this Sublease, the terms and provisions of this Sublease shall govern with respect to the relationship between Sublandlord and 8 Subtenant, and the terms and provisions of the Overlease shall govern with respect to the relationship between Overlandlord and Subtenant. (c) For the purposes of this Sublease, the provisions of the Overlease, as incorporated herein, are subject to the following modifications or deletions: (1) The following Articles and provisions of the Overlease shall not be incorporated herein by reference: Article 2, Article 3, Article 23, Article 24, Exhibit B, Exhibit D, Rider No. One, Rider No. Two, and Rider No. Three. (2) The insurance requirements of Section 14.2 shall apply only to Overlandlord and not Sublandlord. (3) Except as otherwise provided in Paragraph 2(c) above, Subtenant's surrender obligations under Section 18.1 of the Overlease as incorporated herein shall be limited to restoring the Subleased Space to the condition received by Subtenant, as documented in accordance with Section 15 hereof. 8. Sublandlord's Representations. (a) Sublandlord shall indemnify, protect, defend and hold Subtenant harmless from and against any and all claims, liabilities, penalties, forfeitures, losses or expenses (including attorneys' fees and costs) arising from Sublandlord's failure to comply with Sublandlord's obligations under the Overlease, except to the extent such obligations are expressly delegated to Subtenant under this Sublease. In case any action or proceeding is brought against Subtenant by reason of any such claim, Sublandlord, upon written notice from Subtenant, will, at Sublandlord's sole cost and expense, resist or defend such action or proceeding by counsel reasonably satisfactory to Subtenant. Sublandlord's obligations set forth in this Paragraph 8(a) shall survive the Expiration Date. Notwithstanding anything to the contrary contained herein, Sublandlord shall not be liable, and Subtenant agrees to make no claim against Sublandlord for special, indirect or consequential damages, including, without limitation, lost profits or revenues. (b) Sublandlord represents that the Overlease is in full force and effect and that there are no defaults on Sublandlord's part, or, to Sublandlord's knowledge, Overlandlord's part, under the Overlease as of the Commencement Date. As long as Subtenant is not in default under this Sublease beyond the applicable cure period, Sublandlord shall continue to perform the obligations of tenant under the Overlease which are not Subtenant's direct obligation hereunder during the entire term of this Sublease, including the obligation of Sublandlord to pay rent to Overlandlord in accordance with the provisions of the Overlease, subject only to any early termination of the Overlease pursuant to the terms and conditions thereof as of the Effective Date, and without the fault of the Sublandlord. (c) Sublandlord shall not make or agree to make any modifications to the Overlease without the written approval of Subtenant, which approval shall not be unreasonably withheld, delayed or conditioned. 9 (d) Subject to casualty to or condemnation of Subleased Space resulting in termination of the Overlease, if Subtenant performs all the provisions in this Sublease to be performed by Subtenant, Subtenant will have and enjoy throughout the term of this Sublease the quiet and undisturbed possession of the Subleased Space. If this Sublease terminates as a result of a default of one of the parties under this Sublease, the defaulting party will be liable to the non-defaulting party for all damages, costs and expenses suffered by the non-defaulting party as a result of such termination. Notwithstanding anything to the contrary contained herein, Sublandlord shall not be liable, and Subtenant agrees to make no claim against Sublandlord for special, indirect or consequential damages, including, without limitation, lost profits or revenues. 9. Subtenant's Covenants. (a) Subtenant covenants and agrees not to do or suffer or permit any act or thing to be done or suffered which would or might cause the Overlease or the rights of Sublandlord as tenant thereunder to be canceled, terminated or forfeited. (b) Subtenant agrees to indemnify, defend and hold harmless Sublandlord from and against any and all claims, losses, expenses, liabilities or damages (including, without limitation, attorneys' fees) arising out of (i) Subtenant's failure to comply with the terms of this Sublease or the Overlease, including, without limitation, its failure to comply with the covenants contained in subsection 9(a) hereof, or (ii) any act or omission of Subtenant or its agents, employees, contractors, licensees or invitees. In case any action or proceeding is brought against Sublandlord by reason of any such claim, Subtenant, upon written notice from Sublandlord, will, at Subtenant's sole cost and expense, resist or defend such action or proceeding by counsel reasonably satisfactory to Sublandlord. Subtenant's covenants and obligations set forth in this Section 9 and all other indemnification obligations of Subtenant under this Sublease or the Overlease shall survive the Expiration Date. 10. Insurance. Subtenant shall provide and keep in force, during the term of this Sublease, the types of liability and other insurance required to be carried by Sublandlord pursuant to the Overlease. Subtenant shall name Overlandlord, Sublandlord and such other firms, persons or corporations as are designated by either Overlandlord or Sublandlord as additional insureds in the liability policies, and shall provide Overlandlord and Sublandlord a certificate to such effect. 11. Services. Sublandlord agrees that Subtenant shall have and enjoy the same rights which Sublandlord, as tenant under the Overlease, has to performance by Overlandlord of any service, repair, alteration or other similar obligation which is the obligation of Overlandlord to perform under those provisions of the Overlease incorporated herein, including, but not limited to, those set forth in clauses (i) and (ii) below; provided, however, that Subtenant agrees and understands that Sublandlord shall have no obligation or responsibility whatsoever to provide or perform any such service, repair, alteration or other similar obligation including, but not limited to, the 10 obligations, if any, of Overlandlord to: (i) make restorations or repairs after damage to the Building or the Subleased Space by fire or other casualty as provided in Article 10 of the Overlease; and (ii) provide the maintenance, repairs and services provided in the Overlease, including, without limitation, those described in Section 7.2 and Section 12.1 of the Overlease. Subtenant further agrees and understands that each such obligation shall be provided or performed by Overlandlord and not by Sublandlord; provided, however, Sublandlord agrees that Subtenant shall have the rights under Section 12 hereof to enforce Overlandlord's obligations under the Overlease. In furtherance of the foregoing, Subtenant does hereby waive any cause of action and any right to bring any action against Sublandlord by reason of any act or omission of Overlandlord under the Overlease, unless such cause of action arises directly out of Sublandlord's default under the Overlease. 12. Default of Overlandlord. (a) If Overlandlord does not perform or observe any of the agreements, covenants, obligations, terms, provisions or conditions under the Overlease on its part to be performed or observed (collectively, "Overlandlord's Obligations") (including any obligation for the payment of money or any failure or delay on Overlandlord's part in providing any services or in making any repairs or alterations, or in performing or observing any similar obligation of Overlandlord under the Overlease), Sublandlord shall have no liability therefor to Subtenant and Sublandlord shall be excused from performance of the corresponding obligations which may be owed by Sublandlord to Subtenant under this Sublease, provided that Sublandlord performs its obligations under this Section 12. Subject to the terms of the Overlease, Subtenant shall benefit from all the rights and privileges existing under the Overlease in favor of "Tenant" to the extent such rights and privileges are applicable to the Subleased Space, and Sublandlord agrees to use reasonable efforts to enforce such rights and privileges for the benefit of Subtenant. Any condition resulting from a default by Overlandlord not caused by or arising from a default by Sublandlord under the Overlease, shall not constitute as between Sublandlord and Subtenant an eviction, actual or constructive, of Subtenant. No such default shall excuse Subtenant from the performance or observance under this Sublease, or entitle Subtenant to terminate this Sublease or to receive any reduction in or abatement of the rent provided for in this Sublease, except as may be expressly permitted to Sublandlord as tenant under the Overlease. (b) If Overlandlord fails to perform or observe any of the Overlandlord Obligations, Subtenant shall diligently and in good faith seek to enforce such Overlandlord Obligations directly against Overlandlord. Such diligent good faith efforts shall include, without limitation: (a) notifying Overlandlord of its nonperformance under the Overlease, and requesting that Overlandlord perform its obligations under the Overlease; and (b) seeking legal remedies against Overlandlord as the Sublandlord's agent, if necessary, in order to obtain the performance of the Overlandlord Obligations; provided, however, that Subtenant shall indemnify and hold harmless Sublandlord from and against all liability, loss, claim, demand, penalty or damage (including, without limitation, attorneys' fees) which Sublandlord may incur or suffer by reason of Subtenant bringing such action. Pursuant to and for the sole purpose of clause (b) of the preceding sentence, Sublandlord hereby appoints Subtenant as Sublandlord's agent for the limited 11 purpose of enforcing the Overlandlord Obligations in accordance with this Sublease. Sublandlord will have no obligation to institute legal action against Overlandlord unless Subtenant is unable to bring legal action as Sublandlord's agent, in which case Sublandlord agrees to participate in such legal action for the limited purpose of permitting Subtenant to bring such action against Overlandlord; provided, however, that Subtenant shall indemnify and hold harmless Sublandlord from and against all liability, loss, claim, demand, penalty or damage (including, without limitation, attorneys' fees) which Sublandlord may incur or suffer by reason of Sublandlord bringing such action. Any legal action brought against Overlandlord to enforce Overlandlord's Obligations, whether in the name of Subtenant or Sublandlord, shall be brought by legal counsel selected by Subtenant and Subtenant shall pay the actual court costs and attorneys' fees arising from such legal action. Sublandlord agrees to cooperate generally with Subtenant, at no cost to Sublandlord, in such action and shall execute any and all documents reasonably required in furtherance of such action. 13. Overlandlord's Consent. Notwithstanding anything to the contrary herein set forth, this Sublease shall not become effective and the Commencement Date shall not occur unless and until Sublandlord has obtained from Overlandlord written consent (the "Consent") to this Sublease. Sublandlord agrees to request the Consent promptly upon the execution of this Sublease. Sublandlord shall have no liability to Subtenant in the event that Overlandlord fails or refuses to grant the Consent. Subtenant agrees to cooperate with Sublandlord in connection with obtaining the Consent, including, without limitation, providing any information which Overlandlord may reasonably request. In the event that Overlandlord refuses to grant the Consent, or in the event that no Consent has been granted on or before the Outside Commencement Date, both Sublandlord and Subtenant shall have the right to terminate this Sublease by notice given to the other party at any time prior to the giving by Overlandlord of the Consent. In all provisions of this Sublease requiring the satisfactory approval or consent of Sublandlord, Subtenant first shall be required, if Sublandlord under similar circumstances would be required under the terms of the Overlease, to obtain the approval or consent of Sublandlord and then to obtain the like approval or consent of Overlandlord. Sublandlord shall forward to Overlandlord such requests as Subtenant may submit for approval or consent from Landlord. 14. Notices (a) Any notice, demand or communication which, under the terms of this Sublease or under any statute or municipal regulation, must or may be given or made by the parties hereto, shall be in writing and given or made by mailing the same by registered or certified mail, return receipt requested, or by sending same by overnight delivery using a nationally recognized overnight courier, addressed as follows: To Subtenant: HNC Software Inc. 5935 Cornerstone Court West San Diego, CA 92121 Attn: Ken Andrews, Esq. 12 with a copy to: Brobeck Phleger & Harrison LLP 12750 High Bluff, Suite 300 San Diego, California 92130 Attn: W. Scott Biel, Esq. To Sublandlord: Federal Insurance Company c/o the Chubb Group of Insurance Companies 15 Mountain View Road P.O. Box 1615 Warren, New Jersey 07059 Attention: Randall Frey, Manager Office Leasing with a copy to: Gerald W. Hull, Jr., Esq. Drinker Biddle & Shanley LLP 500 Campus Drive Florham Park, New Jersey 07932-1047 Either party, however, may designate such new or other address to which such notices, demands or communications thereafter shall be given, made or mailed by notice given in the manner prescribed herein. Any such notice, demand or communication shall be deemed given or served, as the case may be, on the date of the third (3rd) business day after posting with the United States Mail, or on the first (1st) business day after sending with an overnight courier, as the case may be. (b) Sublandlord agrees to promptly forward to Subtenant a copy of any and all notices received by Sublandlord under the Overlease which affect the Leased Space or this Sublease, including, without limitation, any notice of default. 15. Condition of the Subleased Space and Project. (a) Subtenant represents that it has made or caused to be made a thorough examination and inspection of the Subleased Space and is familiar with the condition of every part thereof. Subtenant agrees that it enters into this Sublease without any representations or warranties, express or implied, by Sublandlord, its agents, representatives, employees, servants or any other person as to the condition of the Subleased Space or the Project (as that term is defined in the Overlease) and agrees to accept the Subleased Space in its "as is" condition as of the date of this Sublease, subject to Sublandlord's obligation to provide the Subleased Space in broom-clean condition, with all carpeting recently shampooed and all paint on the walls of the Subleased Space touched-up where needed, which cleaning, repairs and repainting may be performed by Subtenant and Sublandlord shall reimburse Subtenant for the reasonable costs incurred by Subtenant pursuant thereto. Subtenant shall obtain approval from Sublandlord prior to the commencement of any work that Sublandlord will reimburse Subtenant, provided that 13 such approval shall not be unreasonably withheld, delayed or conditioned. Prior to the Commencement date, Sublandlord shall not remove any of its personal property described on Exhibit "B" attached hereto and incorporated herein (the "Personal Property" as that term is defined in Section 22 hereof) from the Subleased Space, and representatives of Sublandlord and Subtenant shall accompany each other in performing a walk-through inspection of the Sublease Space in order to document the condition of the Sublease Space as received by Subtenant. Except as otherwise provided in Paragraph 2(c), the Subtenant's surrender obligations under this Sublease shall be limited to surrendering the Sublease Space in the condition received by Subtenant as documented by such walk-through inspection, subject to normal wear and tear and casualty. Sublandlord shall have no obligation to perform any other work in or to the Subleased Space or the Project. (b) If the municipality having jurisdiction over the Building requires a certificate of occupancy in connection with the Sublease and/or Subtenant's occupancy of the Subleased Space, then, in that case, on or before the Commencement Date, Subtenant shall obtain, at its expense, and provide to Sublandlord an original certificate of occupancy for the Subleased Space. 16. Consent of Sublandlord. Wherever in this Sublease Subtenant is required to obtain Sublandlord's consent or approval, Subtenant understands that pursuant to the Overlease Sublandlord may be required to obtain the consent or approval of the Overlandlord. If Overlandlord should refuse to grant such consent or approval, Sublandlord shall be released of any obligation to grant its consent or approval, whether or not Overlandlord's refusal, in Subtenant's opinion, is arbitrary or unreasonable. 17. Entire Agreement. No supplement, modification or waiver of this Agreement or any provision hereof shall be binding unless executed in writing by all the parties to this Sublease, and any waiver, consent or approval shall be effective only if in writing and in the specific instance and for the specific purpose for which given. 18. Broker. Sublandlord and Subtenant each represents to the other that it has not dealt with any broker or agent other than the Staubach Company (the "Broker") with respect to the Subleased Space or this Sublease and each shall indemnify and hold harmless the other from and against any and all liabilities, claims, suits, demands, judgments, costs, interests and expenses to which it may be subject or suffer by reason of any claim made by any person, firm or corporation other than the Broker for any commission, expense or other compensation as a result of the execution and delivery of this Sublease and based on alleged conversations or negotiations by said person, firm or corporation with either Sublandlord or Subtenant, as the case may be. Within thirty (30) days of the Commencement Date, Sublandlord hereby covenants to pay to Broker a commission equal to six percent (6%) of the aggregated fixed rent payable by 14 Subtenant during the term of this Sublease, as determined on the Commencement Date. In the event this Sublease is terminated or cancelled before the Outside Commencement Date by Sublandlord or Subtenant pursuant to express terms of this Sublease, Sublandlord shall have no responsibility to pay Broker a commission. 19. Rules and Regulations. Subtenant shall comply with all rules and regulations regarding the Project as may be prescribed by Overlandlord. 20. Furniture and Equipment. (a) As of the Commencement Date, Subtenant agrees to acquire and Sublandlord agrees to convey, in consideration of Subtenant's entering into this Sublease, those items of furniture, equipment and other personal property located in the Subleased Space that are described on Exhibit C annexed hereto to the extent same is located in the Subleased Space on the Commencement Date except that the cubes will be left in their current configuration and condition less normal wear and tear (the "Personal Property"). Sublandlord shall execute and deliver to Subtenant upon the Commencement Date, a bill of sale in the form of Exhibit "C" attached hereto and incorporated herein. The Personal Property will be delivered in its "as is" condition as of the Commencement Date. (b) Subtenant represents that it has made or caused to be made a thorough examination and inspection of the Personal Property and is familiar with the condition of every part thereof, except that Landlord warrants that Landlord has good title to the Personal Property free of any liens or claims of any third party as of the Commencement Date. Subtenant agrees that, except for the Sublandlord's warranty in the preceding sentence, Subtenant is acquiring title to the Personal Property without any representations or warranties, express or implied, by Sublandlord, its agents, representatives, employees, servants, or any other person as to the condition of the Personal Property, and Subtenant agrees to accept the Personal Property in its "as is" condition as of the date of this Sublease, subject to ordinary wear and tear. Sublandlord shall have no obligation to perform any work to the Personal Property. 21. Parking and Signage. (a) Subtenant shall have the right to use the 96 unassigned parking spaces that Sublandlord has the right to use pursuant to Section 1.3 of the Overlease, subject, however, to the terms and provisions of the Overlease. (b) Sublandlord shall request that Overlandlord allow Subtenant to exercise any signage rights which Sublandlord has under the Overlease; provided, however, Sublandlord shall have no liability to Subtenant, and the terms and conditions of this Sublease shall not be impaired or affected in any manner, in the event that Overlandlord does not cooperate with said request. Within ten (10) days after demand from Sublandlord, Subtenant will pay Sublandlord amounts equal to any amounts charged by Overlandlord in connection with installation or maintenance of Subtenant's signage. 15 22. Defaults. In the event that Subtenant shall be in default under any covenant, or shall fail to honor any term, agreement, condition or obligation under this Sublease or the Overlease as incorporated herein, Sublandlord shall have available to it all of the remedies available to Overlandlord under the Overlease in the event of a like default or failure on the part of the tenant thereunder. 23. Subordination. This Sublease is subject and subordinate to the Overlease and to all ground or underlying leases, mortgages and deeds of trust which may now or hereafter affect such leases or the real property of which the Leased Space is a part and all renewals, modifications, replacements and extensions of any of the foregoing. This Section shall be self-operative and no further instrument of subordination shall be required, it being understood that neither Overlandlord nor Sublandlord shall obligated to provide Subtenant with any Subordination, Non-Disturbance and Attornment Agreement (as that term is defined in Section 8.1.1 of the Overlease). To confirm such subordination, Subtenant shall execute within fifteen (15) days after demand, or such shorter period as may be required under the Overlease, any reasonable certificate, agreement or other instrument that Sublandlord may request. Any certificate, agreement or instrument that Overlandlord requests Subtenant to execute pursuant to the terms of the Overlease shall be deemed reasonable. 24. Alterations. Subtenant may make no changes, alterations, additions, improvements or decorations in, to or about the Subleased Space without Sublandlord's prior written consent, which consent shall not be unreasonably withheld, and without Overlandlord's consent in accordance with the terms of the Overlease; provided, however, Sublandlord hereby consents to Subtenant's installation of Subtenant's wiring, cabling and telephone lines in the Subleased Space, subject, however, to the terms of the Overlease. 25. Governing Law. The exercise, validity, construction, operation and effect of the terms and provisions of this Sublease shall be determined and enforced in accordance with the laws of the State of California applicable to agreements made and to be performed in the State of California. Governing Law. Sublandlord and Subtenant hereby consent to the personal jurisdiction and venue of any California state court located in the County of Santa Clara and United States District Courts for the Northern District of California, and any successor court, and the service or process by any means authorized by such court. 26. Successors and Assigns. Subject to Section 6 hereof, this Sublease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 27. No Removal of Improvements. 16 Upon the expiration of the term of this Sublease, Subtenant will have no obligation to remove any improvements from the Subleased Space that were installed prior to the date of this Sublease. 28. Attorneys' Fees. If there is any legal action or proceeding between Sublandlord and Subtenant to enforce any provision of this Sublease or to protect or establish any right or remedy of either Sublandlord or Subtenant hereunder, the non-prevailing party to such action or proceeding will pay to the prevailing party all costs and expenses, including reasonable attorneys' fees incurred by such prevailing party in such action or proceeding and in any appearance in connection therewith, and if the prevailing party recovers a judgment in any such action, proceeding or appeal, such costs, expenses and attorney's fees will be determined by the court or arbitration panel handling the proceeding and will be included in and as a part of the judgment. 29. Authority. Each person executing this Sublease on behalf of a party hereto represents and warrants that he or she is authorized and empowered to do so and the thereby bind the party on whose behalf he or she is signing. 30. Counterparts. This Sublease may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which taken together shall comprise but a single instrument. 31. Entire Agreement. This Sublease and the applicable portions of the Lease contained by reference herein, contain all of the covenants, conditions and agreements between the parties concerning the Subleased Space, and shall supersede any and all prior correspondence, agreements and understandings concerning the Subleased Space, both oral and written. No addition or modification of any term or provision of this Sublease shall be effective unless set forth in writing and signed by both Sublandlord and Subtenant. IN WITNESS WHEREOF, Sublandlord and Subtenant have executed this Sublease as of the day and year first above written. WITNESSETH: SUBLANDLORD: FEDERAL INSURANCE COMPANY /s/ (ILLEGIBLE) By: /s/ (ILLEGIBLE) - ------------------------- ----------------------------- Name: Name:_______________________ Title:______________________ 17 SUBTENANT: HNC SOFTWARE INC. /S/ Betsy Hansen By: /s/ Mary Burnside - -------------------- ------------------------ Name: Betsy Hansen Name: Mary Burnside Title: Chief Operating Officer 18 EXHIBIT A OVERLEASE OFFICE LEASE METRO PLAZA San Jose, California LANDLORD: METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation TENANT: THE FEDERAL INSURANCE COMPANY, An Indiana corporation METRO PLAZA OFFICE LEASE TABLE OF CONTENTS
Page ---- SUMMARY OF LEASE TERMS ............................................................. v ARTICLE 1 PREMISES/COMMON AREAS/PARKING ........................................ 1 1.1 Premises ......................................................... 1 1.2 Common Areas ..................................................... 1 1.3 Parking .......................................................... 2 ARTICLE 2 TERM/CONSTRUCTION OF PREMISES ....................................... 3 2.1 Term ............................................................ 3 2.2 Construction of Premises ........................................ 3 2.3 Acceptance by Tenant ............................................ 4 ARTICLE 3 RENT/ADDITIONAL CHARGES .............................................. 4 3.1 Rent ............................................................. 4 3.2 Base Annual Rent ................................................. 4 3.3 Omitted .......................................................... 5 3.4 Taxes and Operating Costs ........................................ 5 3.4.1 Definitions .................................................... 5 3.5 Additional Taxes ................................................. 9 3.6 Late Payments .................................................... 10 3.7 Consideration .................................................... 10 3.8 Time and Manner of Payment ....................................... 10 3.9 Limitation on Taxes and Operating Expenses ARTICLE 4 USE AND OCCUPANCY .................................................... 11 4.1 Permitted Use .................................................... 11 4.2 Compliance with Law .............................................. 11 4.3 Compliance With Insurance Requirements ........................... 11 4.4 Certificates of Occupancy ........................................ 12 4.5 Life-Safety Systems .............................................. 12 4.6 Prohibited Uses .................................................. 13 4.7 Signage .......................................................... 13 4.8 Exercise Facility ARTICLE 5 ASSIGNMENT/MORTGAGE/SUBLETTING ....................................... 14 5.1 Prohibition Against Assignment, Etc .............................. 14 5.2 Payment of Cash Proceeds ......................................... 15 5.3 Landlord's costs ................................................. 16
Federal Lease.4 11-09-92 ARTICLE 6 ALTERATIONS .......................................................... 16 6.1 Alterations ...................................................... 16 6.2 Mechanics' Liens ................................................. 18 6.3 Alterations as Landlord's Property ............................... 18 ARTICLE 7 REPAIRS .............................................................. 19 7.1 Tenant's Obligations/Procedures .................................. 19 7.2 Landlord's Obligations and Rights ................................ 19 7.3 Statutory Waivers ................................................ 19 7.4 No Liability of Landlord ......................................... 19 ARTICLE 8 SUBORDINATION/PROTECTION OF LENDERS .................................. 20 8.1 Subordination, Non-Disturbance and Attornment .................... 20 8.2 Attornment to Successor .......................................... 20 8.3 Lender's Right To Cure ........................................... 21 ARTICLE 9 LIABILITY/INDEMNIFICATION ............................................ 22 ARTICLE 10 DAMAGE/DESTRUCTION ................................................... 23 10.1 Casualty Damage ................................................. 23 10.2 Waiver of Statutory Remedies .................................... 24 ARTICLE 11 EMINENT DOMAIN ....................................................... 24 11.1 Partial or Total Taking ......................................... 24 11.2 Award ........................................................... 24 11.3 Temporary Taking ................................................ 24 ARTICLE 12 SERVICES ............................................................. 25 12.1 Basic Services .................................................. 25 12.2 Tenant's Extra Services ......................................... 27 12.3 Landlord's Liability ............................................ 27 ARTICLE 13 LANDLORD'S RIGHT OF ENTRY ............................................ 27 ARTICLE 14 TENANT'S AND LANDLORD'S INSURANCE .................................... 28 14.1 Tenant's Insurance .............................................. 28 14.2 Landlord's Insurance

-ii- 14.3 General Requirements ............................................ 29 14.4 Waiver of Subrogation ........................................... 29 ARTICLE 15 INSOLVENCY OR BANKRUPTCY ............................................. 30 15.1 Insolvency or Bankruptcy ........................................ 30 15.2 Measure of Damages .............................................. 31 15.3 Provision of Services and Assumption of Lease ................... 31 ARTICLE 16 DEFAULT/REMEDIES ..................................................... 32 16.1 Events of Default ............................................... 32 16.2 Termination of the Right to Possession........................... 33 16.3 Rights Upon Termination ......................................... 33 16.4 Continuance of Lease ............................................ 34 16.5 Other Remedies .................................................. 35 16.6 Waiver of Rights of Redemption .................................. 35 ARTICLE 17 LANDLORD'S RIGHT TO PERFORM .......................................... 35 ARTICLE 18 END OF TERM .......................................................... 36 18.1 Condition of Premises ........................................... 36 18.2 Holding over .................................................... 36 18.3 Conditions of Termination ....................................... 37 ARTICLE 19 QUIET POSSESSION ..................................................... 37 ARTICLE 20 RULES AND REGULATIONS ................................................ 37 ARTICLE 21 LANDLORD'S DEFAULT/LIABILITY ......................................... 38 21.1 Notice/Right to Cure ............................................ 38 21.2 Force Majeure ................................................... 38 21.3 Limitation of Landlord's Liability .............................. 38 21.4 Sale by Landlord ................................................ 39 ARTICLE 22 NOTICES .............................................................. 39 ARTICLE 23 SECURITY DEPOSIT ..................................................... 40 ARTICLE 24 BROKERAGE ............................................................ 41 ARTICLE 25

-iii- MISCELLANEOUS ........................................................ 41 25.1 Captions and Construction ....................................... 41 25.2 Definitions ..................................................... 41 25.3 Successors and Assigns .......................................... 41 25.4 Landlord's Approval ............................................. 41 25.5 Joint and Several Liability ..................................... 42 25.6 Governing Law ................................................... 42 25.7 Severability .................................................... 42 25.8 Security Systems ................................................ 42 25.9 Time of the Essence ............................................. 42 25.10 Recordation .................................................... 42 25.11 Change of Name ................................................. 43 25.12 Estoppel Certificate ........................................... 43 25.13 Tenant's Authority ............................................. 43 25.14 Attorneys' Fees ................................................ 43 25.15 Waiver Of Trial By Jury ........................................ 44 25.16 No Waiver ...................................................... 44 25.17 Modifications in Writing ....................................... 44 25.18 Complete Agreement ............................................. 44 25.19 Survival ....................................................... 44 25.20 Binding Effect ................................................. 45 25.21 Exhibits and Riders ............................................ 45

EXHIBIT A - PREMISES EXHIBIT B - WORK LETTER AND CONSTRUCTION AGREEMENT EXHIBIT B-1 SPACE PLAN EXHIBIT B-2 BUILDING STANDARDS EXHIBIT C - RULES AND REGULATIONS EXHIBIT D - CONFIRMATION OF LEASE TERM EXHIBIT E - PROJECT DESCRIPTION EXHIBIT F - SIGNAGE EXHIBIT G - SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT RIDER 1- OPTION TO EXTEND TERM RIDER 2- OPTION TO EXPAND PREMISES RIDER 3- ADDITIONAL PROVISIONS -iv- METRO PLAZA OFFICE LEASE SAN JOSE, CALIFORNIA SUMMARY OF LEASE TERMS A. EXECUTION DATE: As of November 18, 1992 B. LANDLORD: Metropolitan Life Insurance Company, a New York corporation C. TENANT: The Federal Insurance Company, an Indiana corporation D. TRADE NAME (if any): The Chubb Group of Insurance Companies E. GUARANTOR (if any): non-applicable F. PREMISES (Section 1.1, Exhibit A & A-1): Address: 181 Metro Drive, San Jose, California Suite: Suites 750 & 600, 22, 529 square feet of Tenant's Usable Area (24,059 square feet of Tenant's Rentable Area), located in the Project, as described on Exhibit E G. PARKING SPACES (Section 1.3): ninety-six (96) H. TERM (Section 2.1): Scheduled Commencement Date: April 1, 1993 Expiration Date: March 31, 2003 Length of Term: ten (10) years. I. BASE ANNUAL RENT (Section 3.2): Months 1-60 $25,261.95 per month-- $303,143.40 per annum Months 61-62 $O per month Months 63-120 $31,276.70 per month-- $375,320.40 per annum J. PERMITTED USE (Section 4.1): Executive offices, including general administrative office use as a general insurance office for the administration, sale, issuance and underwriting of insurance policies and for the processing and defense of claims. -v- K. ADDRESS FOR NOTICES (Article 22): To Landlord: With Copies To: Building Manager Metropolitan Life Insurance Metro Plaza Company 25 Metro Drive Metro Plaza Suite 110 3 Lagoon Drive, Suite 300 San Jose, CA 95110 Redwood City, CA 94065 Attn: Assistant Vice President To Tenant: With Copies To: Federal Insurance Company Federal Insurance Company 15 Mountain View Road 181 Metro Drive Post Office Box 1615 San Jose, California 95110 Warren, New Jersey 07061-1615 Att: Roger Trachsel Att: Donald P.-Bush Vice President and Bellemead Development Corporation 280 Corporate Center 4 Becker Farm Road Roseland, New Jersey 07068 Att: Marc Leonard Ripp, Esq. Vice President and Assistant General Counsel L. TAXES AND OPERATING COSTS (Section 3.4) Tenant's Share: 5.4797% Building Rentable Area: 410,350 square feet. M. SECURITY DEPOSIT (Article 23): Non Applicable N. BROKER(S) (Article 24): CB Commercial Address: 226 Airport Parkway, Ste. 150 San Jose, CA 95110 License No. 00409987 COOPERATING BROKER: Cornish & Carey Commercial 4701 Patrick Henry Drive Santa Clara, California 95054 -vi- License No. 00832933 Bellemead Brokerage Services, Inc. 280 Corporate Center 4 Becker Farm Road Third Floor Roseland, New Jersey 07068 Att: Eric H. Grosseibl, President O. SIGNAGE COST (Section 4.7): Tenant to pay full cost of signage, subject to Exhibit F. P. ADJUSTMENTS: The figures set forth in Paragraphs F (Premises), G (Parking Spaces) and I (Base Annual Rent) above are subject to increase pursuant to Rider TWO attached hereto, and the length of term set forth in Paragraph H (Term) above is subject to Rider One and Rider THREE attached hereto. The provisions of the Lease identified above in parentheses are those provisions making reference to above-described Lease Terms. Each such reference in the Lease shall incorporate the applicable Lease Terms. In the event of any conflict between the Summary of Lease Terms and the Lease, the latter shall control. LANDLORD: TENANT: METROPOLITAN LIFE INSURANCE FEDERAL INSURANCE COMPANY, COMPANY, a New York an Indiana corporation corporation By [SIGNATURE ILLEGIBLE] By [SIGNATURE ILLEGIBLE] -------------------------------- ---------------------------------- Its Its Vice President ------------------------------- --------------------------------- -iiv- LEASE Landlord hereby leases to Tenant and Tenant hereby hires from Landlord the Premises upon and subject to the terms, covenants and conditions hereinafter set forth: ARTICLE 1 PREMISES/COMMON AREAS/PARKING 1.1 Premises. The Premises comprise the area within the Building (as defined in Section 3.4 below) described in Paragraph F of the Summary of Lease Terms, and cross-hatched on the floor plan(s) attached hereto as Exhibit A. Landlord agrees that with respect to Tenant, Landlord will not modify the measurements of the Premises or the Building during the term of the Lease. 1.2 Common Areas. 1.2.1 Tenant shall have the right to the nonexclusive use of all areas and facilities outside the Premises and within the exterior boundary lines of the Project (as defined in Exhibit E) that are reasonably provided and designated by Landlord from time to time for the general nonexclusive use of Landlord, Tenant and the other tenants of the Project, including parking areas, loading and unloading areas, driveways, walkways, and landscaped areas (herein called "Common Areas"). 1.2.2 The manner in which the Common Areas are maintained and operated and the expenditures therefor shall be at the good faith discretion of Landlord, and the use of such areas and facilities shall be subject to such Rules and Regulations, including, without limitation, the provisions of any covenants, conditions and restrictions affecting the Project, as Landlord shall in the good faith exercise of its discretion make from time to time. Landlord shall not be responsible for the nonperformance of any such Rules and Regulations or covenants, conditions and restrictions by any other tenant or occupant of the Project. Tenant shall be required to comply with any Rules and Regulations from and after thirty days after the date that Tenant receives written notice of the promulgation of such Rules and Regulations. Notwithstanding the foregoing, Tenant shall not be required to comply with any Rules and Regulations that it demonstrates are enforced in a manner which is materially discriminatory or which materially and adversely affects Tenant's express rights granted to it hereunder. Whenever in any Rule and Regulation, Landlord's consent, approval or permission is required, Tenant shall request the same in writing. If Landlord does not respond within 10 days after receipt of such request, Tenant shall send a second request. If Landlord does not respond within 5 days after receipt of such -1- second request with its consent approval or permission or its reasons for the denial of the same, such request shall be deemed approved. 1.2.3 Exhibit A shows the approximate location of the Premises and is not meant to constitute an agreement as to the specific location of the Common Areas or the elements thereof or of the means of access to the Premises or the Project. Landlord hereby reserves the right, at any time and from time to time, as long as reasonable access to the Premises remains available, to (a) make alterations in or additions to the Project and the Common Areas, including without limitation, the modification of the location, size, shape and number of the Common Areas for maintenance purposes, (b) designate property outside the Project to be part of the Common Areas, (c) use the Common Areas while engaged in making alterations in or additions or repairs to the Project, and (d) change the arrangement and location of entrances or passageways, corridors, stairs, toilets and other public parts of the Project. Tenant agrees that no diminution of light, air, or view by any structure that may be erected in the Project after the date hereof shall entitle Tenant to any reduction of Rent or result in any liability of Landlord to Tenant. Notwithstanding the foregoing, Landlord shall not make any changes to the Project and/or the Common Areas which materially and adversely affect Tenant's express rights granted to it hereunder. 1.2.4 Landlord reserves the right, from time to time, to grant such easements, rights and dedications as Landlord deems necessary or desirable, and to cause the recordation of parcel maps and covenants, conditions and restrictions affecting the Project, as long as such easements, rights, dedications, maps and covenants, conditions and restrictions do not unreasonably interfere with the use of the Premises by Tenant or decrease Tenant's rights and remedies under the Lease or increase Landlord's rights or remedies under the Lease. At Landlord's request, Tenant shall join in the execution of any of the aforementioned documents. The Project may be known by any name that Landlord may choose, which name may be changed from time to time in Landlord's sole discretion. Landlord agrees, solely as a courtesy, to endeavor to provide Tenant with no less than 30 days' prior written notice before changing the name of the Project, provided that the failure of Landlord to do so shall not constitute a breach or default by Landlord hereunder. 1.2.5 The rights of Tenant hereunder in and to the Common Areas shall at all times be subject to the rights of Landlord and other tenants of Landlord who use the same in common with Tenant, and it shall be the duty of Tenant to keep all of the Common Areas free and clear of any obstructions created or permitted by Tenant or resulting from Tenant's operation and to permit the use of any of the parking area portions of the Common -2- Areas only for normal parking and ingress and egress by the invitees, employees and customers of Tenant to and from the Project. If, in the opinion of Landlord, unauthorized persons are using the Common Areas by reason of the presence of Tenant in the Premises, Tenant, upon demand of Landlord, shall use all commercially reasonable efforts to correct such situation by appropriate action or proceedings against all such unauthorized persons: however Tenant is not a guarantor of the outcome of such action. Nothing herein shall affect the right of Landlord at any time to remove any such unauthorized persons from said areas or to prevent the use of any of said areas by unauthorized persons. 1.3 Parking. 1.3.1 Tenant shall have the right for the benefit of Tenant and its employees, customers and invitees to the use on an unassigned basis the number of Parking Spaces specified in Paragraph G of the Summary of Lease Terms on those portions of the Common Areas designated by Landlord from time to time for parking; provided, however, parking by Tenant's employees shall be limited to levels B, C and D of the Project's parking structure. There shall be no charge for such Parking Spaces during the Initial Term of the Lease. Landlord shall maintain parking area lighting at the same level and in the same manner as such lighting is currently being maintained. 1.3.2 The Parking Spaces to be provided to Tenant pursuant to Paragraph G of the Summary of Lease Terms shall be used for parking only by vehicles no larger than full-sized passenger automobiles or pick-up trucks. Landlord shall have the right, in addition to all other rights and remedies that it may have under this Lease, to remove or tow away any vehicle parked in areas other than those designated by Landlord for Parking. ARTICLE 2 TERM/CONSTRUCTION OF PREMISES 2.1 Term. 2.1.1 The term of this Lease (the "Term") shall commence upon (and include) the date of Substantial Completion (as defined below) of the Premises (the "Commencement Date"), which the parties estimate will occur on the Scheduled Commencement Date and, except as otherwise provided herein or in any exhibit or addendum hereto, shall continue to and including the Expiration Date. Should the Commencement Date be a date other than the Scheduled Commencement Date, the Expiration Date shall correspondingly change to a date that is ten years from such actual Commencement -3- Date and Landlord and Tenant shall promptly execute a Confirmation of Lease Term in the form attached hereto as Exhibit D. 2.1.2 "Substantial Completion" shall mean (and the Premises shall be deemed "Substantially Complete") when Landlord's architect shall have issued a Notice of Substantial Completion with respect to the Premises and Tenant may lawfully occupy the Premises. Substantial Completion shall be deemed to have occurred notwithstanding a requirement to complete "punchlist" or similar minor corrective work described on a list which Tenant shall provide to Landlord within sixty (60) days after the Commencement Date. Landlord shall complete, at its own expense except to the extent provided otherwise in the Work Letter, all punchlist items within a commercially reasonable time. Landlord shall provide Tenant's construction representatives with twenty (20) days' prior notice of the Commencement Date. Landlord shall assign to Tenant, to the extent assignable, warranties, if any, obtained from the contractor and any subcontractors in connection with the construction of tenant improvements. 2.2 Construction of Premises. 2.2.1 Landlord shall perform the work and make the installations in the Premises substantially as set forth in the Work Letter attached hereto as Exhibit B (the "Landlord's Work"). Landlord's Work shall be performed by Landlord's general contractor. Other than as provided in Exhibit B, and elsewhere in the Lease if specifically applicable to the Work Letter, Landlord has no obligation to improve, alter or remodel the Premises for Tenant's initial occupancy. All such installations set forth in Exhibit B shall immediately become and remain the property of Landlord. 2.2.2 If Landlord shall be unable to give possession of the Premises on the Scheduled Commencement Date for any reason, any such delay resulting therefrom shall be deemed excused and Landlord shall not be subject to any liability for the failure to give possession on said date; provided however, that if and only if construction of the Premises commences by November 30, 1992, Tenant as its sole right and remedy may terminate the Lease if the Commencement Date does not occur on or before August 1, 1993, or on or before December 1, 1993 by reason of force majeure events. Each such date shall be subject to further extension to the extent any delays in construction are attributed to any of the events or activities set forth in paragraph 5 of the Work Letter. Under such circumstances unless the delay is the fault of Tenant, neither the Term nor Tenant's obligation to pay monthly Installments (as defined below) shall commence until the Commencement Date. Except as otherwise set forth in this Section 2.2.2 no such failure to give possession on the Scheduled Commencement Date shall in any way -4- affect or impair the validity of this Lease or the obligations of Tenant hereunder, provided that the Expiration Date shall be ten (10) years from the actual Commencement Date. Except as expressly set forth in the Work Letter, if permission is given to Tenant to enter into the possession of the Premises or to occupy premises other than the Premises prior to the Scheduled Commencement Date, such occupancy shall be deemed to be under all the terms, covenants, conditions, provisions, and agreements of this Lease, including without limitation, Tenant's obligation to pay the Base Annual Rent and other charges at the same rate as though the Term had commenced. 2.3 Acceptance by Tenant. Neither Landlord nor Landlord's agents have made any representations or promises with respect to the Project or the Premises except as herein expressly set forth. The taking of possession of the Premises by Tenant shall be conclusive evidence, as against Tenant, that Tenant accepts the same in its then "as is" condition, subject to the completion of "punch1ist" items mutually agreed upon by Landlord and Tenant, and that the Premises and the Project were in good and satisfactory condition at the time such possession was so taken. Landlord shall cause such mutually agreed upon "punch1ist" items to be completed with reasonable diligence. In addition, Landlord shall repair all latent defects in workmanship and materials of the Premises, provided Tenant shall give Landlord written notice of any such latent defects within twelve (12) months after the Commencement Date. For purposes of this Section 2.3, the term "latent defects" shall mean defects which were not readily apparent at the time the "punch1ist" was formulated. ARTICLE 3 RENT/ADDITIONAL CAGES 3.1 Rent. "Rent" as used herein shall refer to the Base Annual Rent (as defined in Section 3.2, below), as it may be adjusted as hereinafter provided in this Lease, plus all sums due under this Lease. 3.2 Base Annual Rent. Tenant shall pay to Landlord during the Term the Base Annual Rent (as set forth in the Summary of Lease Terms), which sum shall be payable by Tenant in equal consecutive monthly installments on or before the first day of each month ("Monthly Installment(s)"), in advance, in the manner described more particularly in Section 3.8.1. If the Commencement Date should occur on a day other than the first day of a calendar month, or the Expiration Date should occur on a day other than the last day of a calendar month, then the Monthly Installment, Taxes, and Operating Costs for such fractional month shall be prorated on a daily basis upon a thirty (30) day calendar month and said -5- obligation of either Landlord or Tenant shall survive the expiration or earlier termination of the Lease. In addition to the Base Annual Rent, Tenant shall pay the amount of any Rent adjustment and additional payments when and as hereinafter provided in this Lease. 3.3 Omitted 3.4 Taxes and operating Costs. 3.4.1 Definitions. The following terms shall be defined as set forth below: (a) "Computation Year" shall mean the calendar year, provided that Landlord, upon no less than thirty (30) days' notice to Tenant, may change the Computation Year from time to time to any other twelve (12) consecutive month period and, in the event of any such change, Tenant's Share of Taxes and operating Costs shall be equitably adjusted for the Computation Years involved in any such change. (b) "Tenant's Rentable Area" shall mean the number of rentable square feet set forth in Paragraph F of the Summary of Lease Terms. (c) "Building" shall mean that certain three (3) building complex, including connecting arcades and an associated parking structure, all located within the Project. (d) "Tenant's Usable Area" shall mean the number of useable square feet set forth in Paragraph F of the Summary of Lease Terms. (e) "Building Rentable Area" shall mean the number of square feet listed in Paragraph L of the Summary of Lease Terms. (f) "Tenant's Share" shall be computed by dividing Tenant's Rentable Area by the Building Rentable Area. As to the Computation Year in which such change occurs, for purposes of this Article 3, Tenant's Share shall be determined on the basis of the number of days during such Computation Year at each such percentage. (g) "Taxes" shall mean the amount of taxes and assessments, general or special, ordinary or extraordinary, unforeseen as well as foreseen, upon or with respect to all or any portion of the Project and the areas used in connection with the operation of the Project, the Rent, and the personal property -6- contained in the Project imposed by Federal, State or local governments or governmental assessment districts. Taxes shall not include income, transfer, franchise, capital stock, estate or inheritance taxes, late payment charges, interest or penalties. Taxes shall include, without limitation, gross receipts taxes, special assessments, annual or periodic license or use fees, excises, transit charges, housing fund assessments, other business taxes and the cost of contesting by appropriate proceedings any of the aforementioned Taxes (with respect either to validity or amount). If, because of any change in the method of taxation of real estate, any tax or assessment is imposed upon Landlord or upon the owner of the land, the Project (or any part thereof), the areas used in connection with the operation thereof or the rents or income therefrom, in substitution for or in lieu of any tax or assessment which would otherwise be a real estate tax or assessment, or with respect to any subject matter which was during the Computation Year the subject of a real estate tax or assessment, such other tax or assessment shall be deemed to be included in Taxes. If any Taxes are specially assessed by reason of the personal property, occupancy or activities of one or more tenants and not the occupancy or activities of the tenants as a whole, such taxes shall be allocated by Landlord to the tenant or tenants whose specific personal property, occupancy or activities brought about such assessment. (h) "Operating Costs" shall mean the aggregate amount of actual and documented (i) on-site wage and labor costs applicable to the persons engaged in the management, operation, maintenance, overhaul or repair of all or any portion of the Project and the areas used in connection therewith, whether they be employed by Landlord or by independent contractors (including, without limitation, the cost effect of any increase or decrease in the hours of employment or the number of paid holidays or vacation days, social security taxes, unemployment insurance taxes and the cost (if any) of providing disability, hospitalization, medical, welfare, pension, retirement, or other benefits applicable with respect to such employees); (ii) the cost of utilities, utilities surcharges, water and sewer charges, fuel, building supplies and materials, service contracts, janitorial services, security, parking expenses, or any other costs levied, assessed or imposed by, or at the direction of, or resulting from statutes or regulations or interpretations thereof, promulgated by any federal, state, regional, municipal or local government authority in connection with the use or occupancy of the Project, including the parking facilities serving the Project, costs incurred in the management of the Project, rental value of a Project management office, a management fee, costs of elevator maintenance, supplies, materials, equipment, tools, the repair, replacement and maintenance of the nonstructural portions of the Project or any portion thereof (including, without limitation, the plumbing, -7- heating, ventilating, air-conditioning, electrical, security, fire and life-safety systems installed or furnished by Landlord), costs of maintenance and upkeep of all parking and Common Areas, rental of personal property used in maintenance and management, costs and expenses of gardening and landscaping, costs of maintenance of signs, resurfacing, painting, lighting, cleaning, refuse removal, security and similar items, association fees, assessments or maintenance charges if the Landlord is obligated to pay such charges; (iii) capital expenditures for life-safety systems, for energy conservation, to effect economies in operations and maintenance of the Project, or which are required by law (together with all costs, and interest thereon at an annual rate equal to the reference rate of interest announced publicly from time to time by Bank of America N.T. & S.A. at its San Francisco Headquarters (or any successor bank), or any successor rate of interest thereto (the "Base Rate"), plus 2%, but in no event in excess of the maximum rate of interest permitted by law) all amortized over their useful life, except that any such costs (and the interest thereon) for energy conservation or economies may be amortized at a yearly rate equal to the savings realized during such period as a result of such expenditure; (iv) the cost of fire, all-risk, boiler, sprinkler, public liability, property damage, rent, earthquake or other insurance and the deductible portion of any insured loss otherwise covered by such insurance; (v) the cost of legal, accounting, and consulting fees and of permits, certificates and licenses required in connection with the Project or any portion thereof; and (vi) such other items as are now or hereafter customarily included in the cost of managing, operating, maintaining, overhauling and repairing all or any part of the Project and areas used in connection with operation thereof. Operating Costs shall not include (m) the initial construction cost of the Project, or the cost of providing Landlord's Work to Tenant or any other tenant, or depreciation of such costs; (n) debt service (including, without limitation, interest, principal and any impound payments) required to be made on any mortgage or deed of trust recorded with respect to all or any part of the Project except if imposed pursuant to Section 3.4.1(h)(iii); (o) any rent payable under any ground lease now or hereafter affecting the Project; (p) capital expenditures except as specifically included above; (q) specific costs incurred for the account of, separately billed to and paid by specific tenants; (r) depreciation and other nonoperating debts of Landlord; (s) leasing commissions, attorney's fees, costs, disbursements and other expenses incurred in connection with negotiations for leases with tenants, other occupants or prospective tenants or other occupants of the Building, and similar costs incurred in connection with disputes with tenants, other occupants, or prospective tenants of the Buildings; (t) services, items and benefits for which Tenant or any other tenant or occupant of the Building specifically -8- reimburses Landlord or for which Tenant or any other tenant or occupant pays third persons; (u) penalties for late payment, including, without limitation, taxes and equipment leases; (v) compensation paid to clerks, attendants, or other persons in commercial concessions (such as a snack bar, restaurant or newsstand), if any, operated by Landlord or any subsidiary or affiliate of Landlord; (w) costs for which Landlord is compensated through insurance or other means of recovery; (x) costs of restoration or repair of the Building as a result of total or partial destruction or condemnation (except to the extent of deductibles if any); (y) the costs of removal, encapsulation or abatement of any Hazardous Material (as defined in Section 4.6.2) in the Project, including the removal of asbestos fireproofing, if any, in the Project; (z) acquisition costs of paintings, sculptures or works of art; (aa) costs arising from Landlord's political contributions. All costs and expenses shall be determined in accordance with generally accepted accounting principles which shall be consistently applied (with accruals appropriate to the business). 3.4.2 Tenant shall pay in advance on the first day of each month to Landlord as additional rent one twelfth (1/12) of Tenant's Share of Taxes and Operating Costs for each Computation Year, in an amount estimated by Landlord and billed by Landlord to Tenant: Landlord shall have the right to revise such estimate from time to time; provided that such statement shall not be in lump sum format and shall be consistent with the Landlord's Statement. With reasonable promptness after Landlord has received the tax bills and support for Operating Costs for any Computation Year, but not more than one hundred eighty (180) days after the close of such year, Landlord shall furnish Tenant with a statement (herein called "Landlord's Statement") showing a comparison of estimated Taxes and Operating Costs to actual Taxes and Operating Costs for such Computation Year, and Tenant's Share of those estimated and actual amounts: provided that such statement shall not be in a lump sum format. If Tenant's Share of actual Taxes and Operating Costs for such Computation Year exceeds Tenant's Share of estimated Taxes and Operating Costs paid by Tenant for such Computation Year, Tenant shall pay to Landlord the difference within thirty (30) days after Landlord's Statement is given to Tenant, and if the total amount of Taxes and Operating Costs paid by Tenant for any such Computation Year shall exceed Tenant's Share of actual Taxes and Operating Costs for such Computation Year, such excess shall be credited against the next installments of Tenant's Share of Taxes and Operating Costs due from Tenant to Landlord hereunder. If there is an increase in Taxes (by reason of an increase in assessed valuation or otherwise) affecting prior Computation Year(s) that falls within the Term at any time after rendition of Landlord's Statement for such year(s), Tenant shall pay to Landlord the -9- Tenant's Share of such increase in Taxes attributable to such years) within thirty (30) days after Landlord's Statement is given to Tenant. 3.4.3 If the Term shall commence or terminate on a date other than the first or last day of a Computation Year, Tenant's Share of Taxes and Operating Costs for such partial Computation Year shall be in the proportion that the number of days of the Term included in such partial Computation Year bears to 365. During such partial Computation Year(s) Tenant shall pay Tenant's Share of Taxes and Operating Costs, in the same time and manner provided in Section 3.4.2, except that (a) if the Commencement Date is not the first day of a Computation Year, on or before the first day of the Term, or as soon thereafter as practicable, Landlord may bill Tenant an amount payable per month for the remainder of the Computation Year which in the aggregate shall equal Tenant's Share of estimated Taxes and Operating Costs for the partial Computation Year; and (b) if the Lease terminates before the end of a Computation Year and if Landlord's Statement shows that Tenant has overpaid, Landlord shall remit the amount of such overpayment to Tenant within fifteen (15) days after issuance of Landlord's Statement. The obligation of Landlord shall survive the expiration or earlier termination of the Lease. 3.4.4 For purposes of calculating estimated and actual Taxes and Operating Costs, for any period during which the Project is less than 95% occupied or less than fully assessed, there shall be added at Landlord's option, Taxes and those expenses (of the type set forth in paragraphs (g) and (h) of Section 3.4.1) which Landlord determines vary with occupancy and would have- been incurred had the Project been 95% occupied and fully assessed during any such period. 3.5 Additional Taxes. In addition to the Base Annual Rent and other charges to be paid by Tenant hereunder, Tenant shall reimburse Landlord, upon demand, for any and all taxes payable by Landlord (other than net income taxes) whether or not now customary or within the contemplation of the parties hereto by reason of the personal property, occupancy or activities of Tenant: (a) upon, allocable to, or measured by the Rent payable hereunder, including without limitation, any gross receipts tax or excise tax levied by any governmental or taxing body with respect to the receipt of such rent; or (b) upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof: or (c) upon the measured value of Tenant's personal property located in the Premises or in any storeroom, garage or any other place in the Premises or the Project, or the areas used in connection with the operation of the Project, it being the intention of Landlord and Tenant that, to the extent possible, such personal property taxes -10- shall be billed to and paid directly by Tenant; (d) resulting from (i) Tenant Improvements (as defined in Exhibit B) to the Premises, the cost of which exceeds Landlord's standard tenant allowance ($26.00 per square foot of Tenant's Usable Area), or (ii) Alterations (as defined in Section 6.1) to the Premises, whether title thereto is in Landlord or Tenant; or (e) upon this transaction. Taxes paid by Tenant pursuant to this Section 3.5 shall not be included in any computation pursuant to Section 3.4. 3.6 Late Payments. 3.6.1 Tenant hereby acknowledges that the late payment by Tenant to Landlord of any Rent or other sums due to Landlord hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Accordingly, Tenant shall pay to Landlord, as Additional Rent, without necessity of prior notice or demand, a late charge equal to five percent (5%) of any Rent or other sums not received by Landlord on the date such Rent or other sums are due; provided however that Landlord will provide Tenant with written notice and twenty (20) days' opportunity to cure the first two (2) such events of default during any calendar year with respect to all sums payable hereunder. The parties agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of the late payment by Tenant of Rent or other sums due Landlord hereunder. In no event shall this provision for a late charge prevent Landlord from exercising any right or remedy available to Landlord upon Tenant's failure to pay such Rent or other sums when due, including, without limitation, the right to terminate this Lease. 3.6.2 Notwithstanding any other provisions of this Lease, any Rent or other sums due to Landlord hereunder not paid to Landlord when due hereunder shall bear interest from the first day of the month immediately following the month in which such Rent or other sums were due hereunder, until the same have been fully paid, at a rate (the "Default Rate") that is equal to the lesser of (a) four percent (4%) above the annual reference rate of interest announced publicly from time to time by Bank of America N.T. & S.A. at its San Francisco Headquarters (or any successor bank), or any successor rate of interest thereto, adjusted monthly on the first day of each month following the announcement, and (b) the highest rate permitted by law. The payment of such interest shall not constitute a waiver by Landlord of any default by Tenant hereunder. Any sums owed from Landlord to Tenant under the Lease (other than amounts for which the Lease specifies that Landlord is to provide Tenant a credit) shall bear interest at the Default Rate from the date that is thirty (30) days from the due date of such amount until paid. -11- 3.7 Consideration. The Rent has been established in contemplation that Tenant, subject only to its rights to assign or sublet the space set forth herein, will occupy the Premises for the entire Term (subject to Tenant's right to terminate the Lease pursuant to Rider 3). Tenant expressly acknowledges and agrees that this Section 3.7 was a material inducement to Landlord in establishing the Rent in the amount herein provided and that Landlord has relied on this covenant and agreement in executing this Lease. 3.8 Time and Manner of Payment. 3.8.1 All Rent shall be payable in lawful money of the United States of America at the address specified for Landlord in the Summary of Lease Terms, or at such other place as Landlord shall designate upon not less than thirty (30) days prior written notice, without any prior demand therefor and without any abatement, deduction or setoff whatsoever, in either case except as otherwise maybe expressly provided to the contrary herein. 3.8.2 Except where a longer or shorter period is specifically provided for in this Lease with respect to a particular expenditure, Tenant shall pay, to Landlord, within thirty (30) days after Landlord delivers to Tenant bills or statements therefor: (a) sums equal to all expenditures made and monetary obligations incurred by Landlord pursuant to and in accordance with Article 17 of this. Lease, in connection with the remedying by Landlord of Tenant's default, including, without limitation, expenditures made and obligations incurred for reasonable counsel fees, (b) sums equal to all losses, costs, liabilities, damages and expenses referred to in Article 9, and (c) sums equal to all expenditures made and monetary obligations incurred by Landlord in collecting or attempting to collect the Base Annual Rent, any additional charges or any other sum of money accruing under this Lease or in enforcing any rights of Landlord under this Lease or pursuant to law. Tenant's obligations under this Article 3 shall survive the termination of this Lease. Landlord agrees that all expenditures, monetary obligations incurred and costs incurred under this paragraph 3.8.2 shall be reasonable in amount. Any additional rent charged by Landlord shall include no profit or overhead or administrative or supervision surcharge and supplies shall be charged at their actual cost to Landlord. -12- 3.8.3 Notwithstanding any provisions of the Lease to the contrary, in the event of any dispute as to the amount of actual Taxes and Operating Costs, Tenant shall have the right, after reasonable notice and at reasonable time, to inspect and photocopy Landlord's accounting records. If, after such inspection and photocopying, Tenant continues to dispute the amount of Taxes and/or operating Costs, Tenant shall be entitled to retain at its own cost and expense an independent certified public accounting firm approved by Landlord in its reasonable discretion to determine the proper amount of Operating Costs and or Taxes. If such review reveals that Landlord has overcharged Tenant, then Landlord shall reimburse Tenant the amount of such overcharge. If the review reveals that Tenant was undercharged, then Tenant shall reimburse Landlord the amount of such undercharge. Tenant's failure to object to any statement of Taxes and or Operating Costs within six months after Tenant's receipt of any such statement shall be conclusively deemed to be approval by Tenant thereof and Tenant shall have no further audit rights with respect thereto. 3.9 Limitation on Taxes and Operating Expenses Notwithstanding anything contained in the Lease to the contrary, in no event shall the amount payable by Tenant for Tenant's Share of Taxes and Operating Costs during any Computation Year (or portion thereof) during the Initial Term, calculated on a per rentable square foot/per month basis, exceed the "Expense Cap" for such Computation Year (as determined below). The Expense cap for that portion of the Initial Term occurring during the computation Year comprising the 1993 calendar year shall be equal to the lesser of (i) actual Taxes and Operating Costs (as calculated pursuant to Section 3.4 of the Lease) for such Computation Year, calculated on a per rentable square foot/per month basis, or (ii) Seventy-two cents ($.72) per rentable square foot/per month. Commencing with the Computation Year comprising the 1994 calendar year and for each Computation Year (or portion thereof) thereafter during the Initial Term, the Expense Cap shall be increased with respect to the applicable Computation Year to an amount equal to the product obtained by multiplying the Expense Cap for the immediately preceding Computation Year by 1.06.e Computation Year. For example, if actual Taxes and Operating Costs for the Computation Year comprising the 1993 calendar year are $.73 per rentable square foot/per month, then the Expense Cap for that portion of the Initial Term occurring during the 1993 calendar year would be $.72 per rentable square foot/per month and the Expense Cap for the subsequent Computation Years during the balance of the initial Term would be as follows: with respect to Computation Year comprising the 1994 calendar year: $.7632 ($.72 x 1.06); with respect to computation Year comprising the 1995 calendar year: -13- $.8090 ($.7632 x 1.06); and, with respect to each subsequent computation Year comprising the balance of the Initial Term, the Expense cap shall be increased in the same manner by multiplying the Expense Cap in the immediately preceding computation Year by 1.06. The amount payable by Tenant for Tenant's Share of Taxes and Operating Costs during the Option Term shall not be subject to any limitations except as otherwise set forth in the Lease. ARTICLE 4 USE AND OCCUPANCY 4.1 Permitted Use. Tenant shall use and occupy the Premises for office purposes only and for the specific purposes set forth in Paragraph J of the Summary of Lease Terms, and for no other purpose. The character of the occupancy of the Premises, as restricted by this Article 4 and as further restricted by Article 5, and any of the Rules and Regulations attached to this Lease or hereafter adopted, is an additional consideration and inducement to Landlord for the granting of this Lease. 4.2 compliance with Law. Tenant, at Tenant's expense, shall comply with all laws, rules, orders, ordinances, directions, regulations and requirements of federal, state, county and municipal authorities pertaining to Tenant's use of the Premises and with the recorded covenants, conditions and restrictions, regardless of when they become effective, including, without limitation, all applicable federal, state and local laws, regulations or ordinances pertaining to air and water quality, Hazardous Materials (as hereinafter defined in Section 4.6.2), waste disposal, air emissions and other environmental matters, all zoning and other land use matters, and utility availability, and with any direction of any public officer or officers, pursuant to law, which shall impose any duty upon Landlord or Tenant with respect to the use or occupation of the Premises. Without limiting the generality of the foregoing, Tenant shall, at Tenant's expense, take all proper and necessary action to cause the Premises to be kept, maintained, used and occupied in compliance with the Americans With Disabilities Act of 1990. Notwithstanding the foregoing, except for Tenant's obligations with respect to the Americans with Disabilities Act of 1990, Tenant shall have no responsibility for the cost of correcting existing building code violations in existence as of the Commencement Date. 4.3 Compliance With Insurance Requirements. Tenant shall comply with all rules, orders, directions, regulations and requirements of the Insurance Services Office or any other similar -14- body that sets general requirements of the insurance industry, shall not do or permit to be done any act or thing upon the Premises which will invalidate or be in conflict with any insurance policy covering the Project or any of the areas used in connection with the operation thereof or its fixtures, appurtenances or equipment or the property located therein, and shall not do, or permit anything to be done, in or upon the Premises, or bring or keep anything therein, which shall increase the rates of any insurance on the Project or any of the areas used in connection with the operation thereof or its fixtures, appurtenances or equipment or on property located therein. If by reason of the failure of Tenant to comply with the provisions of this Article 4 any insurance premium shall at any time be higher than it otherwise would be, then, without Landlord's waiving any rights it may have against Tenant hereunder as a result of such failure, Tenant shall reimburse Landlord for that part of all such premiums thereafter paid by Landlord which shall have been charged because of such violations by Tenant, and shall make such reimbursement upon the first day of the month following such expenditure by Landlord. Landlord and Tenant agree that, for all purposes of this Lease, a schedule or "make-up" of a rate for the Premises or the Project issued by the Insurance Services Office, or other body making insurance rates for the Premises or the Project, shall be conclusive evidence of the facts therein stated and of the several items and charges in the insurance rate then applicable to the Premises or the Project. 4.4 Certificates of Occupancy. Tenant shall not at any time use or occupy the Premises in violation of the certificates of occupancy issued for the Premises or the Project. In the event that any department of the City of San Jose or of the County of Santa Clara or of the State of California shall hereafter at any time contend or declare that the Premises are used for a purpose which is in violation of such certificate or certificates of occupancy, Tenant shall immediately discontinue such use of the Premises. Failure by Tenant to discontinue such use after such notice shall be considered a default under this Lease. Any statement in this Lease of the nature of the business to be conducted by Tenant in the Premises shall not be deemed or construed to constitute a representation or guaranty by Landlord that such business is lawful or permissible or will continue to be lawful or permissible under any certificate of occupancy issued for the Premises or the Project or otherwise permitted by law. 4.5 Life-Safety Systems. If there now is or shall be installed in the Project a sprinkler system, heat or smoke detection system or any other so-called life-safety system and any such system or any of its appliances shall be damaged or injured by reason of any act or omission of Tenant or Tenant's agents, servants, employees, contractors, visitors or licensees, Tenant -15- shall forthwith restore the same to good working condition; and if the Insurance Services office or any similar body or any bureau, department or official of the State, County or City government, or any governmental authority having jurisdiction over the Premises, shall require or recommend that any changes, modifications, alterations, or additional equipment be made or supplied in or to any such system by reason of Tenant's business, or the location of partitions, trade fixtures, or other contents of the Premises, or if any such changes, modifications, alterations or additional equipment become necessary to prevent the imposition of a penalty or additional charge in the insurance premium as fixed by said office or by any insurance company, Tenant shall, at Tenant's expense, promptly take and supply such changes, modifications, alterations or additional equipment. All work required under this paragraph shall be performed by Landlord and, to the extent specified herein, at Tenant's cost and expense. 4.6 Prohibited Uses. 4.6.1 Tenant shall not occupy or permit any portion of the Premises to be occupied as an office in a manner that is not generally consistent with the character and nature of all other tenancies in the Project or is for any business which would tend to generate an excess of foot traffic in or about the Project, a use which conflicts with any so-called "exclusive use" clause then given in favor of any tenant of the Project and of which Tenant has notice, any use which is the same as the use stated in any percentage lease of another tenant of the Project, or a use which would be prohibited by any other portion of this Lease (including but not limited to any Rules and Regulations then in effect) or in violation of law. Nothing in this Section 4.6.1 shall expand the permitted use of the Premises as set forth in Section 4.1. 4.6.2 Tenant shall not do or permit to be done any act or thing upon the Premises which shall or might subject Landlord to any liability or responsibility for injury to any person or persons or to any property by reason of any business or operation being carried on upon the Premises or for any other reason, and Tenant hereby agrees to protect and indemnify Landlord against any such liability or responsibility. The foregoing indemnity shall include, without limitation, any injury or loss due to Tenant's use, storage, or disposal of Hazardous Materials. "Hazardous Materials" shall mean any hazardous or toxic substances, materials or wastes, including, but not limited to, those substances, materials, and wastes listed in the United States Department of Transportation Table (49 CFR 172.101) or by the Environmental Protection Agency as hazardous substances (40 CFR Part 302) and amendments thereto, or such substances, materials and wastes which are or become regulated under any applicable local, state or federal law. -16- 4.7 Signage. Landlord, at Tenant's sole cost and expense, shall install and maintain signage in the directory tablets in the elevator lobbies located both on the ground floor and on the floor on which the Premises are located, and signage adjacent to the entrances to the Premises, all of which signage shall be of the same materials, type, style, color, location and dimensions reasonably specified by Landlord for use by tenants in the Project. Tenant shall pay the cost of such signage in the amount set forth in Paragraph O of the Summary of Lease Terms within ten (10) days following Landlord's written demand therefor. The cost and specifications are more particularly set forth in Exhibit F attached hereto. Landlord shall not be obligated to install Tenant's signage until such payment has been received by Landlord from Tenant. 4.8 Exercise Facility. Tenant will indemnify, defend and hold harmless Landlord from any claims or damages resulting from use of any exercise facilities in the Project by Tenant, Tenant's agents, employees or invitees. Tenant agrees to inform all employees of Tenant of the following: (i) the exercise facility is available for the use of tenants of the Project only and for no other person; (ii) use of the facility is at the risk of Tenant or Tenant's employees; (iii) the facility is unsupervised: and (iv) users of the facility must report any needed equipment maintenance or any unsafe conditions to the Landlord of which the user has actual knowledge. Landlord may provide such an exercise facility at Landlord's sole option and may discontinue providing such facility at any time without incurring any liability. Landlord agrees to provide such facility during the initial Term of this Lease unless circumstances arise that make the continued existence and/or operation of such facility in Landlord's judgment, either not prudent or economically feasible, in which event Landlord may discontinue such facility without incurring any liability. Landlord may discontinue such facility at its election for any reason following the expiration of the initial Term of the Lease without incurring any liability. ARTICLE 5 ASSIGNMENT/MORTGAGE/SUBLETTING 5.1 Prohibition on Assignment and Subletting. Except as hereinafter provided in this [ILLEGIBLE] Tenant shall not assign, sublease, transfer or encumber this Lease or any interest therein. Any attempted assignment, sublease, transfer or encumbrance by Tenant in violation of the terms and covenants of this paragraph shall be void. Tenant shall at all times continue to be fully liable for all of its obligations under the terms of this Lease, -17- regardless of assignment or subletting under the terms of this paragraph 5 or otherwise permitted by Landlord in writing, and any such assignment or subletting shall be subject to all of the covenants, agreements, terms, provisions and conditions of this Lease. Provided Tenant is not in default of any covenant, agreement, term, provision or condition contained in this Lease and Tenant's proposed assignment or subletting will not result in a default of any covenant, agreement, term, provision or condition of this Lease, Tenant may assign this Lease or sublease all or part of the Premises to a "Related Entity" (herein defined), and (ii) subject to strict compliance with the following additional conditions and requirements, Tenant may sublease all or any part of the Premises to another entity: (A) The subtenant shall be compatible with other tenants of the Building; (B) The subtenant's use of its portion of the Premises shall not conflict with any exclusive rights previously granted by Landlord; (C) No subtenant shall have any right to EXERCISE ANY RENEWAL OR EXPANSION option or ANY RIGHT of first refusal; (D) If Tenant sublets more than 50% of the Premises, the Option to Extend Term and the Option to Expand Premises shall terminate automatically and be of no further force and effect. (E) Landlord shall have the right to terminate this Lease in regard to any portion of the Premises which Tenant proposes to sublease to someone other than a Related Entity, it being understood and agreed that Tenant shall give Landlord written notice of each proposed sublease, which notice shall identify the proposed subtenant and shall set forth the terms of the sublease. With respect to a proposed sublease to an individual or entity other than a Related Entity, Landlord shall have fifteen (15) days after its actual receipt of such written notice from Tenant in which to notify Tenant in writing of Landlord's election to terminate this Lease in regard to the proposed subleased premises. As used in this Lease, a Related Entity is a corporation which owns fifty-one percent (51%) or more of Tenant, a corporation which is fifty-one percent (51%) or more owned by the owner of Tenant, or a -18- corporation which is fifty-one percent (51%) or more owned by Tenant. 5.2 Payment of Cash Proceeds. Fifty percent (50%) of the excess of (i) all cash or other proceeds paid under any sublease or assignment of Tenant's interest in this Lease, whether consented to by Landlord or not, over (ii) Rent payable by the Tenant for the applicable space covered by such sublease or assignment, shall be the property of and shall be paid to Landlord, and Tenant hereby (1) covenants and agrees to use its best efforts to collect all cash and other proceeds payable under any such sublease or assignment and (2) assigns to Landlord all rights Tenant might have or ever acquire in any such excess cash or other proceeds. This covenant and assignment shall benefit Landlord and its successors in ownership of the Building and shall bind Tenant and Tenant's successors and assigns. Any assignee, sublessee or purchaser or Tenant's interest in this Lease (any such assignee, sublessee or purchaser being hereinafter referred to as "Successor"), by assuming Tenant's obligations hereunder shall be deemed to have assumed liability to Landlord for all amounts paid to persons other than Landlord by such Successor in consideration of any such assignment, sale or subletting, in violation of the provisions hereof. In determining excess Rent, Tenant nay deduct reasonably incurred and documented advertising costs, broker's fees, "legal expenses and the cost of leasehold improvements specifically performed in connection with such subleasing. 5.3 Landlord's Costs. Landlord's review of prospective subtenants and assignees shall be performed at its actual cost, including without limitation reasonable attorney's fees. ARTICLE 6 ALTERATIONS 6.1 Alterations. During the Term of this Lease, Tenant may make alterations, additions or improvements (collectively, "Alterations") to the Premises at its sole cost and expense subject to the following requirements: (a) Prior to the commencement of any non-decorative work, Tenant shall (i) submit plans and specifications prepared by an architect and/or structural engineer licensed by the State of California for Landlord's approval, which approval shall not be unreasonably withheld; provided, however, if the plans and specifications submitted to Landlord reflect only non-structural Alterations which do not affect the HVAC, mechanical, electrical or plumbing systems in the Building and which have a cost which does not exceed Five Thousand Dollars ($5,000), such approval shall not -19- be required; and (ii) obtain any necessary governmental permits and deliver a copy thereof to Landlord (Landlord shall cooperate with Tenant at Tenant's expense to obtain any such permits); (b) The Alterations shall be made by a contractor chosen by Tenant and approved by Landlord, which approval shall be requested in writing by Tenant and not be unreasonably withheld by Landlord; (c) Tenant shall provide satisfactory evidence of contractor's comprehensive general liability insurance covering Landlord (and any ground lessor), builder's risk insurance, and workmen's compensation insurance all in form and substance reasonably satisfactory to Landlord; (d) Tenant shall provide a performance and payment bond satisfactory in form and substance to Landlord and such other security as Landlord may reasonably require to insure payment for the completion of all work free and clear of liens; (e) Tenant shall give Landlord at least ten (10) business days' notice before commencing any non-decorative work so that Landlord can post and record a notice of nonresponsibility; (f) If the making of the Alterations shall require additional services or facilities (including but not limited to extra elevator services, hoisting, cleaning services, trash removal, field supervision, or ordering of material(s)) which services are provided by Landlord, Tenant shall pay Landlord a reasonable charge therefor, together with a fee equal to five (5%) percent of such reasonable charge for Landlord's supervision and overhead; (g) All Alterations shall be made in compliance with all applicable laws and regulations and any requirements or regulations of the INSURANCE SERVICES OFFICE; (h) All of Tenant's contractors, subcontractors, employees, servants and agents must work in harmony with and shall not interfere with any labor employed by Landlord, or Landlord's contractors or by any other tenant or its contractors and shall be subject to Landlord's .construction site rules and regulations, subject to Section 1.2.2; (i) All core drilling, concrete cutting, shall be done between the hours of 7:00 p.m. and 6:00 a.m. Transportation of construction materials through Common Areas shall be done outside the Project's normal operating hours; -20- (j) If any shutdown of plumbing, electrical, or air conditioning equipment becomes necessary in connection with the making of any Alterations, Tenant shall notify Landlord and Landlord will determine when such shutdown may be made. Any such shutdown shall be done only if an agent or employee of Landlord is present and Landlord will use commercially reasonable efforts to have such agent or employee available at a time reasonably convenient for Tenant. Tenant will reimburse Landlord for the expense of any such employee or agent; (k) Any complaints by tenants of excessive noise are to be remedied immediately, or alteration operations are to cease until said noise is abated; (l) Landlord expressly reserves the right to revoke its consent upon notice to Tenant in the event of the material breach of any of the terms or conditions hereof which, except for a breach affecting safety or the structural components of the Premises or the Building for which no notice is required, is not cured within thirty days of notice in which case all work on the Alterations shall immediately cease to the extent directed by Landlord in such notice; (m) Tenant shall reimburse Landlord for any and all costs or expenses reasonably incurred by Landlord in connection with the Alterations, including without limitation architectural or engineers' fees or attorneys' fees; (n) All telecommunications wiring shall be subject to the Project wiring standards which shall be communicated by Landlord to Tenant in writing upon request; and (o) Such other reasonable conditions as Landlord may require. 6.2 Mechanics' Liens. Any mechanics' lien filed against the Premises or the Project for work done by or materials furnished to Tenant or its agents shall be discharged by Tenant at its expense within forty-five (45) days of receipt of notice by the filing of the bond required by law, by payment, by satisfaction or otherwise. Failure to so discharge any such lien shall constitute a default hereunder. 6.3 Alterations as Landlord's Property. All Alterations shall immediately become a part of the realty and shall be and remain Landlord's property, except Tenant's decorative alterations, furniture, furnishings and trade fixtures, and shall not be removed without the written consent of Landlord. All goods, effects, personal property, business and trade fixtures, machinery and equipment owned by Tenant or installed at Tenant's expense in the -21- Premises shall remain the personal property of Tenant and may be removed by Tenant at any time, and from time to time, during the Term of this Lease; provided that Tenant shall, in removing any such property, repair all damage to the Premises or the Project caused by such removal and restore the Premises to their original condition, subject to wear and tear. ARTICLE 7 REPAIRS 7.1 Tenant's Obligations/Procedures. Tenant covenants and agrees with Landlord, at Tenant's own cost and expense to repair or replace any damage done to the Building, the Premises, or any part of any of such property, caused by Tenant or Tenant's agents, employees, invitees, or visitors, and such repairs shall restore the damaged property to as good a condition as it was in prior to such damage, and shall be effected in compliance with all applicable laws; provided; however, if Tenant fails to make such repairs or replacements promptly, Landlord, may, upon thirty (30) days prior written notice (except no notice is required where Landlord determines that such repair or replacement involves a situation which is an emergency or affects safety or the structure of the Building), at its option, make repairs or replacements, and Tenant shall pay the cost thereof to Landlord on demand as Rent. Tenant agrees with Landlord not to make or allow to be made any alterations to the Premises (except as otherwise expressly permitted herein) or place signs anywhere in the Building or the Common Areas, without first obtaining written consent of Landlord in each such instance, which consent may be given on such conditions as Landlord may reasonably determine. The Tenant shall not contract for any work or service which might involve the employment of labor incompatible with the Building employees or employees or contractors doing work or performing services by or on behalf of the Landlord. 7.2 Landlord's Obligations and Rights. Landlord shall repair the Project plumbing, heating, ventilating or air conditioning and electrical systems and make structural repairs in and about the Premises and the Common Areas arising from ordinary wear and tear or through causes not attributable to Tenant or its employees, agents, contractors or invitees, except as otherwise provided in this Lease. Landlord shall repair, at the expense of Tenant, all damage or injury to the Premises or the Project and its fixtures, appurtenances or equipment or to any of the areas used in connection with the operation of the Project, caused by Tenant or Tenant's agents, servants, employees, contractors, visitors or licensees or caused by moving property of Tenant in or out of the -22- Project, or by the installation or removal of furniture or other property, or resulting from fire, heating, ventilating or air conditioning unit or system short circuits, overflow or leakage of water, steam, gas, sewer or odors, or by frost or by bursting or leaking of pipes or plumbing works, or gas, or from any other cause, due to the carelessness, negligence, or improper conduct of Tenant or Tenant's agents, servants, employees, contractors, visitors or licensees. Landlord shall replace, at the expense of Tenant, any and all plate and other glass damaged or broken as a result of any action or activity of Tenant or any agents, invitees, contractors or employees of Tenant. 7.3 Statutory Waivers. Tenant hereby waives all rights under the provisions of Sections 1941 and 1942 of the California Civil code, and all rights under any law in existence during the Term authorizing a tenant to make repairs at the expense of a landlord and deduct the expenses of such repair from Rent due hereunder or to terminate the lease. 7.4 No Liability of Landlord. Except as expressly provided in this Lease, there shall be no allowance to Tenant for diminution of rental value, and no liability on the part of Landlord by reason of inconvenience, annoyance or injury to business arising from the making of, or the failure to make, any repairs, alterations, decorations, additions or improvements in or to any portion of the Premises or the Project (or any of the areas used in connection with the operation thereof, or in or to any fixtures, appurtenances or equipment), or by reason of the negligence of Tenant or any other tenant or occupant of the Project. Notwithstanding the foregoing, Landlord shall be responsible for its own active negligence and willful misconduct. In no event shall Landlord be responsible for any consequential damages arising or alleged to have arisen from any of the foregoing matter. Notwithstanding the foregoing, any such interuption deprives Tenant of the beneficial use of the Premises, there shall be an abatement of rent if and to the extent that the Landlord receives proceeds from a rent insurance policy to cover such lost income. ARTICLE 8 SUBORDINATION/ PROTECTION OF LENDERS 8.1 Subordination, Non-Disturbance and Attornment. 8.1.1 This Lease shall be subject and subordinate to all ground or underlying leases, mortgages and deeds of trust which now or hereafter affect the real property of which the Premises forms a part or affect the ground or underlying leases, and all renewals, modifications, consolidations, replacements and extensions thereof, without the necessity of executing any instrument to effectuate such subordination; provided, however, -23- that such subordination shall be evidenced by a Subordination, Nondisturbance and Attornment Agreement in the form of Exhibit G attached hereto, which Tenant specifically covenants and agrees to execute and deliver from time to time as may be requested by Landlord. However Tenant also agrees that any such first mortgagee shall have the right at any time to subordinate such mortgage, deed of trust or other lien to this Lease on such terms and subject to such conditions as such mortgagee may deem appropriate in its discretion. Landlord is hereby irrevocably vested with full power and authority to subordinate this Lease to any mortgage, deed of trust or other lien now existing or hereafter placed upon the Building, in whole or in part, and Tenant agrees to execute a Subordination, Non-Disturbance and Attornment Agreement in the form of Exhibit G upon 15 days prior written notice to further evidence such subordination. 8.1.2 If Tenant fails to execute and deliver any instruments required by Landlord pursuant to Section 8.1.1 above within ten (10) business days after request therefor from Landlord, Tenant shall be in default of its obligations under this Lease. 8.2 Attornment to Successor. 8.2.1 Tenant agrees that, at the option of the landlord under any ground or underlying lease now or hereafter affecting the real property of which the Premises forms a part, Tenant shall attorn to said landlord in the event of the termination or cancellation of such ground or underlying lease and, if requested by said landlord, shall enter into a new lease with said landlord (or a successor ground lessee designated by said landlord) for the balance of the Term then remaining hereunder upon the same terms and conditions as those herein provided. 8.3 Lender's Right To Cure. If Landlord is in default, Tenant will accept cure of any default by any Holder whose name and address shall have been furnished to Tenant in writing. Tenant may not terminate this Lease for Landlord's default unless Tenant gives notice of such intent to terminate to each such Holder and the default is not cured within thirty (30) days thereafter or within such greater time as may be reasonably necessary to cure such default. A default which cannot reasonably be cured within said thirty (30) day period shall be deemed cured within said period if action necessary to cure the default is commenced within such time and the Holder proceeds diligently thereafter with such action until the default is cured. -24- ARTICLE 9 LIABILITY/ INDEMNIFICATION Landlord shall not be liable to Tenant, or to Tenant's agents, servants, employees, customers, or invitees for any injury to person or damage to property caused by any act, omission, or neglect of Tenant, its agents, servants, or employees, invitees, licensees or any other person entering the Project under the invitation of Tenant or arising out of the use of the Project by Tenant and the conduct of its business or out of a default by Tenant in the performance of its obligations hereunder. Tenant hereby indemnifies and holds Landlord harmless from all liability and claims for any such damage or injury. Any waiver of claims against Landlord and/or indemnification of Landlord pursuant to the terms of this Lease, including, without limitation, the terms of this Article 9, shall in no event be deemed to apply to Landlord's fraud, willful injury to the person or property of another or violation of any law, whether willful or negligent, to the extent such waiver or indemnity would violate California Civil Code section 1668. ARTICLE 10 DAMAGE/DESTRUCTION 10.1 Total Destruction. If the Premises are totally damaged or are rendered wholly untenantable by fire or other cause, and if Landlord shall decide not to restore or rebuild the same, or if the Project shall, in Landlord's judgment, be so damaged that Landlord shall decide to demolish it, then in any of such events Landlord may, within ninety (90) days after such fire or other cause, give Tenant notice of whether it shall restore or rebuild or terminate the Lease and if such decision is to terminate the Lease thereupon the Term shall expire by lapse of time upon the third (3rd) day after such notice is given, and Tenant shall vacate the Premises and surrender the same to Landlord. Notwithstanding the foregoing, if Landlord notifies Tenant that it will restore or rebuild the Premises, it shall provide Tenant with notice of the time period estimated by Landlord in good faith as being necessary for restoring or rebuilding the Premises. In the event that based upon such notice, the restoration or rebuilding of the Premises is estimated to take more than one year from the date of the casualty to restore or rebuild, then Tenant may terminate this Lease by providing Landlord with written notice thereof within thirty days (30) following notice from Landlord of such estimate. Base Annual Rent and Tenant's Share of Taxes and Operating Costs shall be abated until the Premises are restored or rebuilt, if Landlord -25- decides to restore or rebuild the Premises, or until three (3) days after Landlord's notice of its decision not to restore or rebuild. Regardless of the estimate of time to complete restoration of the Premises, if the Premises are not restored within 365 days after the date of the casualty, Tenant may terminate the Lease upon not less than 30 days' prior written notice. Such 365 day period shall not be extended for force majeure events. 10.2 Partial Destruction. 10.2.1 Except as provided in Section 10.2.2 below, if the Premises shall be partially damaged by fire or other cause, the damage shall be repaired by and at the expense of Landlord and, until such repairs shall be completed, the Base Annual Rent and Tenant's Share of Taxes and Operating Costs shall be apportioned according to the part of the Premises which is tenantable or used by Tenant. 10.2.2 Notwithstanding anything contained in this Article 10 to the contrary, in no event shall Landlord be required to spend for any repair, replacement or reconstruction of the Premises or the Project an amount greater than the insurance proceeds (less any costs of collection thereof) actually received by Landlord as a result of the fire or other casualty causing such loss, damage or destruction. No liability of Landlord shall accrue for reasonable delay which may arise by reason of adjustment of insurance on the part of Landlord or Tenant, for reasonable delay on account of labor disputes, or any other cause beyond Landlord's control. 10.3 Waiver of Statutory Remedies. The provisions of this Lease, including this Article 10, constitute an express agreement between Landlord and Tenant with respect to any and all damage to, or destruction of, all or any part of the Premises or any other portion of the Project, and any law of the State of California or other governmental authority, including, without limitation, Sections 1932(2) and 1933(4) of the California Civil Code, with respect to any rights or obligations concerning damage or destruction, and any similar law now or hereafter in effect, shall have no application to this Lease or to any damage to or destruction of all or any part of the Premises or any other portion of the Project. -26- ARTICLE 11 EMINENT DOMAIN 11.1 Partial or Total Taking. If the whole or any part of the Premises shall be taken or condemned for all or any portion of the Term by any competent authority for any public or quasi- public use or purpose, or transferred by agreement in lieu of such taking or condemnation with or without any condemnation action or proceeding being instituted, then, and in either such event, this Lease shall terminate as to the portion so taken and the Rent shall be equitably prorated. Notwithstanding the foregoing, Tenant shall have the right to terminate this Lease if, as a result of such condemnation the Premises are reduced by more than thirty-three percent (33%) of the size of the Premises immediately prior to such taking. 11.2 Award. Except as provided in Section 11.3 below, Tenant hereby expressly assigns to Landlord any award which may be made in connection with any taking or condemnation, together with any and all rights of Tenant now or hereafter arising in or to the same or any part thereof. Nothing contained herein shall be deemed to give Landlord any interest in, or to require Tenant to assign to Landlord, any award made to Tenant specifically for its relocation expenses, the taking of personal property and fixtures belonging to Tenant, or the interruption of or damage to Tenant's business, if such award is made separately to Tenant and does not diminish the award recoverable by Landlord. 11.3 Temporary Taking. If all or any portion of the Premises is condemned or otherwise taken for public or quasipublic use for a limited period of time, this Lease shall remain in full force and effect and Tenant shall continue to perform all terms, conditions and covenants of this Lease. Tenant shall be entitled to receive the entire award made in connection with any such temporary condemnation or other taking for the period during the Term hereof. ARTICLE 12 SERVICES 12.1 Basic Services. Subject to the other provisions of this Lease and to the Rules and Regulations of the Project, Landlord shall: -27- (a) provide automatic elevator facilities on normal business days from 8:00 a.m. 7:00 p.m. and have at least one elevator in each tower of the Project available at all other times: (b) on normal business days from 8:00 a.m. to 7:00 p.m. (and at other times for an additional charge to be fixed by Landlord which as of the date of this Lease is $30.00 per hour) ventilate the Premises and furnish heating or air conditioning when, in the judgment of Landlord, it may be required for the comfortable occupancy of the Premises. Tenant agrees to keep and cause to be kept closed all doors from the Premises and the windows in the Premises, and Tenant agrees to cooperate fully at all times with Landlord and, subject to Section 1.2.2, to abide by all regulations and requirements which Landlord may prescribe for the proper function and protection of the heating, ventilating and air conditioning system. Tenant shall not install or use in the Premises any equipment or conduct its operation in the Premises in a manner which would adversely affect the heating, ventilating and air conditioning system. Landlord, throughout the Term of this Lease, shall have free access to any and all mechanical, electrical or plumbing installations of Landlord or Tenant, including, but not limited to, air conditioning, fan, ventilating and machine rooms, telephone rooms and electrical closets. Tenant shall be given reasonable advance notice prior to an entry by Landlord into the Premises to perform any such work and Landlord shall minimize any disturbance to Tenant in connection with the performance of any alterations or repairs and shall restore the Premises after such entry. Tenant agrees that there shall be no construction of partitions or other obstructions which might interfere with Landlord's free access thereto, or interfere with the moving of Landlord's equipment to or from the enclosures containing said installations. Tenant further agrees that neither Tenant, nor its agents, servants, employees, contractors, visitors or licensees shall at any time enter said enclosures or tamper with, adjust, touch or otherwise in any manner affect Landlord's said mechanical, electrical or plumbing installation: (c) make available electrical facilities comparable to those supplied in other first class office buildings in the vicinity of the Project to provide sufficient power for typewriters and other office machines of similar low electrical consumption, but not including electricity required for electronic data processing equipment, special lighting, and any other item of electrical equipment which (singly) consumes more than .5 kilowatts per hour at rated capacity or requires a voltage other than one hundred ten (110) volts single phase; and provided, however, that if the installation of such electrical equipment requires additional air conditioning capacity above that normally provided to tenants of the Project or above standard usage of existing -28- capacity, then the additional air conditioning installation and/or operating costs attributable thereto shall be paid by Tenant. Tenant agrees not to use any apparatus or device in, upon or about the Premises which may in any way increase the amount of such electricity usually furnished or supplied to the Premises, and Tenant further agrees not to connect any apparatus or device to the wires, conduits or pipes, or other means by which such electricity is supplied, for the purpose of using additional or unusual amounts of electricity, without the prior written consent of Landlord. At all times Tenant's use of electric current shall never exceed Tenant's share of the capacity of the feeders to the Project or the risers or wiring installation. Tenant shall not install or use or permit the installation or use in the Premises of any computer or electronic data processing or ancillary equipment or any other electrical apparatus designed to operate on electrical current in excess of 110 volts and 5 amps per machine, without the prior written consent of Landlord. If Tenant shall require electrical current in excess of that usually furnished or supplied for use of the Premises as general office space, Tenant shall first procure the consent of Landlord to the use thereof and Landlord may cause a meter to be installed in the Premises, or Landlord shall have the right to cause a reputable independent electrical-engineering or consulting firm to survey and determine the value of the electric service furnished for such excess electric current. The cost of any such survey or meters shall be paid by Tenant. Tenant agrees to pay to Landlord, promptly upon demand therefor, all costs of such electrical current consumed as well as an additional use charge calculated as a percentage of electrical current used as shown by said meters or by said survey at the rates charged for such services to the Project by the municipality or the local public utility, as the case may be, furnishing the same, plus any additional expense incurred in keeping account of the electric current so consumed: (d) furnish hot and cold water for drinking, lavatory and office kitchen (if any) purposes only, but if Tenant requires, uses or consumes water for any purpose in addition to ordinary drinking and lavatory purposes (of which Landlord shall be the sole judge), Landlord may reasonably estimate such excess and Tenant shall pay therefor. Landlord may also install a water meter and thereby measure Tenant's water consumption for all purposes. Tenant shall pay Landlord for the cost of the meter and the cost of the installation thereof and throughout the duration of Tenant's occupancy Tenant shall keep said meter and installation equipment in good working order and repair at Tenant's own cost and expense, in default of which Landlord may cause such meter and equipment to be replaced or repaired and collect the cost thereof from Tenant as additional rent hereunder. Tenant agrees to pay for water consumed, as shown in said meter, as and when bills are rendered -29- and on default in making such payment Landlord may pay such charges and collect the same from Tenant; and (e) provide janitorial service on weekdays (except for holidays) in the manner customary for comparable office buildings; provided, however, if the Premises or the use thereof varies significantly from normal office facilities Tenant shall reimburse Landlord for any excess costs attributable to such other use. Such services shall not materially diminish from those in effect as of the Commencement Date. 12.2 Tenant's Extra Services. If Tenant shall require the services described in this Article 12 beyond the services described herein as standard, such services shall be provided by Landlord, at Landlord's option and at Tenant's sole expense. 12.3 Landlord's Liability. Landlord reserves the right to stop service of the elevator, plumbing, heating, ventilating, air conditioning and electricity or other mechanical systems, or cleaning services, when necessary, by reason of accident or emergency or for inspection, repairs, alterations, or construction in the Premises or the Project which in the judgment of the Landlord are desirable or necessary to be made, until same shall have been completed, and, except for its active negligence or wilful misconduct, shall have no responsibility or liability for failure to supply any of such services in such instance. Interruption or curtailment of any services (including variations in electrical power from the utility) shall not constitute a constructive or partial eviction or entitle Tenant to any abatement of Rent or any compensation, including, but not limited to, compensation for annoyance, inconvenience or injury to business. If, as a result of any governmental rule or regulation, Landlord imposes a curtailment of services or equipment in the Project or the Premises, Tenant shall comply therewith and shall be liable to Landlord for any surcharge imposed for any violation by Tenant. ARTICLE 13 LANDLORD'S EIGHT OF ENTRY Landlord and Landlord's agents shall have the right to enter the Premises at all times, to examine the same and subject to the terms and conditions of this Lease, to make such repairs or alterations as Landlord may deem necessary or desirable, including, without limitation, the use and maintenance of pipes and conduits in and through the Premises, and Landlord and its agents shall be allowed to take all material into and upon the Premises that may be required therefor without the same constituting an eviction of Tenant in whole or in part, and subject to the provisions of Article 10, the Base Annual Rent reserved shall in no wise abate -30- while said repairs, alterations, decorations, additions or improvements are being made, by reason of inconvenience, annoyance or injury to the business of Tenant because of the prosecution of any such work, or otherwise. Landlord and Landlord's agents are expressly granted permission to show the Premises at any reasonable time to prospective tenants, mortgagees, purchasers, lessees of the Project and other persons with a business interest therein. If, during the last month of the Term, Tenant shall have removed all or substantially all of Tenant's property therefrom, Landlord and its agents may immediately enter and alter, renovate and redecorate the Premises, without elimination or abatement of Rent or other compensation, and such acts shall have no effect upon this Lease. If Tenant shall not be personally present to open and permit an entry into the Premises, and such entry is , in Landlord's judgment necessary for emergency reasons Landlord or Landlord's agents may enter the same by a master key, or may forcibly enter the same, without rendering Landlord or such agents liable therefor (if during such entry Landlord or Landlord's agents shall accord reasonable care to Tenant's property), and without in any manner affecting the obligations, terms, covenants, conditions, provisions or agreements of this Lease. Except for entry required in connection with an emergency, Landlord shall not enter the Premises except upon 48 hours prior written notice and accompanied by an employee of Tenant. Nothing herein contained, however, shall be deemed or construed to impose upon Landlord any obligation, responsibility or liability whatsoever, for the care, supervision or repair of the Project or any part thereof, other than as otherwise provided in this Lease. ARTICLE 14 TENANT'S AND LANDLORD'S INSURANCE 14.1 Tenant's Insurance. Tenant shall carry at its expense and maintain in force during the Term the following insurance: (a) Comprehensive General Liability Insurance with a Broad Form Liability Endorsement (including protective liability coverage on operations of independent contractors engaged in construction and also blanket contractual liability insurance) on an "occurrence" basis against claims for "personal injury" liability, including, without limitation, bodily injury, death or property damage liability with a limit of not less than One Million Dollars ($1,000,000) in the event of "personal injury" to any number of persons or of damages to property arising out of any one "occurrence"; such insurance shall cover Tenant's indemnity obligations hereunder and may be furnished under a "primary" policy -31- and an "umbrella" policy, provided that it is primary insurance and not excess over or contributory with any insurance in force for Landlord; (b) Such other insurance as may be required by Landlord in connection with the Premises or Tenant's activities in the Project, provided such other insurance is being required by institutional owners of similar office buildings in the San Francisco-San Jose metropolitan area. 14.2 Landlord's Insurance. (a) Landlord shall during the entire Term, maintain fire and extended coverage insurance on the Building and a standard policy of rent interuption insurance in an amount equal to the full replacement cost of the Building and with deductibles in such amounts as Landlord may accept; provided, however, so long as Metropolitan Life Insurance Company, or any other property, casualty or life insurance company having assets of $500,000,000.00, ( a "Permitted Self Insurer") is the owner of the Building, it shall have the right to self-insure against any and all perils and/or liabilities against which it would otherwise be required to insure and it shall also have the right to effect any such insurance by means of so called "blanket" or "umbrella" policies of insurance. Any such insurance shall be maintained at the expense of Landlord (the cost to Landlord being included as a part of the Operating Costs), and payments for losses thereunder shall be made solely to Landlord and the mortgagees of Landlord as their interest shall appear. If a Permitted Self Insurer elects to self-insure against certain perils and/or liabilities against which it would otherwise be required to maintain a policy or policies of insurance, then for purposes of this Lease it shall be deemed to hold insurance against such perils and/or liabilities in not less than the minimum amount of insurance which Landlord is otherwise required to maintain under the terms of this Lease, with a deductible of $500,000.00. (b) Comprehensive General Liability Insurance with a Broad Form Liability Endorsement (including protective liability coverage on operations of independent contractors engaged in construction and also blanket contractual liability insurance) on an "occurrence" basis against claims for "personal injury" liability, including, without limitation, bodily injury, death or property damage liability with a limit of not less than One Million Dollars ($1,000,000) in the event of "personal injury" to any number of persons or of damages to property arising out of any one "occurrence". -32- 14.3 General Requirements. 14.3.1 All such insurance shall name Landlord, any beneficiary under a deed of trust, mortgagee and/or ground or underlying lessor as additional insureds and shall provide that Landlord and any additional insureds shall receive thirty (30) days written notice from the insurer prior to any cancellation or change of coverage, and shall contain a cross liability or severability clause. 14.3.2 All insurance required to be carried by Tenant hereunder shall be written only as primary insurance and non-contributing and shall be effected with only such companies as Landlord shall approve, but in any event not with any company of less repute than those having a general policy rating of A and a financial rating of XV as rated in the most current available "Best's Insurance Reports." In the event "Best's Insurance Reports" is not currently published, such minimum standard shall be that published by any other nationally recognized publisher of such information. Landlord's approval shall be deemed to have been given unless Landlord in writing disapproves such company not later than one month after submission of a policy or certificate to Landlord. Any insurance carried by Landlord shall not be contributory. 14.3.3 Tenant shall deliver the policies of insurance required hereunder or certificates thereof to Landlord on or before the Commencement Date, and thereafter at least thirty (30) days before the expiration dates of expiring policies. 14.3.4 In the event Tenant shall fail to procure such insurance, or to deliver such policies or certificates within the time periods required hereunder, Landlord may, at its option, procure same for the account of Tenant, and the cost thereof shall be paid to Landlord within thirty (30) days after delivery to Tenant of bills therefor. Nothing contained in this Article 14 shall be construed as a limitation of Tenant's liability hereunder. 14.4 waiver of Subrogation. 14.4.1 Notwithstanding the provisions of this Article 14 or any other Article in this Lease, Landlord waives any and all rights of recovery against Tenant for or arising out of damage to or destruction of the Premises, or the Project, or any part thereof, from causes then included under standard fire and extended coverage insurance policies or endorsements, whether or not such damage or destruction shall have been caused by the negligence of Tenant, its agents, employees, contractors, visitors or licensees, but only to the extent that Landlord's insurance policies then in -33- force permit such waiver. Tenant waives any and all rights of recovery against Landlord for or arising out of damage to or destruction of any property of Tenant, from causes then included under standard fire and extended coverage insurance policies or endorsements, whether or not caused by the negligence of Landlord, its agents, employees, contractors, visitors or licensees, but only to the extent that Tenants insurance policies then in force permit such waiver. Landlord and Tenant represent that their present insurance policies now in force permit such waiver. 14.4.2 If at any time during the Term either party shall give no less than five (5) days prior notice to the other certifying that any insurance carrier which has issued any such policy covering any of the property above mentioned has refused to consent to the aforesaid waiver of subrogation, or if such carrier will consent to such waiver only upon the payment of an additional premium (and such additional premium is not paid by the other party hereto), or such carrier revokes a consent previously given or cancels or threatens to cancel any policy previously issued and then in force and effect because of such waiver of subrogation, then, in any of such events, the waiver in this Article 14 shall thereupon be of no further force and effect as to the loss, damage or destruction covered by such policy; provided, however, that if at any time thereafter such consent shall be obtained therefor without an additional premium from any existing or substitute insurance carrier, the waiver hereinabove provided for shall again become effective. ARTICLE 15 INSOLVENCY OR BANKRUPTCY 15.1 Insolvency or Bankruptcy. 15.1.1 In addition to the occurrences set forth in Section 16.1 hereinafter, the following events shall constitute a default under this Lease: (i) Tenant admits in writing its inability to pay its debts as they mature; (ii) Tenant makes an assignment for the benefit of creditors or takes any other similar action for the protection or benefit of creditors; (iii) Tenant gives notice to any governmental body of insolvency or pending insolvency, or suspension or pending suspension-of operations; (iv) Tenant files a voluntary petition in bankruptcy or has an involuntary petition filed against him, her or it; (v) Tenant files any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or other similar relief under any present or future bankruptcy statute, regulation or law; (vi) a court of competent jurisdiction enters an order, judgment or decree approving a petition filed against Tenant seeking any relief described in the preceding subparagraph (v) and -34- such order, judgment or decree shall remain unvacated and unstayed for an aggregate of thirty (30) days from the date of entry thereof; (vii) a trustee, receiver, conservator or liquidator of Tenant or of all or any substantial part of its Property or its interest in the Premises is employed or appointed and such receivership remains undissolved for thirty (30) days; or (viii) this Lease or any estate of Tenant hereunder is levied upon under any writ of attachment or execution, and such writ shall remain unvacated and unstayed for thirty (30) days. 15.1.2 Upon the filing of a petition by or against Tenant under the United States Bankruptcy Code, Tenant, as debtor in possession, and any trustee who may be appointed agree to: (a) Perform each and every obligation of Tenant under this Lease until such time as this Lease is either rejected or assumed by order of the United States Bankruptcy Court; (b) Pay Rent in the manner and at the time provided hereunder as reasonable compensation for use and occupancy of the Premises; (c) Reject or assume this Lease within sixty (60) days of the filing of such petition under Chapter 7 of the Bankruptcy Code or within one hundred twenty (120) days (or such shorter term as Landlord, in its sole discretion, may deem reasonable so long as notice of such period is given) of the filing of a petition under any other Chapter; (d) Give Landlord at least forty-five (45) days prior written notice of any abandonment of the Premises; any such abandonment to be deemed a rejection of this Lease; and (e) Do all other things of benefit to Landlord otherwise required under the Bankruptcy Code. Tenant, as debtor in possession, and any such trustee shall be deemed to have rejected this Lease in the event of the failure to comply with any of the above requirements and to have consented to the entry of an order by an appropriate Bankruptcy Court providing all of the above, waiving all rights to notice of the entry of such order. 15.2 Measure of Damages. In the event of the termination of this Lease pursuant to Section 15.1, Landlord shall be entitled to the same rights and remedies as those set forth in Sections 16.3 and 16.5 and in Article 18 of this Lease. 15.3 Provision of Services and Assumption of Lease. In the event of the occurrence of any of those events specified in -35- Section 15.1, if Landlord shall not choose to exercise, or by law shall not be able to exercise, its rights hereunder to terminate this Lease upon the occurrence of such events, then, in addition to any other rights of Landlord hereunder or by law, (a) Landlord shall not be obligated to provide Tenant with any of the services specified in Article 12, unless Landlord has received compensation in advance for such services, and the parties agree that Landlord's estimate of the compensation required with respect to such services shall control, and (b) neither Tenant, as debtor-in-possession, nor any trustee or other person (hereinafter collectively called the "Assuming Tenant") shall be entitled to assume this Lease unless, on or before the date of such assumption, the Assuming Tenant (i) cures, or provides adequate assurance that the latter will promptly cure, any existing default under this Lease, (ii) compensates, or provides adequate assurance that the Assuming Tenant will promptly compensate, Landlord for any pecuniary loss (including, without limitation, attorneys' fees and disbursements) resulting from such default, and (iii) provides adequate assurance of future performance under this Lease, it being covenanted and agreed by the parties that, for such purposes, any cure or compensation shall be effected by the immediate payment of any monetary default or any required compensation, or the immediate correction or bonding of any nonmonetary default; any "adequate assurance" of such cure or compensation shall be effected by the establishment of an escrow fund for the amount at issue or by bonding and "adequate assurance" of future performance shall be effected by the establishment of an escrow fund for the amount at issue or by bonding, it being covenanted and agreed by Landlord and Tenant that the foregoing provision is a material part of the consideration for this Lease. ARTICLE 16 DEFAULT/REMEDIES 16.1 Events of Default. At Landlord's option, it shall be deemed a breach of this Lease if; (a) Tenant defaults in the making of any payments of money pursuant to this Lease when due and shall fail, for a period of three (3) days after written notice from Landlord specifying such default, to cure said default. Any such notice shall, in the sole discretion of Landlord, constitute notice of unlawful detainer pursuant to California Code of Civil Procedure section 1161; or (b) omitted; or (c) Tenant shall default in the performance of any obligation required to be performed by Tenant under this Lease (other than the matters specified in subsections (a), (b), (d), (e) and (f) of this Section 16.1) and shall fail, for a period of ten -36- (10) days after written notice from Landlord specifying such default, to cure said default (which cure shall include compensation for any damages suffered and costs incurred, including attorneys' fees, by Landlord due to such default and prior to such cure), unless such default cannot be cured within said ten (10) days, in which case, it shall be deemed a breach of this Lease if Tenant either (i) fails to commence to cure the applicable default within such ten (10) day period, (ii) fails to thereafter use due diligence to cure the applicable default within such period of time as may be reasonably necessary, or (iii) fails to cure the applicable default within sixty (60) days following written notice from Landlord specifying such default. Any such notice shall, in the sole discretion of Landlord, constitute notice of unlawful detainer pursuant to California Code of Civil Procedure section 1161; or (d) omitted; or (e) Any execution or attachment shall be issued against Tenant or any of Tenant's property which has a material adverse affect on Tenant's creditworthiness and which is not released or bonded, to the sole satisfaction of Landlord, within thirty (30) days following the levying of such execution or attachment; or 16.2 Termination of the Right to Possession. In the event that Landlord elects, pursuant to Section 16.1, to declare a breach of this Lease, then Landlord shall have the right to give Tenant three (3) days' notice of its intention to terminate this Lease and Tenant's right to possession of the Premises and thereupon, at the expiration of said three (3) day period (or the expiration of the periods described in Sections 16.1(a) and (c) above if Landlord elects that the notice given pursuant thereto shall constitute notice of unlawful detainer pursuant to California Code of Civil Procedure section 1161), the Term of this Lease shall expire as fully and completely as if that day were the day herein definitely fixed for the expiration of the Term hereof and Tenant shall then vacate and deliver possession of the Premises to Landlord, but Tenant shall remain liable as hereinafter provided. If Tenant fails to so vacate and deliver the Premises as aforesaid, Landlord shall have the right, subject to applicable law, without notice, to re-enter the Premises and dispossess Tenant and the legal representatives of Tenant and all other occupants of the Premises by unlawful detainer or other summary proceedings, or otherwise, and remove their effects and regain possession of the Premises (but Landlord shall not be obligated to effect such removal) and Tenant hereby waives service of notice of intention to re-enter or to institute legal proceedings to that end. -37- 16.3 Rights Upon Termination. In the event of termination of this Lease or termination of Tenant's right to possession (as a result of Tenant's breach of this Lease or pursuant to Article 15) , Landlord shall have: (a) The right to remove any and all persons and property from the Premises, in accordance with applicable law, but Landlord shall not be obligated to effect such removal. Said property may, at Landlord's option, be stored or otherwise dealt with as provided within this Lease or as applicable law may then provide or permit, including, but not limited to, the right of Landlord to sell or otherwise dispose of the same or to store the same, or any part thereof, in a warehouse or elsewhere at the expense and risk of and for the account of Tenant. (b) The rights and remedies provided by California civil code Section 1951.2 to recover from Tenant upon termination of the Lease: (i) the worth at the time of award of the unpaid Rent and other charges which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid Rent and other charges which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (iii) subject to Subdivision (c) of the California Civil Code Section 1951.2, the worth at the time of award of the amount by which the unpaid Rent and other charges for the balance of the Term after the time of award exceeds the amount of rental loss that Tenant proves could be reasonably avoided; and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom. The "worth" at the time of award of the amounts referred to in clauses (i) and (ii) of this Section 16.3(b) shall be computed by allowing interest at the Default Rate. The worth at the time of the award of the amount referred to in clause (iii) of this Section 16.3(b) shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus 1%. (c) The rights and remedies provided by California Civil Code Section 1951.4, which allows Landlord to continue this Lease in effect and to enforce all of its rights and remedies under -38- this Lease, including the right to recover Rent and additional charges as they become due, for as long as Landlord does not terminate Tenant's right to possession; (d) The right to enforce, to the extent permitted by the laws of the state of California then in force and effect, any other rights or remedies set forth in this Lease or otherwise applicable hereto by operation of law or contract. 16.4 Continuance of Lease. In the event of any breach of this Lease by Tenant (and regardless of whether or not Tenant has abandoned the Premises), this Lease shall not terminate unless Landlord, at Landlord's option, elects at any time when Tenant is in breach of this Lease to terminate Tenant's right to possession as provided in Section 16.2 of this Article 16 or, at Landlord's further option, by the giving of any notice (including, but not limited to, any notice preliminary or prerequisite to the bringing of legal proceedings in unlawful detainer) terminates Tenant's right to possession. For so long as this Lease continues in effect, Landlord may enforce all of Landlord's rights and remedies under this Lease, including the right to recover all Rent as it becomes due hereunder. For the purpose of this Section 16.4, the following shall not constitute termination of Tenant's right to possession: (i) acts of maintenance or preservation or efforts to relet the Premises, or (ii) the appointment of a receiver upon initiative of Landlord to protect Landlord's interest under this Lease. 16.5 Other Remedies. In the event of a breach or threatened breach by Tenant of any of the terms, covenants, conditions, provisions or agreements of this Lease, Landlord shall additionally have the right of injunction and Tenant agrees to pay the premium for any bond required in connection with such injunction. Provision in this Lease of any particular remedy shall not preclude Landlord from any other remedy, at law or in equity. 16.6 Waiver of Rights of Redemption. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future law in the event of Tenant being evicted or dispossessed for any cause, or in the event of Landlord obtaining possession of the Premises, by reason of the violation by Tenant of any of the terms, covenants, conditions, provisions or agreements of this Lease, or otherwise. ARTICLE 17 LANDLORD'S RIGHT TO PERFORM If Tenant shall default in the performance of any obligation on Tenant's part to be performed under this Lease, after applicable -39- notice and cure periods, if any are provided for under this Lease, Landlord may immediately, or at any time thereafter, without notice, perform the same for the account of Tenant. If Landlord at any time is compelled to pay or elects to pay any sum of money or do any act which will require the payment of any sum of money (including, but not limited to, employment of attorneys or incurring of costs) by reason of the failure of Tenant to comply with any term, covenant, condition, provision or agreement hereof, the sum or sums so paid or incurred by Landlord with interest at the Default Rate shall be due from Tenant to Landlord promptly upon demand by Landlord, as additional rent. ARTICLE 18 END OF TERM 18.1 Condition of Premises. Upon the expiration or other termination of the Term, Tenant shall quit and surrender the Premises to Landlord, broom clean, in as good order, condition and repair as it now is or may hereafter be placed, ordinary wear excepted. Tenant shall remove all property of Tenant, as directed by Landlord. In addition, at Landlord's option, Landlord may require Tenant to remove any improvements installed after the commencement Date on Tenant's behalf in the Premises. If Tenant shall remove any such property or improvements permitted or required to be removed from the Premises, Tenant shall repair or, at Landlord's option, shall pay to Landlord the cost of repairing, any damage arising from such removal. Any property left on the Premises at the expiration or other termination of this Lease, or after the happening of any of the events of default set forth in Article 16, may, at the option of Landlord, either be deemed abandoned or be placed in storage at a public warehouse in the name of and for the account of and at expense and risk of Tenant or otherwise disposed of by Landlord in the manner provided by law. Tenant expressly releases Landlord of and from any and all claims and liability for damage to or destruction or loss of property left by Tenant upon the Premises at the expiration or other termination of the Lease and Tenant hereby indemnifies Landlord against any and all claims and liability with respect thereto. 18.2 Holding Over. If Tenant holds over after the Term such tenancy shall be from month to month only and shall not be a renewal hereof, and Tenant shall pay as Monthly Installments (a) during the first thirty (30) days of such holdover an amount agreed to be one and one-half (1 1/2) the Monthly Installment of the last month of the Term and all the other charges at one and one-half (1 1/2) times the rate as herein provided and (b) during the next sixty (60) days, an amount agreed to be two (2) times the Monthly Installment of the last month of the Term and all the other charges at two (2) times the rate as herein provided. Tenant shall also -40- comply with all of the terms, covenants, conditions, provisions and agreements of this Lease for the time during which Tenant holds over. If, without the express written consent of Landlord, Tenant shall fail to vacate the Premises within ninety (90) days of the expiration of the Term or sooner termination of this Lease for any cause or after Tenant's right to occupy the Premises ceases, thereafter, and notwithstanding anything to the contrary contained elsewhere in this Lease, Tenant shall be liable to Landlord for the use and occupancy of the Premises in an amount agreed to be three (3) times the Monthly Installment of the last month of the Term for each month Tenant holds over, and three (3) times all the other charges as provided in this Lease for the last month of the Term. If the Premises are not surrendered at the end of the Term or of a permitted hold over period, Tenant shall be additionally responsible to Landlord for all damage (including but not limited to the loss of Rent) which Landlord shall suffer by reason thereof, and Tenant hereby indemnifies Landlord against all claims made by any succeeding tenant against Landlord, resulting from delay by Landlord in delivering possession of the Premises to such succeeding Tenant. Tenant's obligation to observe or perform all of the terms, covenants, conditions, provisions and agreements of this Article shall survive termination of this Lease. 18.3 Conditions of Termination. In the event that this Lease terminates for any reason prior to the Expiration Date (including but not limited to termination by Landlord), such termination will terminate any and all agreements for the extension of this Lease (whether expressed in an option, exercised or not, or in a collateral document or otherwise). Any right herein contained on the part of Landlord to terminate this Lease shall continue during any extension hereof. Any option on the part of Tenant herein contained for an extension hereof shall not be deemed to give Tenant any option for a further extension beyond the first extended term. No act or thing done by Landlord or Landlord's agents during the Term shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept such surrender shall be valid unless in writing signed by Landlord. No employee of Landlord or Landlord's agents shall have any power to accept the keys to the Premises prior to the termination of this Lease. ARTICLE 19 QUIET POSSESSION Landlord covenants and agrees with Tenant that upon Tenant's paying Base Annual Rent and all other charges and observing and performing all the terms, covenants, conditions, provisions and agreements of this Lease on Tenant's part to be observed or performed, Tenant shall have quiet possession of the Premises for the Term, subject, however, to the terms of this Lease and of any -41- ground leases, underlying leases, mortgages and deeds of trust affecting all or any portion of the Project or any of the areas used in connection with the operation of the Project. ARTICLE 20 ALES AND REGULATIONS Tenant and Tenant's agents, employees, contractors, visitors and licensees shall observe faithfully and comply strictly with the Rules and Regulations attached hereto as Exhibit C and made a part hereof, and such other and further reasonable Rules and Regulations as Landlord or Landlord's agents may from time to time adopt, subject to Section 1.2.2. Any addition or change in the Rules and Regulations shall become effective within thirty (30) days after notice thereof given by Landlord. Landlord shall not be liable to Tenant or any other party for violation of any said Rules and Regulations, or the breach of any term, covenant, condition, provision or agreement in any lease, by any other tenant or other party in the Project. Subject to Section 1.2.2, the failure of Landlord to enforce any of the Rules and Regulations attached to this Lease, or hereafter adopted, against Tenant or any other tenant in the Project shall not be deemed a waiver of any such Rule and Regulation. ARTICLE 21 LANDLORD'S DEFAULT/LIABILITY 21.1 Notice/Right to Cure. Landlord shall not be deemed to be in default in the performance of any obligation required to be performed by it hereunder unless and until it has failed to perform such obligation within thirty (30) days after written notice by Tenant to Landlord specifying the nature of Landlord's failure to perform such obligation; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed to be in default if it shall commence such performance within such thirty (30) day period and thereafter shall diligently prosecute the same to completion. All rights to cure provided to Landlord under this Section 21.1 shall also be accorded to any mortgagee, ground lessor or beneficiary under a deed of trust encumbering the Project. 21.2 Force Majeure. This Lease and the obligation of Tenant to keep, observe and perform all of the terms, covenants, conditions, provisions and agreements of this Lease on the part of Tenant to be kept, observed or performed shall in no way be affected, impaired or excused because Landlord is unable to fulfill any of its obligations under this Lease, or is delayed or curtailed -42- in any way from doing so, by reason of any cause beyond Landlord's reasonable control, including, but not limited to, acts of God, strike or labor troubles, fuel or energy shortages, governmental preemption or curtailment in connection with a national emergency or in connection with any rule, order, guideline or regulation of any department or governmental agency or by reason of the conditions of supply and demand which have been or are affected by a war or other emergency. Any such prevention, delay or curtailment shall be deemed excused and Landlord shall not be subject to any liability resulting therefrom. Tenant waives and releases its right to terminate this Lease under Section 1932(1) of the California Civil Code or under any similar law or statute now or hereafter in effect. 21.3 Limitation of Landlord's Liability. Tenant agrees to look only to the equity of Landlord in the Project and not to Landlord personally with respect to any obligations or payments due or which may become due from Landlord hereunder, and no other property or assets of Landlord or any partner, joint venturer, officer, director, shareholder, agent, or employee of Landlord, disclosed or undisclosed, shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's claims under or with respect to this Lease, and no partner, officer, director, agent or employee of Landlord shall be personally liable in any manner or to any extent under or in connection with this Lease. If at any time the holder of Landlord's interests hereunder is a partnership or joint venture, a deficit in the capital account of any partner or joint venturer shall not be considered an asset of such partnership or joint venture. 21.4 Sale by Landlord. In the event of a sale or conveyance of Landlord's interest in the Project, Landlord shall thereafter be released from any further liability for any of the terms, covenants or conditions (express or implied) herein contained in favor of Tenant; and Tenant agrees thereafter to look solely to the successor in interest of Landlord for the performance of any of Landlord's obligations hereunder. This Lease and Tenant's rights hereunder shall not be affected by any such sale or conveyance, and Tenant agrees to attorn to the successor in interest of such transferror. ARTICLE 22 NOTICES Except as otherwise in this Lease provided, a bill, statement, consent, notice or communication which Landlord may desire or be required to give to Tenant shall be deemed sufficiently given or rendered if in writing, dispatched by private air courier, or mailed by registered, certified or express United States mail -43- addressed to Tenant at the address set forth in Paragraph K of the Summary of Lease Terms. The time of the rendition of such bill or statement and of the giving of such consent, notice or communication shall be deemed to be: one hundred twenty (120) hours after the time when the same is mailed (if the notice is mailed via the United States Postal Service), twenty-four (24) hours after the time when the same is dispatched by private air courier (if the notice is so dispatched), as herein provided. Any notice, request, demand or communication by Tenant to Landlord must be in writing and sent by registered, certified or express United States mail (postage fully prepaid), addressed to Landlord, at the address set forth in Paragraph K of the Summary of Lease Terms or at such other address as Landlord shall designate by notice given as herein provided, and the time of the giving of such notice, request, demand or communication shall be deemed to be one hundred twenty (120) hours after the time when the same is mailed. If Tenant is notified of the identity and address of Landlord's mortgagee or beneficiary under a deed or trust, or ground or underlying lessor, Tenant shall give such party notice of any default by Landlord hereunder by registered, certified or express United States mail and such party shall have a reasonable opportunity to cure such default before Tenant's exercising any remedy available to it. ARTICLE 23 SECURITY DEPOSIT Tenant has deposited with Landlord the sum specified in Paragraph M of the Summary of Lease Terms (the "Security Deposit") as security for the faithful performance and observance by Tenant of all of the terms, covenants, conditions, provisions and agreements of this Lease. Tenant shall not be entitled to interest on the security Deposit and Landlord shall not be obligated to hold the Security Deposit as a separate fund, but may commingle it with other funds. In the event Tenant defaults in respect of any of the terms, covenants, conditions, provisions or agreements of this Lease, including, but not limited to, the payment of Rent or other sums due hereunder, Landlord may use, apply or retain the whole or any part of the Security Deposit to the extent required for the payment of Rent or any other sums as to which Tenant is in default or for any sum which Landlord may expend or may be required to expend by reason of Tenant's default in respect of any of the terms, covenants, conditions, provisions or agreements of this Lease, including, but not limited to, any damages or deficiency in the reletting of the Premises, whether such damages or deficiency accrued before or after summary proceedings or other re-entry by Landlord. Tenant, on demand by Landlord, will forthwith replenish the Security Deposit or any portion thereof so used or applied by Landlord. In the event that Tenant shall fully and faithfully comply with all of the terms, covenants, conditions, provisions and -44- agreements of this Lease, the Security Deposit, without interest, shall be returned to Tenant promptly after the Expiration Date, but only after delivery of possession of the entire Premises to Landlord. In the event of a sale of Project or leasing of the Project, or the sale of such leasehold, or any part thereof incorporating the Premises, Landlord shall have the right to transfer the Security Deposit to the transferee or lessee and Landlord shall thereupon be released by Tenant from all liability for the return of the Security Deposit; and in the event of the transfer of the Security Deposit, Tenant shall look solely to the new landlord for the return thereof; and the provisions hereof shall apply to every transfer or assignment made of the Security Deposit to a new landlord. Tenant shall not assign or encumber or attempt to assign or encumber the Security Deposit and neither Landlord nor its successors or assigns shall be bound to any such assignment, encumbrance nor by any purported transfer thereof by operation of law. In the event of the termination of any ground lease or foreclosure of any fee or leasehold mortgage or deed of trust (or conveyance in lieu thereof) now or hereafter affecting the real property of which the Premises forms a part, Tenant shall look to the new landlord for the return of the Security Deposit only if said security deposit is actually transferred to such new landlord. ARTICLE 24 BROKERAGE Tenant represents and warrants to Landlord that no real estate broker, agent or finder negotiated or was instrumental in negotiating or representing Tenant in the negotiation of this Lease or the consummation hereof except for the brokers identified in the Lease Summary which are the only brokers engaged by Landlord. Landlord shall be responsible for the payment of the commission or fee, if any, owed to the brokers specified in the Summary of Lease Terms. Tenant shall pay the commission or fee of any other broker, agent or finder acting for Tenant or claiming any commissions or fee on the basis of contracts or dealings with Tenant and not disclosed herein by Tenant, and Tenant hereby indemnifies and agrees to protect, defend and hold Landlord harmless from and against any claims made by any such broker, agent or finder of Tenant and any and all costs and damages suffered by Landlord as a consequence thereof, including without limitation attorneys' fees. ARTICLE 25 MISCELLANEOUS 25.1 Captions and construction. The marginal notes and headings are inserted only as a matter of convenience and for -45- reference and in no way define, limit or describe the scope or intent of this Lease nor do they in any way affect this Lease. The language in all parts of this Lease shall be construed according to its normal and usual meaning and not strictly for or against either Landlord or Tenant. All of the terms, conditions, provisions and agreements of the Lease shall be deemed to be covenants as well as conditions. 25.2 Definitions. The term "Landlord" as used in this Lease means only the owner or mortgagee in possession or grantee in possession under a deed of trust, or the owner of a lease of the Project (or part thereof in which the Premises is situated) for the time being. The words "re-enter" and "re-entry" as used in this Lease are not restricted to their technical legal meaning. 25.3 Successors and Assigns. The covenants contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and their respective legal representatives and successors, and, except as otherwise provided in this Lease, their assigns. 25.4 Landlords Approval. The review, approval, inspection or examination by Landlord of any item to be reviewed, approved, inspected or examined by Landlord under the terms of this Lease or the Exhibits attached hereto shall not constitute the assumption of any responsibility by Landlord for either the accuracy or sufficiency of any such item or the quality or suitability of such items for its intended use. Any such review, approval, inspection or examination by Landlord is for the sole purpose of protecting Landlord's interests in the Project and under this Lease, and no third parties, including, without limitation, Tenant or any person or entity claiming through or under Tenant, or the contractors, agents, employees, visitors or licensees of Tenant or any such person or entity, shall have any rights hereunder. 25.5 Joint and Several Liability. If a partnership or more than one legal person at any time constitutes Tenant, (1) each partner and each legal person is jointly and severally liable for the keeping, observing and performing of all of the terms, covenants, conditions, provisions and agreements of this Lease to be kept, observed or performed by Tenant, and (2) the term "Tenant" as used in this Lease shall mean and include each such partner or legal person jointly and severally and the act of or notice from or notice or refund to, or the signature of, any one or more of them, with respect to this Lease, including but not limited to any renewal, extension, expiration, termination or modification of this Lease, shall be binding upon each and all of the persons executing this Lease as Tenant with the same force and effect as if each and all of them had so acted or so given or received such notice or refund or so signed. -46- 25.6 Governing Law. This Lease shall be governed by and construed in accordance with California law. 25.7 Severability. In the event any term, covenant, condition, provision or agreement herein contained is held to be invalid or void by any court of competent jurisdiction, the invalidity of any such term, covenant, condition, provision or agreement shall in no way affect any other term, covenant, condition, provision or agreement herein contained, unless the elimination of such term materially affects the fundamental rights and benefits of either party to this Lease. 25.8 Security Systems. Landlord shall not be obligated to provide or maintain any security patrol or security system above and beyond that which is being provided by Landlord as of the date of this Lease. However, if Landlord elects to provide such additional patrol or system, the cost thereof shall be included in Operating Costs as defined in Section 3.4.1. Landlord shall not be responsible for the quality of any such patrol or system which may be provided hereunder or for damage or injury to Tenant, its employees, invitees or others due to the failure, action or inaction of such patrol or system. 25.9 Time of the Essence. Time is of the essence with respect to the performance of each and every provision of this Lease to be performed by Tenant and Landlord. 25.10 Recordation. Neither this Lease, nor any notice nor memorandum regarding the terms hereof, shall be recorded by Tenant. Any such unauthorized recording shall give Landlord the right to declare a breach of this Lease and pursue the remedies provided herein. Tenant agrees to execute and acknowledge, at the request of Landlord, a memorandum of this Lease, in recordable form. 25.11 Change of Name. If the name of Tenant or any successor or assign shall be changed during the term of this Lease, such party shall promptly notify Landlord thereof, which notice shall be accompanied by a certified copy of the document effecting such change of name. 25.12 Estoppel Certificate. Tenant shall at any time and from time to time upon not less than twenty (20) days' prior notice from Landlord, execute, acknowledge and deliver to Landlord a statement in writing certifying to those facts for which such estoppel certificate has been requested by Landlord or any current or prospective purchaser, mortgagee (or beneficiary under a deed of trust), ground lessor or underlying lessor, including without limitation (a) that this Lease is unmodified and in full force and effect (or, if modified, adequately identifying such modification and certifying that this Lease, as so modified, is in full force -47- and effect) and (b) the dates to which the Base Annual Rent, additional payments and other charges are paid, (c) whether or not there is any default by Landlord or Tenant in the performance of any term, covenant, condition, provision or agreement contained in this Lease and (d) whether or not there are any setoffs, defenses or counterclaims against enforcement of the obligations to be performed under this Lease and, if there are, specifying each such default, setoff, defense or counterclaim. Any such statement may be conclusively relied upon by any prospective purchaser or lessee, encumbrancer or ground lessor of the Premises or of all or any portion of the Project. Tenant's failure to deliver such statement within such time shall be deemed a material default by Tenant under the Lease. 25.13 Tenant's Authority. If Tenant signs as a corporation or partnership, each of the persons executing this Lease on behalf of Tenant does hereby covenant and warrant that Tenant is a duly organized and existing entity, that Tenant has and is qualified to do business in California, that Tenant has full right and authority to enter into this Lease, and that each and every person signing on behalf of Tenant is authorized to do so. Upon Landlord's request, Tenant shall provide Landlord with evidence satisfactory to Landlord confirming the foregoing covenants and warranties. 25.14 attorneys' Fees. In the event that either Landlord or Tenant fails to perform any of its obligations under this Lease or in the event a dispute arises concerning the meaning or interpretation of any provision of this Lease, the basis of the dispute shall be settled by judicial proceedings and the defaulting party or the party not prevailing in such dispute, as the case may be, shall pay all costs and expenses incurred by the other party in enforcing or establishing its rights hereunder, including without limitation, court costs and attorneys' fees. 25.15 Waiver Of Trial By Jury. The respective parties hereto hereby waive trial by jury in any action, proceeding or counter-claim brought by either of the parties hereto against the other on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises, or any claim of injury or damage, or the enforcement of any remedy under any statute, emergency or otherwise. The parties hereto agree that the venue of any such action, proceeding or counter-claim shall be the county in which the Project is located. 25.16 No Waiver. The failure of Landlord to seek redress for violation of, or to insist upon the strict performance of any term, covenant, condition, provision or agreement of this Lease, or any of the Rules and Regulations attached to this Lease or hereafter adopted by Landlord, shall not prevent a subsequent act, which -48- would have originally constituted a violation, from having all the force and effect of any original violation. No provision of this Lease shall be deemed to have been waived by Landlord, unless such waiver be in writing signed by Landlord. The acceptance by Landlord of Rent with knowledge of the breach of any term, covenant, condition, provision or agreement of this Lease shall not be deemed a waiver of such breach. No payment by Tenant or receipt by Landlord of a lesser amount than the Monthly Installment shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Rent or pursue any other remedy provided in this Lease. 25.17 Modifications in Writing. Any agreement hereafter made shall be ineffective to change, modify, waive or discharge any provision of this Lease in whole or in part unless such agreement is in writing and signed by the party against whom enforcement of the change, modification, waiver or discharge is sought. 25.18 Complete Agreement. There are no oral agreements between Landlord and Tenant affecting this Lease, and this Lease supersedes and cancels any and all prior negotiations, arrangements, correspondence, communications, brochures, agreements and understandings, if any, whether oral or written, between Landlord and Tenant or displayed by Landlord to Tenant with respect to the subject matter of this Lease. There are no representations between Landlord and Tenant other than those contained in this Lease and all reliance with respect to any representations is based solely upon the terms of this Lease. 25.19 Survival. The obligations of Tenant under this Lease to indemnify, protect, defend and hold harmless, including, without limitation, the obligations set forth in Articles 9 and 24, shall survive the expiration or sooner termination of this Lease. 25.20 Binding Effect. Submission of this instrument for examination or signature by Tenant does not constitute an offer to lease, or a reservation of or option for a lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant. 25.21 Exhibits and Riders. This Lease consists of pages 1 through 49 , inclusive, together with a Summary of Lease Terms, Exhibits A through G and Riders One, Two and Three, all of which are made a part hereof as though fully set forth herein. IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this Lease on the day and year first above written. -49- LANDLORD: TENANT: METROPOLITAN LIFE INSURANCE COMPANY FEDERAL INSURANCE COMPANY a New York corporation, an Indiana corporation BY [SIGNATURE ILLEGIBLE] BY [SIGNATURE ILLEGIBLE] Its ASSISTANT VICE PRESIDENT Its VICE PRESIDENT -50- [MAP] [MAP] METRO PLAZA OFFICE LEASE EXHIBIT B WORK LETTER AND CONSTRUCTION AGREEMENT (Allowance) This agreement supplements the Lease dated November 18, 1992 executed concurrently herewith by METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation, as Landlord, and FEDERAL INSURANCE COMPANY, an Indiana corporation, as Tenant. 1. Tenant shall devote such time as may be necessary to enable Landlord to complete the final layout plans and specifications for the Premises ("Construction Drawings") and obtain by November 1, 1992: a) Tenant's written approval, and approval by appropriate government authorities of the Construction Drawings, and b) approval by Tenant of the cost thereof. The Construction Drawings shall include among other things, the location of all partitions, doors, light fixtures, electrical outlets, telephone outlets and other standard or special installations required by Tenant, as well as wall finishes and floor coverings. The Construction Drawings, as they may be modified as provided herein, shall be prepared by Landlord in accordance with the design specified by Tenant and reasonably approved by Landlord. Tenant shall be responsible for the suitability for the Tenant's needs and business of the design and function of all Tenant Improvements. All real property improvements to be constructed by Landlord as shown on the Construction Drawings, standard or special, shall be defined as "Tenant Improvements." 2 Landlord shall complete the construction of the Tenant Improvements in a good and workmanlike manner up to a maximum cost to Landlord of Seven Hundred Eighty Eight Thousand Five Hundred Fifteen Dollars ($788,515) (Landlord's Maximum Contribution). The cost of the Tenant Improvements ("Tenant Improvement Costs") to be paid by Landlord from said allowance shall include: (a) The costs of preliminary space planning (including one revision) and final architectural and engineering plans and specifications (Construction Drawings) for the Tenant Improvements, and engineering costs associated with completion of the State of California energy utilization calculations under Title 24 legislation; -1- (b) All costs of obtaining building permits and other necessary authorizations from the City of San Jose and State of California; (c) All costs of interior design and finish schedule plans and specifications including as-built drawings; (d) All direct and indirect costs of procuring and installing Tenant Improvements in the premises, including the construction fee for overhead and profit but not to exceed five (5) percent of the cost of the work and the cost of all on-site supervisory and administrative staff, office, equipment and temporary services rendered by Landlord's contractor in connection with construction of the Tenant Improvements; (e) All fees payable to Landlord's architectural and engineering firm if it is required by Tenant to redesign any portion of the Tenant Improvements following Tenant's approval of the Construction Drawings; (f) All costs of Tenant's architect for space planning, interior design, construction observation and project management not to exceed a total of eighty four thousand five hundred dollars ( $84,500); and . (g) If and to the extent available after payment of all items set forth in (a) through (f) above, an amount not to exceed Sixteen thousand Eight hundred Ninety-seven dollars ($16,897) for Tenant's moving expenses. In no event shall the Tenant Improvement Costs include any costs of procuring or installing in the Premises any trade fixtures, equipment, furniture, furnishings, telephone equipment or other personal property ("Personal Property") to be used in the Premises by Tenant, and the cost of such Personal Property shall be paid by Tenant. 3. Promptly upon completion of the Construction Drawings (including revisions), Landlord shall notify Tenant in writing of the costs to Tenant for quantities in excess of Landlord's Maximum Contribution. Tenant shall, by signing the Construction Drawings within the time set forth in Paragraph 1 above, give Landlord authorization to complete the Tenant Improvements in accordance with such Construction Drawings and plans, and accompany said authorization with a check made out to Landlord in the amount of the authorized excess cost of the Tenant Improvements over Landlord's Maximum Contribution. Tenant may in such authorization delete any or all of such items of extra costs. If such written authorization and check are not received by Landlord, Landlord shall not be obligated to commence work on the Premises, and Tenant -2- shall be chargeable with any delay in the completion of the Premises. 4. If Tenant shall request any change, addition or alteration in the approved Construction Drawings, Landlord shall promptly give Tenant a written estimate of (a) the cost of engineering and design services to prepare a change order (the "Change Order") in accordance with such request, (b) the cost of work to be performed pursuant to such Change Order, and (c) the time delay expected because of such requested Change Order. Within three (3) business days following Tenant's receipt of the foregoing written estimate, Tenant shall notify Landlord in writing whether it approves such written estimate. If Tenant approves such written estimate and if such cost is in excess of Landlord's Maximum Contribution, Tenant shall accompany such approval with a good check made payable by Landlord in the amount of the estimated cost of preparing the Change order and performing the work thereto, and the foregoing shall constitute Landlord's authorization to proceed. If such written authorization, and check if required, are not received by Landlord within such three (3) business day period, Landlord shall not be obligated to prepare the Change Order or perform any work in connection therewith. Upon completion of the work of the Change order and submission of the final cost thereof by Landlord to Tenant, Tenant shall promptly pay to Landlord any such additional amounts in excess of Landlord's Maximum Contribution. 5. If the completion of the Tenant Improvements in the Premises is delayed so that the Commencement Date occurs after April 1, 1993, (i) at the request of Tenant, (ii) by Tenant's failure to comply with the foregoing provisions, (iii) by changes in the work ordered by Tenant or by extra work ordered by Tenant, or (iv) because Tenant chooses to have additional work performed by Landlord, then Tenant shall be responsible for all costs and any expenses occasioned by such delay including, without limitation, any costs and. expenses attributable to increases in labor or materials; and there shall be no delay in the commencement of Tenant's obligation to pay Rent because of Landlord's failure to complete the Tenant Improvements on time. 6. Tenant may, with Landlord's written consent which will not be unreasonably withheld, enter the Premises prior to the Commencement Date solely for the purpose of installing Tenant's Personal Property and equipment as long as such entry will not interfere with the orderly construction and completion of the Premises. Such entry for such limited purpose shall not be deemed an acceptance of the Premises and Tenant shall not be required to commence payment of Rent prior to the Commencement Date. Tenant shall notify Landlord of its desired time(s) of entry and shall submit for Landlord's approval the scope of the work to be -3- EXHIBIT B LEASED SPACE [MAP] [MAP] METRO PLAZA OFFICE LEASE EXHIBIT D CONFIRMATION OF LEASE TERM THIS MEMORANDUM is made on_______ , 19_, between METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation ("Landlord"), and __________________, a __________________ ("Tenant"), who entered into a lease dated for reference purposes as of _______ 19_, covering certain premises located at Metro Plaza, San Jose, California, which premises are commonly known as ______________ Metro Drive, Suite___________ , San Jose, California. All capitalized terms, if not defined herein, shall be defined as they are defined in the Lease. 1. The parties to this Memorandum hereby agree that the date of ____________, 19___ is the "Commencement Date" of the Term. 2. Tenant hereby confirms the following: (a) That it has accepted possession of the Premises pursuant to the terms of the Lease; (b) That the improvements required to be furnished according to the Lease by Landlord have been Substantially Completed; (c) That Landlord has fulfilled all of its duties of an inducement nature; (d) That the Lease has not been modified, altered or amended, except as follows: - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ (e) That there are no offsets or credits against rentals, nor has any security deposit been paid except as provided by the Lease Terms; -1- (f) That the total cost of the Tenant Improvements was $___________. Landlord contributed $___________ to such improvements which sum has been paid; and (g) That the Lease is in full force and effect. 3. This Memorandum, each and all of the provisions hereof, shall inure to the benefit, or bind, as the case may require, the parties hereto, and their respective heirs, successors, and assigns subject to the restrictions upon assignment and subletting contained in the Lease. LANDLORD: TENANT: [INSERT SIGNATURE BLOCK] -2- METRO PLAZA OFFICE LEASE EXHIBIT E PROJECT DESCRIPTION The three (3) building complex, including connecting arcades, with an associated parking structure and the common Areas, currently known as Metro Plaza and located on Metro Drive between North First Street and Technology Drive in San Jose, California, which location is more particularly described as follows: All of Parcel 5 as shown upon that certain map entitled "Parcel Map Being Parcel 'A' of parcel map 389 M 56," which map was filed for record in the office of the recorder of the County of Santa Clara, State of California, on December 29, 1977 in Book 410 of Maps, Page 17. Assessor's Parcel Number: 230-29-084. -1- EXHIBIT F SIGNAGE You will be provided for completion a form for your building signage. An artwork sample of the building standard will be provided to you. Building standard type set cost is as follows: 1. Tenant Suite Signage $846.00 per sign (incl. cost for 13 letters) $ 10.00 per additional letter (Office Tenant Only) Maximum 14 letters per line Maximum 3 lines per sign 2. Elevator Lobby Floor Directory Signage: $194.00 per strip* (Office Tenants Only) Maximum 45 letters per line *Cost to be adjusted to actual floor occupancy. 3. First Floor Retail Signage: $468.00/sign set-up (Retail Tenants only) (incl. diffuser set-up, painting, touch-up, artwork, layout installation and labor charge) $ 78.50 per letter Maximum 35 letters per line Cost for custom type-set (i.e., other than Building Standard) will be on a case by case review quote basis. Custom type-set is available on tenant suite signage only. If you decide on custom type-set you will be required to provide us with camera ready artwork in the form or a clean acetate with a positive black image or a black and white P.M.T. with a positive black image. Delivery time from our receipt of your order is 2-1/2 weeks for building standard type-set signage and 4-1/2 weeks for custom order type-set signage. -1- RECORDING REQUESTED BY AND WHEN RECORDED RETURN TO: SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT NOTICE: THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT RESULTS IN YOUR LEASEHOLD ESTATE IN THE PROPERTY BECOMING SUBJECT TO AND OF LOWER PRIORITY THAN THE LIEN OF SOME OTHER OR LATER SECURITY INSTRUMENT. THIS AGREEMENT is entered into by and among Tenant, Landlord, and Beneficiary and affects the Property described in Exhibit A attached hereto. The terms "Tenant", "Landlord", "Beneficiary", "Premises", "Lease", "Property", "Loan", "Note", and "Mortgage" are defined in the Schedule of Definitions attached hereto as Exhibit B. This Agreement entered into with reference to the following facts: A. Landlord and Tenant have entered into the Lease covering the Premises in the Property. B. Beneficiary has agreed to make the Loan to Landlord to be evidenced by the Note, which Note is to be secured by the Mortgage covering the Property, provided that the Lease is subordinated to the lien of the Mortgage. C. For the purposes of completing the Loan, the parties hereto desire expressly to subordinate the Lease to the Lien of the Mortgage, it being a condition precedent to Beneficiary's obligation to consummate the Loan that the lien of the Mortgage be unconditionally and at all times prior and superior to the leasehold interests and estates created by the Lease. D. Tenant has requested that Beneficiary agree not to disturb Tenant's possessory rights in the Premises in the event Beneficiary should foreclose the Mortgage; provided that Tenant is not then in default under the Lease after applicable Notice and cure periods, if any and provided further that Tenant attorns to Beneficiary or the purchaser at any foreclosure or trustee's sale of the Property. NOW THEREFORE, in consideration of the mutual covenants contained herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Subordination. Notwithstanding anything to the contrary set forth in the Lease and the leasehold estate created thereby and all of Tenant's rights thereunder shall be and shall at all times remain subject, subordinate and inferior to the Mortgage and the lien thereof, and all rights of Beneficiary thereunder and to any and all renewals, modifications, consolidations, replacements and extensions thereof 2. Acknowledgement and Agreement by Tenant. Tenant acknowledges and agrees that: (a) Beneficiary would not make the Loan without this Agreement; (b) It consents to and approves the Mortgage Security agreements evidencing and securing the Loan; and (c) Beneficiary, in making any disbursements to Landlord, is under no obligation or duty to oversee or direct the application of the proceeds of such disbursements, and such proceeds may be used by Landlord for purposes other than improvement of the Property. (d) From and after the date hereof, in the event of any act or omission by Landlord which would give Tenant the right, either immediately or after the lapse of time, to terminate the Lease or to claim a partial or total eviction, Tenant will not exercise any such right: (i) until it has given written notice of such act or omission to Beneficiary; and (ii) until the same period of time as is given to Landlord under the Lease to cure such act or omission shall have elapsed following such giving of notice to Beneficiary and following the time when Beneficiary shall have become entitled under the Mortgage to remedy the same. (e) It has notice that the Lease and the rent and all other sums due thereunder have been assigned or are to be assigned to Beneficiary as security for the Loan secured by the Mortgage. In the event that Beneficiary notifies Tenant of a default under the Mortgage and demands that Tenant pay its rent and all other sums due under the Lease to Beneficiary, Tenant shall honor (and Landlord hereby requests that Tenant honor) such demand and pay its rent and all other sums due under the Lease directly to Beneficiary or as otherwise required pursuant to such notice. (f) It shall send a copy of any notice or statement under the Lease to Beneficiary at the same time such notice or statement is sent to Landlord. (g) It has no right or option of any nature whatsoever, whether pursuant to the Lease or otherwise, to purchase the Premises or the Property, or any portion thereof or any interest therein, and to the extent that Tenant has had, or hereafter acquires, any such right or option, the same is hereby acknowledged to be subject and subordinate to the Mortgage and is hereby waived and released as against Beneficiary. (h) This Agreement satisfies any condition or requirement in the Lease relating to the granting of a non-disturbance agreement. 3. Foreclosure and Sale. In the event of foreclosure of the Mortgage, or upon a sale of the Property pursuant to the trustee's power of sale contained therein, or upon a transfer of the Property by conveyance in lieu of foreclosure, then: (a) Non-Disturbance. So long as Tenant complies with this Agreement and is not in default after applicable Notice and cure periods, if any, under any of the terms, covenants, or conditions of the Lease, the Lease shall continue in full force and effect as a direct lease between the succeeding owner of the Property and Tenant, upon and subject to all of the terms, covenants and conditions of the Lease, except as set forth in Exhibits C and D attached hereto, for the balance of the term of the Lease. Tenant hereby agrees to adhere to and accept any such successor owner as landlord under the Lease, and to be bound by and perform all of the obligations imposed by the Lease, and Beneficiary, or any such successor owner of the Property, will not disturb the possession of Tenant, and will be bound by all of the obligations imposed on the Landlord by the Lease, except as set forth in Exhibits C and D attached hereto; provided, however, that Beneficiary, or any purchaser at a trustee's or sheriff's sale or any successor owner of the Property shall not be: (i) liable for any act or omission of a prior landlord (including Landlord); or 2 (ii) bound by any deposit amount made by tenant for property to landlord (including Landlord); or (iii) bound by any rent or additional rent which Tenant might have paid in advance to any prior Landlord (including Landlord) for a period in excess of one month or by any security deposit, cleaning deposit or other prepaid charge which Tenant might have paid in advance to any prior landlord (including Landlord); or (iv) bound by any agreement or modification of the Lease made without the written consent of Beneficiary. (b) New Lease. Upon the written request of either Beneficiary or Tenant to the other given at the time of any foreclosure, trustee's sale or conveyance in lieu thereof, the parties agree to execute a lease of the Premises upon the same terms and conditions as the Lease between Landlord and Tenant, with the changes set forth in Exhibits C and D attached hereto, which lease shall cover any unexpired term of the Lease existing prior to such foreclosure, trustee's sale or conveyance in lieu of foreclosure. (d) Beneficiary shall have no responsibility to provide (or liability for not providing) any additional space for which Tenant has any option or right under the Lease unless Beneficiary at its option elects to provide the same and Tenant hereby releases Beneficiary from any obligation it may otherwise have to provide the same, and agrees that Tenant shall have no right to cancel the Lease, abate rent or assert any clam against Beneficiary as a result of the failure to provide any option space. (e) Beneficiary shall have no liability to Tenant or any other party for any conflict between the provisions of the Lease and the provisions of any other lease affecting the Property, including, but not limited to, any provisions relating to renewal options and options to expand, and in the event of such a conflict. Tenant shall have no right to cancel the Lease or take any other remedial action against Beneficiary or action against any other party for which Beneficiary would be liable. 4. Acknowledgement and Agreement by Landlord. Landlord, as landlord under the Lease and mortgagor trustor under the Mortgage, acknowledges and agrees for itself and its heirs, successors and assigns, that: (c) This Agreement does not: (i) constitute a waiver by Beneficiary of any of its rights under the Mortgage: and/or (ii) in any way release Landlord from its obligations to comply with the terms, provisions, conditions, covenants, agreements and clauses of the Mortgage; (b) The provisions of the Mortgage remain in full force and effect and must be complied with by Landlord; and (c) In the event of a default under the Mortgage, Tenant may pay all rent and all other sums due under the lease Beneficiary as provided in this Agreement. 3 5. Provisions by Landlord. Landlord may have no obligation or have any liability with respect to the erection or completion of the improvements in which the Premises are located or for completion of the Premises or any improvements for Tenant's use and occupancy, either at the commencement of the term of the Lease or upon any renewal or extension thereof or upon the addition of additional space, pursuant to any expansion rights contained in the Lease. 6. Notice. All notices hereunder to Beneficiary shall be deemed to have been duly given if mailed by United States registered or certified mail, with return receipt requested, postage prepaid to Beneficiary at its address set forth in Exhibit B attached hereto (or at such other address as shall be given writing by Beneficiary to Tenant) and shall be deemed complete upon any such mailing. 7. Miscellaneous. (a) This Agreement supercedes any inconsistent provision of the Lease. (b) Nothing contained in this Agreement shall be construed to derogate from or in any way impair or affect the lien and charge or provisions of the Mortgage. (c) Beneficiary shall have no obligations nor incur any liability with respect to any warranties of any nature whatsoever, whether pursuant to the Lease or otherwise, including, without limitation, any warranties respecting use, compliance with zoning. Landlord's title Landlord's authority, habitability, fitness for purpose or possession. (d) In the event that Beneficiary shall acquire title to the Premises or the Property, Beneficiary shall have no obligation, nor incur any liability, beyond Beneficiary's then equity interest, if any, in the Premises, and Tenant shall look exclusively to such equity interest of Beneficiary, if any, in the Premises for the payment and discharge of any obligations imposed upon Beneficiary hereunder or under the Lease, and Beneficiary is hereby released and relieved of any other obligations hereunder and under the Lease. (e) This Agreement shall inure to the benefit of the parties hereto, their respective successors and permitted assigns; provided however, that in the event of the assignment or transfer of the interest of Beneficiary, all obligations and liabilities of Beneficiary under this Agreement shall terminate, and thereupon all such obligations and liabilities shall be the responsibility of the party to whom Beneficiary's interest is assigned or transferred; and provided further that the interest of Tenant under this Agreement may not be assigned or transferred without the prior written consent of Beneficiary. (f) This Agreement shall be governed by and construed in accordance with the laws of the State in which the Property is located. 4 IN WITNESS THEREOF, the parties have executed this Attornment Agreement as of ......................., 19 . NOTICE: THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT CONTAINS PROVISIONS WHICH ALLOW THE PERSON OBLIGATED ON THE LEASE TO OBTAIN A LOAN, A PORTION OF WHICH MAY BE EXPENDED FOR OTHER PURPOSES THAN IMPROVEMENT OF THE PROPERTY. IT IS RECOMMENDED THAT, PRIOR TO THE EXECUTION OF THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT, THE PARTIES CONSULT WITH THEIR ATTORNEYS WITH RESPECT THERETO. BENEFICIARY: METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation By__________________________________ TENANT: __________________________________ , a __________________________________ By__________________________________ By__________________________________ LANDLORD: __________________________________ , a __________________________________ By__________________________________ By__________________________________ 5 Legal Description EXHIBIT A Schedule of Definitions "Beneficiary" shall mean Metropolitan Life Insurance Company, a New York corporation. All notices hereunder to Beneficiary shall be mailed to: Metropolitan Life Insurance Company with a copy to: One Madison Avenue New York, New York 10010 Metropolitan Life Insurance Company Attn: Senior Vice President Metropolitan Plaza Real Estate Investments 101 Lincoln Centre Drive Sixth Floor Foster City, California 94404 Attn: Vice President Real Estate Investments "Mortgage" shall mean a first lien Mortgage or Deed of Trust and Security Agreement with Assignment of Rents and Fixture Filing dated as of ................., 19......, encumbering the Property, executed by landlord, as Mortgagor or Trustor, to ...................................................., a ........................................, as Trustee, in favor of Beneficiary, securing repayment of the Loan evidenced by the Note, to be recorded in the records of the County in which the Property is located. "Landlord" shall mean ....................................................., a ............................................................................., having an office at ..........................................................., ..............................................................................., "Lease" shall mean a certain lease entered into by and among Landlord and Tenant, dated as of................., 19......, covering the Premises. "Loan" shall mean a first mortgage loan in an amount up to $...........from "Note" shall that certain Note executed by Landlord in favor of ........... ..............................................................................., a ............................................................................., dated as of ........................, 19 ........., in the amount of $......... "Premises" shall mean certain space in the improvements located in and upon the Property. "Property" shall mean the real property described in Exhibit A attached hereto together with the improvements thereon. "Tenant" shall mean ......................................................., a ............................................................................., having an office at ..........................................................., ................................................................................ EXHIBIT B Notarial Acknowledgment for Metropolitan Life Insurance Company STATE OF ............................... ss. COUNTY OF .............................. On ......................., 19......, before me, the undersigned, a Notary Public in and for said County and State, duly commissioned and sworn, personally appeared ........................, personally known to me or proved to me on the basis of satisfactory evidence to be the person who executed this instrument, acknowledge to me to be a ................. .................. of METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation, the corporation that executed the foregoing instrument, further acknowledged to me to be the person who executed the within instrument on behalf of such corporation, and acknowledged to me that such corporation executed the same pursuant to its By-laws or a resolution of its Board of Directors. WITNESS my hand and official seal. ________________________________________ Notary Public _________________________ Notarial Acknowledgment for Individuals STATE OF ............................... ss. COUNTY OF .............................. On ......................., 19......, before me, the undersigned, a Notary Public in and for said County and State, duly commissioned and sworn, personally appeared ........................ and ........................, personally known to me or proved to me on the basis of satisfactory evidence to be the persons whose names are subscribed to the foregoing instrument and acknowledged to me that they executed the same. WITNESS my hand and official seal. ________________________________________ Notary Public (1) Notarial Acknowledgment for Partnership STATE OF ............................... ss. COUNTY OF .............................. On ......................., 19......, before me, the undersigned, a Notary Public in and for said County and State, duly commissioned and sworn, personally appeared ........................ and ........................, known to me to be ................ of the partners of ......................................... .................................................., a .......................... ........................, the partnership that executed the within instrument, known to me to be the persons who executed the within instrument on behalf of such partnership, and acknowledged to me that such partnership executed the same. WITNESS my hand and official seal. ________________________________________ Notary Public _________________________ Notarial Acknowledgment for Corporation STATE OF ............................... ss. COUNTY OF .............................. On ......................., 19......, before me, the undersigned, a Notary Public in and for said County and State, duly commissioned and sworn, personally appeared ........................ and ........................, known to me to be the ....................... President and ..................... Secretary, respectively, of .............................................................., a ......................................, the corporation that executed the foregoing instrument and known to me to be the persons who executed said instrument on behalf of said corporation, and acknowledged to me to be the persons who executed said instrument on behalf of said corporation, and acknowledged to me that such corporation executed the same, pursuant to its By-laws or a resolution of its Board of Directors. WITNESS my hand and official seal. ________________________________________ Notary Public (2) METRO PLAZA OFFICE LEASE RIDER NO. ONE TO LEASE DATED November 18, 1992 between METROPOLITAN LIFE INSURANCE COMPANY, as Landlord, and FEDERAL INSURANCE COMPANY, as Tenant Option To Extend Term 1. Landlord hereby grants to Tenant two (2) consecutive options (the "Option") to extend the initial Term (the "Initial Term") for an additional five (5) years each (the "Option Term"), upon and subject to the terms and conditions set forth in this Lease, except as otherwise provided for in this Rider. Each Option shall be personal to Federal Insurance Company, and shall not be transferable or assignable to any assignee of the Lease (except a wholly owned subsidiary of Tenant) or sublessee of all or any part of the Premises. The first Option shall be exercised, if at all, by written notice to Landlord on or before the date that is one (1) year prior to the Expiration Date of the Initial Term The second Option shall be exercised, if at all, by written notice to Landlord on or before the date that is one (1) year prior to the last day of the first Option Term. The Base Annual Rent to be paid during each Option Term shall be ninety-five percent (95%) of the then Prevailing Market Rental, as hereinafter defined. Landlord shall, at Landlord's expense, paint and recarpet the Premises upon the exercise by Tenant of the first Option Term and upon the exercise by Tenant of the second option Term. Anything contained herein to the contrary notwithstanding, if Tenant is in default under any of the terms, covenants or, conditions of this Lease either at the time Tenant exercises the Option or at any time thereafter prior to the commencement date of the Option Term (the "Option Commencement Date"), Tenant shall have no rights hereunder to extend the Term. As used herein, the term "Prevailing Market Rental" for the Premises shall mean the rental and all other monetary payments and escalations that Landlord could obtain from a third party desiring to lease the Premises for the relevant Option Term, taking into account the age of the Project, the size of the Premises, the type and quality of tenant improvements, the location and floor levels of the Premises, the quality of construction of the Project and the Premises, the services provided under the terms of this Lease, the rental then being obtained for new leases of space comparable to the Premises in the locality of the Project and all other factors that would be relevant to a third party desiring to lease the Premises for the Option Term in determining the rental such party would be willing to pay therefor such as free rent, moving allowances, lease assumptions and other -1- concessions. The determination of Prevailing Market Rental, based on the foregoing criteria, will be made by Landlord and given to Tenant in Writing within thirty (30) business days following Tenant's exercise of the Option, exercising Landlord's good faith discretion. If within twenty five (25) business days following Tenant's receipt of notice of Landlord's determination of Prevailing Market Rental, Tenant does not give Landlord written notice of acceptance of Landlord's determination of Prevailing Market Rental, then the Lease shall not be extended and the extension option exercised by Tenant shall automatically terminate and be of no force or effect. -2- METRO PLAZA OFFICE LEASE RIDER NO.TWO TO LEASE between METROPOLITAN LIFE INSURANCE COMPANY, as Landlord, and FEDERAL INSURANCE COMPANY, as Tenant Option to Expand the Premises 1. Landlord hereby grants to Tenant an option (the "Expansion Option") to lease Suite 520 at 181 Metro Drive (the "Expansion Space") containing 3,890 square feet of Useable Area and 4,357 square feet of Rentable Area for a term commencing when the work is substantially completed and Tenant may lawfully occupy the Expansion Space (the "Expansion Space Commencement Date"), and ending upon the Expiration Date. The Expansion Option shall be personal to Federal Insurance Company, and shall not be transferable or assignable to any assignee (except a wholly owned subsidiary of Tenant) of the Lease or sublessee of all or any part of the Premises. 2. The Expansion Option shall be exercised, if at all, by written notice from Tenant to Landlord between January 1,1997 and March 31, 1997; provided, however, that if Tenant is in default under any of the terms, conditions or covenants of this Lease after receipt of notice and opportunity to cure either at the time Tenant exercises the Expansion Option or at any time thereafter prior to the Expansion Space Commencement Date, Tenant shall have no right to lease the Expansion Space as provided hereunder. 3. If Tenant elects to exercise the Expansion Option, then Landlord shall use commercially reasonable efforts to deliver possession of the Expansion Space to Tenant for occupancy within ninety (90) days after Tenant exercises such Expansion Option but shall have no liability if it is unable to do so. Upon such delivery, the Expansion Space shall be deemed to be a part of the Premises and shall be leased upon and subject to all of the terms, covenants and conditions of this Lease, except that from and after the Expansion Space Commencement Date, the Base Annual Rent shall be increased by the same amount per Rentable square foot for the Expansion Space as Tenant is paying for the Premises. Notwithstanding the foregoing, if Landlord is unable to deliver the Expansion Space on the Expansion Space Commencement Date, the provisions of Section 2.2. of the Lease, to the extent applicable, shall apply. 4. The number of Parking Spaces allocated to the Expansion Space is 16. -1- 5. The Rentable Area of the Expansion Space is 4,357 and therefore commencing on the Expansion Space Commencement Date Tenant's Share of Operating Costs and Taxes shall be increased to 6.5415. 6. Landlord shall provide up to $58,350 for the retrofit of the Expansion Space. Landlord and Tenant agree to enter into a Workletter and Construction Agreement in form and substance similar to that attached to the Lease as Exhibit B prior to the commencement of Tenant Improvement Work. 7. In the event Tenant exercises the Option to Expand the Premises pursuant to this Rider No. 2, the Right to Terminate Lease set forth in Rider No. 3 shall be null and void and of no further force and effect. -1- METRO PLAZA OFFICE LEASE RIDER NO. THREE TO LEASE between METROPOLITAN LIFE INSURANCE COMPANY, as Landlord, and FEDERAL INSURANCE COMPANY, as Tenant Additional Lease Provisions 1. RIGHT TO TERMINATE LEASE Tenant shall have the rights to terminate the Lease in the sixty-first (61st) month of the Lease Term upon the following terms and conditions: The termination right shall be effective if and only if (i) Tenant provides Landlord with not less than six months prior notice of its election to terminate the Lease which notice shall specify the exact date in the sixty-first (61st), month of the Lease Term on which the termination shall occur ("the Termination Date") and (ii) in addition to all other Rent due and payable hereunder to and including the Termination Date, Tenant pays to Landlord on or before the Termination Date a termination fee in the amount of (a) three hundred thousand dollars ($300,000) and (b) ninety-eight thousand, six hundred fifty-six dollars ($98,656) representing a portion of the leasing commissions paid by Landlord in connection with the Lease. EFFECT OF TERMINATION. Neither the termination of this Lease nor the acceptance by Landlord of the Premises shall in any way be deemed to excuse or release Tenant from any obligation or liability as to the Premises prior to the Termination Date, including without limitation any obligation or liability under provisions of the Lease to indemnify Landlord, or with respect to any breach or breaches of the Lease, which obligation or liability (i) first arises prior to the Termination Date, or (ii) affect any obligation under the Lease which by its terms is intended to survive the expiration or sooner termination of the Lease. -1- EXHIBIT B SUBLEASED SPACE EXHIBIT C BILL OF SALE This BILL OF SALE, effective as of December 15, 2001 ("Effective Date"), is executed by FEDERAL INSURANCE COMPANY, an Indiana corporation ("Seller"), and HNC SOFTWARE INC., a California corporation ("Buyer"). IN CONSIDERATION of the payment of the purchase price of Ten and no/100 Dollars ($10.00), in cash, and the mutual covenants set forth therein, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller hereby sells, assigns and transfers to Buyer all of the assets more particularly described on Schedule 1 attached hereto and made a part hereof ("Assets"), subject to the following terms and conditions: (a) BUYER ACKNOWLEDGES THAT BUYER IS ACQUIRING THE ASSETS "AS IS AND WHERE IS, WITH ALL FAULTS, IF ANY", IN THE CONDITION THEY ARE IN AS OF THE EFFECTIVE DATE, AND NO WARRANTIES, EXPRESS OR IMPLIED, HAVE BEEN MADE BY SELLER REGARDING THEIR PHYSICAL CONDITION, CAPACITY, QUALITY, VALUE, WORKMANSHIP, OPERATING CAPABILITY OR PERFORMANCE, OR THEIR COMPLIANCE WITH APPLICABLE LAWS, OR THEIR FITNESS OR SUITABILITY FOR BUYER'S PURPOSES. NO WARRANTIES, EXPRESS OR IMPLIED, CONTAINED IN THE UNIFORM COMMERCIAL CODE OR OTHERWISE (INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTY OF MERCHANTABILITY AND THE IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE) SHALL APPLY TO THE SALE OF THE ASSETS, AND BUYER HEREBY DISCLAIMS AND NEGATES THE RIGHT TO ANY SUCH WARRANTIES. 2. As of the Effective Date, Seller represents and warrants that: (a) Seller is lawfully possessed of good title to the Assets; (b) Seller has the right and authority to convey the Assets; and (c) the Assets shall be conveyed and delivered to Buyer free and clear of all security interests, liens and encumbrances. 3. Possession of the Assets shall be delivered to Buyer on the Effective Date. 4. All applicable sales, use, transfer and documentary taxes arising out of the transfer of the Assets (but excluding sales taxes and applicable to Seller's period of ownership and income taxes of Seller arising out of the sale) shall be paid by Buyer. 5. This Bill of Sale shall be governed, construed and enforced in accordance with the laws of the State of California. [Signature Page to Bill of Sale] IN WITNESS WHEREOF, this Bill of Sale has been executed in the State of New Jersey, to be effective on the Effective Date first set forth above. SELLER: FEDERAL INSURANCE COMPANY an Indiana corporation Date: By: ----------------------- ------------------------------ Name: ---------------------------- Title: --------------------------- 2 EX-21.01 9 a80186ex21-01.txt EXHIBIT 21.01 EXHIBIT 21.01 HNC SOFTWARE INC. SUBSIDIARIES JURISDICTION NAME OF CORPORATION OF ORGANIZATION HNC Insurance Solutions, Inc. California Celerity Technologies, Inc. Ohio HNC Financial Solutions, Inc. Illinois ClaimPort, Inc. Delaware HNC Software International, Inc. Delaware Rocky Mountain Merger Corp. (shell) Delaware EX-23.01 10 a80186ex23-01.txt EXHIBIT 23.01 EXHIBIT 23.01 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-92902, No. 333-14323, No. 333-18871, No. 333-42819, No. 333-46875, No. 333-50623, No. 333-62195, No. 333-71923, No. 333-80965, No. 333-89165, No. 333-33952, No. 333-40344, No. 333-41388, No. 333-45442, No. 333-55398 and No. 333-62492) and Form S-3 (No. 333-72804) of HNC Software Inc. of our report dated January 23, 2002, except as to Note 16, to which the date is March 21, 2002, relating to the financial statements, which appears in this Form 10-K. San Diego, California March 22, 2002 -----END PRIVACY-ENHANCED MESSAGE-----


(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the Fiscal Year Ended December 31, 2001

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		33-0248788
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5935 Cornerstone Court West, San Diego, CA (Address of principal executive offices)		92121 (Zip Code)


PART I
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
		EXECUTIVE OFFICERS
PART II
	Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Consolidated Financial Data
	Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition
	Item 7a. Quantitative and Qualitative Disclosures about Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management
	Item 13. Certain Relationships and Related Transactions
PART IV
	Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
EXHIBIT LIST
EXHIBIT 4.01
EXHIBIT 10.07
EXHIBIT 10.31
EXHIBIT 10.38
EXHIBIT 10.45
EXHIBIT 10.46
EXHIBIT 21.01
EXHIBIT 23.01


		Page No.

Part I
Item 1.	Business		1
Item 2.	Properties		15
Item 3.	Legal Proceedings		15
Item 4.	Submission of Matters to a Vote of Security Holders		15
	Executive Officers		16
Part II
Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters		17
Item 6.	Selected Consolidated Financial Data		18
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 7a.	Quantitative and Qualitative Disclosures About Market Risk		18
Item 8.	Financial Statements and Supplementary Data		19
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		19
Part III
Item 10.	Directors and Executive Officers of the Registrant		19
Item 11.	Executive Compensation		19
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		20
Item 13.	Certain Relationships and Related Transactions		20
Part IV
Item 14.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		20


Product		Product Description

*Blaze Advisor From HNC*		Blaze Advisor From HNC is a rules management tool used to design, develop, execute and maintain rules-based business applications. Its advanced technology can dramatically improve the way enterprises manage business applications and processes by enabling them to more quickly develop complex applications, respond to changing customer needs, implement regulatory compliance and reduce the total cost of day-to-day operations.

*HNC Connectivity Manager*		HNC Connectivity Manager is a suite of products that allows employers and insurance claims administrators to send first reports of injury (FROI), subsequent reports of injury (SROI) and medical bills to state departments of insurance and departments of labor, to comply with statutes that require them to submit their data electronically. Available in client/server and Web-enabled versions, the products offer injury and medical-related document support as well as business edits to insure accurate and complete data.

*HNC Decision Manager For Financial Applications*		HNC Decision Manager For Financial Applications is used to process over 30% of U.S. credit card applications as well as applications for auto loans, mortgages, loans and lines of credit around the world. HNC Decision Manager combines advanced decisioning and modeling technology to detect customer credit risk with a flexible architecture for superior application processing speed and accuracy.

*HNC Decision Manager For Medical Bill Review*		HNC Decision Manager For Medical Bill Review is the leading medical bill repricing solution for workers’ compensation injuries and automobile medical injuries. The product’s automated data entry and optical character recognition capabilities increase production throughput, and assigns the right staff resources to the right decisions.

*HNC Outsourced Bill Review Services*		HNC Outsourced Bill Review Services provide turnkey insurance bill review administration services at selected locations across the country. These branch operations offer expert medical bill and preferred provider review for workers’ compensation and auto medical insurance bills, including the additional review of complex medical, hospital and surgical bills.


Product		Product Description

*HNC Decision Manager ASP*		HNC Decision Manager ASP is a high-speed, high-volume decisioning service for the financial, insurance and telecommunications industries. It provides the functionality of HNC Decision Manager through an application service provider (ASP) delivery channel. The solution helps users increase new business volume without corresponding increases in headcount and IT budget and gives them control over unique decisioning processes and policies.

*HNC Financial Accounting Manager*		HNC Financial Accounting Manager provides a suite of economical, easy-to-use core accounting solutions designed to help small and mid-size financial institutions manage a wide range of accounting activities more effectively. HNC offers state-of-the-art solutions for general ledger and management reporting, accounts payable processing, fixed-assets accounting, investment accounting and enterprise information reporting.

*HNC — MIRA Claims Advisor*		HNC MIRA Claims Advisor is an automated loss reserving software system currently available for workers’ compensation claims. It uses advanced statistical models based on workers’ compensation claims data collected from the customer. It helps insurance payors calculate claims reserves by providing an accurate, objective and independent method for determining the cost and duration of current claims.

*HNC RoamEx Roamer Data Exchanger*		HNC RoamEx Roamer Data Exchanger helps wireless telecommunications carriers identify potential fraud by delivering near real-time exchange of roamer call records that occur when subscribers roam outside a carrier’s home network. Carriers are able to offer roaming to a greater number of their subscribers, thereby increasing Average Revenue Per User (ARPU), while reducing the risk of fraud when subscribers roam beyond their home network.


Product		Product Description

*HNC Application Risk Manager*		HNC Application Fraud Manager accurately predicts the likelihood and detects the existence of identity deception on various types of credit card, home loan and credit line account applications.

*HNC CardAlert Fraud Manager*		HNC CardAlert Fraud Manager helps card issuers and Electronic Funds Transfer (EFT) network providers combat large-scale counterfeit ATM card fraud. HNC CardAlert Fraud Manager delivers the advanced warning needed to detect a counterfeit card outbreak.


Product		Product Description

*CompCompare*		CompCompare is a benchmarking database that allows users to generate detailed comparative analyses between their claims data and insurance industry data. It features online access to HNC Insurance Solution’s workers’ compensation database. The product is marketed by NCCI (the National Council on Compensation Insurance, Inc.) through a joint marketing agreement with HNC.

*ProviderCompare*		ProviderCompare is a physician profiling system that compares one physician to a peer group of physicians for similar claim populations, identifies providers with significantly higher costs, and uses provider report cards and treatment pattern analysis to educate providers to improve financial outcomes. The product is marketed by NCCI through a joint marketing agreement with HNC.

*HNC Consulting Services*		HNC Consulting Services offers access to HNC Software’s fraud experts, who consult on initiatives such as authorization strategies, fraud prevention strategies, recovery strategies or system advancements to help reduce fraud losses quickly.

*HNC Falcon Fraud Manager*		HNC Falcon Fraud Manager is recognized as the leader in global payment card fraud detection. HNC’s neural networks examine transaction, cardholder and merchant data to detect a wide range of credit card fraud quickly and accurately.

*HNC Falcon Fraud Manager for Merchants*		HNC Falcon Fraud Manager for Merchants is designed for card-not- present transactions. It provides online merchants with a fraud and risk management solution, enabling companies to approve more good transactions, increasing sales and providing better customer service. HNC Falcon Fraud Manager is delivered through an ASP delivery channel.

*HNC Fraud Manager for Telecommunications*		Using advanced science, HNC Fraud Manager for Telecommunications provides telecommunications carriers and operators with protection from fraud. Unlike rules-based systems, HNC Fraud Manager is well suited to stopping complex types of fraud such as subscription fraud, internal fraud and dealer/agent fraud. It also protects carriers from traditional forms of technical fraud, including calling card fraud, cloning, clip-on fraud and PBX fraud.

MasterCard^TMRiskFinder		Developed by MasterCard and HNC, MasterCard^TMRiskFinder uses market-specific neural network models that analyze the behavior of individual cardholders and merchants and finds fraud patterns where these behaviors are similar. To expand the system’s ability to accurately detect fraud, RiskFinder also leverages HNC’s proprietary profiling technology to build detailed profiles of each individual cardholder’s spending patterns/ behavior that are updated with every new transaction. In addition, RiskFinder includes a feature not found in other systems — it incorporates highly detailed merchant profiles to assess risk.


Product		Product Description

*HNC Payment Optimizer*		HNC Payment Optimizer is a healthcare fraud, abuse and waste control solution for Medicare, Medicaid and commercial insurers. It detects fraud and abuse patterns of all types across a broad range of provider types and program areas. HNC Payment Optimizer also adapts to detect fraud and abuse patterns as they emerge and evolve, before they can cause massive losses.

*HNC Risk Manager for Acquirers*		HNC Risk Manager for Acquirers uses HNC’s neural network models and expert rules to identify individual high-risk merchants and manage investigative and intervention actions. It pinpoints patterns among the independent sites in a chain and recognizes merchants who are subject to fraudulent activities such as laundering, skimming or employee swindles. As a result, acquiring banks can manage risk and profitability while improving operational efficiency.

*HNC Risk Manager for Money Laundering*		HNC Risk Manager for Money Laundering uses HNC’s proven modeling and profiling technology to identify key transaction patterns and establish baseline behavior at the account, customer and peer group levels for individual transaction and comparison evaluation. It turns everyday transaction data into money laundering insight with a flexible framework that easily integrates with existing systems.


Product		Product Description

*HNC Cross-Sell Optimizer*		HNC Cross-Sell Optimizer uses advanced algorithms and optimization technology to provide our customers unique insights on customer database information in significantly shorter timeframes. It provides end-to-end campaign management functions, including automated execution, interaction with third-party vendors, response posting and performance reporting.

*HNC Marketing Services Provider*		HNC’s Marketing Services Provider (MSP) solution meets marketers’ need for a reliable and quickly implemented direct marketing solution. The MSP solution automates and streamlines the complex process required to plan, define, execute and analyze sophisticated multichannel, multi-stage marketing campaigns. The MSP service is built around marketing database design and management, and layered with marketing campaign design, scheduling and execution.

*HNC Profit Manager*		HNC Profit Manger is targeted to financial institutions and incorporates an interface to users’ core accounting systems. It ensures the accuracy of profitability measurement through matched-maturity funds transfer pricing and sophisticated cost-allocation methods, including activity-based costing. The system is designed to be an integrated component to the user’s CRM strategy, allowing them to target market segments, price financial products and stimulate and act on strategic plans for growth.


Product		Product Description


*HNC Profitability Predictor*		HNC Profitability Predictor is a predictive algorithm that forecasts future cardholder profitability based on transaction information. More than a simple credit risk score, this algorithm includes revenue potential, risk of delinquency or charge off and attrition likelihood; the result is a complete picture of profitability. A form of this product also uses HNC’s proprietary profiling and modeling techniques to assess individual cardholders and predict the likelihood that they will file for bankruptcy. Through consistent monitoring and action, access to account level information and detailed transaction data, HNC’s neural networks can detect otherwise hard-to-identify relationships that indicate a potential bankruptcy.

*HNC Prospecting Optimizer*		HNC Prospecting Optimizer helps our customers acquire new customers that will prove most profitable to them throughout the relationship. By leveraging proprietary predictive modeling and optimization technology, HNC Prospecting Optimizer allows its users to balance long-term risk and reward, and identify prospects with the greatest economic potential.

*HNC Strategy Manager*		HNC Strategy Manager delivers a complete customer management solution that allows account managers, marketing managers and other designated personnel to supervise customer management actions from the desktop with a powerful, easy-to-use graphical user interface.


• Costa Mesa, California • San Jose, California • Chicago, Illinois • Los Alamos, New Mexico		• Irvine, California • Denver, Colorado • St. Louis, Missouri • Dallas, Texas		• San Mateo, California • Atlanta, Georgia • Cranbury, New Jersey • Arlington, Virginia


Name	Age		Position

John Mutch		45	Chief Executive Officer
Bruce E. Hansen		42	President
Kenneth J. Saunders		40	Chief Financial Officer and Secretary
Mary Burnside		54	Chief Operating Officer
Russell C. Clark		33	Vice President, Corporate Finance and Assistant Secretary
Roger Ahern		33	Vice President, Decision Management
Michael Chiappetta		37	Group Vice President, Risk Management
Sean M. Downs		41	Group Vice President, Insurance Transaction Processing
Kyle W. Thomas		40	Group Vice President, Global Sales


Item 5.	*Market for the Registrant’s Common Equity and Related Stockholder Matters*



		Historical				Adjusted

		High		Low		High		Low

2001:
	First Quarter	$	33.500	$	17.563	$	33.500	$	17.563
	Second Quarter		32.990		14.063		32.990		14.063
	Third Quarter		29.360		17.280		29.360		17.280
	Fourth Quarter		22.840		17.000		22.840		17.000

2000:
	First Quarter	$	122.500	$	72.063	$	24.893	$	14.644
	Second Quarter		77.125		38.000		15.672		7.722
	Third Quarter		81.813		42.000		16.625		8.535
	Fourth Quarter		29.688		12.375		29.688		12.375


Item 6.	*Selected Consolidated Financial Data*


Item 11.	*Executive Compensation*


(a) (1)-(2)	Financial Statements and Schedules:


	(3)	Exhibits:


Item 7.	*Management’s Discussion and Analysis of Results of Operations and Financial Condition*


Item 7a.	*Quantitative and Qualitative Disclosures about Market Risk*


Item 8.	*Financial Statements and Supplementary Data*


Item 9.	*Changes in and Disagreements with Accountants on Accounting and Financial Disclosure*


Item 10.	*Directors and Executive Officers of the Registrant*


Item 12.	*Security Ownership of Certain Beneficial Owners and Management*


Item 13.	*Certain Relationships and Related Transactions*


Item 14.	*Exhibits, Financial Statement Schedules and Reports on Form 8-K*


	Signature	Title	Date


/s/ JOHN MUTCH John Mutch		President and Chief Executive Officer, Director and Chairman of the Board (Principal Executive Officer)	March 25, 2002

/s/ KENNETH J. SAUNDERS Kenneth J. Saunders		Chief Financial Officer and Secretary (Principal Financial Officer)	March 25, 2002

/s/ RUSSELL C. CLARK Russell C. Clark		Vice President, Corporate Finance and Assistant Secretary (Principal Accounting Officer)	March 25, 2002

/s/ EDWARD K. CHANDLER Edward K. Chandler		Director	March 25, 2002

/s/ THOMAS F. FARB Thomas F. Farb		Director	March 25, 2002

/s/ ALEX W. HART Alex W. Hart		Director	March 25, 2002

/s/ DAVID Y. CHEN David Y. Chen		Director	March 25, 2002

/s/ LOUIS A. SIMPSON Louis A. Simpson		Director	March 25, 2002


Description		Page

Selected Consolidated Financial Data			F-2
Management’s Discussion and Analysis of Results of Operations and Financial Condition			F-3
Report of Independent Accountants			F-34
Consolidated Financial Statements:
	Consolidated Balance Sheet as of December 31, 2001 and 2000		F-35
	Consolidated Statement of Operations for the years ended December 31, 2001, 2000 and 1999		F-36
	Consolidated Statement of Cash Flows for the years ended December 31, 2001, 2000 and 1999		F-37
	Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income (Loss) for the years ended December 31, 2001, 2000 and 1999		F-38
	Notes to Consolidated Financial Statements		F-39



		Year Ended December 31,

		2001			2000			1999			1998		1997


		(in thousands, except per share data)
Consolidated Statement of
Operations Data:
	Total revenues	$	226,670		$	254,884		$	216,889		$	178,608	$	113,735
	Operating income (loss)		(42,523	)		(149,741	)		(6,784	)		21,026		23,040
	Net income (loss)		(36,452	)		(116,418	)		(6,272	)		10,452		17,565
	Basic net income (loss) per share		(1.06	)		(4.08	)		(0.25	)		0.41		0.72
	Diluted net income (loss) per share		(1.06	)		(4.08	)		(0.25	)		0.39		0.68
	Pro forma net income(1)													15,417
	Pro forma basic net income per share(1)													0.64
	Pro forma diluted net income per share(1)													0.60
	Shares used in computing basic net income (loss) per share and basic pro forma net income per share		34,509			28,529			24,969			25,362		24,275
	Shares used in computing diluted net income (loss) per share and diluted pro forma net income per share		34,509			28,529			24,969			26,650		25,681



		December 31,

		2001		2000		1999		1998		1997


		(in thousands)
Consolidated Balance Sheet Data:
	Cash, cash equivalents and marketable securities available for sale	$	313,725	$	162,753	$	234,081	$	153,340	$	42,946
	Total assets		578,026		447,741		416,421		283,914		119,877
	Long-term obligations, less current portion		151,684		16,616		104,111		101,039		239
	Total stockholders’ equity		387,819		382,574		249,573		153,021		103,860


	Year Ended
	December 31, 2000

	(in thousands)
License and maintenance	$	6,086
Services and other		6,603
Research and development		12,880
Sales and marketing		5,770
General and administrative		16,846

	$	48,185


	*Fluctuations in our revenues and operating results might lead to substantial declines in the price of the notes and our common stock.*


	*We may not be able to forecast our revenues accurately because our products have a long and variable sales cycle.*


	Our failure to complete expected sales in any given quarter could harm our operating results because of the large size of typical orders and our inability to compensate for unanticipated revenue shortfalls.


	*We expect to continue to make strategic acquisitions, which could put a strain on our resources, cause dilution to our stockholders and adversely affect our financial results.*


	*Our expenses are generally fixed, and if we fail to meet our revenue forecasts, we will not be able to reduce these expenses quickly.*


	*Difficulties in implementing our products could harm our revenues and margins.*


	*If we fail to effectively respond to changes in our business, our corporate organization will be disrupted and we will be diverted from our business plan.*