N2H2 INC
EXHIBIT 10.1
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<TYPE>EX-10.1
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<FILENAME>v83748exv10w1.txt
<DESCRIPTION>EXHIBIT 10.1
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                                                                    EXHIBIT 10.1


                                   N2H2, INC.

                     HOWARD PHILIP WELT EMPLOYMENT AGREEMENT


        This Agreement is made by and between N2H2, Inc. (the "Company"), and
Howard Philip Welt ("Executive") effective as of May 18, 2002.

1.      DUTIES AND SCOPE OF EMPLOYMENT.

        a.     POSITIONS AND DUTIES. Executive will continue to serve as
               President and Chief Executive Officer of the Company. Executive
               will render such business and professional services in the
               performance of his duties, consistent with Executive's position
               within the Company, as shall reasonably be assigned to him by the
               Company's Board of Directors (the "Board"). Executive will report
               to the Board and all other Company employees will report to
               Executive.

        b.     BOARD MEMBERSHIP. Executive will continue to serve as a member of
               the Company's Board of Directors (the "Board"), subject to any
               required Board and/or stockholder approval.

        c.     OBLIGATIONS. During the Employment Term, Executive will devote
               his full business efforts and time to the Company. For the
               duration of the Employment Term, Executive agrees not to actively
               engage in any other employment, occupation or consulting activity
               for any direct or indirect remuneration without the prior
               approval of the Board (which approval will not be unreasonably
               withheld); provided, however, that Executive may, without the
               approval of the Board, serve in any capacity with any civic,
               educational or charitable organization, or as a member of
               corporate Boards of Directors (but in all cases subject to
               Section 11).

2.      TERM.

        a.     Executive and the Company agree that Executive's employment with
               the Company shall be for a period of twelve (12) months
               commencing on the Effective Date (defined below). Executive and
               the Company acknowledge that this employment relationship may be
               terminated at any time, upon sixty (60) days advance written
               notice to the other party, with or without good cause or for any
               or no cause, at the option either of the Company or Executive.
               The period of Executive's employment under this Agreement is
               referred to herein as the "Employment Term."

3.      EXECUTIVE BENEFITS.

        a.     During the Employment Term, Executive will be eligible to
               participate in accordance with the terms of all Company employee
               benefit plans that are applicable to other senior executives of
               the Company, as such plans and terms may exist from time to time.


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        b.     Executive will be eligible to participate in an incentive bonus
               plan or program for senior management of the Company, should one
               be established during the Employment Term.

        c.     Company shall, during the Employment Term, pay for Executive's
               parking and health club membership.

4.      COMPENSATION.

        a.     BASE SALARY. During the Employment Term, the Company will pay
               Executive no salary in compensation for his services. The
               Compensation Committee of the Board (the "Committee") will
               reevaluate compensation arrangements from time to time and may
               adjust the Base Salary in accordance with its normal practices.

        b.     STOCK OPTIONS. The Company will grant Executive an option to
               purchase up to 1,400,000 shares of the Company's common stock
               ("Shares") at an exercise price equal to the Fair Market Value on
               the date of grant. The option will vest monthly in arrears in
               equal (116,666) amounts, with such vesting commencing as of the
               Effective Date. For purposes of this Section 4(b), "Fair Market
               Value" shall mean the average of the high and low sales prices of
               the Company's common stock on the Over-the-Counter Bulletin
               Board.

5.      EXPENSES. The Executive is authorized to incur reasonable expenses on
        behalf of the Company in the performance of his duties under this
        Agreement on a basis consistent with the Company's policies from time to
        time, including expenses for travel, business entertainment and other
        business activities. The Executive shall submit all claims for
        reimbursement of such expenses directly to the Company and the Company
        shall ensure that such expenses are reimbursed to the Executive within a
        reasonable time after submission by the Executive of an itemized account
        of such expenses, together with such vouchers or receipts for individual
        expense items as the Company may reasonably require.

6.      SEVERANCE.

        a.     TERMINATION WITHOUT AGREEMENT OF EXECUTIVE OTHER THAN FOR CAUSE.
               If the Company terminates Executive's employment with the Company
               without "Cause" (as defined below) , then promptly following such
               termination of employment, Executive will be entitled to
               immediate 100% vesting of any stock options previously granted to
               Executive that would have vested within eighteen - (18) months of
               the date Executive is terminated without "Cause" (as defined
               below). The term within which Executive must exercise any options
               to acquire Company stock received prior to the date hereof shall
               be as provided in any applicable stock option agreement and the
               Company's stock option plan. If Executive is terminated without
               agreement of Executive other than for Cause, Death or Disability,
               then the term within which Executive must exercise any vested
               options to acquire Company stock received under this Agreement
               shall be


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               the earlier of three (3) years from the Termination Date and the
               expiration of the 10-year term of the Option. If the Executive is
               terminated for reason of Death or Disability, then the term
               within which Executive must exercise any options to acquire
               Company stock shall be as provided in any applicable stock option
               agreement and the Company's stock option plan

        b.     VOLUNTARY TERMINATION FOR GOOD REASON. If Executive voluntarily
               terminates his employment with the Company for "Good Reason" (as
               defined below) then Executive will be entitled to the same
               benefits provided in Section 6(a) above (and subject to the same
               terms and conditions provided in Section 6(a)). The term within
               which Executive must exercise any options to acquire Company
               stock received prior to the date hereof shall be as provided in
               any applicable stock option agreement and the Company's stock
               option plan. Under this paragraph 6(b), the term within which
               Executive must exercise any vested options to acquire Company
               stock received under this Agreement shall be the earlier of three
               (3) years from the Termination Date and the expiration of the
               10-year term of the Option.

        c.     OTHER VOLUNTARY TERMINATIONS. If Executive's employment is
               terminated for any reason other than for Cause, Death or
               Disability (including by Executive, for any reason) within twelve
               (12) months after a "Change of Control" (as defined below) then
               Executive will be entitled to the same payments and benefits
               provided in Section 6(a) above (and subject to the same terms and
               conditions provided in Section 6(a)); and will be paid a cash
               severance payment of $250,000, in twelve monthly installments
               beginning on the first day of the month immediately following
               termination. The term within which Executive must exercise any
               options to acquire Company stock shall be as provided in any
               applicable stock option agreement and the Company's stock option
               plan.

        d.     TERMINATION WITHOUT AGREEMENT OF EXECUTIVE FOR CAUSE. If the
               Company Terminates Executive's employment with the Company for
               Cause then Executive will not be entitled to any other
               compensation or benefits from the Company except to the extent
               provided under the applicable stock option agreement(s) or as may
               be required by law (for example, under Section 4980B of the
               Code), and except that promptly following termination of such
               employment, Executive will be entitled to an additional two
               months vesting of the stock options granted to Executive
               hereunder (not to exceed the total number of stock options
               granted to Executive hereunder). The term within which Executive
               must exercise any options to acquire Company stock shall be as
               provided in any applicable stock option agreement and the
               Company's stock option plan.

        e.     DEFINITIONS. For purposes of this Agreement:

               "Cause" means 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
               twenty-one (21) days' prior written notice


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               regarding any such failure or refusal; (ii) Executive's breach of
               any non-competition 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 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 be reasonably 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(e).

               "Disabled" means Executive being unable to perform the principal
               functions of his duties due to a physical or mental impairment,
               but only if such inability has lasted or is reasonably expected
               to last for at least six (6) months. Whether Executive is
               Disabled shall be determined by the Committee based on evidence
               provided by one or more medical experts selected by the
               Committee. Executive agrees to be seen by or consult with medical
               experts of the Committee's choosing;

               "Good Reason" means (i) a material reduction (without Executive's
               consent) in his title, authority, status, or responsibilities, or
               (ii) a material breach by the Company of its obligations under
               this Agreement;

               "Change of Control" means a merger, consolidation or other
               reorganization in which the Company is not the surviving
               corporation, or in which the Company becomes a subsidiary of
               another corporation, or the sale, lease or exchange of all or
               substantially all of the Company's assets to any other
               corporation or entity (except a subsidiary or parent
               corporation).

7.      INDEMNIFICATION. The Company shall (and is hereby obligated to)
        indemnify (including advance payment of expenses, which such expenses
        shall include, without limitation, attorneys' fees) the Executive for
        all actions taken by Executive as an officer of Company or the failure
        of Executive to take any action in each and every situation where the
        Company is obligated to make such indemnification pursuant to applicable
        law and the relevant portions of the Company's Articles of Incorporation
        and Bylaws. During the Employment Term, the Company, at its sole
        expense, shall maintain in effect director and officer liability
        insurance containing a liability coverage endorsement covering the
        Company's indemnification duty. Upon request, the Company shall furnish
        to the Executive a certificate of such insurance that shall bear an
        endorsement that the same shall not be canceled, non-renewed or
        materially reduced in coverage or limits by the Company, without thirty
        (30) days prior written notice to the Executive.

8.      ASSIGNMENT. This Agreement will be binding upon and inure to the benefit
        of (a) the heirs, executors and legal representatives of Executive upon
        Executive's death and (b) any successor of the Company. Any such
        successor of the Company will be deemed substituted for the Company
        under the terms of this Agreement for all purposes. For this purpose,
        "successor" means any person, firm, corporation or other business entity
        which


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        at any time, whether by purchase, merger or otherwise, directly or
        indirectly acquires all or substantially all of the assets or business
        of the Company. None of the rights of Executive to receive any form of
        compensation payable pursuant to this Agreement may be assigned or
        transferred except by will or the laws of descent and distribution. Any
        other attempted assignment, transfer, conveyance or other disposition of
        Executive's right to compensation or other benefits will be null and
        void.

9.      NOTICES. All notices, requests, demands and other communications called
        for hereunder shall be in writing and shall be deemed given (i) on the
        date of delivery if delivered personally, (ii) one (1) day after being
        sent by a well established commercial overnight service, or (iii) four
        (4) days after being mailed by registered or certified mail, return
        receipt requested, prepaid and addressed to the parties or their
        successors at the following addresses, or at such other addresses as the
        parties may later designate in writing:

        If to the Company:

        N2H2, Inc
        900 Fourth Avenue, Suite 3600
        Seattle, WA 98164
        ATTN: Peter Nickerson, Chairman of the Board

        If to Executive:

        at the last residential address known by the Company.

10.     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.

11.     NON-COMPETITION AND NON-SOLICITATION. For a period beginning on the
        Effective Date (defined below) and ending twelve (12) months from the
        date when Executive ceases to be employed by the Company for any reason
        whatsoever, Executive, directly or indirectly, whether as employee,
        owner, sole proprietor, partner, director, member, consultant, agent,
        founder, co-venturer or otherwise, will:

        a.     Not engage, participate or invest in any business activity
               anywhere in the world which develops, manufactures or markets
               products or performs services which are competitive with the
               products or services of the Company at the time of Executive's
               termination, or products or services which the Company has under
               development or which are the subject of active planning at the
               time of Executive's


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               termination; PROVIDED, HOWEVER, that Executive, may own as a
               passive investor, securities of any corporation which competes
               with the business of the Company so long as such securities do
               not, in the aggregate, constitute more than 2% of any class of
               outstanding securities of such corporations;

        b.     Not attempt to employ, recruit or otherwise solicit, induce or
               influence any person to leave employment with the Company or its
               resellers or distributors; and

        c.     Not directly or indirectly solicit business from any of the
               Company's customers and users on behalf of any business that
               competes with the Company.

Notwithstanding the foregoing, this Section 11 shall not apply if this Agreement
is breached by the Company.

12.     NON-DISPARAGEMENT. Executive and the Company mutually covenant and agree
        that, during the Employment Term and for a period of twelve (12) months
        after the date of termination of Executive's employment with the
        Company, neither shall, directly or indirectly, disparage the other.

13.     ENTIRE AGREEMENT. This Agreement represents the entire agreement and
        understanding between the Company and Executive concerning Executive's
        employment relationship with the Company, and supersedes and replaces
        any and all prior agreements and understandings concerning Executive's
        employment relationship with the Company.

14.     ARBITRATION. In the event of any dispute arising out of or relating to
        this Agreement, the parties undertake to make every effort to reach an
        amicable settlement of their differences (including mediation if
        requested by a party). Failing such settlement, the dispute shall be
        referred to final and binding 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. Any arbitration hereunder shall be conducted in
        Seattle, Washington in accordance with the Employment Arbitration Rules
        of the American Arbitration Association. 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 the covenants contained in Section 11 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.


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15.     ATTORNEYS FEES. In the event of any dispute arising out of or involving
        this Agreement, the prevailing party shall be entitled to recover its
        reasonable attorneys' fees, experts' fees, and costs, including those
        for pretrial, trial, on appeal, in arbitration and in bankruptcy and all
        other costs and expenses associated with any such action in addition to
        any other relief to which such party may be entitled.

16.     NO ORAL MODIFICATION, CANCELLATION OR DISCHARGE. This Agreement may be
        changed or terminated only in writing (signed by Executive and the
        Company).

17.     WITHHOLDING. The Company is authorized to withhold, or cause to be
        withheld, from any payment or benefit under this Agreement the full
        amount of any applicable withholding taxes.

18.     GOVERNING LAW. This Agreement will be governed by the laws of the State
        of Washington (with the exception of its conflict of laws provisions).

19.     EFFECTIVE DATE. This Agreement is effective as of May 18, 2002.

20.     ACKNOWLEDGMENT. Executive acknowledges that he has had the opportunity
        to discuss this matter with and obtain advice from his private attorney,
        has had sufficient time to, and has carefully read and fully understands
        all the provisions of this Agreement, and is knowingly and voluntarily
        entering into this Agreement.

        IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
respective dates set forth below:

EXECUTIVE


/s/ Howard P. Welt                                      DATE: 8/13/02
-----------------------------------                               -------
Howard Philip Welt


N2H2, INC.


BY: /s/ J. Paul Quinn                                       DATE: 8/13/02
-----------------------------------                               -------
Name:  J. Paul Quinn
Title: Chief Financial Officer


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