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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-26825
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N2H2, INC.
(Exact Name of Registrant as Specified in Its Charter)
Washington 91-1686754
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
900 Fourth Avenue, Suite 3400, Seattle, WA 98164
(Address of Principal Executive Offices, including Zip Code)
Registrant's Telephone Number, Including Area Code: (206) 336-1501
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of September 1, 1999, the registrant had outstanding 21,056,956 shares of
common stock, no par value.
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N2H2, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets as of June 30, 1999 and September 30, 1998........3
Condensed Statements of Operations for the three months and nine months
ended June 30, 1999 and 1998..............................................4
Statement of Changes in Shareholders' Equity...............................4
Condensed Statements of Cash Flows for the nine months
ended June 30, 1999 and 1998..............................................5
Notes to Condensed Financial Statements....................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................6
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................8
Item 2. Changes in Securities and Use of Proceeds............................9
Item 3. Defaults Upon Senior Securities......................................9
Item 4. Submission of Matters to a Vote of Security Holders..................9
Item 5. Other Information...................................................10
Item 6. Exhibits and Reports on Form 8-K....................................10
Signatures..................................................................10
</TABLE>
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
N2H2, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
(unaudited) (audited)
----------- -------------
<S> <C> <C>
ASSETS:
Current assets:
Cash ........................................................... $ 5,727 $ 121
Accounts receivable, net ....................................... 1,635 321
Prepaid expenses and other assets .............................. 14 37
-------- --------
Total current assets ......................................... 7,376 479
Property and equipment, net .................................... 2,327 1,271
Other assets ................................................... 237 98
-------- --------
Total assets ................................................. $ 9,940 $ 1,848
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable ............................................... $ 1,031 $ 601
Accrued liabilities ............................................ 638 461
Deferred revenue ............................................... 1,453 1,237
Current portion of long-term debt and notes payable ............ -- 30
Current portion of capital leases .............................. 467 384
-------- --------
Total current liabilities .................................... 3,589 2,713
-------- --------
Deferred revenue ................................................. 173 97
Capital lease obligations ........................................ 625 524
Long term debt and notes payable ................................. 48 1,418
-------- --------
Total liabilities ............................................ 4,435 4,752
-------- --------
Shareholders' equity (deficit)
Common stock, no par value; 250,000,000 shares authorized,
15,643,027 and 9,060,473 issued and outstanding in 1999
and 1998....................................................... 14,714 1,440
Deferred stock option compensation expense ..................... (936)
Accumulated deficit ............................................ (8,273) (4,344)
-------- --------
Total shareholders' equity (deficit) ........................... 5,505 (2,904)
-------- --------
Total liabilities and shareholder's equity (deficit) ........... $ 9,940 $ 1,848
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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N2H2, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited, in thousands except share and per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
ended ended
June 30, June 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues ................................ $ 1,731 $ 675 $ 4,337 $ 1,973
Cost of revenues ........................ 925 271 1,963 667
------------ ------------ ------------ ------------
Gross profit ............................ 806 404 2,374 1,306
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing ................... 779 336 1,785 859
Research and development .............. 470 185 1,168 436
General and administrative ............ 1,380 497 3,011 1,194
------------ ------------ ------------ ------------
Total operating expenses ............ 2,629 1,018 5,964 2,489
------------ ------------ ------------ ------------
Operating loss .......................... (1,823) (614) (3,590) (1,183)
Interest income (expense), net .......... (92) (54) (339) (164)
------------ ------------ ------------ ------------
Net loss ................................ $ (1,915) $ (668) $ (3,929) $ (1,347)
============ ============ ============ ============
Basic and diluted net loss per share .... $ (0.13) $ (0.08) $ (0.33) $ (0.16)
============ ============ ============ ============
Basic and diluted weighted average
shares outstanding .................... 14,520,178 8,686,410 11,998,672 8,686,410
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
N2H2, INC.
Statement of Changes in Shareholders' Equity
(unaudited, in thousands except share amounts)
<TABLE>
<CAPTION>
Deferred
Common stock stock option
-------------------------- compensation Accumulated
Shares Amount expense deficit Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1998 9,060,473 $ 1,440 $ (4,344) $ (2,904)
Issuance of common stock, net of issuance
costs of $900 4,393,716 11,057 11,057
Conversion of notes payable into common stock 1,736,175 724 724
Exercise of stock options 327,663 61 61
Compensation expense recognized on issuance
of stock, stock options and warrants 125,000 304 304
Deferred compensation expense relating to
issuance of stock options 1,128 $ (1,128) --
Amortization of deferred stock option
compensation expense 192 192
Net loss (3,929) (3,929)
----------------------------------------------------------------------------
Balance at June 30, 1999 15,643,027 $ 14,714 $ (936) $ (8,273) $ 5,505
============================================================================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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N2H2, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Nine months
ended June 30,
-------------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ........................................................ $ (3,929) $ (1,347)
Adjustments to reconcile net loss to net cash provided
by (used by) operating activities:
Depreciation and amortization ................................. 588 211
Amortization of deferred stock compensation expense ........... 192
Compensation expense on stock, stock options and warrants ..... 304
Notes payable issued for services ............................. 79
Changes in certain assets and liabilities:
Accounts receivable ........................................... (1,314) 72
Prepaid expenses and other assets ............................. (116) (90)
Accounts payable .............................................. 430 385
Accrued liabilities ........................................... 177 327
Deferred revenue .............................................. 293 372
-------- --------
Net cash provided by (used by) operating activities: ............ (3,375) 9
-------- --------
Cash flows from investing activities:
Purchase of fixed assets ...................................... (801) (121)
-------- --------
Net cash used in investing activities ........................... (801) (121)
-------- --------
Cash flows from financing activities:
Issuance of common stock ...................................... 11,057
Exercise of stock options ..................................... 61
Payments under capital lease obligations ...................... (583) (167)
Borrowings under notes payable ................................ 2,018 222
Repayments of notes payable ................................... (2,771) (4)
-------- --------
Net cash provided by financing activities ....................... 9,782 51
-------- --------
Net increase (decrease) in cash ................................. 5,606 (61)
Cash, beginning of period ...................................... 121 71
-------- --------
Cash, end of period ............................................. $ 5,727 $ 10
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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N2H2, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine-month period ended June 30,
1999 are not necessarily indicative of results to be expected for a full year.
2. Net loss per share
Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding during the period. Diluted
net loss per share is computed by dividing net loss by the weighted average
number of common and dilutive common stock equivalent shares outstanding during
the period. As the Company had a net loss attributable to common shareholders
in each of the periods presented, basic and diluted net loss per share are the
same.
3. Recently issued accounting standards
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures About Segments of an Enterprise and Related
Information. This statement supersedes Statement of Financial Accounting
Standards No. 14, Financial Reporting for Segments of a Business Enterprise.
This statement includes requirements to report selected segment information
quarterly and entity-wide disclosures about products and services, major
customers, and the material countries in which the entity holds assets and
reports revenues. The statement will be effective for fiscal years beginning
after December 15, 1997. Reclassification for earlier periods is required,
unless impracticable, for comparative purposes. The Company is currently
evaluating the impact this statement will have on its financial statements;
however, because the statement requires only additional disclosure, the Company
does not expect the statement to have a material impact on its reported
financial position or results of operations.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued SOP 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use. SOP
98-1 provides guidance for an enterprise on accounting for the costs of
computer software developed or obtained for internal use. SOP 98-1 is effective
for the Company in fiscal 1999. The Company anticipates that accounting for
transactions under SOP 98-1 will not have a material impact on the Company's
financial position or results of operations.
4. Subsequent Event
On July 29, 1999, N2H2 priced an initial public offering of 5,000,000
shares of Common Stock at an offering price of $13.00 per share. 4,950,000
shares were sold by N2H2 and 50,000 shares were sold by selling shareholders.
N2H2's common stock, listed on the NASDAQ National Market under the symbol
"NTWO", began trading on July 30, 1999. Proceeds to N2H2, net of issuance costs,
were approximately $59.2 million.
5. Reclassifications
Certain prior period amounts have been reclassified to conform with the
current period classification.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
Statements made in this filing that are not historical facts are
forward-looking statements. Forward-looking statements include, but are not
limited to, statements containing the words "believes," "anticipates," "expects"
and similar words. Actual results may differ materially from those projected in
any forward-looking statements. Such forward-looking statements are subject to
various known and unknown risks and uncertainties and are therefore not a
guarantee of future performance. The potential risks and uncertainties which
could cause actual results to differ materially include, but are not limited to,
the competitive nature of the Internet filtering industry, changes in domestic
market conditions, the success of our brand and systems development efforts,
the absence of patent protection for N2H2's technology, the fact that others
have patented various filtering technologies, and customer acceptance of our
services, products and fee structures. Further information on the factors and
risks that could affect N2H2's business, financial condition and results of
operations are included under the Risk Factors sections of N2H2's public
filings with the Securities and Exchange Commission, including its
Registration Statement on Form S-1 (File No. 333-78495).
N2H2 develops and provides:
- Proxy server-based internet content filtering solutions to
schools, homes, internet service providers, corporations and
government agencies,
- Filtered educationally-oriented internet search services,
- Educationally-oriented communication tools for teachers,
students, and parents, and
- Customizable filtered portal tools for affinity groups.
In June 1999, N2H2 completed the acquisition of "GradeChecker", a
proprietary technology developed by Educational Internet Communications, LLC.
GradeChecker is being incorporated as a value added tool into Searchopolis. It
enables parents and teachers to track a student's academic progress in school
using the internet. Also in June, 1999, N2H2 signed service agreements with
SchoolsNet, Ltd., an Internet Service Provider serving over 1 million students
in the public schools of four Australian states.
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RESULTS OF OPERATIONS
REVENUES. We generate our revenues from installations, subscriptions,
and search service and related advertising fees.
Revenues for the three months ended June 30, 1999 increased 156% to $1.7
million from $675,000 for the three months ended June 30, 1998. Revenues from
installations increased by $379,000, or 152%, to $628,000 for the three months
ended June 30, 1999, from $249,000 for the same period in 1998. Subscription
revenues increased by $546,000, or 128%, to $972,000 for the three months ended
June 30, 1999, from $426,000 for the same period in 1998. We recognized search
service and advertising revenues from Searchopolis of approximately $131,000 in
the three months ended June 30, 1999.
Revenues for the nine months ended June 30, 1999 increased 120% to $4.3
million from $2.0 million for the nine months ended June 30, 1998. Revenues
from installations increased by $680,000, or 85%, to $1.5 million for the nine
months ended June 30, 1999, from $799,000 for the same period in 1998.
Subscription revenues increased by $1.4 million, or 117%, to $2.6 million for
the nine months ended June 30, 1999, from $1.2 million for the same period in
1998. We recognized search and service and advertising revenues from
Searchopolis of approximately $303,000 in the nine months ended June 30, 1999.
No customer accounted for more than 10% of revenues.
COST OF REVENUES. Cost of revenues consists of the costs of Website
review, depreciation of servers which we own and are installed at customer
locations, technical installation and support and telecommunications costs. In
addition, since April 1999, we have included search processing and hosting fees
paid to outside providers of search engine and Web hosting services as cost of
revenues.
Cost of revenues for the three months ended June 30, 1999 increased by
241% to $925,000 from $271,000 for the same period of the previous year. Cost of
revenues as a percentage of total revenues increased to 53% for the three months
ended June 30, 1999, from 40% for the same period in 1998. Almost half of the
increase in cost of revenues was due to the inclusion of search processing and
hosting fees as cost of revenues, and the balance of the increase was primarily
due to increased staffing.
Cost of revenues for the nine months ended June 30, 1999 increased 196%,
to $2.0 million, from $667,000 for the same period of the previous year. Cost of
revenues as a percentage of total revenues increased to 45% for the nine months
ended June 30, 1999, from 34% for the same period in 1998. Of this increase in
cost of revenues, approximately $795,000 was due to increased staffing in review
and customer support while the balance was due to the inclusion of search
processing and hosting fees and increased depreciation on new servers placed in
customer networks.
SALES AND MARKETING. Sales expenses consist primarily of salaries and
commissions. Marketing expenses consist primarily of salaries, marketing
brochures, trade show costs, direct mailing programs, advertising, public
relations and travel.
Sales and marketing expenses for the three months ended June 30, 1999
increased 132% to $779,000 from $336,000 for the same period of the previous
year. Of the $443,000 increase, $284,000 was due to increased expenditures for
advertising and attending trade shows, and $158,000 was due to costs related to
increased staffing primarily in the sales department.
Sales and marketing expenses for the nine months ended June 30, 1999
increased by 108% to $1.8 million from $859,000 for the same period of the
previous year. Of the $926,000 increase, $430,000 was due to increased
expenditures for advertising and attending trade shows, and the balance was due
to costs related to increased staffing primarily in the sales department.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and benefits for software developers, consulting fees,
facilities costs and equipment depreciation. In the development of new products
and enhancement of existing products, the technological feasibility of the
service is not established until substantially all product development is
complete. Accordingly, development costs and all costs related to internal
research and development have been expensed as incurred.
Research and development expenses for the three months ended June 30,
1999 increased by 154% to $470,000 from $185,000 for the same period of the
previous year. The increase was primarily due to increased staffing.
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Research and development expenses for the nine months ended June 30,
1999 increased by 168% to $1.2 million from $436,000 for the same period of the
previous year. The increase was primarily due to increased staffing.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, benefits and related costs for executive, finance,
human resources and administrative personnel, third party professional service
fees, the cost of facilities and general depreciation expenses.
General and administrative expenses for the three months ended June 30,
1999 increased by 178% to $1.4 million from $497,000 for the same period of the
previous year. Of the increase, approximately $265,000 was due to professional
and legal fees primarily associated with the installation of new accounting and
management information systems and general corporate matters, approximately
$190,000 due to non-cash compensation expenses resulting from the issuance of
stock options, and the balance due to increases in the number of employees
supporting the growth of the company.
General and administrative expenses for the nine months ended June 30,
1999 increased by 152% to $3.0 million from $1.2 million for the same period of
the previous year. Approximately $434,000 of the increase was due to
professional and legal fees primarily associated with the installation of new
accounting and management information systems and general corporate
matters, $496,000 due to non-cash compensation expenses resulting from the
issuance of stock options and the balance was due primarily to increases in
the number of administrative employees supporting the growth of the company and
increases in office space.
INCOME TAXES. Prior to May 1999 N2H2 was an S corporation for federal
income tax purposes, and effective May 11, 1999, became a C corporation. As a C
corporation, N2H2 is subject to income tax. Operating losses will result in net
operating loss carryforwards available to offset future taxable income.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended June 30, 1999, operating activities
resulted in a net cash outflow of $3.4 million, and capital expenditures,
excluding those under capital leases, totaled $801,000. Financing activities
for the nine months ended June 30, 1999 provided $11.1 million from the sale of
Common Stock and approximately $2.0 million in proceeds from long-term debt
obligations, in several transactions. Of the cash raised approximately $2.8
million was used to retire outstanding term debt obligations and $583,000 was
paid under capital lease obligations.
Subsequently, on July 29, 1999 we completed the sale of Common Stock
through an underwritten public offering, raising approximately $59.2 million,
net of underwriting commissions and estimated offering expenses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The company remains a defendant in the lawsuits described in its
registration statement filed on form S-1 (file No. 333-78495) relating to
Spyglass, Inc. and NextGen Development Corporation. A preliminary settlement has
been reached with NextGen Development Corporation, conditioned upon the
execution of a definitive settlement agreement.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 29, 1999, the Securities and Exchange Commission declared N2H2's
Registration Statement effective. Pursuant to this Registration Statement, N2H2
completed an initial public offering of 5,000,000 shares of its Common Stock at
an offering price of $13.00 per share. Of the shares sold, 4,950,000 were sold
by the Company, and 50,000 were offered by a group of selling shareholders. The
offering was managed by CIBC World Markets Corp. and U.S. Bancorp Piper Jaffray,
Inc. Proceeds to N2H2, net of offering costs, totaled approximately $59.2
million.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held a Special Meeting of Shareholders on June 11, 1999. As
of the record date for the Special Meeting of Shareholders, 15,604,720 shares
were eligible to vote, of which 14,262,443 were represented in person or by
proxy.
The first matter voted upon at the Special Meeting was a proposal to
approve and adopt Restated Articles of Incorporation including:
(a) Increasing the number of authorized shares of common stock from 20,000,000
shares to 250,000,000 shares, and increasing the number of authorized shares of
preferred stock from 10,000,000 shares to 50,000,000 shares;
(b) Prohibiting the board of directors from amending or repealing any bylaw
adopted by the shareholders that expressly states that it may not be amended or
repealed by the board, and requiring a two-thirds vote of the shares eligible
to vote by classes to adopt, amend or repeal the bylaws of the company;
(c) Providing for staggered terms for the directors of the company by dividing
the total number of directors into three groups, with each group containing
one-third of the total, as near as may be, with one group of directors to be
elected at each successive shareholders' meeting, and allowing removal of
directors only for cause;
(d) Requiring a two-thirds vote of the shares eligible to vote to amend certain
articles and sections of the Restated Articles;
(e) Allowing the board of directors to consider the impact of certain business
combinations (generally, a merger, share exchange or consolidation of the
company, or a sale, lease, exchange, mortgage, pledge, transfer or other
disposition or encumbrance of all or a substantial part of the company's
assets), and on the shareholders, employees, suppliers and customers of the
company and the community in which the company operates;
(f) Increasing the requisite percentage for calling a special meeting of
shareholders, and allowing a special meeting of shareholders to be called only
by the president or a majority of the board of directors; and
(g) Correcting certain other provisions and other less substantive matters.
The proposal to adopt the Restated Articles of Incorporation was approved by the
shareholders. The votes were reported as follows:
<TABLE>
<S> <C>
For: 14,224,098
Against: 38,345
Abstain: - 0 -
</TABLE>
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The second matter voted upon at the Special Meeting was a proposal to approve
the 1999 Nonemployee Director Stock Option Plan. Such proposal was approved. The
votes were reported as follows:
<TABLE>
<S> <C>
For: 14,224,098
Against: 38,345
Abstain: - 0 -
</TABLE>
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits.
10.1 First Amendment, dated June 16, 1999, to Union Bank of California Center
Office Lease of March 12, 1999, between Walton Seattle Investors I,
L.L.C and the registrant.
10.2 Second Amendment, dated August 10, 1999, to Union Bank of California
Center Office Lease of March 12, 1999, between Walton Seattle Investors
I, L.L.C and the registrant.
10.3 Third Amendment, dated August 12, 1999, to Union Bank of California
Center Office Lease of March 12, 1999, between Walton Seattle Investors
I, L.L.C and the registrant.
10.4 Employment Agreement of David W. Arnold dated August 23, 1999.
10.5 Option to purchase Common Stock issued August 24, 1999 to David W.
Arnold.
27.1 Financial Data Schedule
b) Reports on Form 8-K.
None
SIGNATURES
N2H2, INC.
By: /s/ Peter H. Nickerson
-------------------------------------
Peter H. Nickerson
President, Chief Executive Officer
and Chairman of the Board
By: /s/ John F. Duncan
-------------------------------------
John F. Duncan
Vice President - Chief Financial
Officer, Secretary, and Treasurer
(principal financial and
accounting 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 on September ___, 1999.
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EXHIBIT 10.1
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE (hereafter "First Amendment") is made and entered
into this 16th day of June, 1999, by and between WALTON SEATTLE INVESTORS I,
L.L.C., a Delaware limited liability company as Landlord, and N2H2, Inc., a
Washington corporation, as Tenant.
RECITALS
A. Landlord and Tenant have entered into that certain Office Lease dated
March 12, 1999, (the "Lease"), whereby Landlord has leased to Tenant and Tenant
has leased from Landlord approximately 30,071 rentable square feet known as
Suite 3400 ("Premises") in that certain building located at 900 Fourth Avenue,
Seattle, Washington 98164 ("Building").
B. Landlord and Tenant desire to further amend certain terms and
conditions of the Lease and to lease temporary space on the 40th floor of the
Building ("Temporary Premises") on an "as-is" basis and to subject the
Temporary Premises in the Building to the terms and conditions of the Lease as
set forth in this First Amendment.
C. All capitalized terms not otherwise defined herein shall have the
same meaning as set forth in the Lease.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
stated herein, Landlord and Tenant hereby modify, amend and supplement the
Lease and agree as follows:
1. TEMPORARY PREMISES. The Temporary Premises shall consist of that portion of
the 40th floor of the Building known as Suite 4000 consisting of
approximately 3,905 rentable square feet as more particularly shown on
Exhibit A.
2. TEMPORARY PREMISES TERM. The Temporary Premises term shall commence on July
15, 1999 and continue on a month-to-month basis until terminated by either
party at the end of a month with at least thirty (30) days prior written
notice. In no event shall the temporary Premises Term extend beyond
December 31, 1999 without the execution of a separate document by both
parties.
3. TEMPORARY PREMISES RENT. The base monthly, fully-serviced based rent
("Temporary Premises Rent"), payable on or before the 1st day of each month
(except for the first month's rent which shall be prorated), is $9,437.08.
4. TENANT IMPROVEMENTS. Tenant accepts the Temporary Premises on an "as-is"
basis and assumes responsibility for any and all costs to improve the
Temporary Premises. Tenant shall submit all plans to Landlord for review
and consent and shall follow the Building procedures for all work. Tenant
shall be solely responsible for the suitability of the design and function
of the Tenant Improvements for Tenant's needs and business.
5. NO CONFLICT. Except as modified by this First Amendment, the terms and
conditions of the Lease shall remain in full force and effect. In the event
of any
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conflict between the terms of this First Amendment and the Lease, this
First Amendment shall govern and control the intent and agreement of the
parties.
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment to
Lease as of the date first set forth above.
LANDLORD: TENANT:
Walton Seattle Investors I, L.L.C., N2H2, Inc.,
a Delaware limited liability company a Washington corporation, as Tenant.
By: Walton Street Real Estate
Fund I, L.P., a Delaware limited
partnership,
Manager
By: Walton Street Managers I, L.P.,
a Delaware limited partnership,
General Partner
By: WSC Managers I, Inc.,
a Delaware corporation,
General Partner
By: /s/ DOUGLAS J. WELKER By: /s/ JOHN DUNCAN
---------------------- ------------------
Douglas J. Welker, John Duncan,
Vice-President CFO/COO
2
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NOTARY PAGE
STATE OF ILLINOIS )
------------ ) :ss.
COUNTY OF COOK )
------------
I certify that I know or have satisfactory evidence that the person appearing
before me and making this acknowledgment is the person whose true signature
appears on this document.
On this 21st day of June, 1999, before me personally appeared DOUGLAS J.
WELKER, to me known to be the VICE PRESIDENT of WSC MANAGERS I, INC., a
Delaware corporation, the corporation that executed the within and foregoing
instrument as General Partner of WALTON STREET MANAGERS I, L.P., a Delaware
limited partnership, the general partner of WALTON STREET REAL ESTATE FUND I,
L.P., a Delaware limited partnership, the Manager of WALTON SEATTLE INVESTORS I,
L.L.C., a Delaware limited liability company, the company joint venture that
executed the within and foregoing instrument, and acknowledged the said
instrument to be the free and voluntary act and deed of said joint venture, for
the uses and purposes therein mentioned, and on oath stated that he/she was
authorized to execute said instrument.
WITNESS my hand and seal hereto affixed the day and year first above written.
/s/ CHRISTINA WALSH
[SEAL] ------------------------------------------------
Christina Walsh
------------------------------------------------
(Type or Print Name)
Notary Public in and for the State of IL
---------,
Residing at
-----------------------------------,
My Appointment Expires: 9/27/00
-----------------------.
State of Washington )
) :ss.
County of King )
On this ___ day of June, 1999, before me personally appeared JOHN DUNCAN to me
known to be the/a CFO/COO of N2H2, INC., the corporation that executed the
within and foregoing instrument, and acknowledged the said instrument to be the
free and voluntary act and deed of said corporation, for the uses and purposes
therein mentioned, and on oath stated that he/she was authorized to execute the
said instrument and that the seal affixed, if any, is the corporate seal of said
corporation.
IN WITNESS, WHEREOF, I have hereunto set my hand and affixed my official seal
the day and year first above written.
/s/ SUZANNE W. ROEN
[SEAL] --------------------------------------------------
Suzanne W. Roen
--------------------------------------------------
(Type or Print Name)
Notary Public in and for the State of Washington
-----------,
Residing at Redmond
-------------------------------------,
My Appointment Expires: 11/7/02
------------------------.
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EXHIBIT A
TEMPORARY PREMISES
(Floor plans showing Premises shaded)
[FLOOR PLAN LAYOUT]
4
<PAGE> 1
EXHIBIT 10.2
SECOND AMENDMENT TO LEASE
THIS SECOND AMENDMENT TO LEASE (hereafter "Second Amendment") is made and
entered into this 10th day of August, 1999, by and between WALTON SEATTLE
INVESTORS I, L.L.C., a Delaware limited liability company as Landlord, and
N2H2, INC., a Washington corporation, as Tenant.
RECITALS
A. Landlord and Tenant have entered into that certain Office Lease dated
March 12, 1999, as amended by the First Amendment to Lease dated June 16, 1999
(as amended, the "Lease"), whereby Landlord has leased to Tenant and Tenant has
leased from Landlord approximately 30,071 rentable square feet, excluding the
Temporary Premises, known as Suite 3400, as more particularly shown on Exhibit
A-1 ("Initial Premises"), in that certain building located at 900 Fourth
Avenue, Seattle, Washington 98164 ("Building").
B. Landlord and Tenant desire to further amend certain terms and
conditions of the Lease and to lease additional space on the 36th floor of the
Building and to subject the additional space to the terms and conditions of the
Lease as set forth in this Second Amendment.
C. All capitalized terms not otherwise defined herein shall have the same
meaning as set forth in the Lease.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
stated herein, Landlord and Tenant hereby modify, amend and supplement the
Lease and agree as follows:
1. ADDITIONAL PREMISES. Tenant hereby leases from Landlord and Landlord hereby
leases to Tenant approximately 12,908 rentable square feet on the 36th
floor as highlighted on attached Exhibit A-2 ("Additional Premises"). The
Additional Premises shall be added to and hereby made a part of the Initial
Premises for a total of 42,979 rentable square feet ("Leased Premises") and
are subject to all of the terms, covenants, and conditions of the Lease.
2. TERM OF LEASE: The term of this Lease shall be for seventy-three (73)
months.
3. INITIAL PREMISES COMMENCEMENT DATE.
a. The commencement date for the 33rd and the 34th floors shall mean
April 1, 1999 ("Commencement Date").
b. The commencement date for the 35th floor shall mean the date which is
the earlier (i) Substantial Completion of the Tenant Improvements
described in Exhibit B of the Lease, Work Letter Agreement, and the
tender of possession of the Premises to Tenant; (ii) The date that
Tenant opens for business on the 35th floor; or (iii) November 1,
1999. ("35th Floor Commencement Date").
4. ADDITIONAL PREMISES COMMENCEMENT DATE. The commencement date for the
Additional Premises shall mean the date which is the earlier of (i)
Substantial Completion of the Tenant Improvements described in the 36th
Floor Work Letter Agreement attached hereto as Exhibit B, if any, and the
tender of possession of the Premises to Tenant; (ii) The date that Tenant
opens for business on the 36th floor; or (iii) May 1, 2000 ("36th Floor
Commencement Date").
5. TERMINATION OPTION. The Option to Terminate the Lease on the 33rd floor, as
defined in Section 1, of Exhibit C of the Lease, is hereby deleted. As of
November 1, 1999, overages above the Tenant Allowance of $42,550.00 from
the 33rd floor shall be amortized into the rental rate at an interest rate
of 12% over the term of the lease (66 months). The overage, $21,456.88, as
amortized shall add $445.67 per month to the Base Rent.
6. BASE RENT: Section 1.1) of the Lease shall be replaced in its entirety with
the following:
<TABLE>
<S> <C>
Rent Schedule:........................................................Total Base Rent
4/1/99 through 35th Floor Commencement Date (at latest 10/31/99):.....$ 25,933.46
35th Floor Commencement Date through 12/31/99:........................$ 56,605.36
1/1/00 through 36th Floor Commencement Date (at latest 4/30/00):......$ 57,215.89
36th Floor Commencement Date through 10/31/00:........................$ 88,679.14
11/1/00 through 12/31/00:.............................................$102,391.42
1/1/01 through 12/31/02:..............................................$104,897.34
1/1/02 through 12/31/02:..............................................$108,478.92
1/1/03 through 12/31/03:..............................................$112,060.50
1/1/04 through 11/30/04:..............................................$115,426.95
12/1/04 through 4/30/05:..............................................$120,428.71
</TABLE>
<PAGE> 2
7. ADDITIONAL PREMISES TENANT IMPROVEMENTS. The tenant improvements for the
Additional Premises are set forth in Exhibit B, attached hereto.
8. ADDITIONAL PREMISES PRO RATA SHARE. In addition to the Pro rata Share set
forth in Section 1.i) of the Lease, the Additional Premises Pro rata
Share shall be 2.41%.
9. ADDITIONAL PREMISES BASE YEAR. As of January 1, 2001, Tenant shall, in
addition to all other sums due under this Lease, pay Landlord an amount
equal to Tenant's Additional Premises Pro rata Share of Taxes and
Operating Expenses, as defined in Section 6.a) and 6.b) of the Lease, for
the Additional Premises, in excess of the amount of Taxes and Operating
Expenses paid by Landlord during the 2000 base year ("Additional Premises
Base Year").
10. TOTAL SECURITY DEPOSIT. Section 1.p) and Section 3. of Exhibit C are
replaced in their entirety by the following:
As material consideration for Landlord to enter into this Lease, Tenant
shall provide additional funds of $35,000.00 no later than July 30, 1999
for a total security deposit of $80,000.00 and additional funds of
$37,000.00 no later than December 30, 2000 for a total security deposit
of $117,000.00.
11. PARKING: Section 1.q) is hereby replaced with the following:
Fifteen (15) stalls upon Commencement increasing on the 35th Floor
Commencement Date to twenty-seven (27) stalls and increasing on the 36th
Floor Commencement Date to thirty-nine (39) stalls.
12. RIGHT OF FIRST REFUSAL. Provided that Tenant is not in default of its
Lease obligations and has been current in its rental payments in the prior
twelve months, Landlord shall provide a Right of First Refusal for the
entire 37th floor, subject to the existing leases, ("First Refusal Space")
until April 31, 2000. During this period, prior to entering into a
commitment with a third party for the leasing of the 37th floor, Tenant
shall be given written notice thereof. The notice shall contain an offer
by Landlord to lease the 37th floor at a price and upon terms that
Landlord has negotiated with a third party. Tenant shall have the right to
lease the First Refusal Space by agreeing in writing within five (5)
business days to match the terms agreed upon between the Landlord and the
third party. If, within five (5) business days after receipt of Landlord's
notice, Tenant agrees in writing to lease the First Refusal Space,
Landlord and Tenant will execute a lease agreement for the First Refusal
Space within ten (10) business days after Landlord's receipt of Tenant's
notice of intent to lease on all the same terms as the notice, and other
matters dependent upon the size of the premises, such as Tenant's Pro rata
Share and Security Deposit. If Tenant does not deliver its notice of
intent to lease the First Refusal Space or portion of the First Refusal
Space offered in Landlord's notice within such five business (5) day
period, or if Landlord and Tenant do not enter into a fully executed lease
amendment for the First Refusal Space or such portion within such ten (10)
day period, then this right of first opportunity to lease the First
Refusal Space or portion of the First Refusal Space will lapse and be of
no further effect and Landlord will have the right to lease the First
Refusal Space or such portion of the First Refusal Space to a third party
on the same or any other terms and conditions, whether or not such terms
and conditions are more or less favorable than those offered to Tenant.
This right of first offer to lease the First Refusal Space is personal to
N2H2, Inc. and is not transferable.
13. RIGHT OF FIRST OFFER. As of and after May 1, 2000, upon written notice by
Tenant, landlord shall provide a Right of First Offer to expand onto the
entire 37th floor ("First Offer Space") at the then market rate for a
five year term. Provided Tenant is not in default of the Lease and has
been current in its rental payments in the prior twelve months, Tenant
shall have the right ("Right of First Offer") to lease the entire 37th
floor of the Building adjacent to the Premises as it may be available.
Available space is hereby defined as space that is not leased or
otherwise encumbered by options to an existing tenant. So long as the
space is available, Tenant may at any time approach Landlord to lease
space at the then current market terms. At Tenant's written request,
Landlord shall deliver the proposed rent and other terms and conditions
upon which Landlord is willing to lease the First Offer Space ("Space
Offer"). The Space Offer shall include the following: (i) the description
of the offered space; (ii) the interior improvements, if any, Landlord is
willing to construct; (iii) the method of payment for any such
improvements; (iv) the Base Rent during the remainder of the Extended
Term, and the formula (if different from the provisions of the Lease or
this Second Amendment) to be used to determine any Additional Rent or
other additional charges; (v) any other business terms Landlord elects to
specify or on which Tenant requests Landlord's position. Tenant shall
keep all terms of the Space Offer confidential and shall not disclose to
any person or entity other than Tenant's representatives and consultants
(who shall agree to keep the information confidential and be provided
only such information as is necessary to perform their services) any
terms of the Space
2
<PAGE> 3
Offer without the prior written consent of Landlord. For a period of
ten (10) days after Landlord's delivery of the Space Offer, Tenant may
elect to take the subject space upon the terms and conditions of this
Lease, (except those inconsistent with the terms of the Space Offer in
which case the terms of the Space Offer shall govern). If Tenant does
not notify Landlord that it elects to take the space within the ten
(10) day period, then Tenant's Right of First Offer to lease such
space shall terminate and Landlord may lease such space to any third
party.
14. REVISED LETTER OF CREDIT. As material consideration for Landlord to
enter into this Lease, Tenant shall provide, by July 30, 1999, an
Irrevocable Standby Letter of Credit equal to $315,000.00 issued in
favor of Landlord by a U.S. commercial bank acceptable to Landlord in
Landlord's reasonable discretion as security for Tenant's performance
of its monetary obligations under the Terms of this Lease ("Revised
Letter of Credit"). The Revised Letter of Credit shall be in a form
acceptable to Landlord for a term of five (5) years and five (5)
months but Landlord shall allow a release of funds from the Revised
Letter of Credit such that the total amount remaining is equal to
$200,000.00 from April 30, 2002 to April 29, 2003 and $100,000.00 from
April 30, 2003 to the end of the Lease Term. Landlord shall be
entitled to draw on such Revised Letter of Credit as often as
necessary to cure any of Tenant's monetary defaults under the Lease.
The use or application of the Revised Letter of Credit or any portion
thereof shall not prevent Landlord from exercising any other right or
remedy provided hereunder or under any Law including the right to
evict the Tenant pursuant to RCW 59.12., and shall not be construed as
liquidated damages or a cure or waiver of any default by Tenant. In
the event the Revised Letter of Credit is reduced by such use or
application, Tenant shall deposit with the above bank issuing the
Revised Letter of Credit within ten (10) days after written notice, an
amount sufficient to restore the full amount of the Revised Letter of
Credit.
15. 34th AND 35th FLOOR RESTROOM RENOVATION. Landlord shall renovate the
elevator lobby restrooms on the 34th and 35th floors to the new
Building Standard at the same time as the 35th floor tenant
improvements, unless such renovations will cause, in Landlord's
opinion, a delay in the substantial completion of those improvements,
in which case the renovations will start after substantial completion
of the 35th floor improvements.
16. COOLING TOWER OPERATION AND MAINTENANCE. On the following terms and
conditions, Landlord grants to Tenant a non-exclusive license to
connect to and use the designated cooling tower located as of the date
hereof on the rooftop of the Building (the "Cooling Tower") for the
purpose of providing additional cooling to the Premises.
a. Landlord shall recondition the existing Cooling Tower to operate
up to its original design capacity and repair and reroute the
piping to the 34th floor as soon as is practical after the
execution of this Second Amendment. It shall be Tenant's
responsibility to inspect and approve Landlord's work prior to
taking responsibility for the Cooling Tower.
b. Access to the Cooling Tower shall be provided via a separate pipe
system refurnished in a manner approved by Landlord. All work
performed by Landlord and Tenant hereunder shall be subject to
the provisions of this Lease related to alterations and
improvements to the Premises, including, without limitation, the
provisions of Section 10 of the Lease.
c. Tenant's use of the Cooling Tower shall be limited to the
Premises only.
d. Tenant shall be responsible for the purchase, installation and
maintenance of the individual HVAC units located with the Leased
Premises. Such units shall be separately metered. If now, or in
the future, Tenant shall require heating, ventilation or air
conditioning in excess of that which Landlord shall be required
to provide under the Lease, Tenant shall provide such additional
heating, ventilation or air conditioning through separate HVAC
units at the Premises connected to the Cooling Tower, at Tenant's
sole expense.
e. Landlord shall engage a qualified third party maintenance
contractor to provide routine maintenance and repair of the
Cooling Tower. Selection of the contractor and the terms of any
service contract shall be subject to Tenant's reasonable
approval. To the extent required by Tenant's sole use of the
Cooling Tower, Tenant shall pay any and all costs, including but
not limited to maintenance, electrical, water and sewer charges,
chemical treatment, fuel, tank permits, testing and repair costs
associated with the Cooling Tower, which are incurred in
connection with the operation, maintenance or repair of the
Cooling Tower or at the direction of Tenant.
f. Tenant assumes and accepts any and all risk of loss, liability
and expense caused to Tenant and/or other tenants in the
Building, arising by the failure of the Cooling Tower to function
for any reason and for any damage to Tenant and/or other tenants
in the Building
3
<PAGE> 4
caused by leaks on the roof or in the pipeline. Tenant shall add
a certificate to its insurance to cover the operation and
maintenance liability of the Cooling Tower and forward a copy of
the certificate for Landlord's files.
g. Tenant accepts the Cooling Tower in its current condition, "AS
IS, WHERE IS" and Landlord makes no warranties or
representations as to the function, reliability, fitness for a
particular purpose or useful life of the Cooling Tower.
h. Landlord may use available capacity from the Cooling Tower
and/or may permit other Building tenants to do so only to the
extent that such use does not interfere with Tenant's use of the
Cooling Tower for the purposes of and in the capacity set forth
above. If Landlord or another Building tenant connects to the
Cooling Tower, the overall maintenance and repair costs shall be
allocated on a pro rata basis between Tenant and other users
based on the number of tons of cooling allocated to the parties.
i. Landlord shall have no responsibility to maintain or repair the
Cooling Tower, Landlord shall not be liable for damages arising
from the failure of the Cooling Tower to function and/or any
delay in the Cooling Tower furnishing cooling to Tenant, nor
shall the temporary failure or interruption of service be
construed as an eviction of Tenant or relieve Tenant from the
duty of observing and performing any provisions of the Lease.
j. Landlord shall have the right to relocate the Cooling Tower at
its sole expense at any time during the Term of this Lease,
provided that Landlord shall bear all expenses which might be
required in order for Tenant to connect to and use the Cooling
Tower as relocated by Landlord.
k. Except as expressly set forth above, with the exception of a
management fee of 5% of the costs to operate the Cooling Tower,
Tenant shall not be charged any fee or rent for access to and
use of the Cooling Tower. The rights and obligation set forth in
this Section shall terminate as of the date of Lease
termination.
17. NO CONFLICT. Except as modified by this Second Amendment, the terms and
conditions of the Lease shall remain in full force and effect. In the event of
any conflict between the terms of this Second Amendment and the Lease, this
Second Amendment shall govern and control the intent and agreement of the
parties.
IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment to
Lease as of the date first set forth above.
LANDLORD: TENANT:
WALTON SEATTLE INVESTORS I, L.L.C., N2H2, Inc.,
a Delaware limited liability company a Washington corporation, as Tenant
By: Walton Street Real Estate Fund I, L.P.,
a Delaware limited partnership,
Manager
By: Walton Street Managers I, L.P.,
a Delaware limited partnership,
General Partner
By: WSC Managers I, Inc.,
a Delaware corporation,
General Partner
By: /s/ DOUGLAS J. WELKER, By: /s/ JOHN F. DUNCAN,
------------------------- ---------------------------
Douglas J. Welker, John F. Duncan,
Vice-President CFO/COO
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<PAGE> 5
NOTARY PAGE
STATE OF ILLINOIS )
) :ss.
COUNTY OF COOK )
I certify that I know or have satisfactory evidence that the person appearing
before me and making this acknowledgement is the person whose true signature
appears on this document.
On this 7th day of September, 1999, before me personally appeared DOUGLAS J.
WELKER, to me known to be the VICE PRESIDENT of WSC MANAGERS I, INC., a
Delaware corporation, the corporation that executed the within and foregoing
instrument as GENERAL PARTNER of WALTON STREET MANAGERS I, L.P., a Delaware
limited partnership, the GENERAL PARTNER of WALTON STREET REAL ESTATE FUND I,
L.P., a Delaware limited partnership, the MANAGER OF WALTON SEATTLE INVESTORS
I, L.L.C., a Delaware limited liability company, the company joint venture that
executed the within and foregoing instrument, and acknowledged the said
instrument to be the free and voluntary act and deed of said joint venture, for
the uses and purposes therein mentioned, and on oath stated that he/she was
authorized to execute said instrument.
WITNESS my hand and seal hereto affixed the day and year first above written.
["OFFICIAL SEAL"] /s/ SUSAN A. RUSHFORD
SUSAN A. RUSHFORD ------------------------------
NOTARY PUBLIC, STATE OF ILLINOIS Susan A. Rushford
MY COMMISSION EXPIRES 8/16/2000 ------------------------------
[Type or Print Name]
Notary Public in and for the
State of Illinois residing at
Chicago
------------------------------
My Appointment Expires:
8/16/2000
------------------------------
STATE OF WASHINGTON )
) :ss.
COUNTY OF KING )
On this 17th day of August, 1999, before me personally appeared JOHN F. DUNCAN
to me known to be the/a CFO/CFO of N2H2, INC., the corporation that executed
the within and foregoing instrument, and acknowledged the said instrument to be
the free and voluntary act and deed of said corporation, for the uses and
purposes therein mentioned, and on oath stated that he/she was authorized to
execute the said instrument and that the seal affixed, if any, is the corporate
seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal
the day and year first above written.
[RUTH M ALFORD]
[NOTARY PUBLIC SEAL] /s/ RUTH M. ALFORD
------------------------------
NOTARY PUBLIC, STATE OF WASHINGTON Ruth M. Alford
------------------------------
[Type or Print Name]
Notary Public in and for the
State of Washington residing
at Seattle
------------------------------
My Appointment Expires:
05/29/02
------------------------------
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EXHIBIT A-1
INITIAL PREMISES
24TH FLOOR
(Floor plans showing Premises shaded)
33RD FLOOR
(Floor plans showing Premises shaded)
Exhibit A-1 continued on next page
6
<PAGE> 7
EXHIBIT A-1 (Continued)
35TH FLOOR
(Floor plans showing Premises shaded)
7
<PAGE> 8
EXHIBIT A-2
ADDITIONAL PREMISES
36TH FLOOR
(Floor plans showing Premises shaded)
[DIAGRAM]
8
<PAGE> 9
EXHIBIT B
36TH FLOOR WORK LETTER AGREEMENT
THIS 36TH FLOOR WORK LETTER AGREEMENT is entered into as of the 10th day
of August, 1999, by and between WALTON SEATTLE INVESTORS I, L.L.C., a Delaware
limited liability company ("Landlord") and N2H2, Inc., a Washington corporation
("Tenant").
RECITALS:
A. Concurrently with the execution of this 36th Floor Work Letter
Agreement, Landlord and Tenant have entered into a lease (the "Lease") covering
certain premises (the "Additional Premises") more particularly described in
Exhibit A-2 above.
B. In order to induce Tenant to enter into the Lease (which is hereby
incorporated by reference to the extent that the provisions of this 36th Floor
Work Letter Agreement may apply thereto) and in consideration of the mutual
covenants hereinafter contained, Landlord and Tenant hereby agree as follows:
1. TENANT IMPROVEMENTS. Reference herein to "Tenant Improvements" shall
include all work to be done in the Additional Premises pursuant to the
Tenant Improvement Plans described in Section 3. below, including, but
not limited to, partitioning, doors, ceilings, floor coverings, wall
finishes (including paint and all covering), electrical (including
lighting, switching, outlets, etc.), telephones, plumbing, heating,
ventilation and air conditioning, fire protection, glazing and relites,
cabinets and other millwork.
2. COMPLETION SCHEDULE. Within ten (10) days after the space planning
meeting for the 36th floors set out below, Landlord shall deliver to
Tenant, for Tenant's review and approval, a schedule (the "Work
Schedule") setting forth a timetable for the planning and completion of
the installation of the Tenant Improvements to be constructed in the
Additional Premises, and the Commencement Date for the term of the Lease.
The Work Schedule shall set forth each of the various items of work to be
done by or approval to be given by Landlord and Tenant in connection with
the completion of the Tenant Improvements. Such Work Schedule shall be
submitted to Tenant for its approval and, upon approval by both Landlord
and Tenant, such Work Schedule shall become the basis for completing the
Tenant Improvement work. If Tenant shall fail to approve the Work
Schedule, as it may be modified after discussion between Landlord and
Tenant, within fifteen (15) working days after the date such Work
Schedule is first received by Tenant, and such failure leads to a delay
in the Substantial Completion of the Tenant Improvements beyond the
Commencement Date determined in the Section 3. of the Second Amendment,
the rent obligation for the 36th floor shall commence on May 1, 2000
regardless of the delay.
3. 36TH FLOOR TENANT IMPROVEMENT PLANS. As soon as is practical after August
1, 1999, but no later than September 31, 1999, Tenant agrees to meet with
Landlord's architect and/or space planner for the purpose of preparing a
space plan for the layout of the 36th floor. Based on such space plan,
Landlord's architect shall prepare final working drawings and
specifications for the Tenant Improvements. Such final working drawings
and specifications may be referred to herein as the "Tenant Improvement
Plans." The Tenant Improvement Plans must be consistent with Landlord's
standard specifications (the "Standards") for tenant improvements for the
Building, as the same may be changed from time to time by Landlord.
Tenant shall be solely responsible for the suitability of the design and
function of the Tenant Improvements for Tenant's needs and business.
4. NON-STANDARD TENANT IMPROVEMENTS. Landlord shall permit Tenant to deviate
from the Standards for the Tenant Improvements; provided that (a) the
deviations shall not be of a lesser quality than the Standards; (b) the
total lighting for the Additional Premises shall not exceed 1.20 watts
per rentable square foot; (c) the deviations conform to the applicable
governmental regulations and necessary governmental permits and approvals
have been secured; (d) the deviations do not require building service
beyond the level normally provided to other tenants in the Property and
do not overload the floors; and (e) Landlord has determined in its sole
discretion that the deviations are of a nature and quality that are
consistent with the overall objectives of the Landlord for the Property.
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<PAGE> 10
5. FINAL PRICING AND DRAWING SCHEDULE. After the preparation of the space
plan and after Tenant's written approval thereof, in accordance with the
Work Schedule, Landlord shall cause its architect to prepare and submit to
Tenant the final working drawings and specifications referred to in
Section 3. hereof. Such working drawings shall be approved by
Landlord and Tenant in accordance with the Work Schedule and shall
thereafter be submitted to the appropriate governmental body by Landlord's
architect for plan checking and the issuance of a building permit.
Landlord, with Tenant's cooperation, shall cause to be made any changes
in the plans and specifications necessary to obtain the building permit.
Concurrent with the plan checking, Landlord shall have prepared a final
pricing for Tenant's approval, in accordance with the Work Schedule,
taking into account any modifications which may be required to reflect
changes in the plans and specifications required by the City or County in
which the Additional Premises are located. After final approval of the
working drawings, no further changes to the Tenant Improvement Plans may
be made without the prior written approval from both Landlord and Tenant,
and then only after agreement by Tenant to pay any excess costs resulting
from the design and/or construction of such changes. Tenant hereby
acknowledges that any such changes shall be subject to the terms of
Section 7. hereof.
6. CONSTRUCTION OF TENANT IMPROVEMENTS. After the Tenant Improvement Plans
have been prepared and approved, the final pricing has been approved and a
building permit for the Tenant Improvements has been issued, Landlord shall
enter into a construction contract with its contractor for the installation
of the Tenant Improvements in accordance with the Tenant Improvement Plans.
Landlord shall supervise the completion of such work and shall use its best
efforts to secure substantial completion of the work in accordance with the
Work Schedule. The cost of such work shall be paid as provided in Section
7. hereof. Landlord shall not be liable for any direct or indirect damages
as a result of delays in construction beyond Landlord's reasonable control,
including, but not limited to, acts of God, inability to secure
governmental approvals or permits, governmental restrictions, strikes,
availability of materials or labor or delays by Tenant (or its architect or
anyone performing services on behalf of Tenant).
7. PAYMENT OF COST OF THE TENANT IMPROVEMENTS.
a) Landlord hereby grants to Tenant a "Tenant Allowance" of up to Two
Hundred Eighty-four Thousand Dollars ($284,000.00) towards
improvements on the 36th Floor (as defined below). Such Tenant
Allowance shall be used only for:
i) Payment of the cost of preparing the space plan and the final
working drawings and specifications, including mechanical,
electrical, plumbing and structural drawings and of all other
aspects of the Tenant Improvement Plans. The Tenant Allowance
will not be used for the payment of extraordinary design work
not included within the scope of Landlord's building standard
improvements or for payments to any other consultants, designers
or architects other than Landlord's architect and/or space
planner.
ii) The payment of plan check, permit and license fees relating to
construction of the Tenant Improvements.
iii) Except as provided in Section 8. below, construction of the
Tenant Improvements, including, without limitation, the
following:
a)
b) Installation within the Additional Premises of all
partitioning, doors, floor coverings, ceilings, wall
coverings and painting, millwork and similar items.
c) All electrical wiring, lighting fixtures, outlets and
switches, and other electrical work to be installed within
the Additional Premises.
d) The furnishing and installation of all duct work, terminal
boxes, diffusers and accessories required for the
completion of the heating, ventilation and air conditioning
systems within the Additional Premises, including the cost
of meter and key control for after-hour air conditioning.
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e) Any additional Tenant requirements including, but not
limited to, odor control, special heating, ventilation
and air conditioning, noise or vibration control or
other special systems.
f) All fire and life safety control systems such as fire
walls, sprinklers, halon, fire alarms, including
piping, wiring and accessories installed within the
Additional Premises.
g) All plumbing, fixtures, pipes and accessories to be
installed within the Additional Premises.
h) Testing and inspection costs.
i) Tenant required ACM costs.
j) Contractor's fees, including but not limited to any
fees based on general conditions.
k) Demolition of any existing build-out inconsistent with
the Tenant Improvement Plans.
l) Construction Management Fee of Five percent (5%) of
the total cost of the Tenant Improvements.
m) All other costs to be expended by Landlord in the
construction of the Tenant Improvements, including
those costs incurred by Landlord for construction of
elements of the Tenant Improvements in the Additional
Premises, which construction was performed by Landlord
prior to the execution of this Lease by Landlord and
Tenant (i.e., during or after the construction of the
base Building) and which construction is for the
benefit of tenants and is customarily performed by
Landlord prior to the execution of leases for such
space in the Property for reasons of economics
(examples of such construction would include the
extension of mechanical [including heating,
ventilating and air conditioning systems] and
electrical distribution systems outside of the core of
the Building, wall construction, column enclosures and
painting outside of the core of the Building, ceiling
hanger wires and window treatment).
b) The cost of each item shall be charged against the Tenant
Allowance. In the event that the cost of installing the Tenant
Improvements, as established by Landlord's final pricing
schedule, shall exceed the Tenant Allowance, or if any of the
Tenant Improvements are not to be paid out of the Tenant
Allowance as provided in Section 7.a) above, the excess shall be
paid by Tenant to Landlord prior to the commencement of
construction of the Tenant Improvements.
i) In the event that, after the Tenant Improvement Plans have
been prepared and a price therefor established by
Landlord, Tenant shall require any changes or substitutions
to the Tenant Improvement Plans, any additional costs
thereof shall be paid by Tenant to Landlord prior to the
commencement of such work. Landlord shall have the right to
decline Tenant's request for a change to the Tenant
Improvement Plans if such changes are inconsistent with
Sections 3. and 4. above, or if the change would, in
Landlord's opinion, unreasonably delay construction of the
Tenant Improvements.
ii) In the event that the cost of the Tenant Improvements
increases as set forth in Landlord's final pricing due to
the requirements of any governmental agency, Tenant shall
pay Landlord the amount of such increase within five (5)
days of Landlord's written notice; provided, however, that
Landlord shall first apply toward such increase any
remaining balance in the Tenant Allowance.
8. SHELL AND CORE CONDITIONS. Landlord shall pay for any initial expenses due
to asbestos-containing materials ("ACM") in the fireproofing. Subsequent
to Tenant's occupancy of the Additional Premises and commencement of this
Lease, Tenant shall be solely responsible for any future costs related to
ACM that arise in conjunction with Tenant's modification of the Additional
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Premises. If, however, asbestos work is required but is not due to any
Tenant initiated modification of the Additional Premises, with the
exception of work required of Tenant by law or statute, the Landlord shall
bear sole responsibility for any such costs. Any ACM related costs
associated with the removal of Tenant's Work in Section 10.c) or Tenant's
Lines in Section 29.a)i) shall be paid by Landlord.
9. BASE BUILDING IMPROVEMENTS. Landlord, at its sole expense, shall demolish
the existing ceiling grid and install a Building-standard sprinkler system
and a new 2' x 2' Building-standard grid in the Additional Premises.
Landlord shall provide deep cell parabolic light fixtures (up to 144) and
new Building-standard diffusers (up to 119) for installation. It shall be
Tenant's responsibility to install the ceiling tiles, light fixtures and
diffusers in the ceiling grid as part of the tenant improvements.
Additionally, Landlord, at its sole expense, shall demolish the existing
walls and carpet in the Additional Premises as required by the space plan.
10. RESTROOM RENOVATION. Landlord shall renovate the restrooms on the 36th
floor to the new Building Standard at the same time as the base building
improvements above.
11. PERSONAL PROPERTY. Tenant shall be solely responsible for procuring or
installing in the Additional Premises any trade fixtures, equipment,
furniture, furnishings, telephone equipment, computer cabling or other
personal property (collectively, "Personal Property") to be used in the
Additional Premises by Tenant, and the cost of such Personal Property shall
be paid by Tenant. Tenant shall conform to the Building's wiring standards
in installing any telephone and computer equipment and shall be subject to
any and all rules of the site during construction of the Tenant
Improvements.
IN WITNESS WHEREOF, this Work Letter Agreement is executed as of the date first
above written
LANDLORD: TENANT:
WALTON SEATTLE INVESTORS I, L.L.C., N2H2, INC.,
a Delaware limited liability company a Washington corporation, as Tenant.
By: Walton Street Real Estate Fund I, L.P.,
a Delaware limited partnership,
Manager
By: Walton Street Managers I, L.P.,
a Delaware limited partnership,
General Partner
By: WSC Managers I, Inc.,
a Delaware corporation,
General Partner
By: /s/ DOUGLAS J. WELKER, By:
----------------------- -----------------------
Douglas J. Welker, John F. Duncan,
Vice-President CFO/COO
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<PAGE> 1
EXHIBIT 10.3
THIRD AMENDMENT TO LEASE
THIS THIRD AMENDMENT TO LEASE (hereafter "Third Amendment") is made and entered
into this 12th day of August, 1999, by and between WALTON SEATTLE INVESTORS I,
L.L.C., a Delaware limited liability company as Landlord, and N2H2, INC., a
Washington corporation, as Tenant.
A. Landlord and Tenant have entered into that certain Office Lease
dated March 12, 1999, as amended by the First Amendment to Lease, dated July
16, 1999, and the Second Amendment to Lease, dated August 10, 1999 (as amended,
the "Lease"), whereby Landlord has leased to Tenant and Tenant has leased from
Landlord approximately 42,979 rentable square feet known as Suite 3400 and
temporary space on the 40th floor of approximately 3,905 rentable square feet
known as Suite 4000 ("Premises"), in that certain building located at 900
Fourth Avenue, Seattle, Washington 98164 ("Building").
B. Landlord and Tenant desire to further amend certain terms and
conditions of the Lease and to lease additional temporary space on the 31st
floor of the Building ("Additional Temporary Premises") on an "as-is" basis and
to subject the Additional Temporary Premises in the Building to the terms and
conditions of the Lease as set forth in this Third Amendment.
C. All capitalized terms not otherwise defined herein shall have
the same meaning as set forth in the Lease.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
stated herein, Landlord and Tenant hereby modify, amend and supplement the
Lease and agree as follows:
1. ADDITIONAL TEMPORARY PREMISES. The Additional Temporary Premises shall
consist of that portion of the 31st floor of the Building known as Suite
3100 consisting of approximately 5,340 rentable square feet, as more
particularly shown on Exhibit A.
2. ADDITIONAL TEMPORARY PREMISES TERM. The Additional Temporary Premises
Term shall commence on September 1, 1999 and continue on a
month-to-month basis until the tenant improvements on the 35th floor are
substantially completed.
3. ADDITIONAL TEMPORARY PREMISES RENT. The base monthly, fully-serviced
base rent ("Additional Temporary Premises Rent"), payable on or before
the 1st day of each month (except for the first month's rent which shall
be payable upon execution of this Third Amendment), is $12,905.00
4. TENANT IMPROVEMENTS. Tenant accepts the Additional Temporary Premises on
an "as-is" basis and assumes responsibility for any and all costs to
improve the Additional Temporary Premises, including any incremental
costs associated with the asbestos containing material in the
fireproofing. Tenant shall submit all plans to Landlord for review and
consent and shall follow the Building procedures for all work. Tenant
shall be solely responsible for the suitability of the design and
function of the tenant improvements for Tenant's needs and business.
5. NO CONFLICT. Except as modified by this Third Amendment, the terms and
conditions of the Lease shall remain in full force and effect. In the
event of any conflict between
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the terms of this Third Amendment and the Lease, this Third
Amendment shall govern and control the intent and agreement
of the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Third Amendment to
Lease as of the date first set forth above.
LANDLORD: TENANT:
WALTON SEATTLE INVESTORS I, L.L.C., N2H2, INC.,
a Delaware limited liability company a Washington corporation, as Tenant.
By: Walton Street Real Estate
Fund I, L.P., a Delaware
limited partnership, Manager
By: Walton Street Managers I, L.P.,
a Delaware limited partnership, General
Partner
By: WSC Managers I, Inc.,
a Delaware corporation,
General Partner
By: /s/ DOUGLAS J. WELKER By: /s/ JOHN DUNCAN
----------------------- ----------------------
Douglas J. Welker, John Duncan,
Vice President CFO/COO
2
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NOTARY PAGE
STATE OF ILLINOIS )
) :ss.
COUNTY OF COOK )
I certify that I know or have satisfactory evidence that the person appearing
before me and making this acknowledgment is the person whose true signature
appears on this document.
On this 14 day of September, 1999, before me personally appeared DOUGLAS J.
WELKER, to me known to be the Vice President of WSC MANAGERS I, INC., a
Delaware corporation, the corporation that executed the within and foregoing
instrument as General Partner of WALTON STREET MANAGERS I, L.P., a Delaware
limited partnership, the general partner of WALTON STREET REAL ESTATE FUND I,
L.P., a Delaware limited partnership, the Manager of WALTON SEATTLE INVESTORS
I, L.L.C., a Delaware limited liability company, the company joint venture that
executed the within and foregoing instrument, and acknowledged the said
instrument to be the free and voluntary act and deed of said joint venture, for
the uses and purposes therein mentioned, and on oath stated that he/she was
authorized to execute said instrument.
WITNESS my hand and seal hereto affixed the day and year first above written.
["OFFICIAL SEAL" /s/ SUSAN A. RUSHFORD
SUSAN A. RUSHFORD -------------------------------
NOTARY PUBLIC, STATE OF ILLINOIS Susan A. Rushford
MY COMMISSION EXPIRES 8/16/2000] -------------------------------
(Type or Print Name)
Notary Public in and for the State of
Illinois, residing at Chicago, IL
My Appointment Expires: 8/16/2000.
STATE OF WASHINGTON )
) :ss.
COUNTY OF KING )
On this 17th day of August, 1999, before me personally appeared JOHN DUNCAN to
me known to be the CFO/COO of N2H2, INC., the corporation that executed the
within and foregoing instrument, and acknowledged the said instrument to be the
free and voluntary act and deed of said corporation, for the uses and purposes
therein mentioned, and on oath stated that he/she was authorized to execute the
said instrument and that the seal affixed, if any, is the corporate seal of
said corporation.
IN WITNESS, WHEREOF, I have hereunto set my hand and affixed my official seal
the day and year first above written.
/s/ RUTH M. ALFORD
-------------------------------
Ruth M. Alford
-------------------------------
[RUTH M. ALFORD SEAL (Type or Print Name)
STATE OF WASHINGTON]
Notary Public in and for the State of Washington,
residing at Seattle
My Appointment Expires: 05/29/02.
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EXHIBIT A
ADDITIONAL TEMPORARY PREMISES
(Floor plans showing Additional Temporary Premises shaded)
[DIAGRAM OF FLOOR PLAN]
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<PAGE> 1
EXHIBIT 10.4
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AND NONCOMPETITION AGREEMENT (this "Agreement"), dated
as of August 23, 1999, is entered into by and between N2H2, INC., a Washington
corporation (the "Company") and DAVID W. ARNOLD, a resident of the State of
Washington (the "Executive").
WHEREAS, the Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Company as
Vice President - Chief Operating Officer of the Company for said period; and
WHEREAS, the parties desire by this writing to set forth the terms and
conditions of the employment relationship between the Company and Executive.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Employment. The Company hereby employs Executive, and Executive
agrees to accept such employment, upon the terms and conditions herein set
forth.
2. Employment Period. The initial term of employment hereunder shall
commence on the date hereof and continue for a period of two (2) years ending on
August 22, 2001 (the "Initial Term"), subject to earlier termination as
provided herein. If Executive's employment is not earlier terminated, following
the Initial Term, this Agreement and Executive's employment hereunder shall
renew indefinitely until terminated by either party in accordance with Section 5
below (the "Employment Period").
3. Position and Duties. Executive hereby agrees to serve as an employee
of the Company as Vice President - Chief Operating Officer. Executive shall
report to the President or such other officer(s) as designated by the Board of
Directors of the Company (the "Board"). Executive shall devote his best efforts
and his full business time and attention to the performance of services to the
Company in accordance with the terms hereof and as may reasonably be requested
by the Board, the President or other Board-designated officer of the Company.
<PAGE> 2
4. Compensation and Other Terms of Employment.
(a) Compensation. In consideration of the performance of his
duties hereunder, during the Employment Period, the Company agrees to pay
Executive during the Term of his employment at a base salary of Two Hundred
Thousand and No/100 Dollars ($200,000.00) per annum (the "Base Compensation").
All amounts payable to Executive under this Section 4(a) shall be paid in
accordance with the Company's regular payroll practices (e.g., timing of
payments and standard employee deductions, such as income tax, Social Security
and Medicare withholdings). Base Compensation shall increase by ten percent
(10%) during each twelve (12) month period beginning October 1, 2000 if the
Company's gross revenues reflected in its audited financial statements for the
fiscal year ending September 30, have increased by at least one hundred percent
(100%) over the gross revenues for the immediately preceding fiscal year.
(b) Bonus. In addition to the Base Compensation described in
Section 4(a) above and any additional bonuses approved by the Board, Executive
shall receive a quarterly bonus in the amount equal to 1.8% of the increase, if
any, of the Company's gross revenues during such quarter over the gross revenues
for the same quarter during the immediately preceding year. For purposes of this
Section 4(b), gross revenues shall be computed in accordance with generally
accepted accounting principles consistently applied. Notwithstanding the
foregoing, the amount of bonus compensation pursuant to this Section 4(b) during
any Company fiscal year shall not exceed seventy percent (70%) of Executive's
Base Compensation during such fiscal year. Bonus compensation for any quarter
shall be payable on the 15th day of the month following the end of the quarter
and shall be subject to standard employee deductions.
(c) Business Expenses. During the Employment Period, upon
presentation of vouchers and similar receipts, Executive shall be entitled to
receive reimbursement in accordance with the policies and procedures of the
Company maintained from time to time for all reasonable business expenses
actually incurred in the performance of his duties hereunder.
(d) Vacation. During the Employment Period, Executive shall be
entitled to four (4) weeks paid annual vacation. Executive's vacation will be
scheduled at those times most convenient to the Company's business.
(e) Benefits. During the Employment Period, the Company shall
provide to Executive such other employment benefits as may from time to time, be
made generally available to executives of the Company, including, without
limitation, the opportunity to participate in a group health insurance plan
(including coverage of Executive's family) and other benefit plans, if any are
in existence, in accordance with the terms of such plans, which benefits are
intended to be substantially similar to those provided by the Company as of the
date hereof (assuming availability at costs consistent with and comparable to
those currently paid by the Company); provided, however, that the Company shall
not be required to establish, continue or maintain any benefit plans.
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(f) Additional Benefits. The Company shall reimburse Executive
on a monthly basis for reasonable commuting costs, parking, health club dues and
high speed Internet access at home.
5. Termination of Employment. Executive's employment shall be terminated
on any of the following occurrences:
(a) Executive's Permanent Disability. For purposes of this
Agreement, "Permanent Disability" means an illness, injury or other physical or
mental condition continuing for at least ninety (90) consecutive days, arising
at any time during the Employment Period, unless with reasonable accommodation
Executive could perform the essential functions of his position and making such
accommodation would not result in an undue hardship to the Company. If
Executive's employment is terminated because of Executive's Permanent
Disability, the Company shall continue to pay all Base Compensation and pro rata
bonus amounts accrued pursuant to Sections 4(a) and (b) for the longer of (i)
the remaining Initial Term of this Agreement or (ii) twelve (12) months.
(b) Executive's Death. If Executive's employment is terminated
because of Executive's death, the Company shall pay to Executive's personal
representative (on behalf of Executive's estate), within 60 days after the
Company receives written notice of such representative's appointment, all Base
Compensation and pro rata bonus amounts, if any, accrued pursuant to Sections
4(a) and 4(b) above through the date of termination, and shall continue to pay
all Base Compensation and pro rata bonus amounts, if any, accrued pursuant to
Sections 4(a) and (b) for the longer of (i) the remaining Initial Term of the
Agreement or (ii) twelve (12) months.
(c) For Cause. If Executive's employment is terminated with
Cause (as defined in Section 6(a) below), the Company shall pay to Executive all
Base Compensation accrued through the date of termination pursuant to Sections
4(a) and 4(b) above, whereupon the Company shall have no further obligations to
Executive under this Agreement. Executive and his dependents, if any, shall also
be entitled to any continuation health insurance coverage rights available under
applicable law. Without waiving any rights the Company may have hereunder or
otherwise, the Company hereby expressly reserves its rights to proceed against
Executive for damages in connection with any claim or cause of action that the
Company may have arising out of or related to Executive's employment hereunder.
(d) Termination By The Company Without Cause or Voluntary
Termination By Executive With Good Reason. If Executive's employment with the
Company is terminated by the Company without Cause, or is Voluntarily Terminated
(as defined in Section 6(b) below) by Executive with Good Reason (as defined in
Section 6(c) below), the Company shall pay to Executive all Base Compensation
and pro rata bonus amounts, if any, accrued pursuant to Sections 4(a) and 4(b)
above through the date of such termination and shall continue to pay Executive's
Base Compensation and bonus for a period eighteen months (18) months thereafter
(the "Severance Period"). Those unvested stock options which are scheduled to
vest between the date of termination and the end of the Severance Period shall
be deemed to vest immediately.
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Executive and his dependents, if any, shall also be entitled to any continuation
health insurance coverage rights available under applicable law.
(e) Voluntary Termination By Executive Without Good Reason. If
Executive's employment with the Company is Voluntarily Terminated by Executive
without Good Reason, the Company shall pay to Executive all Base Compensation
and bonus accrued through the date of termination pursuant to Sections 4(a) and
4(b) above, whereupon the Company shall have no further obligations to Executive
under this Agreement. Executive and his dependents, if any, shall also be
entitled to any continuation health insurance coverage rights available under
applicable law. Without waiving any rights the Company may have hereunder or
otherwise, the Company hereby expressly reserves its rights to proceed against
Executive for damages in connection with any claim or cause of action that the
Company may have arising out of or related to Executive's employment hereunder.
(f) Voluntary Termination By Executive Following Change in
Control. If Executive's employment with the Company is Voluntarily Terminated by
Executive within 30 days of a Change in Control (as defined in Section 6(d)
below), the Company shall pay to Executive all Base Compensation and bonus
amounts accrued pursuant to Sections 4(a) and 4(b) through a period equal to the
Severance Period. All unvested stock options shall be deemed to vest
immediately. Executive and his dependents, if any, shall also be entitled to any
continuation of health insurance coverage rights available under the applicable
law.
(g) Termination Obligations.
(i) Executive hereby acknowledges and agrees that all
personal property and equipment furnished to or prepared by Executive in the
course of or incident to his employment by the Company, belongs to the Company
and shall be promptly returned to the Company upon termination of the Employment
Period. "Personal property" includes, without limitation, all books, manuals,
records, reports, notes, contracts, lists, blueprints, and other documents, or
materials, or copies thereof (including computer files), and all other
proprietary information belonging, or relating to the business of, the Company
or any affiliate. Following termination, Executive will not retain any written
or other tangible materials containing any proprietary information of the
Company or any affiliate.
(ii) Upon termination of the Employment Period,
Executive shall be deemed to have resigned from all offices, directorships and
similar positions then held with the Company or any affiliate.
(iii) The representations and warranties contained
herein and Executive's obligations under Sections 9 and 10 shall survive
termination of the Employment Period and the expiration or termination of this
Agreement. Any provision hereof required to give meaning and effect to such
surviving provisions shall also survive the termination of the Employment Period
and the expiration or termination of this Agreement.
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<PAGE> 5
6. Definitions. For the purposes of this Agreement the following terms
and phrases shall have the following meanings:
(a) "Cause" shall mean a termination of Executive's employment
by the Company due to (i) Executive's failure or refusal to perform his duties,
responsibilities or obligations hereunder after at least fourteen (14) days'
prior written notice regarding any such failure or refusal, (ii) Executive's
breach of any noncompetition or confidentiality agreement with the Company;
(iii) the willful misappropriation of funds or property of the Company; (iv) use
of alcohol or drugs which interferes with performance of Executive's obligations
under this Agreement, continuing after at least thirty (30) days' prior written
notice; (v) conviction of a felony or of any crime involving moral turpitude,
fraud or misrepresentation; or (vi) the commission by Executive of any willful
or intentional act in disregard of the interests of the Company which could
reasonably be expected to materially injure the reputation, business or business
relationships of the Company, provided, however, that a good faith mistake in
the normal course of business shall not be considered "Cause" under this Section
6(a).
(b) "Voluntary Termination" shall mean the termination by
Executive of his employment by the Company by voluntary resignation or any other
means other than (i) death or Permanent Disability, (ii) simultaneous with
termination for Cause or (iii) simultaneous with or following an event which,
whether or not known to the Company at the time of such Voluntary Termination by
Executive, would constitute Cause.
(c) "Good Reason" shall mean, with respect to a Voluntary
Termination, (i) if (A) such Voluntary Termination occurs within the thirty (30)
day period immediately following a permanent material reduction of Executive's
duties and responsibilities or a permanent change in Executive's duties and
responsibilities such that Executive's duties and responsibilities are
inconsistent with the type of duties and responsibilities of Executive in effect
immediately prior to such reduction or change, (B) such Voluntary Termination
promptly follows a reduction in Executive's benefits, or (C) the President or
the Board otherwise determines that a Voluntary Termination by Executive is for
"Good Reason" under the circumstances then prevailing, and (ii) if Executive
provides written notice of such Good Reason to the Company and the Company does
not correct the circumstances giving rise to such Good Reason during the
following 30-day period. The Company's termination or material breach of this
Agreement without Cause shall constitute Good Reason.
(d) "Change In Control" means the occurrence of any one of the
following events:
(i) any recapitalization, consolidation or merger of the
Company in which the Company is not the continuing or surviving entity or which
contemplates that all or substantially all of the business and/or assets of the
Company shall be controlled by another person or entity other than the person or
entity which controlled the Company immediately prior to such recapitalization,
consolidation or merger;
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(ii) any sale, lease, exchange or transfer (in one
transaction or series of related transactions) of all or substantially all of
the assets of the Company; or
(iii) approval by the members of the Company of any plan
or proposal for the liquidation or dissolution of the Company, unless such plan
or proposal is abandoned within 60 days following such approval.
7. Stock Options. Subject to the discretion of the Company's Board of
Directors Executive shall be entitled to participate in any Company stock option
or stock purchase plan.
8. Records and Confidential Information.
(a) Executive acknowledges that, in connection with the
performance of his duties during the Term of this Agreement, the Company will
make available to Executive, or Executive will have access to, certain
Confidential Information (as defined below) and Trade Secrets (as defined by the
Uniform Trade Secrets Act) of the Company and its affiliates. Executive
acknowledges and agrees that any and all Confidential Information or Trade
Secrets of the Company learned or obtained by Executive during the course of his
employment by the Company or otherwise (including, without limitation,
information that Executive obtained through or in connection with his ownership
of and employment by the Company prior to the date hereof) whether developed by
Executive alone or in conjunction with others or otherwise, shall be and is the
property of the Company and its affiliates.
(b) Confidential Information and Trade Secrets of the Company
will be kept confidential by Executive, will not be used in any manner which is
detrimental to the Company, will not be used other than in connection with
Executive's discharge of his duties hereunder, and will be safeguarded by
Executive from unauthorized disclosure.
(c) Following Executive's termination hereunder, as soon as
possible after the Company's written request, Executive will return to the
Company all written Confidential Information and Trade Secrets of the Company
will have been provided to Executive, and Executive will destroy all copies of
any analyses, compilations, studies or other documents prepared by Executive or
for Executive's use containing or reflecting any Confidential Information or
Trade Secrets of the Company. Within 5 business days of the receipt of such
request by Executive, Executive shall, upon written request of the Company,
deliver to the Company a notarized document certifying that such written
Confidential Information and Trade Secrets of the Company have been returned or
destroyed in accordance with this Section.
(d) For the purposes of this Agreement, "Confidential
Information" shall mean all confidential and proprietary information to the
Company, and its affiliates, including, without limitation, the Company's
marketing strategies, pricing policies or characteristics, customers and
customer information, product or product specifications, designs, manufacturing
processes, manufacturing costs, cost of materials, customer lists, business or
business prospects, plans, proposals, codes, marketing studies, research,
reports, investigations, or other information of similar character. For purposes
of this Agreement, Confidential Information shall not include and
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Executive's obligations under this Section shall not extend to (i) information
which is generally available to the public or within the industry, (ii)
information obtained by Executive from third persons not under agreement to
maintain the confidentiality of the same and (iii) information which is required
to be disclosed by law or legal process.
(e) This Section is not intended to, and does not, limit in any
way Executive's duties and obligations to the Company under statutory and common
law not to disclose or make personal use of any Confidential Information or
Trade Secrets of the Company.
9. Assignment of Inventions.
(a) Definition of Inventions. "Inventions" means discoveries,
developments, concepts, ideas, methods, designs, improvements, inventions,
formulas, processes, techniques, programs, know-how and data, whether or not
patentable or registerable under copyright or similar statutes, except any of
the foregoing that (i) is not related to the business of the Company or its
affiliates, or the Company's (and its affiliates') actual or demonstrable
research or development (ii) does not involve the use of any equipment,
supplies, facility or Confidential Information of the Company, (iii) was
developed entirely on Executive's own time, and (iv) does not result from any
work performed by Executive for the Company.
(b) Assignment. Executive agrees to and hereby does assign to
the Company, without further consideration, all of his right, title and interest
in any and all Inventions he may make during the Term hereof.
(c) Duty to Disclose and Assist. Executive agrees to promptly
disclose in writing all Inventions to the Company, and to provide all assistance
reasonably requested by the Company in the preservation of the Company's
interests in the Inventions including obtaining patents in any country
throughout the world. Such services will be without additional compensation if
Executive is then employed by the Company and for reasonable compensation and
subject to his reasonable availability if he is not. If the Company cannot,
after reasonable effort, secure Executive's signature on any document or
documents needed to apply for or prosecute any patent, copyright, or other right
or protection relating to an Invention, whether because of his physical or
mental incapacity or for any other reason whatsoever, Executive hereby
irrevocably designates and appoints the Company and its duly authorized officers
and agents as his agent and attorney-in-fact, to act for and in his behalf and
in his name and stead for the purpose of executing and filing any such
application or applications and taking all other lawfully permitted actions to
further the prosecution and issuance of patents, copyrights, or similar
protections thereon, with the same legal force and effect as if executed by him.
(d) Ownership of Copyrights. Executive agrees that any work
prepared for the Company, which is eligible for copyright protection under the
laws of the United States or any other country, shall be a work made for hire
and ownership of all copyrights (including all renewals and extensions) therein
shall vest in the Company. If any such work is deemed not to be a work made for
hire for any reason, Executive hereby grants, transfers and assigns all right,
title and interest in such work and all copyrights in such work and all renewals
and extensions thereof to the Company,
7
<PAGE> 8
and agrees to provide all assistance reasonably requested by the Company in the
establishment, preservation and enforcement of the Company's copyright in such
work, such assistance to be provided at the Company's expense but without any
additional compensation to Executive. Executive hereby agrees to and does hereby
waive the enforcement of all moral rights with respect to the work developed or
produced hereunder, including without limitation any and all rights of
identification of authorship and any and all rights of approval, restriction or
limitation on use or subsequent modifications.
(e) Litigation. Executive agrees to render assistance and
cooperation to the Company at its request regarding any matter, dispute or
controversy with which the Company may become involved and of which Executive
has or may have reason to have knowledge, information or expertise. Such
services will be without additional compensation if Executive is then employed
by the Company and for reasonable compensation and subject to his reasonable
availability if he is not.
10. Covenants Not to Compete.
(a) Non-Interference with Customer Accounts. Executive covenants
and agrees that, during the Employment Period, and for a period of eighteen (18)
months after the date of termination of Executive's employment with the Company,
Executive shall not, directly or indirectly, personally or on behalf of any
other person, business, corporation, or entity, contact or do business with any
customer of the Company with respect to any Internet filtering product or
service which is competitive with any product or service which was sold,
provided, or under development by the Company at any time during the
twelve-month period prior to the date of termination of Executive's employment
with the Company. This covenant applies to those customers and the related
entities of those customers to which the Company sold its Internet filtering
products or services at any time during the twelve-month period prior to the
date of termination of Executive's employment with the Company, and those
prospective customers with which the Company actively pursued sales or the
provision of services at any time during the twelve-month period prior to the
date of termination of Executive's employment with the Company.
(b) Noncompetition. Executive covenants and agrees that, during
the Employment Period, and for a period of eighteen (18) months after the date
of termination of Executive's employment with the Company, Executive shall not,
directly or indirectly, own an interest in, operate, join, control, advise, work
for, serve as a director of, have a financial interest which provides any
control of, or participate in any corporation, partnership, proprietorship,
firm, association, person, or other entity (collectively, "Businesses")
producing, designing, providing, soliciting orders for, selling, distributing,
or marketing any Internet filtering products, goods, equipment, or services
which are similar to any Internet filtering products, goods, equipment or
services produced, sold or provided by the Company at any time during the
twelve-month period prior to the date of termination of Executive's employment
with the Company. THE PARTIES ACKNOWLEDGE THAT THE COMPANY PROVIDES SERVICES ON
A WORLD WIDE BASIS AND, ACCORDINGLY THAT IT IS NOT FAIR OR APPROPRIATE TO
RESTRICT THE FOREGOING COVENANT GEOGRAPHICALLY.
8
<PAGE> 9
(c) This covenant does not prohibit the mere ownership of less
than two percent (2%) of the outstanding stock of any publicly traded
corporation as long as Executive is not otherwise in violation of this covenant.
(d) Non-Diversion. During the Employment Period, and for a
period of eighteen (18) months after the date of termination of Executive's
employment with the Company, Executive shall not divert or attempt to divert or
take advantage of or attempt to take advantage of any actual or potential
business or opportunities of the Company or its subsidiaries or affiliates which
Executive became aware of as the result of his employment with the Company.
(e) Non-Recruitment. Executive agrees that the Company has
invested substantial time and effort in assembling its present workforce.
Accordingly, Executive agrees that during the Employment Period and for a period
of eighteen (18) months after the date of termination of Executive's employment
with the Company, Executive shall not (i) hire away any individuals who were
employed by the Company or its subsidiaries or affiliates during the
twelve-month period prior to the date of termination of Executive's employment
with the Company or (ii) directly or indirectly entice, solicit or seek to
induce or influence any such employees to leave their employment with the
Company or its subsidiaries or affiliates.
(f) Non-Disparagement. Executive and the Company mutually
covenant and agree that, during the Employment Period and for a period of
eighteen (18) months after the date of termination of Executive's employment
with the Company, neither shall, directly or indirectly disparage the other.
(g) Remedies. Both parties acknowledge that should they
materially breach this Agreement, it will be difficult to determine the
resulting damages to the non-breaching party, and, in addition to any other
remedies the non-breaching party may have, the non-breaching party shall be
entitled to temporary injunctive relief without being required to post a bond
and to permanent injunctive relief without the necessity of proving actual
damage. In the event of any action or proceeding to interpret or enforce this
Agreement, the prevailing party shall be entitled to recover its reasonable
attorneys' fees and costs, whether or not litigation is actually commenced and
including litigation of any appeal. Failure of either party to seek any or all
remedies in one case does not restrict that party from seeking any remedies in
another situation, and no such action shall not constitute a waiver of any of
the party's rights.
(h) Severability and Modification of Any Unenforceable Covenant.
It is the parties' intent that each of the covenants be read and interpreted
with every reasonable inference given to its enforceability. However, it is also
the parties' intent that if any term, provision or condition of the covenants is
held by a court of competent jurisdiction to be invalid, void or unenforceable,
the remainder of the provisions thereof shall remain in full force and effect
and shall in no way be affected, impaired or invalidated. Finally, it is also
the parties' intent that if a court should determine any of the covenants are
unenforceable because of over breadth, then the court shall modify said covenant
so as to make it reasonable and enforceable under the prevailing circumstances.
9
<PAGE> 10
(i) Tolling. In the event of the breach by Executive of any
covenant the running of the period of restriction shall be automatically tolled
and suspended for the amount of time that the breach continues, and shall
automatically recommence when the breach is remedied so that the Company shall
receive the benefit of Executive's compliance with the covenants.
11. No Assignment. This Agreement and the rights and duties hereunder
are personal to Executive and shall not be assigned, delegated, transferred,
pledged or sold by Executive without the prior written consent of the Company.
Executive hereby acknowledges and agrees that the Company may assign, delegate,
transfer, pledge or sell this Agreement and the rights and duties hereunder (a)
to an affiliate of the Company or (b) to any third party acquiring through
merger, consolidation or purchase all or substantially all of the business
and/or assets of the Company. This Agreement shall inure to the benefit of and
be enforceable by the parties hereto, and their respective heirs, personal
representatives, successors and assigns.
12. Miscellaneous Provisions.
(a) Payment of Taxes. To the extent that any taxes become
payable by Executive by virtue of any payments made or benefits conferred by the
Company, the Company shall not be liable to pay or obligated to reimburse
Executive for any such taxes or to make any adjustment under this Agreement. Any
payments otherwise due under this Agreement to Executive, including, but not
limited to, the Base Compensation and any bonus, shall be reduced by any
required withholding for federal, state and/or local taxes and other appropriate
payroll deductions.
(b) Insurance. The Company may, from time to time, apply for and
take out, in its own name and at its own expense, life, health, accident,
disability or other insurance on Executive in any sum or sums that it may deem
necessary to protect its interests, and Executive shall aid and cooperate in all
reasonable respects with the Company in procuring any and all such insurance,
including, without limitation, submitting to the usual and customary medical
examinations, and by filling out, executing and delivering such applications and
other instruments in writing as may be reasonably required by an insurance
company or companies to which an application or applications for such insurance
may be made by or for the Company. In order to induce the Company to enter into
this Agreement, Executive represents and warrants to the Company that, to his
knowledge, Executive is insurable at standard (non-rated) premiums.
(c) Deceased Executive. In the event that Executive shall die
while entitled to benefits hereunder, the payment which would otherwise be made
to Executive, shall be made to the estate, or other appropriate legal
representative, of Executive.
(d) Notices. All notices, offers or other communications
required or permitted to be given pursuant to this Agreement shall be in writing
and shall be considered as properly given or made if (i) delivered personally,
(ii) mailed from within the United States by certified mail, return receipt
requested, postage prepaid, (iii) sent by prepaid telegram or facsimile
transmission (with written confirmation of receipt) or (iv) sent by overnight
delivery service. All notices given or made pursuant hereto shall be so given or
made to the parties at the following addresses, or to
10
<PAGE> 11
any other address the addressee may have notified the sender beforehand
referring to this Agreement, and shall be deemed effective when so given or made
at such address whether or not the recipient still resides at that address or
actually receives the notice:
If to Executive:
David W. Arnold
8410 NE 27th Place
Bellevue, Washington 98004
If to the Company:
N2H2, Inc.
900 4th Avenue
Suite 3400
Seattle, Washington 98164
Attn: President
With a copy to:
Lane Powell Spears Lubersky LLP
1420 Fifth Avenue, Suite 4100
Seattle, Washington 98101-2338
Attn: Jim D. Johnston
Facsimile: (206) 223-7107
(e) Severability. If any provision of this Agreement is held by
a court of competent jurisdiction to be invalid, illegal or unenforceable, such
provision shall be severed and enforced to the extent possible or modified in
such a way as to make it enforceable, and the invalidity, illegality or
unenforceability thereof shall not affect the validity, legality or
enforceability of the remaining provisions of this Agreement.
(f) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Washington applicable to
contracts executed in and to be performed entirely within that state, except
with respect to matters of law concerning the internal corporate affairs of any
corporate entity which is a party to or the subject of this Agreement, and as to
those matters, the law of the jurisdiction under which the respective entity
derives its powers shall govern.
(g) Counterparts. This Agreement may be executed in
counterparts, each of which shall be an original, but all of which shall
constitute one and the same instrument.
(h) Entire Understanding. This Agreement, including all Recitals
hereto which are incorporated herein by this reference, together with the other
agreements and documents being executed and delivered concurrently herewith by
Executive, the Company and certain of its
11
<PAGE> 12
affiliates, constitute the entire understanding among all of the parties hereto
and supersedes any prior understandings and agreements, written or oral, among
them respecting the subject matter within.
(i) Pronouns and Headings. As used herein, all pronouns shall
include the masculine, feminine, neuter, singular and plural thereof wherever
the context and facts require such construction. The headings, titles and
subtitles herein are inserted for convenience of reference only and are to be
ignored in any construction of the provisions hereof.
(j) Amendments. Except as specifically set forth herein, this
Agreement shall not be changed or amended unless in writing and signed by both
Executive and the President (or other officer of the Company designated by the
Board).
(k) Executive's Acknowledgment. Executive acknowledges (i) that
he has consulted with or has had the opportunity to consult with independent
counsel of his own choice concerning this Agreement and has been advised to do
so by the Company, and (ii) that he has read and understands this Agreement, is
fully aware of its legal effect, and has entered into it freely based on his own
judgment.
(l) Arbitration. It is understood and agreed between the parties
hereto that any claim of any nature whatsoever arising out of or connected with
Executive's employment with the Company, including but not limited to wrongful
termination, breach of contract, defamation, and claims of discrimination
(including age, disability, sex, religion, race, national origin, color, etc.)
or harassment, whether under federal, state or local laws, common law or in
equity, shall be decided by submission to final and binding arbitration. The
arbitrator shall be a retired or former superior court or appellate court judge.
This arbitration provision shall be governed by the Federal Arbitration Act the
arbitration shall be and pursuant to rules and procedures hereafter adopted by
the Company, and failing such adoption, the Federal Rules of Civil Procedure.
Any arbitration hereunder shall be conducted in Seattle, Washington. Judgment
shall be final upon the award rendered by the arbitrator and may be entered in
any court having jurisdiction thereof. It is further understood and agreed
between the parties hereto that actions seeking temporary injunctions are hereby
excluded from arbitration and, therefore, may be sought in a court of
appropriate jurisdiction without resort to arbitration, even though resolution
of the underlying claim must be submitted to arbitration. Provided: This Section
shall not govern any matter arising out of Executive's violation of, or
threatened violation of, the terms of the Employee Intellectual Property
Agreement attached hereto as Appendix A and incorporated herein by reference
("IP Agreement"), or Executive's violation of the covenants contained in
Sections 10 of this Agreement, in which event the Company shall be entitled to
seek injunctive or other equitable relief in any state or federal court located
in King County, Washington, and the parties agree to submit to the jurisdiction
of such court.
(m) Delivery by Facsimile. The parties agree that counterparts
of this Agreement may be executed and delivered by facsimile, followed by
regular mailing of original signed counterparts.
12
<PAGE> 13
IN WITNESS WHEREOF, this Agreement has been executed as of the date and
year first above written.
THE COMPANY:
N2H2, INC.
By /s/ PETER NICKERSON
--------------------------------------------
Its President
THE EXECUTIVE:
/s/ DAVID W. ARNOLD
----------------------------------------------
David W. Arnold
13
<PAGE> 14
APPENDIX A
EMPLOYEE INTELLECTUAL PROPERTY AGREEMENT
BY and BETWEEN: N2H2, INC. (the "COMPANY"), a Washington corporation
and DAVID W. ARNOLD ("EMPLOYEE").
In the course of employment with the Company, Employee has had and/or will have
access to information, products, processes, tools, know-how and other
intellectual properties that are confidential, proprietary or licensed to the
Company. There is currently an understanding and agreement between the Company
and Employee regarding these confidentiality and intellectual property matters,
which was documented in part by a certain N2H2 Employee Confidentiality and
Nondisclosure Agreement. As a condition of Employee's continuing employment, the
parties now wish to have this Agreement supersede and replace all previous
agreements of the parties on matters of confidentiality and intellectual
property rights.
NOW THEREFORE, in consideration of the employment relationship between the
parties, the parties agree, promise and covenant to each other as follows:
1. SCOPE OF AGREEMENT.
(a) The parties acknowledge and agree that this Agreement addresses only
certain issues relating to patent, copyright, trade secret and other
intellectual property rights. This Agreement is not a contract of employment and
does not address or modify any of the terms and conditions of employment,
including but not limited to duration of employment, compensation, non-compete
covenants, and other employment-related issues.
(b) This Agreement and Executive Employment Agreement constitute the
entire agreement of the parties with respect to the subject matter thereof, and
may not be modified, amended or waived except in a writing signed by both
parties. In the event of any inconsistency between this Agreement and Executive
Employment Agreement, the provisions of this Agreement will control. This
Agreement shall be effective as of the beginning of the employment relationship
between the parties.
2. DEFINITIONS.
For purposes of this Agreement, the capitalized terms set forth below
shall have the meanings assigned to them as follows:
(a) "Development" shall mean any information, product, process, invention,
discovery, technique, idea, design, work of authorship, improvement or
modification, in whatever form and
14
<PAGE> 15
whether or not patentable, copyrightable or otherwise protectable under law,
that is created, made, conceived, developed, expressed in tangible form or
reduced to practice by Employee (either alone or with others).
(b) "Protected Development" shall mean any Development that:
(i) results from the use of equipment, supplies, facility, Protected
Information and any property or proprietary rights (whether tangible or
intangible) that are owned, leased or contracted for by the Company;
(ii) relates directly to the business of the Company, or to the
Company's actual or demonstrably anticipated research or development; or
(iii) results from any work or services performed by Employee for the
Company.
In particular, Protected Development shall include, without limitation,
any computer design, programming and documentation; source code and object code
for software; database, model, documentation, and information to whose creation
Employee contributes during the course of Employee's employment by the Company.
(c) "Protected Information" shall mean all information, in whatever form or
format, that is identified by the Company or is reasonably understood as private
or confidential, or that qualifies for protection under law as a trade secret or
proprietary information of the Company, its affiliated companies, its suppliers
or its customers. Protected Information shall include, but is not limited to:
(i) inventions, discoveries, ideas, techniques, drawings, specifications,
models, database, software, documentation; (ii) customer-related information;
(iii) sales and marketing plans, projections and analysis; (iv) any and all
information related to the business operations of the Company, its affiliated
companies, its suppliers or its customers; and (v) any and all information
provided to the Company by third parties which the Company is obligated to keep
confidential.
Notwithstanding the foregoing, Protected Information does not include any
information that is or becomes part of the public domain through no act or
failure to act on the part of Employee.
3. ASSIGNMENT OF INTELLECTUAL RIGHTS TO THE COMPANY.
(a) Subject to the limitation of Subsection 3(b), Employee hereby grants,
transfers and assigns to the Company all of the Employee's right, title, and
interest in or to: (i) the Protected Developments; and (ii) any proprietary
rights therefrom. Employee agrees that any copyrightable Protected Development,
to the extent created by Employee within the scope of Employee's employment with
the Company, shall be deemed to be a "work made for hire," pursuant to the
United States Copyright Act (17 U.S.C. Section 101).
(b) In compliance with Washington state law (RCW 49.44.140), Employee hereby
acknowledges that Employee has been advised and notified by the Company via this
Agreement that the Agreement does not apply to an invention for which no
equipment, supplies, facility, or
15
<PAGE> 16
trade secret information of the Company was used and which was developed
entirely on Employee's own time, unless: (i) the invention relates (A) directly
to the business of the Company, or (B) to the Company's actual or demonstrably
anticipated research or development; or (ii) the invention results from any work
performed by Employee for the Company.
(c) Employee shall promptly disclose all Developments to the Company and keep
records relating to the conception, tangible expression and reduction to
practice of all such Developments. Employee acknowledges and agrees that this
disclosure obligation applies to all Developments, whether or not they qualify
as Protected Developments, for the purpose of determining rights of Employee and
the Company in such inventions. Any and all disclosure records, to the extent
related to a Protected Development, shall remain the sole and exclusive property
of the Company, and the Employee shall surrender possession of such records to
the Company upon request or upon any suspension or termination of the Employee's
employment with the Company.
(d) Employee shall render and provide the Company with all information,
documentation and assistance, and shall sign and deliver all such assignments,
affidavits, declarations and other documents that the Company may request to
perfect, enforce, or defend any proprietary rights in or based on the Protected
Developments. The Company shall pay reasonable compensation for such
information, documentation and assistance if they are provided by Employee after
any suspension or termination of Employee's employment.
(e) The Company, in its sole discretion, shall determine the extent of the
proprietary rights, if any, to be protected in any Protected Development.
4. NONDISCLOSURE OF PROTECTED INFORMATION.
(a) Unless otherwise specified in writing, Employee shall assume that any and
all information disclosed by the Company to Employee, in whatever form, is
Protected Information, whether or not designated as private or confidential.
(b) During the period of employment and thereafter, Employee shall hold in trust
and the strictest confidence any and all Protected Information. Employee shall
not disclose any Protected Information to others without the prior written
permission of the Company, or use any Protected Information for any purpose
other than for the performance of services for the Company. In addition,
Employee shall take all necessary precautions to prevent any person or entity
with whom Employee comes into contact from acquiring, disclosing or using such
Protected Information.
(c) Employee hereby acknowledges and agrees that the obligations with respect to
any particular Protected Information shall be in force and binding as long as
such information qualifies as Protected Information under this Agreement,
regardless of any suspension or termination of employment relationship between
the parties, and regardless of any termination of this Agreement for any reason.
16
<PAGE> 17
(d) All Protected Information is the Company's sole and exclusive property. Upon
request or upon any suspension or termination of Employee's employment, Employee
shall promptly return and surrender to the Company all items and materials in
Employee's possession or control, in whatever form and medium and including any
and all copies, which contain or embody any Protected Information.
(e) Nothing contained in this Agreement shall be construed as granting to or
conferring on Employee any proprietary right or interest in any Protected
Information.
(f) Unless otherwise agreed in writing, the Company shall be free to use and to
disclose in any way it deems appropriate any information provided to the Company
by Employee. Employee agrees not to disclose to the Company any information
which is confidential or private to Employee or to any third party that Employee
does not want so used or disclosed.
5. MISCELLANEOUS PROVISIONS.
(a) Remedies. Employee acknowledges and agrees that any violation of this
Agreement will cause irreparable harm for which the Company may not be fully or
adequately compensated by recovery of monetary damages. Accordingly, in the
event of any such violation or threatened violation, the Company shall be
entitled to injunctive relief from a court of competent jurisdiction in addition
to any other remedy available at law or in equity.
(b) Attorney Fees. If any action at law or in equity is brought to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
recover, at trial and on appeal, in addition to any other relief that may be
granted, reasonable amounts of legal, accounting and other professional fees,
together with other allowable costs and expenses.
(c) Applicable Law and Jurisdiction. The parties agree that this Agreement will
be governed by the laws of the State of Washington, without regard to Washington
choice of law principles. Law suits relating to this Agreement shall be brought
in the appropriate court in the State of Washington, and the parties agree to
submit to the jurisdiction of such court.
(d) Amendment and Assignment. All modifications to this Agreement must be in
writing, signed by the parties hereto. Except by operation of law, neither party
shall assign or delegate its rights or duties under this Agreement without the
prior written consent of the other party.
(e) Independence of Provisions. Each provision herein shall be treated as a
separate and independent clause, and the invalidity or unenforceability of any
one clause shall in no way impair the validity or enforceability of any other
clauses herein.
(f) Successors and Assigns. This Agreement shall be binding on Employee's heirs,
executors, estate administrators and legal representatives and shall be for the
benefit of the Company, its successors or assigns.
17
<PAGE> 18
IN WITNESS THEREOF, the parties hereby execute this Agreement.
The undersigned has read and understood the foregoing and agrees to be bound
thereby.
EMPLOYEE:
Signed: /s/ DAVID W. ARNOLD
---------------------------------------
Print Name: David W. Arnold
Date: August 23, 1999
The foregoing was executed by the Employee and accepted on behalf of the
Company.
N2H2, INC.:
Signed: /s/ PETER NICKERSON
---------------------------------------
By: Peter Nickerson
Title: President
Date: August 23, 1999
18
<PAGE> 1
EXHIBIT 10.5
EXHIBIT B TRIPLICATE ORIGINAL
August 24, 1999
NONQUALIFIED STOCK OPTION AGREEMENT
A STOCK OPTION for a total of 600,000 shares of common stock
(hereinafter the "Option"), of N2H2, Inc., a Washington corporation (the
"Company"), is hereby granted to David W. Arnold (the "Optionee"), at the price
and subject to the terms and provisions set forth below. For purposes of this
Agreement the term "shares" shall be deemed to apply to shares of common stock
of the Company as of the date hereof.
1. OPTION PRICE. The option price is $9.0625 for each share, being one
hundred percent (100%) of the fair market value based on the average closing
price of the prior 10 trading days, as determined by the Board of Directors, of
the Company's Common Stock on August 23, 1999, the date of grant of this Option.
2. VESTING AND EXERCISE OF OPTION. The Option shall vest and be
exercisable in accordance with the following provisions:
a. Schedule of Vesting and Rights to Exercise. The Option shall be
vested and exercisable as follows:
<TABLE>
<S> <C> <C> <C> <C>
150,000 shares Vested on: August 24, 2000 For a total of: 150,000 shares
150,000 shares Vested on: August 24, 2001 For a total of: 300,000 shares
150,000 shares Vested on: August 24, 2002 For a total of: 450,000 shares
150,000 shares Vested on: August 24, 2003 For a total of: 600,000 shares
</TABLE>
b. Method of Exercise. The Option shall be exercisable by a
written notice which shall:
i. state the election to exercise the Option, the number
of shares in respect of which it is being exercised;
ii. contain such representations and agreements as to
the holder's investment intent with respect to such shares of common stock,
acquired by exercise of the Option, as may be satisfactory to the Company;
iii. be signed by the person entitled to the Option; and
iv. be in writing and delivered in person or by
certified mail to the President or Secretary of the Company.
<PAGE> 2
Payment of the purchase price of any shares with respect to which an
Option is being exercised shall be by check. The certificate or certificates for
shares of common stock as to which the Option shall be exercised shall be
registered in the name of the person exercising the Option. Options hereunder
may not at any time be exercised for a fractional number of shares.
c. Restrictions on Exercise. No Option may be exercised if the
issuance of the shares upon exercise would constitute a violation of any
applicable federal or state securities or other law or valid regulation. As a
condition to the exercise of this Option the Company may require the person
exercising the Option to make any representation and warranty to the Company as
the Company's counsel believes may be required by any applicable law or
regulations.
The following legend will appear on all certificates for option shares:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ARE ACQUIRED BY THE
REGISTERED HOLDER PURSUANT TO REPRESENTATION THAT THE HOLDER IS
ACQUIRING THESE SHARES FOR THE HOLDER'S OWN ACCOUNT, FOR INVESTMENT.
THESE SHARES MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR
OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
AS TO THE SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN
EXEMPTION FROM SUCH REGISTRATION STATEMENT.
3. Non-Transferability of Option. Except as otherwise provided herein,
no Option may be sold, pledged, assigned or transferred in any manner, other
than by will or the laws of descent and distribution, and may be exercised
during the lifetime of the Optionee only by the Optionee or by the guardian or
legal representative of the Optionee. The terms of the Option shall be binding
upon the executors, administrators, heirs, successors, and assigns of the
Optionee.
4. Termination of Service to Company. An Option may only be exercised,
to the extent vested on the employee's last day of service to the Company as an
employee, for a period of one hundred (100) days after such last day of service.
5. Term of Option. No Option may be exercised more than ten (10) years
from the date of original grant, and may be exercised during such term only in
accordance with the terms of this agreement.
6. Adjustments Upon Changes in Capitalization. The number and kind of
shares of common stock subject to this Option shall be appropriately adjusted
along with a corresponding adjustment in the Option price to reflect any stock
dividend, stock split, split-up or any combination, exchange or change of
shares, however accomplished.
2
<PAGE> 3
7. Accelerated Vesting. Notwithstanding any provision to the contrary,
in the event the Company or the shareholders of the Company enter into an
agreement to dispose of all or substantially all of the assets or Shares by
means of a sale, reorganization, liquidation, or otherwise, this Option shall
become immediately exercisable with respect to the full number of Shares subject
to this Option. If this Stock Option is not exercised prior to consummation of
any such agreement, it shall terminate. In addition, this Option shall vest and
become exercisable upon certain terminations of employment as set forth in that
certain Executive Employment Agreement dated August 23, 1999 between the
Optionee and the Company.
DATED: August 24, 1999 N2H2, Inc.
By /s/ PETER NICKERSON
---------------------------------------
Peter Nickerson
President
Optionee acknowledges and represents that he is familiar with the terms
and provisions of this Nonqualified Stock Option Agreement as set forth above
and hereby accepts this Option subject to all the terms and provisions hereof.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
of the Compensation Committee of the Company's Board of Directors with respect
to the interpretation of any provision under this Nonqualified Stock Option
Agreement.
DATED: August 24, 1999
/s/ DAVID W. ARNOLD
---------------------------------------
David W. Arnold, Optionee
3
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
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0
0
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