-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DdsNjSo8/IUaTeGyiUSqnAg++L7nhy70VsQ5ZA0zwBKkeQ9ePDDzV1qsR92IM7mR yHIf5bXLTMEa60TRIeravw== 0000912953-97-000002.txt : 19970612 0000912953-97-000002.hdr.sgml : 19970612 ACCESSION NUMBER: 0000912953-97-000002 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970611 SROS: NASD SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: REAL GOODS TRADING CORP CENTRAL INDEX KEY: 0000912953 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 680227324 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-22524 FILM NUMBER: 97622136 BUSINESS ADDRESS: STREET 1: 555 LESLIE STREET CITY: UKIAH STATE: CA ZIP: 95482 BUSINESS PHONE: 7074689294 MAIL ADDRESS: STREET 1: 555 LESLIE STREET CITY: UKIAH STATE: CA ZIP: 95482 10KSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1997 OR /_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File No. - 0-22524 REAL GOODS TRADING CORPORATION (Exact name of small business issuer as specified in its charter) California 68-0227324 (State or other jurisdiction (IRS Employer (incorporation or organization) Identification Number) 555 Leslie Street, Ukiah, California 95482 (Address of principal executive office) (Zip Code) Issuer's telephone number, including area code: (707) 468-9292 Securities registered under Section 12(b) of the Exchange Act: Title of each class Name of each exchange on which registered Securities registered under Section 12(g) of the Exchange Act: Common Stock (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB [ ]. State issuer's revenues for its most recent fiscal year. $18,424,000 State the aggregate market value of the voting stock held by non- affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 60-days. $6,807,185 as of May 01, 1997. The number of shares of the issuer's Common Stock outstanding as of May 20, 1997 was 3,403,804. Documents Incorporated by Reference A portion of the Real Goods Trading Corporation's Proxy Statement for the 1997 Annual Meeting of Shareowners to be filed with the Commission on or before June 27, 1997 is incorporated by reference into Part III, Items 9, 10, 11 and 12 of this Annual Report on Form 10-KSB. With the exception of those portions which are specifically incorporated by reference in this Annual Report on Form 10-KSB, the Real Goods Trading Corporation Proxy Statement for the 1997 Annual Meeting of Shareowners is not to be deemed filed as part of this report. PART I Item 1. DESCRIPTION OF BUSINESS Mission Statement: Through our products, publications and educational demonstrations, Real Goods promotes and inspires an environmentally healthy and sustainable future. Introduction. Real Goods Trading Corporation ("Real Goods" or the "Company") sells primarily environmentally related products and renewable energy products through mail order catalogs, direct sales and retail stores. Except for fiscal 1996, the Company has been profitable every year since it was incorporated in 1990. The Company currently mails catalogs under the names of Real Goods*, Earth Care*, REAL GOODS NEWS (currently being transformed into the REAL GOODS RENEWABLES), REAL STUFF (currently being transformed into the REAL GOODS NEWS) and the POST CONSUMER. The Company sells renewable energy products directly to its customers through the Renewable Energy Department (RG Renewables). The Company's continuing retail stores are located in Hopland, California and Eugene, Oregon. The Company is selling or closing its Snow-Belt Energy store in Amherst, Wisconsin. The Company also conducts consumer education activities through the "Institute for Solar Living", a seminar series, and creates educational products to support its renewable energy products. Each year the Company conducts an internal eco-audit and publishes the results in its annual report to shareowners. In May 1996 the Company opened its Solar Living Center ("SLC"), a twelve acre demonstration site housing a 5,000 square foot retail store constructed of adobe-like covered rice straw bales and with a utility intertie system with its local utility, Pacific Gas & Electric Company. The Company's 10 kilowatt photovoltaic array and 3 kilowatt wind generator produce much of the power for the site; the Company sells the excess power back to PG&E. In the event of power failures or lack of wind and sunshine, a battery backup system provides electricity. The Solar Living Center embodies the Company's core principles and provides an opportunity to demonstrate the practicality of living and working on a low consumption, environmentally sensitive and renewable energy basis. The site is immediately adjacent to Highway 101 in Hopland, California, and has to date been of interest both to residents of Northern California and to tourists who have made it a destination. The Company believes that the Solar Living Center has the potential to be of great strategic importance to the Company's future. In its ten months of operation approximately 100,000 people visited the SLC. In fiscal 1997, store sales nearly doubled from the sales in the store's previous Hopland location in fiscal 1996, although selling space increased by only 20%. A. THE COMPANY'S MARKETS The Company serves several related market segments within the single line of business of specialty retailing. The "ENVIRONMENTALLY RELATED PRODUCTS MARKET," consists of consumers who wish to pursue simpler, more energy conserving, wholesome lifestyles with a belief in preserving the earth's resources in a sustainable manner. Consumers in this market tend to live in urban and suburban residences served by the conventional electric utility power grid. The Company has revamped its color Real Goods and Earth Care catalogs to be more appealing to these customers, and these catalogs now carry primarily conservation and healthy lifestyle products. The "REGIONAL RETAIL MARKET" is served by the Company's three retail stores, located in Hopland, California; Eugene, Oregon and Amherst, Wisconsin. Each of the three stores carries environ- mentally related and renewable energy products as well as regional products with a unique focus. The Hopland, California store, relocated to the Company's new Solar Living Center in May 1996, features a number of products that are handmade locally or made in small quantities that are not suitable for mail order sale. Due to the Hopland store's proximity to Highway 101 and its exposure to summer tourists to Northern California's attractions, the store carries many items for the traveler and camper. The store plans to focus on proprietary and private labelled products which traditionally command higher gross margins. The Amherst, Wisconsin store, Snow-Belt, is the Company's national hearth center, marketed in fiscal 1997 through a REAL GOODS NEWS special catalog; the Company is selling or closing this store. The Eugene, Oregon store features technical sales of hot water systems and is also one of the Company's outlet stores for inventory no longer available through mail order. Since November 1996 the Company has kept open an outlet store in Ukiah at its corporate headquarters; the outlet store was previously only open during the holiday season. The Company's original focus, the "RENEWABLE ENERGY MARKET," consists of homeowners and others living and working without the benefit of the traditional electric company power grid and generating their own electricity. Installation and use of renewable energy products requires a substantial investment of time and money by the consumer. These products are often purchased in connection with constructing or rehabilitating residences with systems and appliances that supply renewable sources of energy or otherwise circumvent the consumer's need to use conventional sources of energy. To increase customer service as well as more effectively manage these larger sales, the Company created a Renewable Energy Department, called Real Goods Renewables, that relates to customers directly. The Company has also identified eco-tourism as a promising market for its renewable energy sales. In the first quarter of fiscal 1997, the Company made the largest sale in its history, a $1.8 million 100 kilowatt photovoltaic renewable energy sale to a resort on the island of Belize in Central America (the "Belize sale"). The Company also earned a $200,000 bonus for the on-time completion of the project. The Company believes there will be other opportunities for significant sales in this market in the future, although there can be no assurance either that the opportunities will develop or that the Company will convert the opportunities to sales thereof. In conjunction with its product marketing efforts, the Company has always emphasized the "CONSUMER EDUCATION MARKET". The Company produces and sells a wide variety of educational materials through its catalogs and retail stores. The primary product that the Company produces for this market is the SOLAR LIVING SOURCEBOOK. In 1992, the Company established the Institute for Solar Living, which offers educational seminars on a variety of topics. With the opening of the SLC in May, 1996 the Company has a demonstration site for the Institute, as the retail store there has been built with sustainable building techniques, including strawbale construction, and has many functioning renewable energy systems. The Company has also established a successful co-publishing relationship with Chelsea Green Publishers of Vermont. 1. ENVIRONMENTALLY RELATED PRODUCTS MARKET. The Company's mail order catalogs market energy saving conservation devices, environmentally related products and educational and well-made gifts to urban and suburban dwellers. Approximately 65% of the Company's total sales in fiscal 1997, including the Belize sale, were derived from catalogs. The Company mailed approximately 6,300,000 catalogs in the current year, compared to 5,400,000 in the previous year. This 15% increase in mailings was implemented to take advantage of paper price decreases and to increase the revenues from the Earth Care catalog. The environmentally related products offered by the Company comprise a full spectrum of energy-efficient lighting equipment; high efficiency appliances; water saving devices such as low-flow showerheads, low-flush toilets and faucet aerators; recycled paper products including toilet paper, paper towels and facial tissue; household products; gift and cards and wraps. The Company also sell non-toxic household cleaning products, water and air purification devices, health-related products and magnetic radiation meters to this same customer base. In January 1997 the Company began a trial program offering a number of its catalog products on its Internet website. The Company believes that the Internet is consistent with the Company's mission to reduce the use of paper and fossil fuels. There can be no assurance that the Company will continue to use the Internet as a means of reaching potential customers in the future. In fiscal 1997 the Company conducted its first large scale catalog mailing utilizing a native language order form in Japan. This fall test mailing had a favorable initial response, and the Company has increased the Japanese fall mailing scheduled in fiscal 1998. Subsequent to year end, in April 1997, the Company also participated in launching a commercial Internet site in Japanese that offered Real Goods products for sale. Initial response supports the Company's belief in the broad based appeal of the Company's products in the Japanese market. There can be no assurance that the Company will successfully exploit foreign sales opportunities. In January 1997 the Company began printing a wholesale catalog that offers a limited number of catalog products at attractive wholesale prices. The catalog is being distributed to inquirers and certain selected businesses. Included in the offering are many of the products that the Company imports directly. Although initial response to this limited offering has been encouraging, there can be no assurance that the Company will be successful at wholesale sales. 2. REGIONAL RETAIL MARKET. The Company's retail stores sell environmentally related products, renewable energy products and unique regional products. In fiscal 1997, the Company's three retail stores accounted for 15% of total sales, including the Belize sale. In May 1996 the Hopland store moved from temporary quarters to the new Solar Living Center, and the Eugene store relocated as well, increasing the square footage of the retail stores to a total of 9,600 square feet from a total of 7,400 square feet for the first two months of fiscal 1997 and all of fiscal 1996. In addition to stocking a majority of the products from the Company catalogs as well as Renewable Energy Products, the Hopland store also offers items that are unique to the Northern California bio-region. Many of these unique products are handmade or made in small quantities that are not suitable for mail order. The Hopland store's products are currently comprised of 65% mail order catalog and renewable items and 35% retail unique items. In April 1996 the Eugene, Oregon store moved from smaller quarters to a 3,800 square foot downtown location. The store carries a majority of the items in the color catalogs, as well renewable energy products and provides full technical support. In addition to being nationally advertised as the Company's outlet center, the store specializes in solar hot water systems. During the November through January months, the Company has previously operated a seasonal outlet store in Ukiah as a clearance center for returned and discontinued merchandise. The Company currently plans to expand this facility and leave it open year round. There can be no assurance the Company will continue to operate an outlet store in Ukiah. The Company's 1,600 square foot Snow-Belt store in Amherst Wisconsin emphasized hearth stoves and related products, as well as many items sold by the Company through its catalogs. The Company expects to sell or close the Snow-Belt store in fiscal 1998 for failing to achieve the long term strategic objectives which the Company had for the store. 3. RENEWABLE ENERGY PRODUCTS MARKET. In fiscal 1997 the Company completed a sale of the largest solar power generating system in Latin America. The system, located at a resort in Belize, generated $2,000,000 of revenue. The Company believes that the size and non-recurring nature of the Belize sale, which accounted for 10% of the Company's fiscal 1997 sales, make it appropriate to state portions of the Company's operating results without reference to the Belize sale. For instance, excluding the Belize sale, approximately 10% of the Company's sales were from renewable energy sales in fiscal 1997, compared to 8% of sales in fiscal 1996; including the Belize sale, approximately 20% of the Company's sales were from renewable energy sales. Real Goods Renewables markets its products through the REAL GOODS NEWS, currently being transformed into the REAL GOODS RENEWABLES CATALOG, a specific catalog mailed to the more sophisticated renewable energy buyer, as well as through the Company's own SOLAR LIVING SOURCEBOOK and other educational materials, and by direct sales. The Company's technical staff are fully trained in energy system sizing and specializes in designing solar systems of all sizes. Real Goods Renewables offers power systems for the eco-tourism market and for remote homes using renewable sources of energy including photovoltaic (solar electric), hydroelectric and wind electric, as well as emerging renewable energy technologies such as hydrogen fuel cells and a new generation of photovoltaic cells. Real Goods Renewables endeavors to provide a broad array of appliances and other system components for most aspects of the independent power systems lifestyle. These products include battery storage systems, power conversion devices, charge controllers, meters, low voltage water pumping systems, solar and propane gas water heaters, high efficiency refrigerators, solar cooling devices, composting toilets and a wide variety of low-voltage household appliances. The traditional markets for these power systems have been remote homes in excess of one-quarter mile from the power companies' lines in the United States and remote villages in third world countries. The Company believes it has assisted over 25,000 homes in making the transition to renewable energy primarily through solar systems. Market research in the solar energy field suggests that the domestic market for solar systems is growing at a rate of 10%-15% annually. However, the Company believes that the market for small scale solar electric systems in the developing third world market is increasing significantly. The Company is seeking to serve the domestic remote home market directly and to develop strategic alliances to address the developing third world market through product sales and education. The Company believes that its renewable energy market will grow significantly in the near future. 4. CONSUMER EDUCATION ACTIVITIES. The Company has traditionally emphasized consumer education as part of its mission, and continues to produce and sell a wide variety of educational materials. The Company's primary product for this market is its SOLAR LIVING SOURCEBOOK, a 700 page textbook that the Company periodically (now in its ninth edition) revises and which features all of the Company's renewable energy products. The SOLAR LIVING SOURCEBOOK is currently distributed by an independent publisher (Chelsea Green) as well as by the Company itself. The Company also markets many publications on specific aspects of renewable energy, conservation and sustainable living within its catalogs and in its retail stores. Additionally, the Company is continuing to develop educational materials and products through its Renewables Department. Currently the Company does not spend material amounts for research and development. The Company has established a successful co-publishing relationship with Chelsea Green Publishers of Vermont. Through this relationship, thirteen books have been co-published bearing " Real Goods Independent Living Series" on the books' covers, including the Company's own SOLAR LIVING SOURCEBOOK. The Company believes that these co-publishing efforts have significantly boosted its position as an education leader in the sustainability movement. In 1992, the Company established the Institute for Solar Living, which offers seminars each year for individuals on a variety of topics such as "Planning and Building Your Renewable Energy Home" and "Strawbale Construction." The seminars are taught by the Company's employees and by third-party industry specialists. The Company believes the Institute for Solar Living creates increased consumer awareness with regard to the Company's renewable energy products and integrates well with the Solar Living Center as a demonstration site. Although the Institute for Solar Living accounts for a modest portion of the Company's sales, it is a significant aspect of the Company's mission. The Company has established a website (www.realgoods.com) which the Company believes to be both user-friendly and informative. The website provides the Company with an alternative avenue for offering its products and explaining its mission, history, programs and products. On the website the Company also maintains an innovative bulletin board for interested Shareowners and prospective stock purchasers to agree upon the purchase and sale of the Company's common stock without the intermediation of stock brokers. Transaction are without cost to purchasers and sellers pay only transfer fees. The Company received the approval of the Staff of the Securities and Exchange Commission for this program in June 1996, and this approval was the first of its kind. There can be no assurance that the Company will continue to offer this service to its Shareowners in the future. B. VENDORS The Company currently purchases its products from a vendor base of more than 750 suppliers, none of which accounts for more than 5% of purchases. The Company's three largest purchases are from vendors who sell renewable energy products, including photovoltaics, appliances, and inverters. While there are many suppliers of these products, the Company has chosen to limit the majority of its renewable energy purchases to three vendors: Solar Electric Specialties Company, a distributor of solar modules manufactured by Siemens Solar Industries; Photocomm, Inc., a distributor of solar modules and high efficiency refrigerators; and Trace Engineering, a manufacturer of inverters and other solar electric controls. The Company has developed long-term relationships with all three of these vendors. Because many of the renewable energy products are relatively new, the number of suppliers for these products can be limited, and the Company, from time to time, may face short-term dependencies upon certain manufacturers for these products. However, the Company believes it would not face long-term difficulties in securing alternate sources of supply for such products if it experiences an interruption in its current supply. The Company believes such an interruption would be brief and is not likely to have a material adverse effect on the Company's back orders and sales revenues for the period affected. The Company generally does not enter into long-term contracts with its suppliers because the Company believes that adequate alternative sources for most products exist and that it has greater flexibility to take advantage of competitive price fluctuations or improvements in technology or quality by not being obligated pursuant to long-term arrangements. As a result, there can be no assurances that the Company will not be subject to unanticipated cost increases or shortages of supply. C. SEASONALITY The Company's revenues are not subject to the extreme seasonality experienced by certain other retailers, however, excluding the Belize sale, 40% of the Company's revenues are realized in the third quarter. Renewable energy products are also subject to seasonality, but the cycle for these products is the inverse of the environmental, conservation and gift products, which has lessened the effect of the holiday season on the Company's sales. The Company's fiscal year ends on March 31. Excluding the Belize sale, the Company's sales have generally increased sequentially over the term of the first, second and third fiscal quarters, and generally declined in the fourth fiscal quarter. It is possible that such seasonal effects will be increased if the Company's customer base continues to include a greater percentage of urban and suburban dwellers. The Company believes that current trends reflect (i) increased demands for its renewable energy products during the mild-weather months when its customers are more likely to undertake construction and major home improvement projects and (ii) increased demand for environmentally related and gift products, similar to that generally experienced by conventional retailers, during the holiday season. (See: "Description of Business -- A. The Company's Markets".) D. BACKORDERS; RETURNS The Company's backorders are generally less than $100,000 at any one time. At March 31, 1997, backorders were $54,000, which was 4.7% of that month's catalog sales. At March 31, 1996 backorders were $27,000, which was 3% of that month's catalog sales. Backorders are considered healthy in certain other industries; however, in the mail order industry, backorders can be symptoms of inefficiency, lack of inventory or bad strategic planning or implementation, since they create both additional costs and risks of lost sales. The majority of the Company's Backorders arise when (i) vendors fail to deliver as promised, or (ii) sales are higher than anticipated. The Company attempts to keep its Backorders at any given time to less than 10% of its total orders; the Company believes this is the industry standard. However, the Company may experience fluctuations in backorder levels due to seasonal changes in demand, inventory levels and delivery from suppliers. Although the Company does have a 90-day return policy for products returned by customers in their original condition, the Company has not historically experienced substantial product returns for its catalog segment. For fiscal 1997, returns of catalog sales were 5.1% of gross catalog sales, compared to 4.8% in the previous year. The Company believes that the hard goods catalog industry in general experiences returns of 5-6%. E. COMPETITION In the sale of environmentally related products, the Company believes that it has many indirect competitors but few direct competitors; indirect competitors range from other catalog retailers selling similar products to specialty retailers and local hardware stores. The Company is currently testing a program to sell branded goods and is in the process of developing new and innovative proprietary products. There can be no assurance that the Company will ever sell material quantities of branded goods or proprietary products. The Company has a number of competitors in the sale of renewable energy products, none of whom is known to the Company to be substantially larger than the Company. However, there can be no assurance that the resources or market positions of the Company's competitors in this area will not change. In both product areas, the Company competes on the basis of price, selection and service. The Company has continued to work to improve its pricing through increased buying and improved vendor discounts. In fiscal 1997 the Company increased its presence at trade shows and plans to improve its product selection. To improve catalog customer service, the Company hired more in house staff and extended in house hours for a reduced reliance on outside operators for its telephone lines. The Company has also increased staff for RG Renewables. The Company believes that its image is enhanced by the various accomplishments that it has made in achieving its mission, including the opening of the Solar Living Center demonstration site, the completion of the sale of the largest solar array in Latin America, the ninth edition of the Solar Living Sourcebook, the Company's increased presence on the Internet, the mission message in the national mail order catalogs and public relations efforts. The Company has a membership program in which members pay a $50 fee to receive a designated newsletter with special pricing, closeout bargains and substantial additional information, as well as a 5% discount on all purchases. The Company's members order much more frequently and have a higher average order than the Company's other customers. In fiscal 1997 the membership program increased by approximately 24% to over 38,000 members. The Company is continuing to explore opportunities to enhance the membership program, including co-ventures with other like-minded mission-oriented companies. F. REGULATION Although the Company believes that certain federal, state and local laws to promote energy conservation may encourage the purchase of its products, the Company also believes that most of its customers purchase its products for other reasons. The Company does not believe that it is subject to regulation other than regulations applicable to catalog vendors of comparable products. The Company does not believe that the costs and effects of its own compliance with federal, state and local environmental laws are likely to be material. The Company does not generally seek or obtain governmental approval for the products it sells; rather, it believes that obtaining such approval is the responsibility of its vendors or the products' manufacturers. The Company has not, to its knowledge, been named in any environmental cause of action relating to its products or the sales thereof. G. EMPLOYEES The Company currently has the full time equivalent of 100 employees. Of those employees, approximately 20 are employed at the Company's retail stores, 8 are employed at RG Renewables and approximately 72 are employed in Ukiah providing support to the catalog and corporate functions. As with many retailers, the Company increases its use of temporary employees during its third fiscal quarter to meet the increased demands of the holiday season. The Company believes its use of temporary employees contributes to its ability to control overhead costs. The Company is not subject to any collective bargaining agreements, and the Company believes its relationships with its employees are good. H. TRADEMARKS The Company has registered the trademark "Real Goods." In addition, the Company has a license to use the name "Earth Care" for recycled paper products. That license may be terminated under certain circumstances. The Company has submitted an application to register the name "Real Goods" in Japan. The Company does not believe that any other patents, trademarks, licenses, franchises, concessions, royalty agreements or labor contracts are material to the business of the Company. Item 2. DESCRIPTION OF PROPERTIES. The Company owns the 12-acre parcel in Hopland, California that is the site of the Solar Living Center and retail store. Hopland is located approximately 12 miles south of Ukiah, on US Highway 101, a major interstate highway. The Company owns the Amherst, Wisconsin facility housing the Snow-Belt retail store. This property consists of a 5,000 square foot cold warehouse, a 3,000 square foot cold storage building and a 1,600 square foot office and retail store. The Company currently leases its Ukiah, California operations facilities, which consist of a 15,300 square foot warehouse distribution center facility on a month-to-month lease. The Company's 13,790 square foot office/customer service/warehouse facility is leased through 1998. The Company has a lease agreement expiring in 1999 for the 3,800 square foot retail store in Eugene, Oregon. The Company's lease on its IBM RISC 6000, which is the computer system and portions of its telephone system, expires in fiscal 1998. The Company believes that it maintains adequate insurance for its real and personal property. Item 3. LEGAL PROCEEDINGS. The Company is not party to any material legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock has been eligible for over-the-counter trading since February 25, 1993. The Company's common stock was listed on the Pacific Stock Exchange on April 11, 1994 under the symbol RGT. Effective July 23, 1996, the Company's stock was listed on the NASDAQ SmallCap Market under the symbol RGTC. Effective July 1996, the Company's stock has traded on the Internet on a bulletin board at http://www.realgoods.com/ maintained by the Company. Between the Company's initial public offering in 1991 and the date listed on the Pacific Stock Exchange, trading in the Company's securities was extremely isolated because the Company's shares were traded only through a single broker offering a passive "bulletin board" matching service. The following chart sets forth the high and low actual sale prices of the Company's common stock for each quarter within the last three fiscal years, to the extent the Company is aware thereof.
Fiscal Year Ended March 31 High (Purchase) Low (Sale) by Share by Share 1996: First Quarter 9 8 Second Quarter 8-7/8 5-3/4 Third Quarter 7-1/4 5-1/8 Fourth Quarter 6 5-1/2 1997: First Quarter 8 5-1/4 Second Quarter 7-7/8 6-1/8 Third Quarter 6-3/8 4-1/4 Fourth Quarter 6 5-1/8
To the extent the Company is aware thereof, the prices on the foregoing table reflect the actual prices paid or received by the investors before commissions and taxes. There were 3,403,804 shares of the Company's common stock outstanding as of May 20, 1997. The Company had 5,333 shareowners of record as of May 1, 1997. Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Sales The Company reported the highest net sales in its history, $18,424,000 for fiscal 1997, an increase of 19% over fiscal 1996. Net sales include a $2 million 100 kilowatt photovoltaic renewable energy sale to a resort in Belize. While the amounts of this sale distort some of the amounts and percentages set forth herein, they are included for completeness, and are excluded only when specifically so stated. For the fiscal year ended March 31, 1997, without the Belize resort sale, net sales for the year were $16,463,000, up 7% from $15,432,000 from the previous year. Excluding the Belize sale, retail and renewable energy sales continued to grow as a percentage of total Company sales, and catalog sales decreased as a percentage of sales: catalog sales were 73% of sales, as compared to 78% in the prior year; retail store sales were 17% of sales, as compared to 14% in the prior year, and renewable energy department sales were 10% of sales, as compared to 8% in the prior year. Catalog sales remained level at $11,968,000, compared to prior year sales of $11,972,000. The Company mailed approximately 17% more catalogs in fiscal 1997, or 6,300,000 compared to 5,400,000, primarily taking advantage of paper price declines in the third and fourth quarter. The Real Goods catalog showed a 12% increase in circulation, and an increase in dollars per book to $2.12 per book in fiscal 1997 from $2.04 per book in fiscal 1996. The remerchandised, re-positioned and expanded Earth Care catalog had a 35% increase in circulation, with dollars per book falling to $1.42 per book compared to $1.80 per book in fiscal 1996. The Company took advantage of the paper price decrease to mail the Earth Care catalog to additional prospect lists and implement long term growth plans for the title. As the Company moved both the Hopland, California and Eugene, Oregon stores to larger quarters, retail store sales increased 26% to $2,754,000, compared to $2,181,000 in the previous fiscal year. The Company had 7,400 square feet of retail selling space during fiscal 1996. For 10 months of the current fiscal year there was 9,600 square feet of retail selling space. The Hopland store has been relocated to the Company's Solar Living Center, and the Eugene store has been relocated to a larger, more central location at a mall in downtown Eugene. Since November 1996, the Company has kept a small outlet store open in Ukiah all year; in fiscal 1996 the Ukiah store was open only from November through January. Renewable energy sales, excluding the Belize sale, increased 37% to $1,693,000 compared to $1,237,000 in the previous fiscal year. The Company believes that Real Goods Renewables has shown a significant sales increase due to the department's increased staff levels, emphasis on customer service (including separate 800 lines), and utilization of a separate and more technical catalog, the Real Goods News, for the renewable energy customers. Due to increased staffing, Renewables has been able to pursue many new leads in both national and international markets, as well as in the expanding "eco-tourism" business. Gross Profit For fiscal 1997, gross profit amounted to $8,799,000, or 47.8% of sales, compared to gross profits of $7,426,000 or 48.1% of sales in the previous fiscal year. Overall gross profits as a percentage of sales was slightly lower due to the percentage of retail and renewable energy sales, including the Belize sale, increasing in comparison to catalog sales; renewable and retail sales traditionally have lower margins than catalog sales. Catalog, retail and renewable energy sales all showed an improvement in gross margins over the previous fiscal year. Catalog sales had a gross profit of $6,373,000 or 53.2% of sales, compared to $6,151,000 or 51.4% of sales in the previous year, which was a $220,000 increase in margin on flat sales. Retail store sales had a gross profit of $1,096,000 or 39.8% of sales, compared to $839,000 or 38.4% of sales in the previous year. Renewable energy sales had a gross profit of $1,282,000 or 35% of sales, including the Belize sale, compared to $394,000 or 31.8% of sales in the previous year. The gains in margins in all areas were attributed to the successful efforts to improve terms with vendors that allow for cash discounts, quantity discounts, and generally improved purchasing efficiencies. Operating Expenses Selling, general, and administrative expenses amounted to $8,133,000 or 44% of sales in fiscal 1997, compared to $7,745,000 or 50.1% of sales in the prior year. Operating expense increased only 5% in absolute dollars while sales increased 19% including the Belize sale, or 7% without the Belize sale. The Belize sale did not generate incremental operating expense. Labor and benefits increased only 2% on the sales increase, reflecting the Company's efforts to improve and streamline internal management. Catalog circulation increased by 15%, yet due to paper price declines experienced in the third and fourth quarters, overall catalog expense declined by 6%. Postage and freight expense increased 19%, reflecting the increased catalog circulation as well as increases by United Parcel Service in February 1996 and February 1997. The Company has experienced small reductions in postage costs since July 1996 due to favorable new postal reclassification regulations. The Company also continued to reduce outside consulting expenses, general expenses, and other variable costs. Depreciation increased $100,000, due to the completion of the Solar Living Center. Earnings from operations were $666,000 for the year, compared to a loss of $319,000 in the previous year, representing a turnaround of $985,000. The Belize sale, improved margins, paper price reductions and improved operational efficiencies contributed to this dramatic improvement. Interest In fiscal 1997, interest expense was $103,000 and interest income was $23,000, resulting in a net interest expense of $80,000. In the previous fiscal year, interest income was $32,000 and interest expense was capitalized into the Solar Living Center construction project. The increased interest expense is due to the loans required to finance the Solar Living Center (see Note 5). Approximately $11,000 of the interest expense in fiscal 1997 was related to the line of credit. The Company largely uses its line of credit to increase inventory levels for the holiday season. Income Taxes Income taxes as a percentage of pretax income was 38% compared to a tax benefit at the rate of 34% for the previous year when the Company reported a loss. The Company believes that the applied tax rate accurately reflects its actual experience. Earnings The Company earned $586,000 before tax and had $363,000 net earnings in the current fiscal year, or $.11 per share. In fiscal 1996, the Company had a before tax loss of $287,000 and a net loss of $175,000 or $.05 per share. Current year profits are the highest annual results ever earned by the Company. These earnings represent a significant turnaround for the Company, as they follow the Company's first annual loss in fiscal 1996. Management believes that the Belize sale, the improved margins particularly from catalog sales, the decreased paper costs in its third and fourth quarters, and improved internal operating efficiencies are to be credited with the earnings gain. The Company has remained committed to its mission of reducing waste and pollution and heightening environmental awareness by continuing to print catalogs on recycled paper, despite the 4% - 10% premium that it pays for recycled paper. Liquidity and Capital Resources During the fiscal year ended March 31, 1997, cash of $252,000 was provided by operations. Cash was increased by a decrease in prepaid purchases of $285,000 due to the effect in the prior year of a purchase for the Belize sale. Cash was decreased by a decrease in customer deposits of $585,000 due to the Belize deposit being recognized in sales in the current year. The Company used $685,000 of cash largely for purchase of property, equipment and improvements related to the completion of its Solar Living Center. Cash provided by financing activities was $677,000, primarily due to the Company completing its construction loan and entering into two long term debt agreements (see note 5) for $585,000 and $604,000 respectively. Cash of $115,000 was used in the repurchase of common stock (see Note 10). The net effect of all of the Company's activities was to increase the Company's cash position to $513,000 at the end of the period from $270,000 at the beginning of the period. The Company has secured a $1,500,000 line of credit for fiscal 1998 to use for seasonal fluctuations in inventory levels as well as operating expenses. Management believes that cash flow from operations together with bank debt financing and existing cash reserves will be sufficient to fund the Company's operations through fiscal 1998. The overall effects of inflation on the Company's business during the periods discussed were not believed to be material. CERTAIN CONSIDERATIONS Except for the historical information contained in this Annual Report on Form 10-KSB, the matters discussed in this document are forward looking statements. These forward looking statements concern matters that involve risks and uncertainties, including, but not limited to, those set forth below, that could cause actual results to differ materially from those in the forward looking statements. The matters set forth below should be carefully considered when evaluating the Company's business and prospects. A. CATALOG SALES. The mail order industry is susceptible to the ebb and flow of both retail industry trends and the general economy. While the Company could be a beneficiary of a trend which increases the popularity of the Company's products, that trend could also ebb away. Of approximately 350 products in each of the Real Goods and Earth Care color catalogs, 35% are new to those catalogs; there can be no assurance that the product selection will be effective. While the Company must incur catalog production and mailing costs, purchase inventory and staff up in preparation for customer responses in advance of need, if customer response is below management's expectations and the Company's gross income decreases, the Company's expenses cannot be reduced timely and proportionately. In addition, the Company will be reliant to some extent on the state of the general economy. An adverse economic environment could impact the mail order catalog industry as a whole. Finally, catalog companies seeking to increase revenues and their "house list" often "prospect" with rented lists; unwise or excessive prospecting can adversely affect operating results. B. RETAIL STORES. There are substantial risks in store retailing, including poor location of retail stores, failing to identify consumer trends correctly, theft by customers and employees, poor financial controls, and losing customers to competitors. The Company is experimenting with retail store formats; there can be no assurance that any of those formats will be profitable, or, if profitable, replicatable. The Company is selling or closing its Amherst, Wisconsin store due to the store's failure to achieve the long term strategic objectives which the Company had for the store. C. SOLAR LIVING CENTER. The Company's mission is to promote and inspire an environmentally healthy and sustainable future through its products, publications and educational demonstrations. The Company has spent approximately $3,000,000 to acquire the land for the Solar Living Center, landscape the land and construct it as a demonstration of many of the principles underlying the Company's mission and vision. Although the initial response has been extremely encouraging in both sales and number of visitors, there can be no assurance that the Solar Living Center, which opened in May 1996, will fulfill the Company's hopes to increase the public's awareness of the Real Goods mission, that the Company will ever realize a suitable return on its investment or that the Company will not incur a substantial loss from the Solar Living Center. The Solar Living Center is located on a flood plain. D. SEASONALITY. As with nearly all retail enterprises, the Company's business is seasonal, and it customarily generates approximately 40% of its revenues in its third fiscal quarter which is the last calendar quarter of the year. The Company's execution in its third quarter is material to its financial success for a fiscal year. Poor third quarter results in any given year would adversely impact the Company to a greater absolute extent than poor results in any other quarter. E. COMPETITION. The Company believes that as to certain of its products it operates in a niche presently too technical and application specific to interest the larger catalogs and that the Company's knowledge of its customers and vendors offerings enables it to be a better intermediary between suppliers and customers for its segment of the market than larger catalogs. However, the Company is small compared to industry leaders. If one or more of the larger catalog retailers decides either to have a major renewable energy and conservation section in an existing catalog or to launch a comparable catalog, the Company's business could be adversely affected. F. NEW INITIATIVES. The Company has undertaken test programs in Japan, in wholesale sales and in selling via the Internet, which may prove to be productive endeavors; however, there can be no assurance that any of them will be successful or, if they appear successful, that they will continue to be successful. G. UNCONTROLLABLE EVENTS. The Company is subject to larger trends and events which are beyond the Company's control. For instance, a severe recession would decrease disposable income and the amounts people spend on non-essential products such as those the Company offers. If there is a war, earthquake, fire or similar event, the Company could be adversely impacted. While the Company carries reasonable insurance considering its size and economics, such insurance may not fully protect the Company from events which are beyond the Company's control. Any long term drop in energy prices could also reduce the attractiveness of certain of the Company's products; reciprocally, the Company could benefit from a long term increase in energy prices. H. SALES TAXES. In 1992, the United States Supreme Court ruled that states may not impose taxes on out-of-state direct marketers, but it suggested that Congress could delegate that power. To date, there has been no congressional action. The Company collects sales tax only on sales made in California and, for so long as it operates the Snow-Belt store, Wisconsin. If the Congress does delegate the power to levy a sales tax and states do levy those taxes, the operations of the Company will likely be affected substantially because the Company's average order is relatively high and the combination of sales taxes with shipping charges may affect consumer buying decisions. I. DEPENDENCE ON KEY PERSONNEL. The Company is substantially dependent on the continued services of John Schaeffer. The loss of Mr. Schaeffer's services for any substantial period of time is certain to have a material adverse impact on the Company. The Company maintains a $1,000,000 life insurance policy on Mr. Schaeffer. The Company does not anticipate acquiring disability insurance on Mr. Schaeffer. J. DEPENDENCE ON CERTAIN SUPPLIERS. Including Foreign Suppliers. The Company carries approximately 350 articles in each color catalog. No more that 5% of the Company's sales arise from a single product. Approximately 3% of the Company's sales are generated from products purchased directly from foreign countries. Accordingly, the Company is subject to both exchange rate fluctuations and possible disruptions in supplies for those products. The Company could also be vulnerable because 5% of its revenues derive from products purchased from a single supplier. However, there is at least one alternative supplier for each product in every case, and management believes that any such effect would be temporary. K. COST INCREASES. For the portion of its sales derived from mail order catalogs, the Company is particularly susceptible to increases in paper prices and postal and shipping charges. In late 1994 and early 1995 paper prices increased dramatically, causing significant cost increases; those prices eased in 1996. There is an immediate effect on the Company's catalog marketing costs as a result of the paper market price fluctuations. Since paper capacity is relatively fixed, the Company believes that prices in this market are directly affected by the strength of the economy. Increased paper prices as well as increased mailing and shipping charges could substantially impact the Company's catalog growth and profitability. Decreased paper prices result in a more favorable mail order catalog market. Postage costs are affected by price changes by the United States Postal Service and United Parcel Service. In early 1995, United States Postal Service prices increased and could increase in the future. In February 1996 and February 1997 United Parcel Service increased rates. The Company does expect annual increases in United Parcel Services's charges. The Company has experienced a small reduction in postage costs since the third quarter due to recently enacted postal reclassification regulations. L. CONTROL. Because of his stock ownership position, John Schaeffer will at all times have the ability to control the operations and strategy of the Company. Item 7. FINANCIAL STATEMENTS. REAL GOODS TRADING CORPORATION TABLE OF CONTENTS PAGE INDEPENDENT AUDITORS' REPORT 16 CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED MARCH 31, 1997 AND 1996: Consolidated Balance Sheets 17 Consolidated Statements of Operations 18 Consolidated Statements of Cash Flows 19 Consolidated Statements of Shareowners' Equity 20 Notes to Consolidated Financial Statements 21-27 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareowners Real Goods Trading Corporation: We have audited the accompanying consolidated balance sheets of Real Goods Trading Corporation and subsidiary (the "Company") as of March 31, 1997 and 1996, and the related consolidated statements of operations, shareowners' equity and of cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Real Goods Trading Corporation and subsidiary as of March 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements in fiscal 1996 the Company changed its method of accounting for certain inventory acquisition and distribution costs. [S]DELOITTE & TOUCHE, LLP Deloitte & Touche, LLP Oakland, California May 9, 1997 REAL GOODS TRADING CORPORATION CONSOLIDATED BALANCE SHEETS MARCH 31, 1997 AND 1996 (In thousands except share data)
1997 1996 ASSETS Current assets: Cash $ 513 $ 270 Accounts Receivable, net of allowance of $6 169 179 Inventories 2,112 2,139 Deferred catalog costs, net 383 403 Prepaid expenses 112 403 Total current assets 3,289 3,394 Property, equipment and improvements, net 3,347 2,936 Intangible assets and other assets, net 166 167 Total assets $6,802 $6,497 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Accounts payable $ 481 $ 575 Accrued expenses 304 345 Customer deposits 85 670 Current maturities of long-term debt 37 387 Deferred income taxes 13 40 Income taxes and other taxes payable 48 35 Total current liabilities 968 2,052 Long-term debt 1,143 15 Total liabilities $2,111 $2,067 Shareowners' equity: Common stock, without par value: Authorized 10,000,000 shares; Issued and outstanding, 3,403,804 and 3,434,666 shares respectively 4,252 4,354 Retained Earnings 439 76 Total shareowners' equity 4,691 4,430 Total liabilities and shareowners' equity $6,802 $6,497
See notes to consolidated financial statements REAL GOODS TRADING CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED MARCH 31, 1997 AND 1996 (In thousands except share data)
1997 1996 Net sales $18,424 $15,432 Cost of sales (9,625) (8,006) Gross profit 8,799 7,426 Selling, general and administrative expenses 8,133 7,745 Earnings (loss) from operations 666 (319) Interest income (expense), net (80) 32 Earnings (loss) before income taxes and cumulative effect of change in accounting principle 586 (287) Income tax benefit (expense) (223) 85 Earnings (loss) before cumulative effect of change in accounting principle 363 (202) Cumulative effect of change in accounting principle, net of tax (Note 2) - 27 Net earnings (loss) $ 363 $ (175) Earnings (loss) per share of common stock: Before cumulative effect of change in accounting principle $0.11 ($0.06) Cumulative effect of change in accounting principle - accounting for certain inventory acquisition and distribution costs $0.00 $0.01 Net earnings (loss) per share $0.11 ($0.05) Weighted average shares used to compute earnings per share 3,418,089 3,435,167
See notes to consolidated financial statements REAL GOODS TRADING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 1997 AND 1996 (In thousands)
1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) before cumulative effect of change in accounting principle $363 $(202) Adjustments to reconcile net earning (loss) before cumulative effect of change in accounting principle to net cash provided by operating activities: Depreciation and amortization 283 176 Other (27) 39 Changes in assets and liabilities: Accounts receivable 9 (92) Inventory 27 110 Deferred catalog costs 20 189 Prepaid expenses 285 (299) Accounts payable (94) (273) Accrued expenses (41) 172 Income taxes and other taxes payable 13 13 Customer deposits (586) 630 Net cash provided by operating activities 252 463 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of land, equipment, and construction in progress (673) (1,411) Purchase of other assets (23) Proceeds from sale of equipment 11 3 Net cash used in investing activities (685) (1,408) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings 2,559 361 Proceeds from issuance of common stock 13 109 Repayment of debt (1,780) (20) Purchase of common stock (115) (67) Net cash provided by financing activities 677 383 Net increase (decrease) in cash 243 (562) Cash at beginning of period 270 832 Cash at end of period $513 $270 Other cash flow information: Interest paid 99 Income taxes paid 233 1 Non cash investing/financing activities: Notes receivable cancelled upon repurchase of options (17)
See notes to consolidated financial statements REAL GOODS TRADING CORPORATION CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY YEARS ENDED MARCH 31, 1997 AND 1996 (In thousands)
COMMON STOCK Total Notes Share- Number Recieve Retained owners' of Shares Amount able Earnings Equity BALANCE, MARCH 31, 1995 3,422 $4,285 $ (17) $ 251 $4,519 Issuance of stock for: Bonuses 1 10 10 Stock options exercised 18 109 109 Repurchase of stock and stock options (6) (68) 17 (51) Stock option compensation 18 18 Net earnings (175) (175) BALANCE, MARCH 31, 1996 3,435 4,354 - 76 4,430 Issuance of stock for: Bonuses 1 10 10 Stock options exercised 1 3 3 Repurchase of stock (33) (115) (115) Net earnings 363 363 BALANCE, MARCH 31, 1997 3,404 $4,252 $ - $ 439 $4,691
See notes to consolidated financial statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization - Real Goods Trading Corporation (the "Company") sells primarily environmentally related products and renewable energy products through mail order catalogs, retail stores, and direct sales of its renewable energy department. The Company was organized on July 1, 1990. Principles of Consolidation - In December, 1995 the Company's wholly owned subsidiary, Snow-Belt Energy Center, Inc. was merged into the Company. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Snow-Belt. Intercompany transactions and balances have been eliminated. Use of Estimates - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories are stated at the lower of cost (first-in/first-out method) or market. Inventories include expenses associated with acquiring the inventory. See Note 2 to the financial statements. Deferred Catalog Costs - The Company capitalizes the direct cost of producing and distributing its mail order catalogs. Deferred catalog costs are amortized based on the estimated sales lives of the catalogs. Property, equipment and improvements are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from 5 to 40 years. Pre-opening costs for retail stores are expensed as incurred. Intangibles represent the excess of cost over tangible net assets acquired and are amortized over 5 years. Income Taxes - The Company accounts for its income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than changes in tax laws. Earnings per share are computed based on the weighted average number of shares outstanding during the period. Reclassification - Certain reclassifications have been made to the March 1996 amounts in order to conform to the March 1997 presentation. Estimated Fair Value of Financial Instruments - Statement of Financial Accounting Standard ("SFAS") No. 107, "Disclosures About Fair Value of Financial Instruments" requires disclosure of the estimated fair value of financial instruments. The carrying values of cash, accounts receivable, accounts payable, and long-term debt approximates their estimated fair values. Stock-based Compensation - The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with APB No. 25, "Accounting for Stock Issued to Employees." New Accounting Standards - In fiscal 1997, Real Goods adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No.121 establishes recognition and measurement criteria for impairment losses when the Company no longer expects to recover the carrying values of a long-lived asset. The adoption of SFAS No. 121 did not have a significant impact on the Company's financial statements. Recently Issued Accounting Standard - In February 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). The Company is required to adopt SFAS 128 in the third quarter of fiscal 1997 and will restate at that time earnings per share (EPS) data for prior periods to conform with SFAS 128. Earlier application is not permitted. SFAS 128 replaces current EPS reporting requirements and requires a dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income (available to common shareowners) by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. If SFAS 128 had been in effect during the current and prior year periods, basic EPS would have been $.11 and ($.05) for the years ended March 31, 1997 and 1996 respectively. Diluted EPS and SFAS 128 would not have been significantly different than primary EPS currently reported for the periods. 2. CHANGE IN ACCOUNTING PRINCIPLE The Company changed its method of accounting for certain inventory acquisition and distribution costs to capitalize such costs into merchandise inventories to better match these costs with their related sales and to conform to the predominant industry practice. Previously, such costs were expensed as incurred. The cumulative effect on prior years of adopting this method was $27,000, which is included in 1996 net income. The effect of this accounting change was an increase in earnings for fiscal 1996 of $4,000. 3. PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following at March 31 (in thousands): 1997 1996 Land $ 490 $ 262 Land Improvements 770 Buildings and leasehold improvements 1,717 200 Equipment, furniture and fixtures 902 798 Construction in progress 10 2,136 Total 3,889 3,396 Less accumulated depreciation (542) (460) Property, equipment and improvements, net $3,347 $2,936
At the end of fiscal 1996, construction in progress related to the Solar Living Center (SLC), located in Hopland, California. The SLC is a twelve acre demonstration site of sustainable living practices and renewable energy systems and includes a retail store. The Solar Living Center was completed in May, 1996. $62,000 of interest was capitalized over a two year period in connection with this project. 4. LINE OF CREDIT On April 8, 1997, the Company entered into an extended line of credit agreement for $1,500,000 from National Bank of the Redwoods (the" Bank"). Borrowings bear interest at 1% over the prime rate, and interest is payable monthly. The line is personally guaranteed by the Company's majority shareowner. This agreement expires April 8, 1998. In fiscal 1997, the Company had a $1,000,000 line of credit with the Bank. Borrowings bore interest at 2% over the prime rate, and interest was payable monthly. That line was personally guaranteed by the Company's majority shareowner. On March 31, 1997, no amounts were outstanding on the Company's line of credit. The extended line of credit agreement contains restrictive covenants including debt to net worth and current ratios, restrictions on capital expenditures, positive cash flow at a certain point in the fiscal year and prohibitions on payment of cash dividends without the Bank's approval. The line is collateralized by substantially all of the Company's assets including inventory, accounts receivable and mailing lists as well as a key person life insurance policy on the life of the Company's majority shareowner. The Company was in compliance with all covenants of the extended line of credit agreement as of March 31, 1997. 5. DEBT
Long term debt consists of the following on March 31 (in thousands): 1997 1996 National Bank of the Redwoods term loan, interest at prime plus .5%, payable through June 30, 2021 $568 Small Business Administration term loan, interest at 7.77%, payable through September, 2016 596 National Bank of the Redwoods construction loan, interest at prime plus 2%, paid June 1996 387 Other 16 15 Total $1,180 $ 402 Short-term 37 387 Long- term 1,143 15 Total $1,180 $402
Collateral for both term loans is a first deed of trust on the Hopland, California property.
Principal payments on long-term debt are as follows (in thousands): Fiscal Year ending March 31: 1998 $37 1999 54 2000 39 2001 41 2002 42 Thereafter 966 Total $1,180
6. DISPOSITION OF ASSETS The Company plans to sell or close its retail store in Amherst, Wisconsin during fiscal 1998, due to the failure of the store to achieve the long term strategic objectives that the Company had for the store. The Company does not anticipate that the sale or closure of this store will result in a loss. 7. LEASES The Company has operating leases for office, warehouse facilities, the Eugene store and certain equipment, which expire from 1997 through 2000. Rental expense for the years ended March 31, 1997 and 1996 was $158,000 and $264,000, respectively.
Future minimum annual lease payments under operating leases are as follows (in thousands): Fiscal Year ending March 31: 1998 $166 1999 43 2000 11 2001 5 Total $225
8. INCOME TAXES
Income tax expense (benefit) consists of the following for the years ended March 31 (in thousands): 1997 1996 Current: Federal $196 $ (40) State 52 1 Total 248 (39) Deferred (25) (31) Total $ 223 $ (70)
The provisions for income taxes for financial reporting purposes are different from the tax provision computed by applying the statutory federal income tax rate.
The differences for each year are reconciled as follows (in thousands): 1997 1996 Federal income taxes at statutory income tax rate (34%) $ 199 $ (84) State taxes net of federal tax benefit 33 (10) Effect of nondeductible expenses 13 13 Other (22) 11 Provision $ 223 $(70)
The components of the net deferred tax liability at year-end are as follows (in thousands): 1997 1996 Deferred tax assets: Accrued reserves $ 23 $ 23 Stock option compensation 14 8 State income taxes 5 1 Other 24 - Total deferred tax assets 66 32 Deferred tax liabilities: Catalog costs (73) (63) Other (6) (9) Total deferred tax liabilities (79) (72) Net deferred tax liability $ (13) $ (40)
9. MAJORITY SHAREOWNER AGREEMENTS The President and majority stockholder has a renewable one-year employment agreement with the Company which provides for an annual salary of $72,000. The President and majority shareowner has personally guaranteed the Company's line of credit agreement. (See Note 4.) The Company has a split dollar life insurance agreement with its President, whereby the Company pays the premiums. The Company has been granted a security interest in the cash value and death benefit of the policy, and stock has been pledged as additional collateral during the period the premiums exceed the cash surrender value. The amount receivable at March 31, 1997 was $111,000. 10. SHAREOWNERS' EQUITY In September 1995 the Board of Directors approved a stock repurchase program. The Company is authorized to repurchase up to $250,000 of common stock. As of March 31, 1997, the Company had repurchased 9,184 shares at an average price of $5.34 per share. In July 1996 the Company repurchased 30,000 shares of unregistered stock from its President and majority shareowner at a below-market price of $3.33 per share. 11. BENEFIT PLANS AND STOCK OPTIONS In August 1992, the Company adopted the Real Goods Trading Corporation 401(k) Retirement Plan effective for the plan year commencing on January 1, 1992. The Plan does not require matching funds from the Company, and the Company has made no contributions. Under the Company's Second Amended and Restated Fiscal 1993 Stock Incentive Plan (the "Plan") the Company can grant incentive and non-qualified options to purchase 600,000 shares of common stock. Incentive Stock Options can be granted at prices not less than 100% of the fair market value of the common shares (85% for non-qualified options) on the date the option is granted, and normally vest over a period not exceeding four years from the date of grant. As of March 31, 1997, options to purchase 233,700 shares were outstanding, and 26,100 had been exercised. On March 3, 1997, the Board of Directors granted to all optionees under the Plan who surrendered their held options the same number of options with the same vesting provisions but at an exercise price which was both (i) five cents per share below the exercise price of the old options and (ii) at or above the current fair market value of the Company's stock on that date. In June 1995 the Company reserved 50,000 shares of common stock for its Non-Employee Directors' Stock Option Plan (Director's Plan). In May 1996 the Company amended and restated the Non-Employee Directors' Stock Option Plan and increased the plan to 100,000 shares. As of March 31, 1997, options to purchase 35,000 shares were outstanding and none had been exercised. Weighted Number of Average Shares Exercise (in thousands) Price Outstanding at March 31, 1995 325 $ 6.10 Granted 103 5.79 Exercised (18) 5.10 Cancelled (100) 8.38 Forfeited (79) 5.10 Outstanding at March 31, 1996 231 5.48 Granted 368 5.71 Exercised (1) 7.00 Forfeited (330) 5.43 Outstanding at March 31, 1997 268 $5.40 Shares exercisable at March 31, 1997 136 $5.12 Shares available for grant at March 31, 1997 405 Range of exercise prices $5.05 to $7.12 Weighted average remaining contractual life at March 31, 1997 8 years At March 31, 1997, 340,200 and 65,000 shares were available for future grants under the Second Amended and Restated Stock Incentive Plan and Directors' Plan respectively. Additional Stock Plan Information As discussed in Note 1, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board No.25, "Accounting for Stock Issued to Employees" and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements in fiscal 1997. In fiscal 1996, as some options had been previously granted at an exercise price below market, an expense of $31,000 was reflected in the financial statements. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", (SFAS 123) requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1996. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of the option pricing models, even though such models were developed to estimate the fair value of freely tradeable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculate values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: Expected life, 60 months following investing; stock volatility, 26.18% in fiscal 1997 and fiscal 1996; risk free interest rate 6% in fiscal 1997 and fiscal 1996; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are calculated at 50% expected rate, based on the Company's historical experience. If the computed fair values of the fiscal 1996 and fiscal 1997 awards had been amortized to expense over the vesting period of the awards, pro forma net earnings would have been $345,000 or $.10 per share in fiscal 1997, and net loss would have been $183,000 or ($.05) per share in fiscal 1996. However, the impact of outstanding non-vested stock options granted prior to fiscal 1996 have been excluded from the pro forma calculation; accordingly, the fiscal 1996 and fiscal 1997 pro forma adjustments are not indicative of future period pro forma adjustments, when the calculation will apply to all applicable stock options. Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. Information with respect to this Item is incorporated by reference to the information set forth under the headings "General Information Regarding Directors and Executive Officers," "Professional Experience of Executive Officers and Directors" and "Reports Required by Section 16(a)" under the section entitled "Board of Directors" in the Company's Proxy Statement for the 1997 Annual Meeting of Shareowners. Item 10. EXECUTIVE COMPENSATION. Information with respect to this Item is incorporated by reference to the information set forth under the headings "Remuneration of Directors," "Compensation of Executive Officers" and "Employee Contracts, Employment Termination and Change - -in-Control Arrangements" under the section entitled "Board of Directors" in the Company's Proxy Statement for the 1997 Annual Meeting of Shareowners. Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information with respect to this Item is incorporated by reference to the information set forth in the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement for the 1997 Annual Meeting of Shareowners. Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information with respect to this Item is incorporated by reference to the information set forth under the heading "Certain Relationships and Related Transactions" under the section entitled " Board of Directors" in the Company's Proxy Statement for the 1997 Annual Meeting of Shareowners. Item 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Form 8-K filed dated April 25, 1996 Form 8-K filed dated May 21, 1996. (b) See Index to Exhibits following Signature Page. ........................ SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this June 10th day of 1997. REAL GOODS TRADING CORPORATION (Registrant) By:[S]DONNA MONTAG, CHIEF FINANCIAL OFFICER Donna Montag, Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. Signature Title Date [S]DONNA MONTAG Chief Financial Officer May 20,1997 Donna Montag [S]JOHN SCHAEFFER President/CEO May 20,1997 John Schaeffer [S]STEPHEN MORRIS Director May 20,1997 Stephen Morris [S]JAMES T. ROBELLO Director May 20,1997 James T. Robello [S]LINDA FRANCIS Director May 20,1997 Linda Francis [S]JOHN LENSER Director May 20,1997 John Lenser [S]BARRY REDER Director May 20,1997 Barry Reder Item 13. INDEX TO EXHIBITS. Exhibit No. Description 3.1* Articles of Incorporation 3.2* Bylaws 10.1* Form of Indemnification Agreement with Directors 10.2** Contract to Purchase Hopland Property 10.7** License Agreement, as amended, between Sierra Club and Earth Care Paper Company, Inc., and consent letter from Sierra Club to the Company 10.9*** Lease of 1670 West 7th Avenue, Eugene, Oregon 10.10**** Lease on 555 Leslie Street, Ukiah, California 10.11**** Loan Agreement between the Company and National Bank of the Redwoods dated April 4, 1995 and certain ancillary documents 10.12**** Split Dollar Agreement by and among the Company and John C. Schaeffer and the Trustee of the Schaeffer 1994 Irrevocable Trust dated May 15, 1995 and Assignment of Life Insurance Policy as Collateral by Trustee of the Schaeffer 1994 Irrevocable Trust 10.13**** Consulting Agreement with Stephen Morris 10.14**** Amended and Restated Real Goods Trading Corporation Fiscal 1993 Stock Incentive Plan 10.15**** The Real Goods Trading Corporation Non-Employee Directors' Stock Option Plan 10.16^ Loan Agreement between the Company and National Bank of the Redwoods dated April 8, 1997 and certain ancillary documents. 10.17^ Term Loan agreement between the Company and National Bank of the Redwoods, dated June 24, 1996 and certain ancillary documents. 10.18^ Term Loan agreement between the Company and Small Business Administration, dated June 17, 1996 and certain ancillary documents. 23.1^ Independent Auditors' Consent. * Incorporated by reference to the Company's Registration Statement of Form 10-KSB filed with the Securities and Exchange Commission on October 1, 1993. ** Incorporated by reference to Amendment No. 1 to the Company's Registration Statement on Form 10-KSB filed with the Securities and Exchange Commission on December 21, 1993. *** Incorporated by reference to the Company's Form 10-KSB filed with the Securities and Exchange Commission on June 29, 1994. **** Incorporated by reference to the Company's Form 10-KSB filed with the Securities and Exchange Commission on June 28, 1995. ^ Incorporated by reference to the Company's Form 10-KSB filed with the Securities and Exchange Commission on June 11, 1997. EX-27 2
5 YEAR MAR-31-1997 APR-01-1996 MAR-31-1997 513 0 175 6 2112 3289 3889 542 6802 968 0 0 0 4252 439 6802 18424 18424 9625 9625 8133 0 80 586 223 363 0 0 0 363 .11 .11
EX-10 3 BUSINESS LOAN AGREEMENT Borrower: REAL GOODS TRADING CORPORATION 555 LESLIE ST UKIAH, CA 95482 Lender: National Bank of the Redwoods Ukiah Office 319 East Perkins Ukiah, CA 95482 THIS BUSINESS LOAN AGREEMENT between REAL GOODS TRADING CORPORATION ("Borrower") and National Bank of the Redwoods ("Lender") is made and executed on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans and other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement. All such loans and financial accommodations, together with all future loans and financial accommodations from Lender to Borrower, are referred to in this Agreement Individually as the "Loan" and collectively as the "Loans". Borrower understands and agrees that: (a) In granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements, as set forth In this Agreement; (b)the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender's sole judgment and discretion; and (c) all such Loans shall be and shall remain subject to the following terms and conditions of this Agreement. TERM. This Agreement shall be effective as of April 8, 1997, and shall continue thereafter until all Indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time. Borrower. The word "Borrower" means REAL GOODS TRADING CORPORATION. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries and Affiliates". CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. Collateral. The word "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. Event of Default. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." Grantor. The word "Grantor" means and includes without limitation each and all of the persons or entitles granting a Security Interest in any Collateral tor the Indebtedness, including without limitation all Borrowers granting such a Security Interest. Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any Indebtedness. Indebtedness. The word "Indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such Indebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable. Lender. The word "Lender" means National Bank of the Redwoods, its successors and assigns. Loan. The word "Loan" or "Loans" means and includes without limitation any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. Note. The word "Note" means and includes without limitation Borrower's promissory note or notes, if any, evidencing Borrower's Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefore. Permitted Liens. The words "Permitted Liens" mean: (a) liens and security interests securing Indebtedness owed by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (d) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (f) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. Related Document. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents. whether now or hereafter existing, executed in connection with the Indebtedness. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Security Interest. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract. Lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial Loan Advance and each subsequent Loan Advance under this Agreement shall be subject to the fulfillment to Lender's satisfaction of all of the conditions set forth in this Agreement and in the Related Documents. Loan Documents. Borrower shall provide to Lender in form satisfactory to Lender the following documents for the Loan: (a) the Note, (b) Security Agreements granting to Lender security interests in the Collateral, (c) Financing Statements perfecting Lender's Security Interests; (d) evidence of insurance as required below; and (e) any other documents required under this Agreement or by Lender or its counsel, including without limitation any guaranties described below. Borrower's Authorization. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents, and such other authorizations and other documents and instruments as Lender or its counsel, in their sole discretion, may require. Payment of Fees and Expenses. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document. Representations and Warranties. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct. No Event of Default. There shall not exist at the time of any advance a condition which would constitute an Event of Default under this Agreement. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists: Organization. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of California and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its businesses or financial condition. Authorization. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower, do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. Financial Information. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. Legal Effect. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrowers properties are titled in borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. Hazardous Substances. The terms "hazardous waste," "hazardous substance," "disposal," "release," and "threatened release," as used in this Agreement, shall have the same meanings as set forth in the "CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (a) During the period of Borrower's ownership of the properties, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, about or from any of the properties. (b) Borrower has no knowledge of, or reason to believe that there has been (i) any use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance on, under, about or from the properties by any prior owners or occupants of any of the properties, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters. (c) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the properties shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, about or from any of the properties; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation those laws, regulations and ordinances described above. Borrower authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the properties for hazardous waste and hazardous substances. Borrower hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release occurring prior to Borrower's ownership or interest in the properties, whether or not the same was or should have been known to Borrower. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the indebtedness and the termination or expiration of this Agreement and shall not be affected by Lenders acquisition of any interest in any of the properties, whether by foreclosure or otherwise. Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. Taxes. To the best of Borrowers knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrowers Loan and Note, that would be prior or that may in any way be superior to Lenders Security Interests and rights in and to such Collateral. Binding Effect. This Agreement, the Note, all Security Agreements directly or indirectly securing repayment of Borrowers Loan and Note and all of the Related Documents are binding upon Borrower as well as upon Borrowers successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. Commercial Purposes. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. Employee Benefit Plans. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. Location of Borrower's Offices and Records. Borrower's place of business, or Borrower's Chief executive office, if Borrower has more than one place of business, is located at 555 LESLIE ST, UKIAH, CA 95482. Unless Borrower has designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. Information. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. Survival of Representations and Warranties. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in extending Loan. Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrowers Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: Litigation. Promptly inform Lender in writing of (a) all material adverse changes in Borrowers financial condition, and (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. Financial Records. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and audit Borrowers books and records at all reasonable times. Additional Information. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrowers financial condition and business operations as Lender may request from time to time. Insurance. Maintain fire and other risk insurance, public liability insurance, as Lender may require with respect to Borrowers properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. Guaranties. Prior to disbursement of any Loan proceeds, furnish executed guarantees of the Loans in favor of Lender, executed by the guarantor named below. on Lender s forms, and in the amount and under the conditions spelled out in those guaranties. Guarantor JOHN C. SCHAEFFER Amount $1,500,000 Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. Loan Proceeds. Use all Loan proceeds solely for Borrowers business operations, unless specifically consented to the contrary by Lender in writing. Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments taxes, governmental charges. Levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrowers properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments taxes, charges, levies, liens and claims against Borrower properties, income, or profits. Performance. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. Operations. Conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. Compliance Certificate. Unless waived in writing by Lender, provide Lender at least annually and at the time of each disbursement of Loan proceeds with a certificate executed by Borrowers chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. Environmental Compliance and Reports. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances, not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities, shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: Indebtedness and Liens. (a) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets, or (c) sell with recourse any of Borrower's accounts, except to Lender. Continuity of Operations. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, (c) pay any dividends on Borrowers stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a"Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or entity, or (c) incur any obligation as surety or guarantor other than in the ordinary course of business. Borrower does not require prior written consent from bank for these transactions which are less than $25,000. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender. EXHIBIT "A" - COVENANTS. An exhibit, titled "EXHIBIT "A" - Covenants," is attached to this Agreement and by this reference is made a part of this Agreement just as if all the provisions, terms and conditions of the Exhibit had been fully set forth in this Agreement. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrowers accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Borrower to make any payment when due on the Loans. Other Defaults. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. Default In Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished, or becomes false or misleading at any time thereafter. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings whether by judicial proceeding self-help repossession or any other method by any creditor of Borrower any creditor of any Grantor against any collateral securing the Indebtedness, or by any governmental agency. This includes a garnishment attachment or levy on or of any of Borrowers deposit accounts with Lender. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent or revokes or disputes the validity of or liability under any Guaranty of the Indebtedness. Change In Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition or Lender believes the prospect of payment or performance of the indebtedness is impaired. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur except where otherwise provided in this Agreement or the Related Documents all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make Loan Advances or disbursements) and at Lenders option all indebtedness immediately will become due and payable all without notice of any kind to Borrower except that in the case of an Event of Default of the type described in the insolvency subsection above such acceleration shall be automatic and not optional in addition Lender shall have all the rights and remedies provided in the Related Documents or available at law in equity or otherwise. Except as may be prohibited by applicable law all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender s right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement together with any Related Documents constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or duties sought to be changed or bound by the alteration or amendment. Applicable Law. This Agreement has been delivered to Lender and accepted by Lender In the State of California. If there is a lawsuit Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Mendocino County the State of California. This Agreement shall be governed by and construed In accordance with the laws of the State of California. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Multiple Parties; Corporate Authority. All obligations of Borrower under this Agreement shall be joint and several and all references to Borrower shall mean each and every Bonower. This means that each of the persons signing below is responsible for all obligations in this Agreement. Consent to Loan Participation. Borrower agrees and consents to Lenders sale or transfer whether now or later of one or more participation interests in the Loans to one or more purchasers whether related or unrelated to Lender. Lender may provide without any limitation whatsoever to any one or more purchasers or potential purchasers any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrowers obligation under the Loans irrespective of the failure or insolvency of any holder of any interest in the Loans. Borrower further agrees that the purchaser of any such participation interest may enforce its interests irrespective of any personal Claims or defenses that Borrower may have against Lender. Costs and Expenses. Borrower agrees to pay upon demand all of Lenders reasonable expenses, including without limitation attorney's fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lenders attorneys fees and Lenders legal expenses, whether or not there is a lawsuit, including attorney's fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. Notices. All notices required to be given under this Agreement shall be given in writing, may be sent by, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current address(es). Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. if feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word Borrower as used herein shall include all subsidiaries and affiliates of Borrower. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary or affiliate of Borrower. Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. Survival. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender s behalf. Time Is of the Essence. Time is of the essence in the performance of this Agreement. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender s right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF APRIL 8, 1997. BORROWER: REAL GOODS TRADING CORPORATION BY: [S]JOHN C. SCHAEFFER LENDER: National Bank of the Redwoods [S]JOHN HORNE BY: Authorized Officer EXHIBIT "A" - COVENANTS References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Borrower: REAL GOODS TRADING CORPORATION 555 LESLIE ST UKIAH, CA 95482 Lender: National Bank of the Redwoods Ukiah Office 319 East Perkins Ukiah, CA 95482 This EXHIBIT "A" - Covenants is attached to and by this reference is made a part of each Business Loan Agreement or Negative Pledge Agreement, dated April 8, 1997, and executed in connection with a Loan or other financial accommodations between National Bank of the Redwoods and REAL GOODS TRADING CORPORATION. BORROWER AGREES TO PROVIDE: Monthly Inventory Valuation Reports due within 20 days of month end. Quarterly 10Q Corporate Financial Statements due within 45 days of quarter end. Annual CPA audited FYE Corporate Financial Statements due within 90 days of 3-31. Copy of annual Corporate Tax Return starting with tax return for 3-31-97 due 9-30-97. Annual Personal Financial Statement for John C. Schaeffer. Copy of annual Personal Tax Return or Extension for John C. Schaeffer starting with 1996. BORROWER AGREES THAT: Current Ratio must be at least 1.25:1. Total Tangible Debt to net worth ratio not to exceed 1 1, as measured quarterly. Positive cash flow after operations is required for the 4 consecutive calendar quarters ending 12/31, as determined from the 10Q reports. The basis for this calculation is attached on Exhibit "B", to be completed and signed by Borrower and submitted to Bank. BORROWING BASE: Maximum advance rate on line not to exceed the lesser of $1,500,000.00 or 50% of the value of inventory located in California. Line to be clear 30 consecutive days after December 31. Bank reserves the right to conduct inventory exams at the Borrower's expense. National Bank of the Redwoods will be major depository bank during term of line. Liability Insurance coverage must be maintained during term of loan. Evidence must be furnished to National Bank of the Redwoods. Evidence of insurance coverage for Equipment and Inventory is required and must be maintained during term of loan. National Bank of the Redwoods to be name Lender's Loss Payee. Life insurance policy to be maintained in a minimum amount of $1,000,000.00. LETTER OF CREDIT SUBLIMIT: As a sublimit under the Line of Credit, Bank agrees from time to time to issue sight import letters of credit for the account of Borrower to support purchases and catalog expenses (each, a "Letter of Credit" and collectively, "Letters of Credit'); provided however, that the form and substance of each Letter of Credit shall be subject to approval by Bank, in its sole discretion; and provided further, that the aggregate undrawn amount of all outstanding Letters of Credit shall not at any time exceed THREE HUNDRED THOUSAND DOLLARS ($300,000.00). Each Letter of Credit shall not have an expiration date subsequent to April 4, 1998. The undrawn amount of all Letters of Credit shall be reserved under the line of Credit and shall not be available for advances thereunder. Each Letter of Credit shall be subject to the additional terms and conditions of the Letter of Credit Agreement and related documents, if any, required by Bank in connection with the issuance thereof (each, a "Letter of Credit Agreement" and collectively, "Letter of Credit Agreements"). Each draft paid by Bank under a Letter of Credit shall be deemed advance under the Line of Credit and shall be repaid by Borrower in accordance with the terms and conditions of this Agreement applicable to such advances; provided however, that if the Line of Credit is not available, for any reason whatsoever, at the time any draft is paid by Bank, or if advances are not available under the Line of Credit at such time due to any limitation on Borrowings set forth herein, then the full amount of such draft shall be immediately due and payable, together with interest thereon, from the date such amount is paid by Bank to the date such amount is fully repaid by Borrower, at the rate of interest applicable to advances under the Line of Credit. In such event, Borrower agrees that Bank, at Bank's sole discretion, may debit Borrower's deposit account with Bank for the amount of any such draft. THIS EXHIBIT "A" - COVENANTS IS EXECUTED ON APRIL 8, 1997. LENDER:[S]JOHN C. SCHAEFFER National Bank of the Redwoods BY:[S]JOHN HORNE Authorized Officer PROMISSORY NOTE Borrower: REAL GOODS TRADING CORPORATION 555 LESLIE ST UKIAH, CA 95482 Lender: National Bank of the Redwoods Ukiah Office 319 East Perkins Street Ukiah, CA 95482 PRINCIPAL AMOUNT: $1,500,000.00 INITIAL RATE: 9.500% DATE OF NOTE: April 8, 1997 PROMISE TO PAY. REAL GOODS TRADING CORPORATION ("Borrower") promises to pay to National Bank of the Redwoods ("Lender"), or order, in lawful money of the United States of America, the principal amount of One Million Five Hundred Thousand & 00/100 Dollars ($1,500,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on April 4, 1998. In addition, Borrower will pay regular monthly payments of accrued unpaid Interest beginning May 4, 1997, and all subsequent Interest payments are due on the same day of each month after that. Interest on this Note is computed on a 365/365 simple interest basis; that is, by applying the ratio of the annual interest rate over the number of days in a year, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an independent index which is the The West Coast Edition Of The Wall Street Journal Prime Rate (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the index becomes unavailable during the term of this loan, Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each day the prime rate changes. The index currently Is 8.500% per annum. The interest rate to be paid to the unpaid principal balance of this Note will be at a rate of 1.000 percentage point over the index, resulting in an initial rate of 9.500% per annum. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. Except for the foregoing, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. LATE CHARGE. If a payment is 11 days or more late, Borrower will be charged 5.000% of the regularly scheduled payment or $75.00, whichever is less. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the Related Documents. (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Note. (h) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. This Note has been delivered to Lender and accepted by Lender in the State of California. If there is lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of MENDOCINO County, the State of California. This Note shall be governed by and construed in accordance with the laws of the State of California. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by or as provided in this paragraph. Lender may, but need not, require that all oral requests be confirmed in writing. The following party or parties are authorized as provided in this paragraph to request advances under the line of credit until Lender receives from Borrower at Lender's address shown above written notice of revocation of their authority: JOHN SCHAEFFER, PRESIDENT; and DONNA MONTAG, CFO. ANYONE OF THESE PARTIES IS AUTHORIZED TO REQUEST ADVANCES. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (a) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; or (d) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender. DEFAULT INTEREST RATE-18.00% PER YEAR. Notwithstanding any other provisions of this note, Borrower acknowledges that in the event of 04-08-1997 default, the interest rate applied to this indebtedness will be increased to 18.00%. Borrower will be notified in writing, with a copy to all guarantors, that an event of default has occurred and that failure to cure the default will result in the application of the default interest rate as of a certain date. That date will be at least seven (7) calendar days from the date of notification to the Borrower. LETTER OF CREDIT SUBLIMIT. This line of credit has a sublimit of $300,000.00 for the issuance of sight import letters of credit as more fully described in the Business Loan Agreement. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: REAL GOODS TRADING CORPORATION BY:[S]JOHN C. SCHAEFFER John C. Schaeffer, President LENDER: National Bank of the Redwoods BY:[S]JOHN HORNE Authorized Officer COMMERCIAL SECURITY AGREEMENT Borrower: REAL GOODS TRADING CORPORATION 555 LESLIE ST UKIAH, CA 95482 Lender: National Bank of the Redwoods Ukiah Office 319 East Perkins Ukiah. CA 95482 THIS COMMERCIAL SECURITY AGREEMENT is entered into between REAL GOODS TRADING CORPORATION (referred to below as "Grantor"), and National Bank of the Redwoods (referred to below as "Lender"). For valuable consideration, Grantor grants to Lender a security Interest In the Collateral to secure the Indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time. Collateral. The word "Collateral" means the following described properly of Grantor, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: All Inventory, chattel paper, accounts, equipment, general intangibles and fixtures, together with the following specifically described property: Furniture and Mailing List. In addition, the word "Collateral" includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: (a) All attachments, accessions, accessories, tools, parts, supplies, increases, and additions to and all replacements of and substitutions for any property described above. (b) All products and produce of any of the property described in this Collateral section. (c) All accounts, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, or other disposition of any of the properly described in this Collateral section. (d) All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the properly described in this Collateral section. (e) All records and data relating to any of the properly described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media. Fixtures are and will be located on the following described real estate: PROPERTY LOCATED AT 200 CLARA AVENUE, UKIAH, CALIFORNIA 95482, MENDOCINO COUNTY; PARCEL NUMBERS' 002-124-10 AND 002-125-02. HAROLD MADDEN AND BARBARA MADDEN ARE THE RECORD OWNERS OF THE REAL PROPERTY DESCRIBED ON WHICH THE COLLATERAL IS LOCATED; AND 555 LESLIE ST, UKIAH, CA 95482, MENDOCINO COUNTY, APN#[S] JOHN C. SCHAEFFER IS THE RECORD OWNER OF THE REAL PROPERTY DESCRIBED ON WHICH THE COLLATERAL IS LOCATED. Event of Default. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "Events of Default. Grantor. The word "Grantor" means REAL GOODS TRADING CORPORATION, its successors and assigns. Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with the Indebtedness. Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note, including all principal and interest, together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. Lender. The word "Lender" means National Bank of the Redwoods, its successors and assigns. Note. The word "Note" means the note or credit agreement dated April 8, 1997, in the principal amount of $1,500,000.00 from REAL GOODS TRADING CORPORATION to Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of and substitutions for the note or credit agreement. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory security interest in and hereby assigns, conveys, delivers, pledges, and transfers all of Grantor's right, title and interest in and to Grantor's accounts with Lender (whether checking, savings, or some other account), including all accounts held jointly with someone else and all accounts Grantor may open in the future, excluding, however, all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Grantor authorizes Lender, to the extent permitted by applicable law, to charge or setoff all Indebtedness against any and all such accounts. OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows: Perfection of Security Interest Grantor agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender Grantor hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue the security interest granted in this Agreement. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral. Grantor promptly will notify Lender before any change in Grantor's name including any change to the assumed business names of Grantor. This is a continuing Security Agreement and will continue in effect even though all or any part of the Indebtedness is paid in full and even though for a period of time Grantor may not be Indebted to Lender. No Violation. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement. Enforceability of Collateral. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, the Collateral is enforceable in accordance with its terms, is genuine, and complies with applicable laws concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any account becomes subject to a security interest in favor of Lender, the account shall be a good and valid account representing an undisputed, bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or theretofore shipped or delivered pursuant to a contract of sale, or for services theretofore performed by Grantor with or for the account debtor, there shall be no setoffs or counterclaims against any such account; and no agreement under which any deductions or discounts may be claimed shall have been made with the account debtor except those disclosed to Lender in writing. Location of the Collateral. Grantor, upon request of Lender, will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation the following: (a) all real property owned or being purchased by Grantor; (b) all real property being rented or leased by Grantor; (c) all storage facilities owned, rented, leased, or being used by Grantor; and (d) all other properties where Collateral is or may be located. Except in the ordinary course of its business, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. Removal of Collateral. Grantor shall keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts, the records concerning the Collateral) at Grantor's address shown above, or at such other locations as are acceptable to Lender. Some or all of the Collateral may be located at the real property described above. Except in the ordinary course of its business, including the sales of inventory, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of California, without the prior written consent of Lender. Transactions Involving Collateral. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender. Title. Grantor represents and warrants to Lender that it holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons. Collateral Schedules and Locations. As often as Lender shall require, and insofar as the Collateral consists of accounts and general intangibles, Grantor shall deliver to Lender schedules of such Collateral, including such information as Lender may require including without limitation names and addresses of account debtors and agings of accounts and general intangibles. Insofar as the Collateral consists of inventory and equipment, Grantor shall deliver to Lender, as often as Lender shall require, such lists, descriptions, and designations of such Collateral as Lender may require to identify the nature, extent, and location of such Collateral. Such information shall be submitted for Grantor and each of its subsidiaries or related companies. Maintenance and Inspection of Collateral. Grantor shall maintain all tangible Collateral in good condition and repair. Grantor will not commit or permit damage to or destruction of the Collateral or any part of the Collateral. Lender and its designated representatives and agents shall have the right at all reasonable times to examine, inspect, and audit the Collateral wherever located. Grantor shall immediately notify Lender of all cases involving the return, rejection, repossession, loss or damage of or to any Collateral; of any request for credit or adjustment or of any other dispute arising with respect to the Collateral; and generally of all happenings and events affecting the Collateral or the value or the amount of the Collateral. Taxes, Assessments and Liens. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. Compliance With Governmental Requirements. Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lender's interest in the Collateral, in Lender's opinion, is not jeopardized. Hazardous Substances. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral, used for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any hazardous waste or substance, as those terms are defined in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. The terms "hazardous waste" and "hazardous substance" shall also include, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for hazardous wastes and substances. Grantor hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify shall survive the payment of the Indebtedness and the satisfaction of this Agreement. Maintenance of Casualty Insurance. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if it so chooses "single interest insurance," which will cover only Lender's interest in the Collateral. Application of Insurance Proceeds. Grantor shall promptly notify Lender of any loss or damage to the Collateral. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness. Insurance Reserves. Lender may require Grantor to maintain with Lender reserves for payment of insurance premiums, which reserves shall be created by monthly payments from Grantor of a sum estimated by Lender to be sufficient to produce, at least fifteen (15) days before the premium due date, amounts at least equal to the insurance premiums to be paid. If fifteen (15) days before payment is due, the reserve funds are insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit and shall constitute a non-interest-bearing account which Lender may satisfy by payment of the insurance premiums required to be paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of Grantor for payment of the insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall remain Grantor's sole responsibility. Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the property insured; (e) the then current value on the basis of which insurance has been obtained and the manner of determining that value; and (f) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser sabsfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral. GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At any bme and even though no Event of Default exists, Lender may exercise its rights to collect the accounts and to notify account debtors to make payments directly to Lender for application to the Indebtedness. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness. EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but shall not be obligated to) discharge or pay any amounts required to be discharged or paid by Grantor under this Agreement, including without limitation all taxes, liens, security interests, encumbrances, and other claims, at any time levied or placed on the Collateral. Lender also may (but shall not be obligated to) pay all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses shall become a part of the Indebtedness and, at Lender's option, will (a) be payable on demand, (b) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (i) the term of any applicable insurance policy or (ii) the remaining term of the Note, or (c) be treated as a balloon payment which will be due and payable at the Note's maturity. This Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon the occurrence of an Event of Default. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Grantor to make any payment when due on the Indebtedness. Other Defaults. Failure of Grantor to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or in any other agreement between Lender and Grantor. Default In Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by or on behalf of Grantor under this Agreement, the Note or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished. Detective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral documents to create a valid and perfected security interest or lien) at any time and for any reason. Insolvency. The dissolution or termination of Grantor's existence as a going business, the insolvency of Grantor, the appointment of a receiver for any part of Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Grantor. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against the Collateral or any other collateral securing the Indebtedness. This includes a garnishment of any of Grantor's deposit accounts with Lender. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or such Guarantor dies or becomes incompetent. Adverse Change. A material adverse change occurs in Grantor's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the California Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: Accelerate Indebtedness. Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice. Assemble Collateral. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession. Sell the Collateral. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in its own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor reasonable notice of the time after which any private sale or any other intended disposition of the Collateral is to be made. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days, or such lesser time as required by state law, before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. Appoint Receiver. To the extent permitted by applicable law, Lender shall have the following rights and remedies regarding the appointment of a receiver: (a) Lender may have a receiver appointed as a matter of right, (b) the receiver may be an employee of Lender and may serve without bond, and (c) all fees of the receiver and his or her attorney shall become part of the Indebtedness secured by this Agreement and shall be available on demand, with interest at the Note rate from date of expenditure until repaid. Collect Revenues, Apply Accounts. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in its discretion transfer any Collateral into its own name or that of its nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, chooses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligators on any Collateral to make payments directly to Lender. Obtain Deficiency. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. Other Rights and Remedies. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise. Cumulative Remedies. All of Lender's rights and remedies, whether evidenced by this Agreement or the Related Documents or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the manners set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit, Grantor agrees upon Lenders request to submit to the jurisdiction of the courts of the State of California. This Agreement shall be governed by and construed in accordance with the laws of the State of California. Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of Lender's costs and expenses, including attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lenders attorney's fees and legal expenses whether or not there is a lawsuit, including attorney's fees and legal expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Multiple Parties-Corporate Authority. All obligations of Grantor under this Agreement shall be joint and several, and all references to Grantor shall mean each and every Grantor. This means that each of the persons signing below is responsible for all obligations in this Agreement. Notices. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Grantor, notice to any Grantor will constitute notice to all Grantors. For notice purposes, Grantor will keep Lender informed at all times of Grantors current address(es). Power of Attorney. Grantor hereby appoints Lender as its true and lawful attorney-in-fact, irrevocably, with full power of substitution to do the following: (a) to demand collect receive receipt for sue and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral; (b) to execute sign and endorse any and all claims, instruments receipts checks drafts or warrants issued in payment for the Collateral; (c) to settle or compromise any and all claims arising under the Collateral and in the place and stead of Grantor to execute and deliver its release and settlement for the claim and (d) to file any claim or claims or to take any action or institute or take part in any proceedings, either in its own name or in the name of Grantor, or otherwise which in the discretion of Lender may seem to be necessary or advisable. This power is given as security for the Indebtedness and the authority hereby conferred is and shall be irrevocable and shall remain in full force and effect until renounced by Lender. Preference Payments. Any monies Lender pays because of an asserted preference claim in Borrower's bankruptcy will become a part of the Indebtedness and at Lender s option shall be payable by Borrower as provided above in the EXPENDITURES BY LENDER paragraph. Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance such finding shall not render that provision invalid or unenforceable as to any other persons or Circumstances. If feasible any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however if the offending provision cannot be so modified it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Successor Interests. Subject to the limitations set forth above on transfer of the Collateral this Agreement shall be binding upon and inure to the benefit of the parties their successors and assigns. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lenders right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender nor any course of dealing between Lender and Grantor shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. Waiver of Co-obligators Rights. If more than one person is obligated for the Indebtedness Borrower irrevocably waives disclaims and relinquishes all claims against such other person which Borrower has or would otherwise have by virtue of payment of the Indebtedness or any part thereof specifically including but not limited to all rights of indemnity contribution or exoneration. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED APRIL 8 1997. GRANTOR: REAL GOODS TRADING CORPORATION BY:[S]JOHN C. SCHAEFFER, PRESIDENT John C. Schaeffer, President COMMERCIAL GUARANTY Borrower: REAL GOODS TRADING CORPORATION 555 LESLIE ST UKIAH, CA 95482 Lender: National Bank of the Redwoods Ukiah Office 319 East Perkins Ukiah, CA 95482 Guarantor: JOHN C. SCHAEFFER 350 N SPRING ST UKIAH, CA 95482 AMOUNT OF GUARANTY. The principal amount of this Guaranty is One Million Five Hundred Thousand & 00/100 Dollars ($1,500,000.00). CONTINUING GUARANTY. For good and valuable consideration, JOHN C. SCHAEFFER ("Guarantor") absolutely and unconditionally guarantees and promises to pay to National Bank of the Redwoods ("Lender") or its order, in legal tender of the United States of America, the Indebtedness (as that term is defined below) of REAL GOODS TRADING CORPORATION ("Borrower") to Lender on the terms and conditions set forth in this Guaranty. The obligations of Guarantor under this Guaranty are continuing. DEFINITIONS. The following words shall have the following meanings when used in this Guaranty: Borrower. The word "Borrower" means REAL GOODS TRADING CORPORATION. Guarantor. The word "Guarantor" means JOHN C. SCHAEFFER. Guaranty. The word "Guaranty" means this Guaranty made by Guarantor for the benefit of Lender dated April 8, 1997. Indebtedness. The word "Indebtedness" is used in its most comprehensive sense and means and includes any and all of Borrower's liabilities, obligations, debts, and indebtedness to Lender, now existing or hereinafter incurred or created, including, without limitation, all loans, advances, interest, costs, debts, overdraft indebtedness, credit card indebtedness, lease obligations, other obligations, and liabilities of Borrower, or any of them, and any present or future judgments against Borrower, or any of them; and whether any such indebtedness is voluntarily or involuntarily incurred, due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined; whether Borrower may be liable individually or jointly with others, or primarily or secondarily, or as guarantor or surety; whether recovery on the indebtedness may be or may become barred or unenforceable against Borrower for any reason whatsoever; and whether the indebtedness arises from transactions which may be voidable on account of infancy, insanity, ultra vires, or otherwise. Lender. The word "Lender" means National Bank of the Redwoods, its successors and assigns. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the indebtedness. MAXIMUM LIABILITY. The maximum liability of Guarantor under this Guaranty shall not exceed at any one time the sum of the principal amount of $1,500,000.00, plus all interest thereon, plus all of Lender's costs, expenses, and attorneys' fees incurred in connection with or relating to (a) the collection of the Indebtedness, (b) the collection and sale of any collateral for the Indebtedness or this Guaranty, or (c) the enforcement of this Guaranty. Attorneys' fees include, without limitation, attorneys' fees whether or not there is a lawsuit, and if there is a lawsuit, any fees and costs for trial and appeals. The above limitation on liability is not a restriction on the amount of the Indebtedness of Borrower to Lender either in the aggregate or at any one time. If Lender presently holds one or more guaranties, or hereafter receives additional guaranties from Guarantor, the rights of Lender under all guaranties shall be cumulative. This Guaranty shall not (unless specifically provided below to the contrary) affect or invalidate any such other guaranties. The liability of Guarantor will be the aggregate liability of Guarantor under the terms of this Guaranty and any such other unterminated guaranties. NATURE OF GUARANTY. Guarantor's liability under this Guaranty shall be open and continuous for so long as this Guaranty remains in force. Guarantor intends to guarantee at all times the performance and prompt payment when due, whether at maturity or earlier by reason of acceleration or otherwise, of all Indebtedness within the limits set forth in the preceding section of this Guaranty. Accordingly, no payments made upon the Indebtedness will discharge or diminish the continuing liability of Guarantor in connection with any remaining portions of the Indebtedness or any of the Indebtedness which subsequently arises or is thereafter incurred or contracted. Any married person who signs this Guaranty hereby expressly agrees that recourse may be had against both his or her separate property and community property. DURATION OF GUARANTY. This Guaranty will take effect when received by Lender without the necessity of any acceptance by Lender, or any notice to Guarantor or to Borrower, and will continue in full force until all Indebtedness incurred or contracted before receipt by Lender of any notice of revocation shall have been fully and finally paid and satisfied and all other obligations of Guarantor under this Guaranty shall have been performed in full. If Guarantor elects to revoke this Guaranty, Guarantor may only do so in writing. Guarantor's written notice of revocation must be mailed to Lender, by certified mail, at the address of Lender listed above or such other place as Lender may designate in writing. Written revocation of this Guaranty will apply only to advances or new Indebtedness created after actual receipt by Lender of Guarantor's written revocation. For this purpose and without limitation, the term "new Indebtedness" does not include Indebtedness which at the time of notice of revocation is contingent, unliquidated, undetermined or not due and which later becomes absolute, liquidated, determined or due. This Guaranty will continue to bind Guarantor for all Indebtedness incurred by Borrower or committed by Lender prior to receipt of Guarantor's written notice of revocation, including any extensions, renewals, substitutions or modifications of the Indebtedness. All renewals, extensions, substitutions, and modifications of the Indebtedness granted after Guarantor's revocation, are contemplated under this Guaranty and, specifically will not be considered to be new Indebtedness. This Guaranty shall bind the estate of Guarantor as to Indebtedness created both before and after the death or incapacity of Guarantor, regardless of Lender's actual notice of Guarantor's death. Subject to the foregoing, Guarantor's executor or administrator or other legal representative may terminate this Guaranty in the same manner in which Guarantor might have terminated it and with the same effect. Release of any other guarantor or termination of any other guaranty of the Indebtedness shall not affect the liability of Guarantor under this Guaranty. A revocation received by Lender from any one or more Guarantors shall not affect the liability of any remaining Guarantors under this Guaranty. It is anticipated that fluctuations may occur in the aggregate amount of Indebtedness covered by this Guaranty, and it is specifically acknowledged and agreed by Guarantor that reductions in the amount of Indebtedness, even to zero dollars ($0.00), prior to written revocation of this Guaranty by Guarantor shall not constitute a termination of this Guaranty. This Guaranty is binding upon Guarantor and Guarantor's heirs, successors and assigns so long as any of the guaranteed Indebtedness remains unpaid and even though the Indebtedness guaranteed may from time to time be zero dollars ($0.00). GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, either before or after any revocation hereof, without notice or demand and without lessening Guarantor's liability under this Guaranty, from time to time: (a) prior to revocation as set forth above, to make one or more additional secured or unsecured loans to Borrower, to lease equipment or other goods to Borrower, or otherwise to extend additional credit to Borrower; (b) to alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms of the Indebtedness or any part of the Indebtedness, including increases and decreases of the rate of interest on the indebtedness; extensions may be repeated and may be for longer than the original loan term; (c) to take and hold security tor the payment of this Guaranty or the Indebtedness, and exchange, enforce, waive, subordinate, fail or decide not to perfect, and release any such security, with or without the substitution of new collateral; (d) to release, substitute, agree not to sue or deal with any one or more of Borrower's sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose; (e) to determine how, when and what application of payments and credits shall be made on the Indebtedness; (f) to apply such security and direct the order or manner of sale thereof, including without limitation, any nonjudicial sale permitted by the terms of the controlling security agreement or deed of trust, as Lender in its discretion may determine; (g) to sell, transfer, assign, or grant participations in all or any part of the Indebtedness; and (h) to assign or transfer this Guaranty in whole or in part. GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to Lender that (a) no representations or agreements of any kind have been made to Guarantor which would limit or qualify in any way the terms of this Guaranty; (b) this Guaranty is executed at Borrower's request and not at the request of Lender (c) Guarantor has full power right and authority to enter into this Guaranty; (d) the provisions of this Guaranty do not conflict with or result in a default under any agreement or other instrument binding upon Guarantor and do not result in a violation of any law, regulation court decree or order applicable to Guarantor; (e) Guarantor has not and will not, without the prior written consent of Lender sell, lease, assign, encumber, hypothecate, transfer, or otherwise dispose of all or substantially all of Guarantor's assets, or any interest therein; (f) upon Lenders request, Guarantor will provide to Lender financial and credit information in form acceptable to Lender, and all such financial information which currently has been, and all future financial information which will be provided to Lender is and will be true and correct in all material respects and fairly present the financial condition of Guarantor as of the dates the financial information is provided; (g) no material adverse change has occurred in Guarantor's financial condition since the date of the most recent financial statements provided to Lender and no event has occurred which may materially adversely affect Guarantor's financial condition; (h) no litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Guarantor is pending or threatened; (i) Lender has made no representation to Guarantor as to the creditworthiness of Borrower; and (j) Guarantor has established adequate means of obtaining from Borrower on a continuing basis information regarding Borrower's financial condition. Guarantor agrees to keep adequately informed from such means of any facts, events, or circumstances which might in any way affect Guarantor's risks under this Guaranty, and Guarantor further agrees that, absent a request for information Lender shall have no obligation to disclose to Guarantor any information or documents acquired by Lender in the course of its relationship with Borrower. GUARANTOR'S WAIVERS. Except as prohibited by applicable law Guarantor waives any right to require Lender to (a) make any presentment protest, demand, or notice of any kind, including notice of change of any terms of repayment of the Indebtedness, default by Borrower or any other guarantor or surety, any action or nonaction taken by Borrower, Lender, or any other guarantor or surety of Borrower, or the creation of new or additional Indebtedness; (b) proceed against any person, including Borrower, before proceeding against Guarantor; (c) proceed against any collateral for the Indebtedness, including Borrower's collateral, before proceeding against Guarantor; (d) apply any payments or proceeds received against the Indebtedness in any order; (e) give notice of the terms, time, and place of any sale of the collateral pursuant to the Uniform Commercial Code or any other law governing such sale; (f) disclose any information about the Indebtedness, the Borrower, the collateral, or any other guarantor or surety, or about any action or nonaction of Lender; or (g) pursue any remedy or course of action in Lender's power whatsoever. Guarantor also waives any and all rights or defenses arising by reason of (h) any disability or other defense of Borrower, any other guarantor or surety or any other person; (i) the cessation from any cause whatsoever, other than payment in full, of the Indebtedness; (j) the application of proceeds of the Indebtedness by Borrower for purposes other than the purposes understood and intended by Guarantor and Lender, (k) any act of omission or commission by Lender which directly or indirectly results in or contributes to the discharge of Borrower or any other guarantor or surety, or the Indebtedness, or the loss or release of any collateral by operation of law or otherwise; (l) any statute of limitations in any action under this Guaranty or on the Indebtedness; or (m) any modification or change in terms of the Indebtedness, whatsoever, including without limitation, the renewal, extension acceleration, or other change in the time payment of the Indebtedness is due and any change in the interest rate, and including any such modification or change in terms after revocation of this Guaranty on Indebtedness incurred prior to such revocation. Guarantor waives all rights and any defenses arising out of an election of remedies by Lender even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed Guarantor's rights of subrogation and reimbursement against Borrower by operation of Section 580d of the California Code of Civil Procedure or otherwise. Guarantor waives all rights and defenses that Guarantor may have because Borrower's obligation is secured by real property. This means among other things: (1) Lender may collect from Guarantor without first foreclosing on any real or personal property collateral pledged by Borrower. (2) If Lender forecloses on any real property collateral pledged by Borrower: (A) The amount of Borrower's obligation may be reduced only by the price for which the collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price. (B) Lender may collect from Guarantor even if Lender by foreclosing on the real property collateral, has destroyed any right Guarantor may have to collect from Borrower. This is an unconditional waiver of any rights and defenses Guarantor may have because Borrower's obligation is secured by real property. These rights and defenses include, but are not limited to, any rights and defenses based upon Section 580a, 580bl 580dl or 726 of the Code of Civil Procedure. Guarantor understands and agrees that the foregoing waivers are waivers of substantive rights and defenses to which Guarantor might otherwise be entitled under state and federal law. The rights and defenses waived include without limitation, those provided by California laws of suretyship and guaranty, anti-deficiency laws, and the Uniform Commercial Code. Guarantor acknowledges that Guarantor has provided these waivers of rights and defenses with the intention that they be fully relied upon by Lender. Until all Indebtedness is paid in full, Guarantor waives any right to enforce any remedy Lender may have against Borrower or any other guarantor, surety, or other person, and further, Guarantor waives any right to participate in any collateral for the Indebtedness now or hereafter held by Lender. GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees that each of the waivers set forth above is made with Guarantor's full knowledge of its significance and consequences and that, under the circumstances, the waivers are reasonable and not contrary to public policy or law. If any such waiver is determined to be contrary to any applicable law or public policy, such waiver shall be effective only to the extent permitted by law or public policy. LENDER'S RIGHT OF SETOFF. In addition to all liens upon and rights of setoff against the moneys, securities or other property of Guarantor given to Lender by law, Lender shall have, with respect to Guarantor's obligations to Lender under this Guaranty and to the extent permitted by law, a contractual possessory security interest in and a right of setoff against, and Guarantor hereby assigns, conveys, delivers, pledges, and transfers to Lender all of Guarantor's right, title and interest in and to, all deposits, moneys, securities and other property of Guarantor now or hereafter in the possession of or on deposit with Lender, whether held in a general or special account or deposit, whether held jointly with someone else, or whether held for safekeeping or otherwise, excluding however all IPA, Keogh, and trust accounts. Every such security interest and right of setoff may be exercised without demand upon or notice to Guarantor. No security interest or right of setoff shall be deemed to have been waived by any act or conduct on the part of Lender or by any neglect to exercise such right of setoff or to enforce such security interest or by any delay in so doing. Every right of setoff and security interest shall continue in full force and effect until such right of setoff or security interest is specifically waived or released by an instrument in writing executed by Lender. SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the Indebtedness of Borrower to Lender, whether now existing or hereafter created, shall be prior to any claim that Guarantor may now have or hereafter acquire against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby expressly subordinates any claim Guarantor may have against Borrower, upon any account whatsoever, to any claim that Lender may now or hereafter have against Borrower. In the event of insolvency and consequent liquidation of the assets of Borrower, through bankruptcy, by an assignment for the benefit of creditors, by voluntary liquidation, or otherwise, the assets of Borrower applicable to the payment of the claims of both Lender and Guarantor shall be paid to Lender and shall be first applied by Lender to the Indebtedness of Borrower to Lender. Guarantor does hereby assign to Lender all claims which it may have or acquire against Borrower or against any assignee or trustee in bankruptcy of Borrower, provided however, that such assignment shall be effective only for the purpose of assuring to Lender full payment in legal tender of the Indebtedness. If Lender so requests, any notes or credit agreements now or hereafter evidencing any debts or obligations of Borrower to Guarantor shall be marked with a legend that the same are subject to this Guaranty and shall be delivered to Lender. Guarantor agrees, and Lender hereby is authorized, in the name of Guarantor, from time to time to execute and file financing statements and continuation statements and to execute such other documents and to take such other actions as Lender deems necessary or appropriate to perfect, preserve and enforce its rights under this Guaranty. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Guaranty: Integration, Amendment. Guarantor warrants, represents and agrees that this Guaranty, together with any exhibits or schedules incorporated herein, fully incorporates the agreements and understandings of Guarantor with Lender with respect to the subject manner hereof and all prior negotiations, drafts, and other extrinsic communications between Guarantor and Lender shall have no evidentiary effect whatsoever. Guarantor further agrees that Guarantor has read and fully understands the terms of this Guaranty; Guarantor has had the opportunity to be advised by Guarantor's attorney with respect to this Guaranty; the Guaranty fully reflects Guarantor's intentions and parol evidence is not required to interpret the terms of this Guaranty. Guarantor hereby indemnifies and holds Lender harmless from all losses, claims, damages, and costs (including Lender's attorneys' fees) suffered or incurred by Lender as a result of any breach by Guarantor of the warranties, representations and agreements of this paragraph. No alteration or amendment to this Guaranty shall be effective unless given in writing and signed by the parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Guaranty has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit, Guarantor agrees upon Lender's request to submit to the jurisdiction of the courts of Mendocino County, State of California. This Guaranty shall be governed by and construed in accordance with the laws of the State of California. Attorneys' Fees; Expenses. Guarantor agrees to pay upon demand all of Lender's costs and expenses, including attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Guaranty. Lender may pay someone else to help enforce this Guaranty, and Guarantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Guarantor also shall pay all court costs and such additional fees as may be directed by the court. Notices. All notices required to be given by either party to the other under this Guaranty shall be in writing, may be sent by telefacsimile, and, except for revocation notices by Guarantor, shall be effective when actually delivered or when deposited with a nationally recognized overnight courier, or when deposited in the United States mail, first class postage prepaid, addressed to the party to whom the notice is to be given at the address shown above or to such other addresses as either party may designate to the other in writing. All revocation notices by Guarantor shall be in writing and shall be effective only upon delivery to Lender as provided above in the section titled "DURATION OF GUARANTY." If there is more than one Guarantor, notice to any Guarantor will constitute notice to all Guarantors. For notice purposes, Guarantor agrees to keep Lender informed at all times of Guarantor's current address. Interpretation. In all cases where there is more than one Borrower or Guarantor, then all words used in this Guaranty in the singular shall be deemed to have been used in the plural where the context and construction so require; and where there is more than one Borrower named in this Guaranty or when this Guaranty is executed by more than one Guarantor, the words "Borrower" and "Guarantor" respectively shall mean all and any one or more of them. The words "Guarantor," "Borrower," and "Lender" include the heirs, successors, assigns, and transferees of each of them. Caption headings in this Guaranty are for convenience purposes only and are not to be used to interpret or define the provisions of this Guaranty. If a court of competent jurisdiction finds any provision of this Guaranty to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances, and all provisions of this Guaranty in all other respects shall remain valid and enforceable. If any one or more of Borrower or Guarantor are corporations or partnerships, it is not necessary for Lender to inquire into the powers of Borrower or Guarantor or of the officers, directors, partners, or agents acting or purporting to act on their behalf. and any Indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed under this Guaranty. Waiver. Lender shall not be deemed to have waived any rights under this Guaranty unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Guaranty shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Guaranty. No prior waiver by Lender, nor any course of dealing between Lender and Guarantor, shall constitute a waiver of any of Lender's rights or of any of Guarantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Guaranty, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY." NO FORMAL ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY IS DATED APRIL 8.1997. GUARANTOR:[S]JOHN C. SCHAEFFER, PRESIDENT John C. Schaeffer, President EX-10 4 BUSINESS LOAN AGREEMENT Borrower: REAL GOODS TRADING CORPORATION 555 LESLIE ST UKIAH, CA 95482 Lender: National Bank of the Redwoods Main Office 111 Santa Rosa Ave Santa Rosa, CA 95404-4905 THIS BUSINESS LOAN AGREEMENT between REAL GOODS TRADING CORPORATION ("Borrower") and National Bank of the Redwoods ("Lender") is made and executed on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans and other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement. All such loans and financial accommodations, together with all future loans and financial accommodations from Lender to Borrower, are referred to in this Agreement Individually as the "Loan" and collectively as the "Loans." Borrower understands and agrees that: (a) In granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements, as set forth in this Agreement; (b) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender's sole judgment and discretion; and (c) all such Loans shall be and shall remain subject to the following terms and conditions of this Agreement. TERM. This Agreement shall be effective as of June 24, 1996, and shall continue thereafter until all Indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time. Borrower. The word "Borrower" means REAL GOODS TRADING CORPORATION. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries and Affiliates." CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. Collateral. The word "Collateral" means and includes without limitation all properly and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. Event or Default. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." Grantor. The word "Grantor" means and includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the Indebtedness, including without limitation all Borrowers granting such a Security Interest. Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any Indebtedness. Indebtedness. The word "Indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such Indebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable. Lender. The word "Lender" means National Bank of the Redwoods, its successors and assigns. Loan. The word "Loan" or "Loans" means and includes without limitation any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial Accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. Note. The word "Note" means and includes without limitation Borrower's promissory note or notes, if any, evidencing Borrower's Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. Permitted Liens. The words "Permitted Liens" mean: (a) liens and security interests securing Indebtedness owed by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (d) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (f) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Security Interest. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial Loan Advance and each subsequent Loan Advance under this Agreement shall be subject to the fulfillment to Lender's satisfaction of all of the conditions set forth in this Agreement and in the Related Documents. Loan Document. Borrower shall provide to Lender in form satisfactory to Lender the following documents for the Loan: (a) the Note, (b) Security Agreements granting to Lender security interests in the Collateral, (c) Financing Statements perfecting Lender's Security Interests; (d) evidence of insurance as required below; and (e) any other documents required under this Agreement or by Lender or its counsel. Borrower's Authorization. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents, and such other authorizations and other documents and instruments as Lender or its counsel, in their sole discretion, may require. Payment of Fees and Expenses. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document. Representations and Warranties. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct. No Event of Default. There shall not exist at the time of any advance a condition which would constitute an Event of Default under this Agreement. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists: Organization. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of California and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its businesses or financial condition. Authorization. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower, do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. Financial Information. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. Legal Effect. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, Legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the properties for hazardous waste and hazardous substances. Borrower hereby (a)releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release occurring prior to Borrower's ownership or interest in the properties, whether or not the same was or should have been known to Borrower. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination or expiration of this Agreement and shall not be affected by Lenders acquisition of any interest in any of the properties, whether by foreclosure or otherwise. Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. Taxes. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. Binding Effect. This Agreement, the Note, all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note and all of the Related Documents are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. Commercial Purposes. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. Employee Benefit Plans. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. Location of Borrower's Offices and Records. Borrower's place of business, or Borrower's Chief executive office, if Borrower has more than one place of business, is located at 555 LESLIE STREET, UKIAH, CA 95482. Unless Borrower has designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. Information. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. Survival of Representations and Warranties. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in making the above referenced Loan to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: Litigation. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. Financial Records. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. Additional Information. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security Interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrowers properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any bme a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. Performance. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. Compliance Certificate. Unless waived in writing by Lender, provide Lender at least annually and at the time of each disbursement of Loan proceeds with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. Environmental Compliance and Reports. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: Indebtedness and Liens. (a) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets, or (c) sell with recourse any of Borrower's accounts, except to Lender. Continuity of Operations. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, (c) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that not withstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or entity, or (c) incur any obligation as surety or guarantor other than in the ordinary course of business. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender. EXHIBIT "A" - COVENANTS. An exhibit, titled "Exhibit "A" - Covenants," is attached to this Agreement and by this reference is made a part of this Agreement just as if all the provisions, terms and conditions of the Exhibit had been fully set forth in this Agreement. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Borrower to make any payment when due on the Loans Other Defaults. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower Default in Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. False Statement. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished, or becomes false or misleading at any time thereafter. Detective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a received for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the Indebtedness, or by any governmental agency. This includes a garnishment, attachment, or levy on or of any of Borrower's deposit accounts with Lender. Event Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. Change In Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate and, at Lender's option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to decline a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a put of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the enbre understanding and agreement of the parties as to the manners set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement has been delivered to Lender and accepted by Lender In the State of California. If there is a Lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Sonoma County, the State of California. This Agreement shall be governed by and construed in accordance with the laws of the State of California. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Consent to Loan Participation. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other manner relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loans irrespective of the failure or insolvency of any holder of any interest in the Loans. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. Costs and Expenses. Borrower agrees to pay upon demand all of Lender's expenses, including without limitation attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's attorney's fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. Notices. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current address(es). Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used herein shall include all subsidiaries and affiliates of Borrower. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary or affiliate of Borrower. Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. Survival. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. Time Is of the Essence. Time is of the essence in the performance of this Agreement. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF JUNE 24, 1996. BORROWER: REAL GOODS TRADING CORPORATION BY:[S]John C. Schaeffer, President John C. Schaeffer, President LENDER: National Bank of the Redwoods By:[S]Marshall McDonald Authorized Officer EXHIBIT "A" - COVENANTS References In the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Borrower: REAL GOODS TRADING CORPORATION 555 LESLIE STREET UKIAH, CA 95482 Lender: National Bank of the Redwoods Main Office 111 Santa Rosa Ave Santa Rosa, CA 95404-4905 This Exhibit "A" - Covenants is attached to and by this reference is made a part of each Business Loan Agreement or Negative Pledge Agreement, dated June 24, 1996, and executed in connection with a loan or other financial accommodations between National Bank of the Redwoods and REAL GOODS TRADING CORPORATION. BORROWER AGREES TO PROVIDE: Quarterly corporate financial statements which can be company prepared due within 30 days of quarter end, starting with the June 30, 1996 quarter end. Annual CPA audited FYE business financials due by June 30 of each year. Copy of annual corporate tax return due within 90 days of March 31st of each year, beginning 3-31-97. Annual personal financial statement of John C. Schaeffer to be submitted no later than September 30th of each year. Copy of annual personal tax return of John C. Schaeffer, to be submitted by June 30th of each year, beginning 6/30/97 for the 1996 tax year. BORROWER AGREES THAT: National Bank of the Redwoods will be major depository bank during term of loan. Evidence of insurance coverage for flood, fire, and property on the property known as 13701 Highway 101, Hopland, CA is required and must be maintained during term of loan. National Bank of the Redwoods to be named Lender's Loss Payee. THIS EXHIBIT "A" - COVENANTS IS EXECUTED ON JUNE 24, 1996. BORROWER: REAL GOODS TRADING CORPORATION By:[S]JOHN C. SCHAEFFER, PRESIDENT John C. Schaeffer, President LENDER: National Bank of the Redwoods By:[S]MARSHALL MCDONALD Authorized Officer PROMISSORY NOTE References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Borrower: REAL GOODS TRADING CORPORATION 555 LESLIE ST UKIAH, CA 95482 Lender: National Bank of the Redwoods Main Office 111 Santa Rosa Ave Santa Rosa, CA 95404-4905 PRINCIPAL AMOUNT: $585,000.00 INITIAL RATE: 10.750% DATE OF NOTE: June 24, 1996 PROMISE TO PAY. REAL GOODS TRADING CORPORATION ("Borrower") promises to pay to National Bank of the Redwoods ("Lender"), or order, In lawful money of the United States of America, the principal amount of Five Hundred Eighty Five Thousand & 00/100 Dollars ($585,000.00), together with interest on the unpaid principal balance from June 24, 1996, until paid in full. PAYMENT. Subject to any payment changes resulting from changes in the index, Borrower will pay this loan on demand, or 11 days no demand is made, in 299 principal payments of $1,950.00 each and one final principal and interest payment of $1,967.23. Borrower's first principal payment is due July 31, 1996, and all subsequent principal payments are due on the last day of each month after that In addition, Borrower will pay regular monthly payments of all accrued unpaid interest due as of each payment date. Borrower's first interest payment is due July 31, 1996, and all subsequent interest payments are due on the last day of each month after that Borrower's final payment due June 30, 2021, will be for all principal and accrued interest not yet paid. Interest on this Note is computed on a 365/365 simple interest basis; that is, by applying the rate of the annual interest rate over the number of days in a year, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an independent index which is the "NBR REFERENCE RATE". This index is calculated by adding .50 percentage points to the PRIME RATE as published in the MONEY RATES section of the West Coast Edition of the Wall Street Journal (the "Index'). The Index is not necessarily the lowest rate charged by Lender on its loans. If the index becomes unavailable during the term of this loan, Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each day the independent index changes. When PRIME RATE is published as a range of rates, the index will not change until a single rate has been published for two consecutive days. The index currently is 9.000% per annum. The Interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 2.000 percentage points over the index, resulting in initial rate of 10.750% per annum. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. Except for the foregoing, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments under the payment schedule. Rather, they will reduce the principal balance due and may result in Borrower making fewer payments. LATE CHARGE. If a payment is 11 days or more late, Borrower will be charged 5.000% of the regularly scheduled payment or $75.00, whichever is less. LENDER'S RIGHTS. Upon Lender's demand, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. This Note has been delivered to Lender and accepted by Lender In the State of California. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Sonoma County, in the State of California. This Note shall be governed by and construed in accordance with the laws of the State of California. COLLATERAL. Borrower acknowledges this Note is secured by, in addition to any other collateral, a Deed of Trust dated June 24,1996, to a trustee in favor of Lender on real property located in MENDOCINO County, State of California. That agreement contains the following due on sale provision: Lender may, at its option, declare immediately due and payable all sums secured by this Deed of Trust upon the sale or transfer, without the Lender's prior written consent, of all or any part of the Real Property, or any interest in the Real Property. A "sale or transfer" means the conveyance of Real Property or any right, title or interest therein; whether legal, beneficial or equitable; whether voluntary or involuntary; whether by outright sale, deed, installment sale contract, land contract, contract for deed, leasehold interest with a term greater than three (3) years, lease-option contract, or by sale, assignment, or transfer of any beneficial interest in or to any land trust holding title to the Real Property, or by any other method of conveyance of Real Property interest. If any Trustor is a corporation, partnership or limited liability company, transfer also includes any change in ownership of more than twenty-five percent (25%) of the voting stock, partnership interests or limited liability company interests, as the case may be, of Trustor. However, this option shall not be exercised by Lender if such exercise is prohibited by applicable law. DEFAULT INTEREST RATE - 18.00% PER YEAR. Not withstanding any other provisions of this note, Borrower acknowledges that in the event of default, the interest rate applied to this indebtedness will be increased to 18.00%. Borrower will be notified in writing, with a copy to all guarantors, that an event of default has occurred and that failure to cure the default will result in the application of the default interest rate as of a certain date. That date will be at least seven (7) calendar days from the date of notification to the Borrower. ADDITIONAL PROVISION. Borrower acknowledges that this note is secured by, in addition to any other collateral, a separate Security Agreement dated August 10,1995 covering leasehold improvements. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the notification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: REAL GOODS TRADING CORPORATION By:[S]JOHN C. SCHAEFFER JOHN C. SCHAEFFER, PRESIDENT LENDER: National Bank of the Redwoods BY:[S]MARSHALL MCDONALD Authorized Officer COMMERCIAL SECURITY AGREEMENT References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Borrower: REAL GOODS TRADING CORPORATION 555 LESLIE ST UKIAH, CA 95482 Lender: National Bank of the Redwoods Main Office 111 Santa Rosa Ave Santa Rosa, CA 95404-4905 THIS COMMERCIAL SECURITY AGREEMENT is entered into between REAL GOODS TRADING CORPORATION (referred to below as "Grantor"); and National Bank of the Redwoods (referred to below as "Lender"). For valuable consideration, Grantor grants to Lender a security interest in the Collateral to secure the Indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time. Collateral. The word "Collateral" means the following described property of Grantor, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: SEE ADDENDUM "A" ATTACHED HERETO AND MADE A PART HEREOF. In addition, the word "Collateral" includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: (a) All attachments, accessions, accessories, tools, parts, supplies, increases, and additions to and all replacement of and substitutions for any property described above. (b) All products and produce of any of the property described in this Collateral section. (c) All accounts, general intangibles, instruments, rents, monies, payments, and all other rights arising out of a sale, lease, or other disposition of any of the property described in this Collateral section. (d) All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this collateral section. (e) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to Utilize, create, maintain, and process any such records or data on electronic media. Event of Default. The words "Event of Default" mean and include without limitation any of the Event of Default set forth below in the section titled "Events of Default." Grantor. The word "Grantor" means REAL GOODS TRADING CORPORATION, its successors and assigns. Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with the indebtedness. Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note, including all principal and interest, together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. Lender. The word "Lender" means National Bank of the Redwoods, its successors and assigns. Note. The word "Note" means the note or credit agreement dated June 24, 1996, in the principal amount of $585,000.00 from REAL GOODS TRADING CORPORATION to Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of and substitutions for the note or credit agreement. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreement, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows: Perfection of Security Interest. Grantor agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper not delivered to Lender for possession by Lender. Grantor hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue the security interest granted in this Agreement. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral. Grantor promptly will notify Lender before any change in Grantor's name including any change to the assumed business names of Grantor. No Violation. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement. Enforceability of Collateral. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, the Collateral is enforceable in accordance with its terms, is genuine, and complies with applicable laws concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. Location of the Collateral. Grantor, upon request of Lender, will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation the following: (a) all real property owned or being purchased by Grantor; (b) all real property being rented or leased by Grantor; (c) all storage facilities owned, rented, leased, or being used by Grantor; and (d) all other properties where Collateral is or may be located. Except in the ordinary course of its business, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. Removal of Collateral. Grantor shall keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts, the records concerning the Collateral) at Grantor's address shown above, or at such other locations as are acceptable to Lender. Except in the ordinary course of its business, including the sales of inventory, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of California, without the prior written consent of Lender. Transactions Involving Collateral. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other desolation. Upon receipt. Grantor shall immediately deliver any such proceeds to Lender. Title. Grantor represents and warrants to Lender that it holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons. Collateral Schedules and Locations. Insofar as the Collateral consists of inventory, Grantor shall deliver to Lender, as often as Lender shall require, such lists, descriptions, and designations of such Collateral as Lender may require to identify the nature, extent, and location of such Collateral. Such information shall be submitted for Grantor and each of its subsidiaries or related companies. Maintenance and Inspection of Collateral. Grantor shall maintain all tangible Collateral in good condition and repair. Grantor will not commit or permit damage to or destruction of the Collateral or any part of the Collateral. Lender and its designated representatives and agents shall have the right at all reasonable times to examine, inspect, and audit the Collateral wherever located. Grantor shall immediately notify Lender of all cases involving the return, rejection, repossession, loss or damage of or to any Collateral; of any request for credit or adjustment or of any other dispute arising with respect to the Collateral; and generally of all happenings and events affecting the Collateral or the value or the amount of the Collateral. Taxes, Assessments and Liens. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. Compliance With Governmental Requirements. Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lender's interest in the Collateral, in Lender's opinion, is not jeopardized. Maintenance of Casualty Insurance. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if it so chooses "single interest insurance," which will cover only Lender's interest in the Collateral. Application of Insurance Proceeds. Grantor shall promptly notify Lender of any loss or damage to the Collateral. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness. Insurance Reserves. Lender may require Grantor to maintain with Lender reserves for payment of insurance premiums, which reserves shall be created by monthly payments from Grantor of a sum estimated by Lender to be sufficient to produce, at least fifteen (15) days before the premium due date, amounts at least equal to the insurance premiums to be paid. If fifteen (15) days before payment is due, the reserve funds are insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit and shall constitute a non-interest-bearing account which Lender may satisfy by payment of the insurance premiums required to be paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of Grantor for payment of the insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall remain Grantor's sole responsibility. Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the property insured; (e) the then current value on the basis of which insurance has been obtained and the manner of determining that value, and (f) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral. GRANTOR'S RIGHT TO POSSESSION. Until default, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's Security Interest in Such Collateral. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the indebtedness. EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but shall not be obligated to) discharge or pay any amounts required to be discharged or paid by Grantor under this Agreement, including without limitation all taxes, liens, security interests, encumbrances, and other claims, at any time levied or placed on the Collateral. Lender also may (but shall not be obligated to) pay all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses shall become a part of the Indebtedness and at Lender's option, will (a) be payable on demand, (b) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (i) the term of any applicable insurance policy or (ii) the remaining term of the Note, or (c) be treated as a balloon payment which will be due and payable at the Note's maturity. This Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon the occurrence of an Event of Default. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Grantor to make any payment when due on the Indebtedness. Other Defaults. Failure of Grantor to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or in any other agreement between Lender and Grantor. Default In Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by or on behalf of Grantor under this Agreement, the Note or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral documents to create a valid and perfected security interest or lien) at any time and for any reason. Insolvency. The dissolution or termination of Grantor's existence as a going business, the insolvency of Grantor, the appointment of a receiver for any pan of Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Grantor. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against the Collateral or any other collateral securing the indebtedness. This includes a garnishment of any of Grantor's deposit accounts with Lender. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or such Guarantor dies or becomes incompetent. Adverse Change. A material adverse change occurs in Grantor's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the California Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: Accelerate Indebtedness. Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice. Assemble Collateral. Lender may require Grantor to deliver to Lender all or any option of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession. Sell the Collateral. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in its own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor reasonable notice of the time after which any private sale or any other intended disposition of the Collateral is to be made. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days, or such lesser time as required by state law, before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a pan of the indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. Appoint Receiver. To the extent permitted by applicable law, Lender shall have the following rights and remedies regarding the appointment of a receiver: (a) Lender may have a receiver appointed as a matter of right, (b) the receiver may be an employee of Lender and may serve without bond, and (c) all fees of the receiver and his or her attorney shall become part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. Collect Revenues, Apply Accounts. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in its discretion transfer any Collateral into its own name or that of its nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, chooses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligators on any Collateral to make payments directly to Lender. Obtain Deficiency. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. Other Rights and Remedies. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise. Cumulative Remedies. All of Lender's rights and remedies, whether evidenced by this Agreement or the Related Documents or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit, Grantor agrees upon Lender's request to submit to the jurisdiction of the courts of the State of California. This Agreement shall be governed by and construed in accordance with the laws of the State of California. Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of Lender's costs and expenses, including attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Notices. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Grantor, notice to any Grantor will constitute notice to all Grantors. For notice purposes, Grantor will keep Lender informed at all times of Grantor's current address(es). Power of Attorney. Grantor hereby appoints Lender as its true and lawful attorney-in-fact irrevocably, with full power of substitution to do the following: (a) to demand, collect, receive, receipt for, sue and recover all sums of money o; other property which may now or hereafter become due, owing or payable from the Collateral; (b) to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral, (c) to settle or compromise any and all claims arising under the Collateral, and, in the place and stead of Grantor, to execute and deliver its release and settlement for the claim; and (d) to file any claim or claims or to take any action or institute or take part in any proceedings, either in its own name or in the name of Grantor, or otherwise, which in the discretion of Lender may seem to be necessary or advisable. This power is given as security for the Indebtedness, and the authority hereby conferred is and shall be irrevocable and shall remain in full force and effect until renounced by Lender. Preference Payments. Any monies Lender pays because of an asserted preference claim in Borrower's bankruptcy will become a part of the Indebtedness and, at Lender's option, shall be payable by Borrower as provided above in the "EXPENDITURES BY LENDER" paragraph. Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Successor Interests. Subject to the limitations set forth above on transfer of the Collateral, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. Waiver of Co-obligator's Rights. If more than one person is obligated for the Indebtedness, Borrower irrevocably waives, disclaims and relinquishes all claims against such other person which Borrower has or would otherwise have by virtue of payment of the Indebtedness or any part thereof, specifically including but not limited to all rights of indemnity, contribution or exoneration. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JUNE 24, 1996. GRANTOR: REAL GOODS TRADING CORPORATION BY:[S]JOHN C. SCHAEFFER EX-10 5 LOAN AGREEMENT BETWEEN CALIFORNIA STATEWIDE CERTIFIED DEVELOPMENT CORPORATION 129 C STREET DAVIS, CA 95616 AND REAL GOODS TRADING CORPORATION 13771 SOUTH HIGHWAY 101 HOPLAND, CA 95449 LOAN AGREEMENT THIS AGREEMENT dated June 17, 1996, by and between REAL GOODS TRADING CORPORATION, having their principal office at 13771 South Highway 101, Hopland, CA 95449 (hereinafter the"Borrower"), and CALIFORNIA STATEWIDE CERTIFIED DEVELOPMENT CORPORATION, a California corporation, having its principal offices at 129 C Street, Davis, CA 95616 (hereinafter the "Lender"). WHEREAS, the Borrower has applied to the Lender for a loan for the purpose of providing Borrower permanent financing for a physical plant located at 13771 South Highway 101, Hopland, CA 95449, construction loan interest and permits and fees. (hereinafter the "Acquisition Assets"), and WHEREAS, the Lender is willing to sell a Debenture (hereinafter the "Debenture"), the proceeds of which Debenture will be used to make such a Loan to the Borrower on the terms and conditions hereinafter set forth: NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows: ARTICLE I THE LOAN SECTION 1.01: THE LOAN, NOTE AND RATE Subject to the terms and conditions of this Agreement, and the Authorization and Debenture Guaranty Agreement of the U. S. Small Business Administration, the Lender hereby agrees to lend the Borrower, and the Borrower hereby agrees to borrow from the Lender and repay the Lender or its Assigns, the amount of $604,000.00 (hereinafter the "Loan"). The obligation of the Borrower to repay the Loan shall be evidenced by the promissory note (hereinafter the "Note") of the Borrower in a form satisfactory to the Lender payable to the order of the Lender for the amount of the Loan with interest on the unpaid principal as determined at the time when the Debenture of the Lender, in the amount of $604,000.00, is sold as per the SBA Authorization and Debenture Guaranty Agreement No. CDC 848 941 30 05 CA. SECTION 1.02: THE TERM AND PREPAYMENT The term of the loan shall be 20 years. The Note shall be repayable in 240 equal monthly installments. The first monthly installment shall be due and payable on October 1, 1996. All payments will be made promptly to the Lender at its address specified at the beginning of this Agreement, or at such other address as it may designate in writing. Prepayment of the entire outstanding balance of the Indebtedness may be made prior to the maturity date hereof, but no partial prepayments may be made. The actual amount necessary to prepay the Indebtedness during the term on the loan will be an amount equal to the outstanding principal balance of the Debenture, plus interest accrued and unpaid thereon to the prepayment date, plus a prepayment premium ("PP"), if and, determined as follows: PP = D(I x P), where D = the remaining principal balance of the Debenture I = the interest rate stated on the face of the Debenture expressed in decimal points P = the factor set forth below for the applicable year: Year P 1 1.00 2 .90 3 .80 4 .70 5 .60 6 .50 7 .40 8 .30 9 .20 10 .10 11 and thereafter .0
The borrower will be responsible for monthly payments up to and including the payment due for the month of the next semi-annual debenture payment following the date on which the prepayment is made. A request for prepayment shall be made to the Development Company at least forty-five (45) days before the prepayment date. Seven (7) business days prior to the scheduled prepayment date, Borrower shall cause to be transferred by wire a non-refundable good faith deposit of One Thousand Dollars ($1,000.00) to the CSA. Such deposit shall be applied in full to the repurchase price of the debenture secured by the Note, and shall be forfeited if Borrower fails to pay the designated total prepayment amount on the designated prepayment date. SECTION 1.03: PURPOSE OF LOAN The purpose of the loan is to provide Borrower with permanent financing for real property and improvements located at 13701 South Highway 101, Hopland, CA 95449 as well as for construction loan interest, permits and fees. Borrower agrees that it will apply the funds received by it under this Agreement in accordance with the use of loan proceeds specified in the SBA Authorization and Debenture Guaranty Agreement No. CDC 848 941 30 05 CA. Borrower further agrees that no application of any funds received from the Lender hereunder shall be made in violation of the Small Business Investment Act of l958 as amended, or the Regulations promulgated thereunder. ARTICLE II REPRESENTATIONS AND WARRANTIES Borrower represents and covenants the following: SECTION 2.01: BORRROWER DULY AUTHORIZED Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has power to enter into this Agreement and to execute its guaranty of the Note. SECTION 2.02: DULY AUTHORIZED The making and performance by Borrower of this Agreement, and the execution and delivery of the Note, and Security Agreements and Instruments by Borrower and the execution of its guaranty by Guarantor will not violate any law, rule, regulation, order, writ, judgment, decree, determination or award presently in effect having applicability to Borrower or Guarantor or any provision of the Borrower s Certificate of Incorporation or By-Laws or result in a breach of or constitute a default under any indenture or bank loan or credit agreement or any other agreement or instrument to which Borrower or Guarantor is a party or by which either party or either party's property may be bound or affected. SECTION 2.03: LEGALLY BINDING INSTRUMENTS When this Agreement is executed by Borrower and Lender, and when the Note is executed and delivered by Borrower for value, each such instrument shall constitute the legal, valid, and binding obligation of Borrower in accordance with its terms. Any Security Agreements and Instruments, Financing Statements, Mortgages and other liens on chattel or real estate shall constitute legal, valid and binding liens free and clear of all prior liens and encumbrances except as provided for. SECTION 2.04: NO LEGAL SUITS There are no legal actions, suits, or proceedings pending or, to the knowledge of Borrower, threatened against Borrower or Guarantor before any court or administrative agency, which, if determined adversely to Borrower or Guarantor, would have a material adverse effect on the financial condition or business of Borrower or Guarantor. SECTION 2.05: NO LEGAL AUTHORIZATION NEEDED No authorization, consent or approval or any formal exemption of any Governmental body, regulatory authorities (Federal, state or local) or mortgagee, creditor or third party is or was necessary to the valid execution and delivery by Borrower of this Agreement, the Note, or any Security Agreement, Financing Statement or Mortgage except as provided for under Sections 3.09 and 3.10 herein. SECTION 2.06: NOT IN DEFAULT Neither Borrower nor Guarantor is in default of any obligation, covenant, or condition contained in any bond, debenture, note or other evidence of indebtedness or any mortgage or collateral instrument securing the same. SECTION 2.07: TAXES ARE PAID Borrower and Guarantor have filed all tax returns which are required and have paid or made provision for the payment of all taxes which have or may become due pursuant to said returns or pursuant to any assessments received by Borrower or Guarantor. No tax liability has been asserted by the Internal Revenue Service or other taxing agency, federal, state, or local for taxes materially in excess of those already provided for and Borrower knows of no basis for any such deficiency assessment. SECTION 2.08: NO ADVERSE CHANGE Borrower certifies that there has been no adverse change since the date of the Loan Application in the financial condition, organization, operation, business prospects, fixed properties, or personnel of Borrower or Guarantor. ARTICLE III CONDITIONS OF LENDING The obligation of Lender to make the Loan shall be subject to the fulfillment at the time of closing of each of the following conditions: SECTION 3.01: EXECUTION OF AUTHORIZATION Borrower shall have executed and delivered to Lender the SBA Authorization and Debenture Guaranty Agreement No. CDC 848 941 30 05 CA. SECTION 3.02: EXECUTION AND DELIVERY OF NOTE AND LOAN AGREEMENT Borrower shall have executed and delivered to Lender this Loan Agreement and the Note in a form satisfactory to Lender and its Counsel. SECTION 3.03: EXECUTION AND DELIVERY OF MORTGAGE Borrower shall have executed and delivered to Lender a Mortgage on the real estate purchased with the Loan proceeds. Said Mortgage shall be free and clear of all prior liens and encumbrances except as provided for in accordance with the SBA Authorization and Debenture Guaranty Agreement No. CDC 848 941 30 05 CA. Said Mortgage is to secure payment of the principal of the Note, the interest thereon, and any other sums payable by Borrower hereunder. SECTION 3.04: EXECUTION AND CERTIFICATION OF RESOLUTION OF BOARD OF DIRECTORS Guarantor shall have executed and delivered to Lender a duly certified copy of a Resolution of its Board of directors authorizing the execution and delivery by Guarantor of the Guaranty. SECTION 3.05: CORPORATE PAPERS Borrower shall have delivered to Lender copies of Guarantor's Certificate of Incorporation, By-Laws, and Certificate of Good Standing. SECTION 3.06: EXECUTION OF CSA AGREEMENT Borrower shall have executed and delivered to Lender the Central Servicing Agent Agreement (SBA Form 1506) in a form satisfactory to Lender's Counsel. SECTION 3.07: PERSONAL AND CORPORATE GUARANTEES Lender shall have received duly executed guaranty agreements (SBA Form l48) of all individuals or entities, as set forth in the SBA Authorization and Debenture Guaranty Agreement No. CDC 848 941 30 05 CA in amount and form satisfactory to Lender's counsel. SECTION 3.08: TITLE INSURANCE Borrower shall have secured mortgage title insurance in the form issued by companies satisfactory to Lender, in the amount of the Loan insuring Lender and secured by a mortgage or deed of trust subject only to exceptions approved in the SBA Authorization and Debenture Guaranty Agreement No. CDC 848 941 30 05 CA. The title policy shall show no delinquent taxes or assessments affecting the real property or any part thereof on the date of closing except as approved by Lender. SECTION 3.09: GOVERNMENTAL APPROVAL Borrower shall have secured all necessary approvals or consents, if required, of Governmental bodies having jurisdiction with respect to any construction contemplated in accordance with the use of proceeds of the SBA Authorization and Debenture Guaranty Agreement No. CDC 848 941 30 05 CA. SECTION 3.10: APPROVAL OF OTHERS Borrower shall have secured all necessary approvals or consents required with respect to this transaction by any mortgagee, creditor or other party having any financial interest in Borrower. SECTION 3.11: OPINION OF COUNSEL Lender shall have received the opinion of Borrower's counsel that: 1. the Guarantor is a corporation duly organized and validly existing under the laws of the State of California; 2. The Note has been duly executed and delivered by the Borrower and when the principal amount stated therein, less fees and expenses, has been advanced to the Borrower or its assigns, will be a valid and binding obligation of the Borrower enforceable in accordance with its terms, except as limited by bankruptcy and similar laws affecting creditors generally. ARTICLE IV AFFIRMATIVE COVENANTS OF THE BORROWER Borrower agrees to comply with the following covenants from the date hereof until Lender has been fully repaid with interest, unless Lender or its Assigns shall otherwise consent in writing: SECTION 4.01: PAYMENT OF THE LOAN Borrower agrees to pay punctually the principal and interest on the Note according to its terms and conditions and to pay punctually any other amounts that may become due and payable to Lender under or pursuant to the terms of this Agreement or Note. SECTION 4.02: PAYMENT OF OTHER INDEBTEDNESS Borrower and Guarantor agree to pay punctually the principal and interest due on any other indebtedness now or hereafter at anytime owing by Borrower or Guarantor to Lender or any other lender. SECTION 4.03: PAYMENT OF CDC FEES In consideration of Lender's expenses associated with processing and servicing this Loan, the Borrower agrees to pay to Lender a processing fee of l.5% of the Debenture amount at loan closing and an annual servicing fee of 0.5% of the unpaid balance payable on a monthly basis. The remaining balance on which the servicing fee will be based will be determined every five (5) years commencing five (5) years from the Closing Date. SECTION 4.04: CENTRAL SERVICING AGENT Borrower agrees to use the services of the Central Servicing Agent, hereinafter "CSA", as agent for Lender. In consideration of the CSA's expenses associated with the origination and servicing of the Loan, Borrower agrees to pay the CSA an origination fee of 0.25% of the Debenture amount at the time of Loan disbursement and an annual servicing fee payable monthly of l/10 of l% of the unpaid Loan balance for until the Loan is paid in full. The remaining balance on which the servicing fee will be based will be determined every five (5) years commencing five (5) years from the Closing Date. Borrower further agrees to allow the CSA to withhold from the Debenture sale proceeds and amount equal to 0.5% of the total Debenture proceeds to establish a Master Reserve Account. The Master Reserve Account is not refundable. SECTION 4.05: SELLING GROUP - UNDERWRITING FEE Borrower authorizes SBA through its agents to contract for the firm underwritten offering of the Certificates (as that term is defined in the Servicing Agent Agreement, SBA Form 1506) through one or more underwriters (the "Selling Group") and to permit the Selling Group to receive an underwriting fee not to exceed 5/8 of 1% of the total Debenture proceeds. SECTION 4.06: FUNDING FEE Borrower authorizes the CSA to deposit into the Master Reserve Account a funding fee in the amount of 1/4 of 1% of the net debenture proceeds to be distributed by the CSA as the SBA shall direct. SECTION 4.07: MAINTAIN AND INSURE PROPERTY Borrower agrees at all times to maintain the property provided as security for this loan in such conditions and repair that Lender's security will be adequately protected. Borrower also agrees to maintain during the term of the Loan adequate hazard insurance policies covering fire and extended coverage and such other hazards as may be deemed appropriate in amounts and form sufficient to prevent Borrower from becoming a co-insurer and issued by companies satisfactory to Lender with acceptable loss payee clauses in favor of Lender. Borrower further agrees, if at any time during the life of the Loan, Borrower's property is declared to be within a flood hazard area, to purchase Federal Flood Insurance if available. Such insurance shall be in an amount equal to the lesser of: l. the amount of the Loan; 2. the insurable value of the property; or 3. the maximum limit of coverage available. If the property is not located in a flood hazard area at the time of the Loan closing, Borrower will provide satisfactory evidence of that fact. Borrower further agrees to maintain adequate liability and worker's compensation insurance in amounts and form satisfactory to Lender. SECTION 4.08: PAY ALL TAXES Borrower and Guarantor agree to duly pay and discharge all taxes, assessments and governmental charges upon either or against either's properties prior to the date on which the penalties attach thereto except that Borrower and/or Guarantor shall not be required to pay any such tax, assessment, or governmental charge which is being contested by either in good faith and by appropriate proceedings. SECTION 4.09: PROVIDE ADDITIONAL EQUITY Borrower agrees to provide additional equity funds to cover additional project costs incurred as a result of overruns or unanticipated expenses or changes in work orders in the project as specified in SBA Authorization and Debenture Guaranty Agreement No. CDC 848 941 30 05 CA. SECTION 4.10: MAINTAIN EXISTENCE Borrower agrees to maintain its corporate existence, rights, privileges, and franchises within the State of California and qualify and remain qualified as a foreign corporation in each jurisdiction in which its present or future operations or its ownership of property require such qualifications. SECTION 4.11: PROVIDE FINANCIAL INFORMATION Borrower and Guarantor agree to maintain adequate records and books of account, in which complete entries will be made reflecting all of their business and financial transactions, such entries to be made in accordance with generally accepted principles of good accounting practice consistently applied in the case of financial transactions. In addition, Borrower agrees to deliver to Lender quarterly financial statements certified by an authorized officer of Borrower, to be true and accurate copies within sixty (60) days of the close of the period and annual financial statements, prepared by an independent accountant and certified by an authorized officer of Borrower to be true and accurate copies within ninety(90) days of the close of the period. SECTION 4.12: PROVIDE OTHER INFORMATION AND DOCUMENTS Borrower agrees to provide further information, display documents and execute and deliver any and all additional documents and instruments as may be reasonably requested by Lender, its Assigns or Counsel, or the CSA including but not limited to: l. executing the SBA Form l59 "Compensation Agreement"; 2. displaying the SBA Form 722 "Equal Opportunity Poster"; 3. executing the SBA Form 600 Series "Civil Rights Compliance Forms"; and 4. Providing information as required of Lender by the SBA for its annual reporting requirements. Borrower further agrees to provide written notice to Lender of any public hearing or meeting before any administrative or other public agency which may, in any manner, affect the chattel, personal property, or real estate securing the Loan. SECTION 4.13: RIGHT TO INSPECTION Borrower agrees to grant Lender, until the Note has been fully repaid with interest, the right at all reasonable hours to inspect the chattel, personal property and real estate used to secure the Loan; and Borrower further agrees to provide Lender free access to Borrower's premises for the purpose of such inspection to determine the condition of the chattel, personal property and real estate. SECTION 4.14: NULL AND VOID COVENANTS Borrower agrees that in the event that any provision of this Loan Agreement or any other instrument executed at closing or the application thereof to any person or circumstances shall be declared null and void, invalid, or held for any reason to be unenforceable by a Court of competent jurisdiction, the remainder of such agreement shall nevertheless remain in full force and effect, and to this end, the provisions of all covenants, conditions, and agreements described herein are deemed separate. SECTION 4.15: EXPENSES AND CLOSING COSTS Borrower agrees to pay all fees, expenses, and charges in respect to the Loan, or its making or transfer to Lender in any way connected therewith including, but not limited to, the fees and out-of-pocket expenses of Counsel employed by Lender, title insurance and survey costs, recording and filing fees, mortgage taxes, documentary stamp, and any other taxes, fees and expenses payable in connection with this transaction and with the enforcement of this Loan Agreement and Note. SECTION 4.16: NOTICE OF DEFAULT Borrower agrees to give written notice to Lender of any event within fifteen (15) days of the event which constitutes an Event of Default under this Loan Agreement or that would, with notice or lapse of time or both, constitute an Event of Default under this Loan Agreement. SECTION 4.17: INDEMNIFICATION Borrower agrees to indemnify and save Lender or its assigns harmless against any and all liability with respect to, or resulting from, any delay in discharging any obligation of Borrower. SECTION 4.18: EXPENSES OF COLLECTION OR ENFORCEMENT Borrower agrees, if at any time Borrower defaults on any provision of this Loan Agreement, to pay Lender or its assigns, in addition to any other amounts that may be due from Borrower, an amount equal to the costs and expenses of collection, enforcement or correction or waiver of the default incurred by Lender or its assigns in such collection, enforcement, correction or waiver of default, including but not limited to all attorneys' fees. ARTICLE V NEGATIVE COVENANTS OF THE BORROWER Borrower covenants and agrees that, from the date hereof until payment in full of the Note, unless Lender or its assigns shall otherwise expressly consent in writing, it will not enter into any agreement or other commitment the performance of which would constitute a breach of any of the covenants contained in this Loan Agreement, including but not limited to the following covenants: SECTION 5.01: ENCUMBER THE ACQUISITION ASSETS Borrower will neither create nor suffer to exist any mortgage, pledge, lien, charge, or encumbrance, including liens arising from judgments on the Acquisition Assets except as provided for by the SBA Authorization and Debenture Guaranty Agreement No. CDC 848 941 30 05 CA. SECTION 5.02: SELL THE ACQUISITION ASSETS Borrower will not sell, convey, or suffer to be conveyed, lease, assign, transfer or otherwise dispose of the Acquisition Assets unless approved in writing by the Small Business Administration. This agreement and the Note are secured by a Deed of Trust which contains the following provision, among others: "IN THE EVENT OF SALE OR TRANSFER OF ALL OR ANY PORTION OF THE PROPERTY DESCRIBED HEREIN, ALL SUMS REMAINING UNPAID UNDER THE NOTE SECURED BY THIS DEED OF TRUST SHALL BECOME IMMEDIATELY DUE AND PAYABLE AT THE ELECTION OF THE BENEFICIARY HEREIN AND NOTICE OF SUCH ELECTION IS HEREBY WAIVED." SECTION 5.03: CHANGE OWNERSHIP The principals of Borrower will not permit without the written permission of the SBA any material change in the ownership structure, control, or operation of Borrower including but not limited to: 1. any change in ownership of the Borrower other than the regular public trading of Borrower s stock 2. Any change in the controlling interest of the Borrower; 3. any merger into or consolidation with any other person, firm, or corporation; 4. any significant issuance of any stock having ordinary voting power for the election of governing body of the Borrower; 5. any change in the nature of its business as carried at the date hereof; 6. any substantial distribution, liquidation or other disposal of the Borrower's assets to the shareholders other than distribution of dividends in the normal course of business. SECTION 5.04: BORROWER OWNERSHIP OF LENDER During the term of the Loan, neither the Borrower nor its affiliates nor its principals nor its close associates will acquire, either directly or indirectly, an ownership position or interest in the Lender in excess of l0% of the votes or shares of the Lender. ARTICLE VI EVENTS OF DEFAULT The entire unpaid principal of the Note, and the interest then accrued thereon, shall become and be immediately due and payable upon the written demand of the Lender or its Assigns, without any other notice or demand of any kind or any presentment or protest, if any one of the following events (hereafter an "Event of Default") shall occur and be continuing at the time of such demand, whether voluntarily or involuntarily, or without limitation, occurring or brought about by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rules or regulation of any administrative or governmental body, provided, however, that such sum shall not be then payable if Borrower's payments have been expressly waived in writing, or the time for making the Borrower's payments has been expressly extended by the SBA in writing: SECTION 6.01: NON-PAYMENT OF LOAN If the Borrower shall fail to make payment when due of any installment of principal on the Note, or interest accrued thereon and if the default shall remain unremedied for fifteen (l5) days; SECTION 6.02: NON-PAYMENT OF OTHER INDEBTEDNESS If default shall be made in the payment when due of any installment of principal or of interest on any of the Borrower's other indebtedness and if such default shall remain unremedied for fifteen (l5) days; SECTION 6.03: INCORRECT REPRESENTATION OR WARRANTY If any representation or warranty contained in, or made in connection with the execution and delivery of, this Loan Agreement, or in any certificate furnished pursuant hereto, shall prove to have been incorrect when made in any material respect; SECTION 6.04: DEFAULT IN COVENANTS If the Borrower shall default in the performance of any other term, covenant, or agreement contained in this Loan Agreement, and such default shall continue unremedied for thirty (30) days after either: l. it becomes known to Borrower or an executive officer of the Guarantor; or 2. written notice thereof shall have been duly given to the Borrower by the Lender; SECTION 6.05: VOLUNTARY INSOLVENCY If the Borrower or Guarantor shall become insolvent or shall ease to pay its debts as they mature or shall voluntarily file a petition in Bankruptcy or a petition seeking reorganization, or the appointment of a receiver, trustee, or liquidation for it or a substantial portion of its assets or to effect a plan or other arrangement with creditors, or shall be adjudicated bankrupt, or shall make a voluntary assignment for the benefit of its creditors; SECTION 6.06: INVOLUNTARY INSOLVENCY If any involuntary petition shall be filed against the Borrower or Guarantor under any bankruptcy, insolvency or similar law or seeking the reorganization of or the appointment of any receiver, trustee, or liquidator for the Borrower or Guarantor, or of a substantial part of the property of the Borrower or the Guarantor, or if a writ or warrant of attachment or similar process shall be issued against a substantial part of the property of the Borrower or the Guarantor, and such petition shall not be dismissed or such writ or warrant of attachment or similar process shall not be released or bonded within thirty (30) days after filing of levy; SECTION 6.07: JUDGMENTS If any final judgment for the payment of money that is not fully covered by liability insurance and is in excess of $l0,000.00 shall be rendered against the Borrower or the Guarantor, and within thirty (30) days, shall not be discharged, or an appeal therefrom taken and execution thereon effectively stayed pending such appeal and, if such judgment is affirmed on appeal, the same shall not be discharged within thirty (30) days. ARTICLE VII HAZARDOUS MATERIALS SECTION 7.01 Lender and Borrower agree as follows with respect to the existence or "Use" of "Hazardous Materials" (as hereinafter defined) on the Premises: a) Borrower, at its sole cost, shall comply with all local, state, and federal laws, regulations and permit conditions and requirements relating to the generation, manufacture, above-ground storage, underground storage, use, handling, management, processing, treatment, recycling, transportation, or disposal (herein collectively referred to as "Use") of Hazardous Materials on the Premises. If Borrower (or any of Borrower's agents, employees, contractors, licensees or invitees) intends to commence Use of any Hazardous Materials on the Premises (except for reasonable quantities of gasoline, motor oil or similar petroleum products used in connection with automobiles and other vehicles), Borrower shall notify Lender in writing at least twenty (20) days prior to (i) the first appearance on the Premises of the respective Hazardous Material, indicating in such notice the nature of the Hazardous Material and the intended manner and extent of such Use; and (ii) any material increase or change in the manner or extent of such Use. Lender shall have the right, in its sole discretion, to approve or disapprove of any such Use of Hazardous Material on the Premises, and may as a condition to approving any such Use, impose such requirements as are at that time dictated by the S.B.A. and may require the depositing by Borrower with Lender of appropriate insurance and/or other security to ensure that Lender and the Premises are reasonably protected against any potential liability or loss that may arise therefrom. No approval by Lender shall relieve Borrower from any of its other obligations under this Article. (b) If the presence of Hazardous Materials on the Premises caused or permitted by Borrower, its agents, employees, contractors, licensees or invitees results in contamination or deterioration of the air, water, soil or of any improvements on or under the Premises or on or under any adjacent property, or results in any exposure of any person, including but not limited to Borrower's employees, to Hazardous Materials in violation of any local, state, or federal law or regulation, then Borrower shall promptly take any and all action which may be necessary or appropriate to clean up such contamination in the manner and to the extent (i) required by applicable law or regulation or by any applicable governmental agency, (ii) as may be a condition to the future issuance or continuing effectiveness of any governmental permit or approval which relates to the use, occupancy, licensing or development of the Premises or all or any part of the property of which the Premises form a part, (iii) as may be reasonably required by Lender, or (iv) as may be required by any actual or prospective lender with respect to the Premises. (c) Borrower shall be solely responsible for and shall defend, indemnify, and hold Lender (including all prior and future owners of the Premises or any leasehold or other interest therein) and its partners, lenders, agents and employees free and harmless from and against any and all claims, causes of action, costs, fines, penalties, liabilities and expenses, including attorneys' fees and costs and experts' and consultants' fees and costs, incurred or arising in any way out of or in connection with any Use of Hazardous Materials by Borrower, its agents, employees, contractors, licensees or invitees, including but not limited to all costs and expenses associated with any permit compliance, investigation, testing, monitoring, feasibility studies, remedial action, planning, removal, clean-up, abatement, restoration work or other action required to return the Premises to its condition existing prior to the appearance of any such Hazardous Materials on the Premises. The indemnity obligation of Borrower hereunder shall survive any expiration or earlier termination of the term of this Lease. (d) Lender may cause or permit testing wells to be installed on the Premises or on adjoining property in locations selected by Lender or its consultants or agents, or by any applicable regulatory authority and may cause the soil and/or ground water to be tested to detect the presence of Hazardous Material by the use of such tests as Lender or its consultants or agents or any applicable regulatory authority may deem appropriate for such purposes. The cost of such tests and of the installation, maintenance, repair and replacement of such wells shall be paid by Lender, except that Borrower shall pay the cost thereof if the presence of Hazardous Materials is detected which is reasonably believed to have been caused by Borrower, its agents, employees, contractors, licensees or invitees. (e) As used herein, the term "Hazardous Material" means any hazardous or toxic substance, material or waste, the storage, use or disposition of which is or becomes regulated by any local governmental authority, the State of California or the United States Government. The term "Hazardous Material" includes, without limitation, any material or substance which is (i) "hazardous material", "hazardous substance", "hazardous waste", or "extremely hazardous waste" as defined in California Health and Safety Code Sections 25501(j), 25316, 25501(k), 25115 and 25117; (ii) any waste listed under Article 9 or defined as hazardous or extremely hazardous pursuant to Article 11 of Title 22 of the California Administrative Code, Division 4, Chapter 20; (iii) any "hazardous waste" as defined or listed pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq. (42 U.S.C. Section 6903), (iv) any"hazardous substance" as defined in Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq. (42 U.S.C. Section 9601), (v) any material, substance, or waste defined or listed as a "hazardous material", "hazardous substance", "hazardous waste" or other similar designation by any regulatory scheme of the State of California, the U.S. Government, or any local or regional governmental agency having jurisdiction over the Premises, that is similar to the foregoing; (vi) any chemical known to the State of California to cause cancer or reproductive toxicity that is subject to California Health and Safety Code Sections 25249.5 and following; and/or (vii) the successor to any of the aforementioned statutes, rules or regulations. ARTICLE VIII MISCELLANEOUS SECTION 8.01: NO WAIVER BY FAILURE TO EXERCISE No failure or delay on the part of the Lender in exercising any right, power, or remedy hereunder shall operate as a waiver thereof, nor shall any single partial exercise of any such right, power, or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. SECTION 8.02: NO NON-WRITTEN WAIVER No modification or waiver of any provision of this Loan Agreement or of the Note, nor any consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 8.03: NO RIGHT TO NOTICE No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. SECTION 8.04: AMENDMENTS The Borrower and the Lender or its Assigns, with the concurrence of the SBA, hereby expressly reserve all rights to amend any provisions of this Agreement, to consent to or waiver any departure from the provisions of the Note, and to release or otherwise deal with any collateral security for payment of the Note provided, however, that all such amendments be in writing and executed by the Lender or its Assigns, the Borrower and the SBA. SECTION 8.05: NOTICES All notices, consents, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given to a party hereto if mailed by certified mail, prepaid, to the parties at their respective addresses set forth at the end of this Loan Agreement or to such other addresses as any party may have designated in writing to any other party hereto. SECTION 8.06: PAYMENTS The Borrower will make payments to the Lender in accordance with the terms and conditions and instructions contained in the Central Servicing Agent Agreement (SBA Form 1506). SECTION 8.07: SURVIVAL OF REPRESENTATIONS AND WARRANTIES All agreements, representations, and warranties made by the Borrower herein or any other document or certificate delivered to the Lender in connection with the transactions contemplated by this Loan Agreement shall survive the delivery of this Agreement, the Note and the Security Agreements hereunder and shall continue in full force and effect so long as the Note is outstanding. SECTION 8.08: SUCCESSORS AND ASSIGNS This Loan Agreement shall be binding upon the Borrower, its Successors, and assigns, except that the Borrower may not assign or transfer its rights without prior written consent of the Lender and the SBA. This Agreement shall insure to the benefit of the Lender, its Successors and Assigns, and, except as otherwise provided in particular provisions hereof, all subsequent holders of the Note. SECTION 8.09: COUNTERPARTS This Loan Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. SECTION 8.10: GOVERNING LAW This Loan Agreement and the Note and Security Agreements, Financing Statements and Mortgage shall be deemed contracts made under the laws of the State of California and for all purposes shall be construed in accordance with the laws of California. SECTION 8.11: ARTICLE AND SECTION HEADINGS Article and section headings used in this Agreement are for convenience only and shall not affect the construction of this Agreement. DATED: June 17, 1996 Borrower: Lender: Real Goods Trading Corporation California Statewide Certified 13771 South Highway 101 Development Corporation Hopland, CA 95449 29 C Street Davis, CA 95616 By: [S]John C. Schaeffer By:[S]Barbara A. Vohryzek John C. Schaeffer Barbara A. Vohryzek President Executive Director By: [S]Donna Montag Donna Montag Secretary OMB Approval No. 3245-0201 expiration Date 11-30-90 SBA LOAN NO. CDC 848 94I 30 05 CA SMALL BUSINESS ADMINISTRATION (SBA) GUARANTY June 17, 1996 California Statewide Certified In order to induce Development Corporation hereinafter called "Lender") to make a loan or (SBA or other Lending Institution) loans, or renewal or extension thereof, to Real Goods Trading Corporation (hereinafter called "Debtor"), the Undersigned hereby unconditionally guarantees to Lender, its successors and assigns, the due and punctual payment when due, whether by acceleration or otherwise, in accordance with the terms thereof, of the principal of and interest on and all other sums payable, or stated to be payable, with respect to the note of the Debtor, made by the Debtor to Lender dated June 17, 1996 in the principal amount of $604,000.00 , with interest to the rate of * per cent per annum. Such note, and the interest thereon and all other sums payable with respect thereto are hereinafter collectively called "Liabilities". As security for the performance of this guaranty the Undersigned hereby mortgages, pledges, assigns, transfers and delivers to Lender certain collateral (if any), listed in the schedule on the reverse side hereof. The term "collateral" s used herein shall mean any funds, guaranties, agreements or there property or rights or interest of any nature whatsoever, or the proceeds thereof, which may have been, are, or hereafter may be, mortgaged, pledged, assigned, transferred or delivered directly or indirectly by or on behalf of the Debtor or the Undersigned or any other party to Lender or to the holder of the aforesaid note of the Debtor, or which may have been, are, or hereafter may be held by any party as trustee or otherwise, as security, whether immediate or underlying, for the performance of this guaranty or the payment of the Liabilities or any of them or any security therefor. The Undersigned waives any notice of the incurring by the Debtor at any time of any of the Liabilities, and waives any and all presentment, demand, protest or notice of dishonor, nonpayment, or other default with respect to any of the Liabilities and any obligation of any party at any time comprised in the collateral. The Undersigned hereby grants to Lender full power, in its uncontrolled discretion and without notice to the undersigned, but subject to the provisions of any agreement between the Debtor or any other party and Lender at the time in force, to deal in any manner with the Liabilities and the collateral, including, but without limiting the generality of the foregoing, the following powers: (a) To modify or otherwise change any terms of all or any part of the Liabilities or the rate of interest thereon (but not to increase the principal amount of the note of the Debtor to Lender), to grant any extension or renewal thereof and any other indulgence with respect thereto, and to effect any release, compromise or settlement with respect thereto; (b) To enter into any agreement of forbearance with respect to all or any part of the Liabilities, or with respect to all or any part of the collateral, and to change the terms of any such agreement; (c) To forbear from calling for additional collateral to secure any of the Liabilities or to secure any obligation comprised in the collateral; (d) To consent to the substitution, exchange or release of all or any part of the Liabilities, whether or not the collateral, if any received by Lender upon any such substitution, exchange or release shall be of the same or of a different character or value than the collateral surrendered by Lender; (e) In the event of the nonpayment when due, whether by acceleration or otherwise, of any of the Liabilities, or in the event of default in the performance of any obligation comprised in the collateral, to realize on the collateral or any part thereof, as a whole or in such parcels or subdivided interests as Lender may elect, at any public or private sale or sales, for cash or on credit or for future delivery, without demand, advertisement or notice of the time or place of sale or any adjournment thereof (the Undersigned hereby waiving any such demand, advertisement and notice to the extent permitted by law), or by foreclosure or otherwise, or to forbear from realizing thereon, all as Lender in its uncontrolled discretion may deem proper, and to purchase all or any part of the collateral for its own account at any such sale or foreclosure, such powers to be exercised only to the extent permitted by law. * Interest to be determined at the time when the Debenture of the Lender is sold as per the SBA Authorization referencing the above SBA Loan Number. The obligations of the Undersigned hereunder shall not be released, discharged or in any way affected, nor shall the Undersigned have any rights or recourse against Lender, by reason of any action Lender may take or omit to take under the foregoing powers. In case the Debtor shall fail to pay all or any part of the Liabilities when due, whether by acceleration or otherwise, according to the terms of said note, the Undersigned, immediately upon the written demand of Lender, will pay to Lender the amount due and unpaid by the Debtor as aforesaid, in like manner as if such amount constituted the direct and primary obligation of the Undersigned. Lender shall not be required, prior to any such demand on, or payment by, the Undersigned, to make any demand upon or pursue or exhaust any of its rights or remedies against the Debtor or others with respect to the payment of any of the Liabilities, or to pursue or exhaust any of its rights or remedies with respect to any part of the collateral. The Undersigned shall have no right of subrogation whatsoever with respect to the Liabilities or the collateral unless and until Lender shall have received full payment of all the Liabilities. The obligations of the Undersigned hereunder, and the right of Lender in the collateral, shall not be released, discharged or in any way affected, nor shall the Undersigned have any rights against Lender by reason of the fact that any of the collateral may be in default at the time of acceptance thereof by Lender or later; nor by reason of the fact that a valid lien in any of the collateral may not be conveyed to, or created in favor of, Lender; nor by reason of the fact that any of the collateral may be subject to equities or defenses or claims in favor of others or may be invalid or defective in any way; nor by reason of the fact that any of the Liabilities may be invalid for any reason whatsoever; nor by reason of the fact that the value of any of the collateral, or the financial condition of the Debtor or of any obligor under or guarantor of any of the collateral, may not have been correctly estimated or may have changed or may hereafter change; nor by reason of any deterioration, waste, or loss by fire, theft, or otherwise of any of the collateral, unless such deterioration, waste or loss be caused by the willful act or willful failure to act of Lender. The Undersigned agrees to furnish Lender, or the holder of the aforesaid note of the Debtor, upon demand, but not more often than semiannually, so long as any part of the indebtedness under such note remains unpaid, a financial statement setting forth, in reasonable detail, the assets, liabilities, and net worth of the Undersigned. The Undersigned acknowledges and understands that if the Small Business Administration (SBA) enters into, has entered into, or will enter into, a Guaranty Agreement, with Lender or any other lending institution, guaranteeing a portion of Debtor's Liabilities, the Undersigned agrees that it is not a co-guarantor with SBA and shall have no right of contribution against SBA. The Undersigned further agrees that all liability hereunder shall continue notwithstanding payment by SBA under its Guaranty Agreement to the other lending institution. The term "Undersigned" as used in this agreement shall mean the signer or signers of this agreement, and such signers, if more than one, shall be jointly and severally liable hereunder. The Undersigned further agrees that all liability hereunder shall continue notwithstanding the incapacity, lack of authority, death, or disability of any one or more of the Undersigned, and that any failure by Lender or its assigns to file or enforce a claim against the estate of any of the Undersigned shall not operate to release any other of the Undersigned from liability hereunder. The failure of any other person to sign this guaranty shall not release or affect the liability of any signer hereof. Guarantor waive all rights and defense arising out of an election of remedies by the creditor, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed the guarantor's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the Code of Civil Procedure or otherwise. [S]JOHN C. SCHAEFFER John C. Schaeffer NOTE-- Corporate guarantors must execute guaranty in corporate name, by duly authorized officer, and seal must be affixed and duly attested; partnership guarantors must execute guaranty in firm name, together with signature of a general partner. Formally executed guaranty is to be delivered at the time of disbursement of loan. (LIST COLLATERAL SECURING THE GUARANTY) In consideration of the Guaranty by the Small Business Administration of a Debenture in the amount of $604,000.00 issued by CALIFORNIA STATEWIDE CERTIFIED DEVELOPMENT CORPORATION (which Debenture is identified as REAL GOODS TRADING CORPORATION) said CALIFORNIA STATEWIDE CERTIFIED DEVELOPMENT CORPORATION assigns and transfers all interest herein to the U.S. SMALL BUSINESS ADMINISTRATION CALIFORNIA STATEWIDE CERTIFIED DEVELOPMENT CORPORATION By:[S] BARBARA A. VOHRYZEK Barbara A. Vohryzek, Executive Director Attest:[S]KAREN L. GODELL Karen L. Goodell U. S. Small Business Administration Certified Development Company Program "504" NOTE Loan Number CDC 848 941 30 05 CA Ukiah, California (City and State) $ 604,000 00 (Date) June 17, 1996 For value received, the Undersigned promises to pay to the order of California Statewide Certified Development Corporation, Payee (development company), at its office in (City and State) Davis, California or upon assignment or transfer of this Note by the Payee, and written notice thereof to the Undersigned, at such other place as may be designated from time to time by said assignee or transferee, Six hundred four thousand dollars, (Write out amount) with interest on the outstanding balance at 7.77% per annum commencing on September 11, 1996 (date of Debenture). Loan payments shall be made in equal installments, each in the amount of $4,962.82, commencing on the first day of September 1, 2016, and continuing due and payable on the first day of each month thereafter until September 11, 2016, when the full unpaid balance of principal and interest shall become due and payable. In addition to the aforesaid loan payments, Undersigned's total monthly obligation shall include the service fees set forth in the Servicing Agent Agreement (SBA Form 1506) attached to and incorporated into this Note. This Promissory Note evidences and related Collateral is given, to secure a loan made by the Payee to the Undersigned and such Note and Collateral will be assigned by Payee to the Small Business Administration (SBA) to secure the guaranty by SBA pursuant to 503(a) of the Small Business Investment Act [15 U.S.C. 697(a)], of a Debenture to be issued and sold by the Payee (the "Debenture"), which is hereby incorporated herein by reference. All payments under this note shall be applied in this order: (1) to the servicing fees set forth in the Servicing Agent Agreement, (2) to interest, (3) to principal, (4) to the late fee set forth in this Note. LATE CHARGE In the event Payee or its Agent or assignee accepts a late payment after the fifteenth day of the month in which such payment is due, the Undersigned agrees to pay a late payment charge equal to five percent of the late amount or $100.00, whichever is greater, as compensation for additional collection efforts. DEFINITIONS The term "Indebtedness" as used herein shall mean the indebtedness evidenced by this Note, including principal, interest, service fees, late payment charges, and expenses including but not limited to the expenses related to the care and preservation of Collateral and interest at the note rate thereon, whether contingent, now due or hereafter to become due, and the stated prepayment premium, if applicable. The term "Collateral" as used in this Note shall mean any funds, guaranties, or other property, or rights therein of any nature whatsoever, or the proceeds thereof, which are, or hereafter may be hypothecated, directly or indirectly, by the Undersigned or others, in connection with, or as security for, the Indebtedness or any part thereof. The Collateral, and each part thereof, shall secure the Indebtedness and each part thereof. The covenants and conditions set forth or referred to in any instruments of hypothecation constituting the Collateral are hereby incorporated in this Note as covenants and conditions of the Undersigned with the same force and effect as though such covenants and conditions were fully set forth herein. The term "CSA" shall mean the Central Servicing Agent appointed by the development company (SBA Form 1506) and accepted by the Undersigned to receive all payments by the Undersigned under this Note. The term "Undersigned" shall mean the borrower under this Note and, if the operating small concern for the benefit of which this loan is made is not the borrower, such operating small concern. PREPAYMENT Payment of the entire outstanding balance of the Indebtedness may be made prior to the maturity date hereof, timing to be arranged with Payee or SBA as assignee but no partial prepayments may be made. The amount required to prepay this Note shall be the aggregate of the Indebtedness including interest to the prepayment (repurchase) date, and any prepayment premium required by the schedule to be attached to this Note and incorporated by this reference. For purposes of prepayment the repurchase date is the next semi-annual payment date on the Debenture. The Undersigned must make a written request for prepayment to the payee or SBA as assignee at least forty-five (45) days before the prepayment date. Ten (10) business days prior to the scheduled prepayment date the undersigned shall cause to be transferred by wire a nonrefundable good faith deposit of one thousand dollars ($1,000) to the CSA. Such deposit shall be applied in full to the repurchase price of said debenture and shall be forfeited if undersigned fails to pay the designated total prepayment amount to the CSA on the designated prepayment date, as compensation for the cost of arranging the failed prepayment. ACCELERATION The Indebtedness shall immediately become due and payable, upon the appointment of a receiver or liquidator, whether voluntary or involuntary, for the Undersigned or for any of its property, or upon the filing of a petition by or against the Undersigned under the provisions of any State or Federal insolvency law or under the provisions of the Bankruptcy Code of 1978 or upon the making by the Undersigned of an assignment for the benefit of its creditors. Payee with the consent of SBA, or SBA as assignee is authorized to declare all or any part of the Indebtedness immediately due and payable upon the happening of any of the following events: (1) Failure to pay any part of the Indebtedness when due; (2) nonperformance by the Undersigned of any agreement with, or any condition imposed by, the development company or SBA; (3) failure of the Undersigned or any person acting on behalf of the Undersigned to disclose any material fact, in any application, declaration or other document delivered to the development company or SBA or any misrepresentation by or for the benefit of the Undersigned in such document; (4) the reorganization, merger or consolidation of the Undersigned without prior written consent of the development company and SBA, or the making of an agreement therefor; (5) the sale of the Collateral, or any part of it or any interest in it, or any agreement that the Collateral will be alienated by the Undersigned, or any alienation of the Collateral by operation of law or otherwise; (6) the Undersigned's failure duly to account, to Payee's or SBA's (as assignee) satisfaction, at such time or times as may be required, for any of the Collateral, or proceeds thereof, coming into the control of the Undersigned; (7) the institution of any suit affecting the Undersigned deemed by SBA to affect adversely its interest hereunder in the Collateral or otherwise; (8) any change, without prior written approval by SBA, affecting ten or more percent in the legal or equitable ownership of the Undersigned; (9) any change in the respective ownerships of the Undersigned; (10) if the Undersigned and/or its affiliates acquire directly or indirectly an ownership interest of ten or more percent in the development company; (11) any other event prohibited by the related security or other instruments; or (12) any violation by the Undersigned of SBA regulations. Payee's or SBA's as assignee failure to exercise its rights under this paragraph shall not constitute a waiver thereof. Upon acceleration pursuant to this paragraph, the indebtedness shall be computed in the same manner as is set forth for the prepayment amount in the preceding paragraph captioned "Prepayment". COLLATERAL Upon the nonpayment of the Indebtedness, or any part thereof, when due, whether by acceleration or otherwise, Payee with SBA's consent or SBA as assignee is empowered to sell, assign, and deliver the whole or any part of the Collateral at public or private sale. After deducting all expenses incidental to such sale or sales, Payee or SBA as assignee may apply the proceeds thereof to the payment of the Indebtedness as it shall deem proper. The Undersigned hereby waives all rights to redemption or appraisement whether before or after sale. Payee with SBA's consent or SBA as assignee is further empowered, to convert into money all or any part of the Collateral, by suit or otherwise, and to surrender, compromise, release, renew, extend, exchange, or substitute any item of the Collateral in transactions with the Undersigned or any third party. Whenever any item of the Collateral shall not be paid when due, or otherwise shall be in default, whether or not the Indebtedness, or any part thereof, has become due, Payee or SBA as assignee shall have the same rights and powers with respect to such item of the Collateral as are granted in respect thereof in this paragraph in case of nonpayment of the Indebtedness, or any part thereof, when due. None of the rights, remedies, privileges, or powers of Payee or SBA as assignee expressly provided for herein shall be exclusive, but each of them shall be cumulative with and in addition to every other such power now or hereafter existing in favor of Payee or SBA as assignee, whether at law or in equity, by statute or otherwise. The Undersigned agrees to take all necessary steps to administer, supervise, preserve, and protect the Collateral; and regardless of any action taken by Payee or SBA as assignee, there shall be no duty upon Payee or SBA as assignee in this respect. The Undersigned shall pay all expenses of any nature, including but not limited to reasonable attorney's fees and costs, which Payee or SBA as assignee may deem necessary in connection with the satisfaction of the Indebtedness or the administration, preservation (including, but not limited to, adequate insurance of), or the realization upon the Collateral. Payee with SBA's consent or SBA as assignee is authorized to pay at any time and from time to time any or all of such expenses, add the amount of such payment to the amount of the Indebtedness, and charge interest thereon at the rate specified herein with respect to the principal amount of this Note. The security rights of Payee or SBA as assignee hereunder shall not be impaired by any indulgence, including but not limited to (a) any renewal, extension, or modification which Payee or SBA as assignee may grant with respect to the Indebtedness or any part thereof, or (b) any surrender, compromise, release, exchange, or substitution which Payee or SBA as assignee may grant in respect of the Collateral, or (c) any indulgence granted in respect to any endorser, guarantor, or surety. The Payee or SBA as assignee of this Note, the Collateral, any guaranty, and any other document (or any of them), sold, transferred, or pledged, shall forthwith become vested with and entitled to exercise all the powers and rights given by this Note as if said purchaser, transferee, or pledgee were originally named as Payee in this Note. Real Goods Trading Corporation By:[S]DONNA MONTAG By:[S]JOHN C. SCHAEFFER Donna Montag, Secretary John C. Schaeffer, President In consideration of the guarantee by Small Business Administration of a Debenture in the amount of $604,000.00, issued by California Statewide Certified Development Corporation, (Development Company) (which Debenture is identified as Small Business. Project Real Goods Trading Corporation) said California Statewide Certified Development Corporation hereby assigns and transfers all rights, title and interest in this Note to the Small Business Administration. California Statewide Certified Development Corporation By: [S]BARBARA A. VOHRYZEK Barbara A. Vohryzek, Executive Director Prepayment Schedule Prepayment of the entire outstanding balance of the Indebtedness may be made prior to the maturity date hereof, but no partial prepayments may be made. The actual amount necessary to prepay the Indebtedness during the term on the loan will be a nonrefundable $1,000.00 deposit plus an amount equal to the outstanding principal balance of the Debenture, plus interest accrued and unpaid thereon to the next semi-annual payment date on the Debenture, plus a prepayment premium ("PP"), if and, determined as follows: PP = D(I x P), where D = the remaining principal balance of the Debenture I = the interest rate stated on the face of the Debenture expressed in decimal points P = the factor set forth below for the applicable year: Year P 1 1.00 2 .90 3 .80 4 .70 5 .60 6 .50 7 .40 8 .30 9 .20 10 .10 11 end "hereafter .0
This Schedule is incorporated into the promissory Note of the borrower by the paragraph entitled "Prepayment" on page 2 of the Note. [S]J. S. Borrower's Initials EX-23 6 DELOITE AND TOUCHE, LLP INDEPENDENT AUDITORS' REPORT We consent to the Incorporation by reference in Registration Statement No. 333-15991 Real Goods Trading Corporation on Form S-8 of our report dated May 9, 1997, appearing in this Annual Report on Form 10-KSB of Real Goods Trading Corporation for the year ended March 31, 1997. [S]DELOITTE AND TOUCHE, LLP Deloitte and Touche, LLP Oakland, California May 9, 1997 -----END PRIVACY-ENHANCED MESSAGE-----