-----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, Bc0jyrYgkG3tSpmxtmks4HSrDUW/0vmPKo79gKp8/aVq3CEuCcZWpJJDr/px5rXd 3YjYRKk3O4X71jXiZJts7w== /in/edgar/work/20000705/0000912953-00-000006/0000912953-00-000006.txt : 20000920 0000912953-00-000006.hdr.sgml : 20000920 ACCESSION NUMBER: 0000912953-00-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000705 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REAL GOODS TRADING CORP CENTRAL INDEX KEY: 0000912953 STANDARD INDUSTRIAL CLASSIFICATION: [5961 ] IRS NUMBER: 680227324 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12964 FILM NUMBER: 667664 BUSINESS ADDRESS: STREET 1: 3440 AIRWAY DRIVE STREET 2: SUITE E CITY: SANTA ROSA STATE: CA ZIP: 95403 BUSINESS PHONE: 7075422600 MAIL ADDRESS: STREET 1: 3440 AIRWAY DRIVE STREET 2: SUITE E CITY: SANTA ROSA STATE: CA ZIP: 95403 10-K 1 0001.txt 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, 2000 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 Identification Number) (incorporation or organization) 3440 Airway Drive, Santa Rosa, California 95403 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (707) 542-2600 Securities registered under Section 12(b) of the Exchange Act: Title of each class Name of each exchange on which registered Common Stock Chicago Stock Exchange 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. $18,979,378 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. $12,659,435 as of June 20, 2000. The number of shares of the issuer's Common Stock outstanding as of June 20, 2000 was 4,080,742. Documents Incorporated by Reference A portion of the Real Goods Trading Corporation's Proxy Statement for the 2000 Annual Meeting of Shareowners to be filed with the Commission on or before June 30, 2000 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 2000 Annual Meeting of Shareowners is not to be deemed filed as part of this report. PART I Item 1. DESCRIPTION OF BUSINESS Mission Statement: To promote and inspire an ecologically sustainable future. Introduction. Real Goods Trading Corporation ("Real Goods" or the "Company") sells primarily healthy living, environmental, and renewable energy products through mail order catalogs, direct sales, retail stores and its Internet site (www.realgoods.com). The Company mailed catalogs under the names of Real Goods(, Chelsea Green Junction, Real Goods News, and the Renewable Energy Products Catalog, Real Goods Renewables in fiscal 2000. The Company also sells renewable energy products directly to its customers through its renewable energy division, Real Goods Renewables. The Company's four retail stores are located in Hopland, Berkeley, and Los Gatos, California and Eugene, Oregon. The Company plans to close its Eugene, OR store and has opened a store in West Los Angeles, CA. The Company also has an outlet store inside its Berkeley store. A. The Company's Markets The Company serves several related market segments within the single line of business of specialty retailing. The "Healthy Living & Environmental Products Market" consists of catalog customers who wish to pursue more energy conserving and 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 areas served by the conventional electric utility power grid. Several regional markets are served by the Company's retail stores. Each of the four stores carries substantially all of the products in the catalogs but also carries environmental, healthy living and clothing products as well as unique regional products. The Company's demonstration retail store at the Solar Living Center in Hopland, California was built with sustainable building materials, including straw bale construction, and is 100% powered by renewable energy systems. Over 130,000 visitors come to the Solar Living Center every year. The Company uses its outlet store in Berkeley, California, to reduce overstocks, returns and discontinued products. 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 who generate their own electricity using solar, wind, and hydro power systems. The Company has also identified eco-tourism and the commercial market as a promising sub market for its renewable energy sales. As the price of renewable energy products (particularly photovoltaic (solar electric) modules) declines, this market will become more mainstream. 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 and has a successful co-publishing relationship with Chelsea Green Publishing Company of Vermont with whom it has co-published over 20 book titles. 1. Healthy Living and Environmentally Related Products Market. Using both mail order catalogs and the Internet, the Company markets energy saving conservation devices, healthy living and environmentally related products, durable tools, and educational and well-made gifts to urban and suburban dwellers. Approximately 68% of the Company's total sales in fiscal 2000 were derived from catalogs, down from 75% in 1999. The Company mailed approximately 4,387,500 catalogs in the current year, compared to 4,716,500 in the previous year as the Company focused its marketing strategy and diversified further into the Internet. Approximately 7.8% of the Company's total sales in fiscal 2000 were made over the Internet, up from 2.9% in fiscal 1999; certain of those sales were of renewable energy products. 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; bed and bath products, organic cotton apparel, and household products including a wide variety of non-toxic cleaners. The Company also sells water and air purification devices, health-related products, solar tools, and durable tools to this same customer base. 2. Regional Retail Market. The Company's retail stores serve as demonstration centers for itd mail order catalog and renewable energy products. The Company markets energy saving devices, healthy living and environmentally related products, educational and well-made gifts and unique regional products in each of its retail stores. The Company's four retail stores accounted for 23% of total sales in fiscal 2000 compared to 22% in fiscal 1999. The Company had 15,500 square feet of retail space during fiscal 2000, up from 14,300 square feet in fiscal 1999. The Solar Living Center ("SLC"), which opened in 1996 in Hopland, California, is a twelve acre demonstration site that is the home of the Company's flagship store. The 4,200 square foot retail store is constructed of adobe-like covered rice straw bales and has a utility intertie system with Green Mountain Energy. The Company's 10 kilowatt photovoltaic array and 3 kilowatt wind generator can seasonally produce more power than is necessary for the site; the Company sells the excess power back to Green Mountain. 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. Nearly 132,000 visitors came to the SLC in fiscal 2000. The Company believes that the Solar Living Center remains important to the Company's future. In September 1999, a 132 kw array was constructed by GPU AstroPower on the site from which the energy is sold to Green Mountain Energy under a long term contract. In addition to serving as a demonstration center for renewable energy products and catalog products, the Hopland store also offers retail products, some of which 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. Approximately two-thirds of the Hopland store's products are catalog and renewable energy items; one third are retail unique items. The 4,800 square foot Berkeley store serves as an urban demonstration center for the Company's catalog and renewable energy products. In January 1998, the Company opened a 1,500 square foot outlet store which recently was moved inside the Berkeley store. The Company conducts its clearance programs through this store. The Los Gatos store, 3,400 square feet, was opened in November 1999 and serves an affluent suburban market. It is located in a mall with a Whole Foods Market store. The Company believes that the store will further the Company's mission of spreading renewable energy and sustainable living to a wider audience. The West L.A. store is a 3,100 square foot store that opened in late May, 2000. The store is situated adjacent to a Whole Foods Market store and services a densely populated affluent area. The Eugene, OR store is located in a low population area and has been under-performing. Therefore, the Company has decided to close this store in the near future. 3. Renewable Energy Products Market. Real Goods Renewables offers power systems for the eco-tourism market and for domestic 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 customers for these power systems have been owners of 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 over 26,000 homes have used its products to migrate to renewable energy primarily through solar systems. In addition 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. President Clinton's "million solar roofs" initiative has brought much interest in renewable energy to mainstream America. Currently the federal government is proposing tax credits for homeowners installing renewable energy systems. The U.S. Department of Energy continues to provide funds for photovoltaic installations via the Team UP program. The California Energy Commission is offering a significant (up to 50%) renewable energy rebate program for homeowners who install utility intertie systems. Many other states have, or will soon have, similar rebate programs. The Company has offered assistance in fulfillment of the program requirements for its customers and is well positioned to take advantage of these offers. Real Goods Renewables markets its products through the Real Goods Renewables Catalog, a technical 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 is fully trained in energy system sizing and specializes in designing solar systems of all sizes. 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 has adopted the slogan "knowledge is our most important product." The Company's primary product for this market is the tenth edition of its Solar Living Sourcebook, a 575 page textbook that the Company periodically revises, 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. Over 125,000 copies of this book have been sold in 47 countries. The Company also markets many publications on specific aspects of renewable energy conservation and sustainable living within its catalogs and in its retail stores. The Company does not spend material amounts for research and development. The Company has established a successful co-publishing relationship with Chelsea Green Publishing Company of Vermont. Through this relationship, twenty books have been co-published under the "Real Goods Solar Living Series" imprint, 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. The Company also contributes significant funds to a non-profit corporation which operates the Institute for Solar Living (ISL). Originally founded by the Company and currently in its ninth season, the Institute for Solar Living offers over 40 educational 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 Institute employees and by third-party industry specialists. The Institute creates increased consumer awareness with regard to renewable energy products and rents the Solar Living Center as a demonstration site. The ISL sponsors an annual energy festival, SolFest, every summer which brings 5,000-10,000 visitors onsite to experience workshops, speakers, renewable energy demonstrations, and entertainment. The Company believes that SolFest contributes significantly to its educational efforts and enhances brand recognition. The Company has been contributing funds to the Institute until the Institute can develop its fundraising efforts and become self-funding. 5. Internet Site. The Company has established a website (www.realgoods.com) which provides the Company with an alternative channel for offering its products and explaining its mission, history, programs and products. The Company believes that its customers on its website can find the largest array of environmental and healthy living products anywhere in the world. In fiscal 2000 the Company sold $1,482,000 worth of products through its website, representing 269% of the previous year's sales. The Company also maintains an innovative bulletin board on its website 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. Transactions 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 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 700 suppliers, none of which accounts for more than 3.5% of the Company's purchases. The Company's ten largest vendors account for 24.6% of purchases. The four largest annual purchases are from vendors who sell renewable energy products, including solar electric modules, high efficiency appliances, and inverters (power conditioning equipment). While there are many suppliers of these products, the Company has chosen to limit the majority of its renewable energy purchases to four vendors: Astropower, a distributor of solar modules; Applied Power, a distributor of solar modules and other equipment manufactured by Siemens Solar Industries; Kyocera, a distributor of solar modules and high efficiency refrigerators; and Trace Engineering, a manufacturer of inverters and other solar electric controls. The Company has had long-term relationships with all 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 long term material adverse effect on the Company's orders and sales revenues for the period affected. The Company generally does not enter into long-term contracts with its suppliers because adequate alternative sources for most products exist allowing 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 assurance that the Company will not be subject to unanticipated cost increases or shortages of supply. C. Seasonality Forty percent of the Company's revenues are realized in its third fiscal quarter, which ends on December 31. 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 lessens the effect of the holiday season on the Company's sales. The Company's fiscal year ends on March 31. The Company's sales generally increase sequentially over the first, second and third fiscal quarters, and generally decline 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 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 Backorders are considered common in certain other industries; however, in the mail order industry, backorders can be symptoms of inefficiency, lack of inventory or bad strategic planning 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 of certain products are higher than anticipated. At March 31, 1999, backorders were $236,000, which was 23% of that month's catalog sales. At March 31, 2000, backorders were $11,000, which was 2% of that month's catalog sales. The main cause for the increase in backorders at the end of fiscal 1999 was the significant increase in sales of Y2K related products by substantially more than the Company anticipated. This large backorder status had been significantly reduced by December 1999. 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 2000, returns of catalog sales were 9.0% of gross catalog sales. This is an increase over last year (6.6%) as a result of increasing the soft goods portion of the product mix. The Company believes that the hard goods catalog industry in general experiences returns of 5-6% and the soft goods catalog industry experiences returns of 15-30%. E. Competition Within the catalog market, the Company is very small compared to industry leaders. The market for environmentally related and healthy living products has grown, and the number of both large and small catalog retailers carrying these products has increased. The same is true of Internet sales. Real Goods has also developed a small number of proprietary products. There can be no assurance that the Company will ever sell material quantities of branded goods or proprietary products. In the retail market, the Company is experimenting with retail store formats and it expects to continue to refine its retail store approach. In the renewable energy market, the Company operates in a niche presently too technical and application specific to interest the larger catalogs. The Company's knowledge of its customer and awareness of vendor offerings as well as its superior technical knowledge and experienced staff enable it to be a better intermediary between suppliers and customers for its segment of the market than larger catalogs. The Company believes that some Internet vendors without technical support staff are underselling the Company's prices for common goods. There can be no assurance that the resources or market positions of the Company's competitors in this area will not change. In all three markets, the Company competes on the basis of price, selection and service. The Company has continued to work to improve its pricing through selective, focused buying and improved vendor discounts. In fiscal 2000 the Company increased its presence at trade shows and plans to continue to improve its product selection. The Company believes that its image is enhanced by the various accomplishments that it has made in achieving its mission, including the opening of its Solar Living Center demonstration site along with its ongoing educational programs, the completion of the sale of the largest solar array in Latin America, the tenth edition of the Solar Living Sourcebook, the Company's increased presence on the Internet, the mission message in the mail order catalogs and public relations efforts. The Company has a program in which participants pay a $50 fee to receive a designated book, a newsletter with special pricing, closeout bargains and substantial additional information, as well as a 5% discount on all purchases. In most cases if customers have a large initial purchase, then will opt for the program in order to take advantage of the discount on their order. The Company's program customers order much more frequently and have a higher average order than the Company's other customers. In fiscal 2000 the number of customers who availed themselves of the discount program increased by 13% to approximately 62,000. 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 101 employees. Of those employees, approximately 25 are employed at the Company's retail stores, 5 are employed at Real Goods Renewables in Ukiah, approximately 39 are employed in Ukiah providing support to the catalog and corporate functions, and 32 are employed at Santa Rosa, California at the Corporate Headquarters. 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 believes its relationships with its employees are good. H. Trademarks The Company has registered the trademark "Real Goods" and has a license to use the name "Earth Care" for recycled paper products but has discontinued that product line. That license may be terminated under certain circumstances. The Company has registered 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. I. Relationship with Whole Foods Market, Inc. and WholePeople.com In September 1999 the Company entered into a pair of agreements with Whole Foods Market, Inc. Pursuant to one agreement, Whole Foods Market is to provide certain marketing assistance to the Company. Pursuant to the other agreement which was assigned to its affiliate, WholePeople.com, the Company sold 800,000 shares of the Company's common stock to WholePeople.com for $3.6 million (see note 10 to the financial statements and "Certain Considerations", subsection N). Concurrently, John Schaeffer, Chairman and CEO of the Company, agreed to support a designee of WholePeople.com for election to the Company's Board of Directors, (see Certain Considerations - Whole Foods Market, Inc. Relationship). Item 2. DESCRIPTION OF PROPERTIES. As of May 15, 2000, the following describes the Company's properties: The Company owns the 12-acre parcel in Hopland, California that is the site of the Solar Living Center and its flagship store. Hopland is located approximately 12 miles south of Ukiah, on US Highway 101, a major interstate highway. The Company owns a facility in Amherst, Wisconsin which previously housed one of the Company's retail stores. 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. This property is listed for sale and is currently rented. The Company leases its 10,560 square foot administrative and executive headquarters in Santa Rosa, CA. This lease expires at the end of February, 2004. The Company has a three year lease through March 2002 on its 5,500 square foot Ukiah, California telephone sales facility. The Company's 15,300 square foot office/warehouse and overflow storage facilities (also located in Ukiah, California) are leased through mid October, 2000 and January, 2002 respectively. The Company has a lease agreement expiring in April 2002 for the 3,800 square foot retail store in Eugene, Oregon. The Company has a five year lease agreement, which expires at the end of February 2004, for the 4,800 square foot retail store in Berkeley, California. The Company recently vacated its the 1,500 square foot Outlet store in Berkeley, California and has moved the outlet activities within the Berkeley retail store. The Company leases a 3,400 square foot retail store facility in Los Gatos, California. This is a 5 year lease expiring in November 2004. The Company opened a new 3,100 square foot store in leased facilities in West Los Angeles on May 28, 2000. The lease is for 10 years, terminating on March 31, 2010, but may be terminated on March 31, 2005 with proper notice. The Company believes that it maintains adequate insurance for its real and personal property. Item 3. LEGAL PROCEEDINGS. Not applicable. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREOWNER MATTERS The Company's stock is listed on the Chicago Stock Exchange under the symbol RGT and it is currently also listed on the Nasdaq Small Cap Market under the symbol RGTC and traded on the bulletin board maintained on the Company's web site. The following chart sets forth the high and low actual sale prices of the Company's common stock for each quarter within the last two fiscal years. TRADING INFORMATION
Fiscal Year Ended March 31 High Low 1999: First Quarter $6 $4-7/8 Second Quarter 5-3/8 3 Third Quarter 4-1/4 3-1/2 Fourth Quarter 4-1/2 3-7/8 2000: First Quarter $5-9/16 $3-1/2 Second Quarter 5-1/4 4-1/8 Third Quarter 5-1/32 3-9/32 Fourth Quarter 4 3-1/4
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Sales The Company reported a 1.3% increase in net sales to $18,979,000 for fiscal 2000, compared to $18,736,000 for fiscal 1999. In fiscal 2000, the Company changed its presentation (see Note 1 to the financial statements) and included freight collected in sales and freight out expense in cost of sales. Previously, these amounts were included in selling, general and administrative expenses. The amounts in fiscal 1999 have been reclassified to conform to the new presentation. Catalog sales decreased 1.8% to $11,699,000, or 61.6% of net sales in fiscal 2000, compared to $11,914,000 or 63.6% in the prior year. Internet sales (included in the catalog) division were $1,482,000 or 7.8% of sales for fiscal 2000 compared with $551,000, or 2.9% in fiscal 1999. The Company mailed 4,167,500 catalogs in fiscal 2000 compared to 4,431,500 catalogs in fiscal 1999, a decrease of 6%. Catalog division sales per catalog increased from $2.69 per catalog mailed to $2.81 per catalog and is attributed to the effect of Internet sales growth. Included in net catalog sales for the years ended March 31, 2000 and 1999 are shipping and handling fees collected from customers of $1,256,000 and $1,373,000, respectively. Retail store sales increased 8.1% to $4,046,000, or 21.3% of net sales in fiscal 2000, compared to $3,743,000 or 20.0% of net sales in the prior year. The Company opened a new store in Los Gatos, California in November, 1999 which contributed $302,000 in total revenue for fiscal 2000. Therefore, the Company had four retail stores and one outlet store open with 15,500 square feet of retail selling space at the end of fiscal 2000 compared with 14,300 square feet of selling space in fiscal 1999. On a comparable basis, excluding Los Gatos, retail sales for fiscal 2000 were $3,744,000 compared to $3,743,000 for fiscal 1999. A sharp drop in the Company's sales of renewable energy products in the fourth fiscal quarter contributed to the of sales results in fiscal 2000. Renewable energy sales increased 5.0% to $3,234,000, or 17.0% of net sales in fiscal 2000, compared to $3,079,000, or 16.4% of net sales in the prior year. The increase in this area of the Company's business was primarily due to Y2K concerns but also reflects the public's increased awareness of energy utilization and a desire to safeguard the earth's natural resources, energy incentive credit programs sponsored by many state agencies in conjunction with the deregulation of utilities, and customers' interests in potential renewable energy solutions. The Company also continues to market its services to the "eco-tourism" market. Included in net renewable energy sales for fiscal years 2000 and 1999 are shipping and handling fees collected from customers of $144,000 and $143,000, respectively. GROSS PROFIT Gross profit amounted to $7,834,000, or 41.3% of net sales in fiscal 2000 compared to $7,832,000, or 41.8% of sales in fiscal 1999. The relative flatness of gross profit is attributable to the lack of growth in the catalog division. Catalog sales had a 2.4% decrease in gross profit of $5,327,000 or 45.5% of catalog net sales in fiscal 2000, compared to $5,459,000 or 45.8% of catalog net sales in the prior year. The slight margin decrease is attributable to the reduction in net shipping income, the reduction of prices on selected merchandise to promote sales, and increased cost of product which was not passed through to customers for competitive reasons. Net shipping income included in catalog gross profit was $240,000 in fiscal 2000 and $332,000 in fiscal 1999. Retail stores sales had a gross profit of $1,519,000 or 37.5% of retail net sales in fiscal 2000 compared to $1,400,000 or 37.4% of retail net sales in fiscal 1999. This margin percentage reflects the same mix of renewable energy and retail product as in fiscal 1999. Renewable energy sales had a gross profit of $988,000 or 30.6% of net renewable energy sales compared to $973,000 or 31.6% of net renewable energy sales for the prior year. This decrease in gross profit percentage is attributable to higher product costs and increased competition in the renewable energy field. Renewable energy products have generally lower profit margins. Net shipping income included in renewable gross profit was $30,000 in fiscal 2000 and $32,000 in fiscal 1999. OPERATING EXPENSES Selling, general, and administrative expenses were $9,402,000 or 49.5% of sales in fiscal 2000, compared to $8,497,000 or 45.4% of sales in the prior year. Increases in expenses occurred in the areas of labor and benefits, catalog expenses, supplies, depreciation, rents, utilities, travel, and general corporate expenses. These increases more than offset the decreases that occurred in postage, purchased services, and recruitment costs. Many of the expense increases were attributable to costs associated with moving the Company headquarters from Ukiah to Santa Rosa, California. OTHER INCOME AND EXPENSE In fiscal 2000, interest expense was $47,000 and interest income was $110,000, resulting in a net interest income of $63,000. In the previous fiscal year, interest expense was $48,000 and interest income was $90,000, for a net interest income of $42,000. The Company had lower interest expense and higher interest income due to the cash position following the equity investment by WholePeople.com. The Company recorded a $354,000 net loss on write down and disposition of assets in fiscal 2000. In fiscal 1999, a $1,000 net gain was recorded on the sale of assets. In fiscal 1999, the Company recorded a $10,000 write down of the land and building in Amherst, Wisconsin to reflect the estimated net realizable value of the property held for sale. INCOME TAXES Income tax benefits as a percentage of pretax loss were 30% in fiscal 2000 due to the Company's reported loss, compared to a tax benefit of 24% for the previous year. The applied tax rate reflects the Company's actual experience of the turnaround in timing differences and the expected utilitzation of net operating loss carryforwards in future periods. NET LOSS For the year ended March 31, 2000, the Company had a loss before tax benefit of $1,859,000 and a net loss of $1,290,000 or $0.29 per share. In the previous year, the Company had a loss before tax benefit of $632,000 and a net loss of $482,000 or $0.12 per share. LIQUIDITY AND CAPITAL RESOURCES During the fiscal year ended March 31, 2000, cash of $1,172,000 was used in the business. The Company used $2,037,000 of cash in operations, primarily for inventory and the Company's operating loss. The Company used $2,701,000 of cash in investing activities for purchases of property, equipment and improvements, (primarily for retail stores) and computer equipment and assets, and purchase of marketable securities. Cash provided by financing activities was $3,566,000 due primarily to the investment in the Company by WholePeople.com of $3,578,000. The net effect of all of the Company's activities was to decrease the Company's cash by $1,172,000 to $876,000 at the end of the period from $2,048,000 at the beginning of the period. Additional funds in the form of short-term investments in marketable securities are available to the Company to fund current operations and totaled $1,568,000 at March 31, 2000. The Company extended its $1,500,000 line of credit through February 2001 to use for seasonal fluctuations in inventory levels as well as operating expenses; the Company did not use the line of credit during fiscal 2000 except to support letters of credit. The Company intends to review its banking relations in July of 2000 and will review its line of credit at that time. 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 2001. EFFECTS OF INFLATION The overall effects of inflation on the Company's business during the periods discussed were not material. Year 2000 Preparedness and Results As of the date hereof, the Company has not experienced any significant business disruptions as a result of Y2K issues. The Company addressed the Y2K problem through a comprehensive evaluation and improvements of its hardware, software, communications and key external vendors and suppliers. The cost of the evaluation and upgrades was approximately $250,000, most of which was incurred in the normal course of business as periodic software and hardware upgrades. The Company does not foresee significant risks associated with its Y2K compliance at this time. However, if the Company identifies significant risks related to Y2K issues, the Company will develop a plan of action at that time. 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. SALES. The Company 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 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 sales decrease, 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; 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, inadequate merchandise selection, inadequate 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 has only limited experience with its new urban store format. C. SOLAR LIVING CENTER. The Company's mission is "To promote and inspire an ecologically sustainable future." The Company 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 response has been extremely encouraging in both sales and number of visitors, there can be no assurance 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; the building at the Solar Living Center is covered by flood insurance and is above the 100 year flood mark. Currently, a portion of the Solar Living Center is rented to the Real Goods Institute for Solar Living, a not-for-profit organization. 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. In the catalog market, the Company is small compared to industry leaders. If one or more of the larger retailers decides either to have an environmental products section in an existing catalog or to launch a comparable catalog or Internet site, the Company's business could be adversely affected. In addition, if the Company successfully identifies an unmet consumer need, the idea can be copied quickly by retailers with greater buying power and greater prominence. As to its renewable energy market, the Company believes it operates in a niche presently too technical and application specific to interest the larger catalogs and 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. Finally, the options available on the Internet allow potential customers to obtain certain of the Company's value added services without a charge, and then purchase their goods more cheaply from less service oriented vendors. F. EMPLOYEES. Like most other businesses in Northern California, the Company is concerned about its ability to attract and retain employees in a full-employment environment. If the Company is not able to attract or retain all necessary employees, the Company's operating results could be adversely affected. 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 consumers' 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. 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 its Founder and Chairman, John Schaeffer. The loss of Mr. Schaeffer's services for any substantial period of time could possibly have a material adverse impact on the Company. The Company maintains a $1,000,000 insurance policy on Mr. Schaeffer's life. J. DEPENDENCE ON CERTAIN SUPPLIERS,INCLUDING FOREIGN SUPPLIERS. The Company carries approximately 350 products in each color catalog. No more that 6% of the Company's sales arise from a single product. Approximately 7% 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 5.7% 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. 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 adversely impact the Company's catalog growth and profitability. Lower paper prices result in lower costs, but other catalog merchants may be encouraged to expand their mailings. Postage costs are also affected by price changes by the United States Postal Service and United Parcel Service. The Company does expect annual increases in United Parcel Service's charges. L. CONTROL. Because of his stock ownership position, John Schaeffer is likely to continue to have the ability to significantly influence control over the operations and strategy of the Company. M. FUTURE CAPITAL NEEDS. The Company expects that cash flow from operations, available borrowings under the Company's credit line and existing cash reserves will satisfy its cash requirements for at least the next 12 months. However, the Company may incur significant working capital expenditures in connection with its growth strategy and otherwise. To the extent that the cash resources are insufficient to fund the Company's activities, additional funds would be required. There can be no assurance that additional financing will be available on reasonable terms or at all. Failure to obtain such financing could delay or prevent the Company's planned expansion, which could adversely affect the Company's business, financial condition and results of operations. In addition, if additional capital is received through the sale of additional equity or convertible securities, dilution to the Company's shareowners could occur. N. WHOLE FOODS MARKET, INC. RELATIONSHIP. The Company believes that its relationship with Whole Foods Market, Inc. and WholePeople.com have provided certain prospects for growth in certain of the Company's markets. In June 2000, WholePeople.com entered into one or more agreements with Gaiam, Inc. and/or Gaiam.com, the Company's primary competitor. At this time, the Company is unable to assess the impact of those agreements upon the Company and its prospects. However, if the result of those agreements is that WholePeople.com and/or Whole Foods Market, Inc. do not perform their respective obligations to the Company (see Description of the Business - subsection I.), the Company and its prospects could be materially and adversely affected. Item 7. FINANCIAL STATEMENTS. REAL GOODS TRADING CORPORATION TABLE OF CONTENTS PAGE INDEPENDENT AUDITORS' REPORT - MOSS ADAMS, LLP 16 INDEPENDENT AUDITORS' REPORT - DELOTTE & TOUCHE, LLP 17 FINANCIAL STATEMENT AS OF AND FOR THE YEARS ENDED MARCH 31, 2000 AND 1999: Balance Sheets 18 Statements of Operations 19 Statements of Cash Flows 20 Statements of Shareowners' Equity 21 Notes to Financial Statements 22 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Real Goods Trading Corporation We have audited the accompanying balance sheet of Real Goods Trading Corporation as of March 31, 2000, and the related statements of operations, shareholders' equity and cash flows for the year 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 audit. We conducted our audit 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 our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Real Goods Trading Corporation as of March 31, 2000, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. [S]MOSS ADAMS LLP Moss Adams LLP Santa Rosa, California May 24, 2000 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareowners Real Goods Trading Corporation: We have audited the accompanying balance sheet of Real Goods Trading Corporation (the "Company") as of March 31, 1999 and the related statements of operations, shareowners' equity and cash flows for the year 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 audit in accordance with auditing standards generally accepted in the United States of America. 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 financial statements present fairly, in all material respect, the financial position of Real Goods Trading Corporation as of March 31, 1999, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. [S]DELOITTE & TOUCHE LLP Deloitte & Touche LLP Oakland, CA May 21, 1999 REAL GOODS TRADING CORPORATION BALANCE SHEETS MARCH 31, 2000 and 1999 (In thousands except share data)
2000 1999 ASSETS Current assets: Cash $ 876 $ 2,048 Marketable securities 1,568 - Accounts receivable, net of allowance of $6 in 2000 and 1999 152 240 Note receivable - 20 Inventories, net 3,165 2,080 Deferred catalog costs, net 381 272 Prepaid expenses 150 266 Deferred income taxes 34 89 Total current assets 6,326 5,015 Property, equipment and improvements, net 4,063 3,553 Other assets 253 198 Property held for sale 78 78 Note receivable - affiliate, net of allowance of $259 in 2000 60 196 Deferred income taxes 664 39 Total assets $11,444 $ 9,079 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Accounts payable $ 1,374 $ 873 Accrued expenses 309 620 Deposits 55 138 Current maturities of long-term debt 17 16 Other taxes payable 39 57 Total current liabilities 1,794 1,704 Long-term debt, less current maturities 534 552 Total liabilities 2,328 2,256 Shareowners' equity: Common stock, without par value: Authorized 10,000,000 shares; issued and outstanding, 4,881,742 and 4,080,742 shares, respectively 10,771 7,188 Accumulated deficit (1,655) (365) Total shareowners' equity 9,116 6,823 Total liabilities and shareowners' equity $ 11,444 $ 9,079
See notes to financial statements REAL GOODS TRADING CORPORATION STATEMENTS OF OPERATIONS YEARS ENDED MARCH 31, 2000 AND 1999 (In thousands except share and per share data)
2000 1999 Net Sales $ 18,979 $ 18,736 Cost of sales 11,145 10,904 Gross profit 7,834 7,832 Selling, general and administrative expenses 9,402 8,497 Loss from operations (1,568) (665) Interest income, net 63 42 Loss on disposition of assets (354) (9) Loss before income taxes (1,859) (632) Income tax benefit 569 150 Net loss $ (1,290) $ (482) Net loss per share, basic and diluted $ (0.29) $ (0.12) Weighted average shares outstanding, basic and diluted 4,384,887 4,004,286
See notes to financial statements REAL GOODS TRADING CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 2000 AND 1999 (In Thousands)
2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,290) $ (482) Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization 452 344 Loss/writedown on disposition of assets 252 9 Deferred income taxes (570) (151) Other (18) 14 Changes in assets and liabilities: Accounts receivable 88 (30) Note receivable 20 (20) Inventories (1,085) 256 Deferred catalog costs, net (109) 167 Prepaid expenses 116 (52) Income taxes receivable - 167 Accounts payable 501 147 Accrued expenses and other (311) 298 Deposits (83) (296) NET CASH FROM OPERATING ACTIVITIES (2,037) 371 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment, and construction in progress (962) (514) Investments in marketable securities (3,093) - Maturities of marketable securities 1,525 - Purchase of other assets (55) (45) Proceeds from sale of equipment and other assets - 25 Note receivable - affiliate (116) (196) NET CASH FROM INVESTING ACTIVITIES (2,701) (730) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net 3,586 1,138 Repayment of debt (17) (17) Purchase of common stock (3) (15) NET CASH FROM FINANCING ACTIVITIES 3,566 1,106 NET INCREASE (DECREASE) IN CASH (1,172) 747 CASH AT BEGINNING OF PERIOD 2,048 1,301 CASH AT END OF PERIOD $ 876 $ 2,048 Other cash flow information: Interest paid $ 47 $ 48 Income taxes paid 1 1
See notes to financial statements REAL GOODS TRADING CORPORATION STATEMENTS OF SHAREOWNERS' EQUITY YEARS ENDED MARCH 31, 2000 AND 1999 (In thousands)
Common Stock Retained Total Number of Earnings Shareowners Shares Amount (Deficit) Equity BALANCE, MARCH 31, 1998 3,857 $6,065 $ 117 $6,182 Issuance of common stock in direct public offering, net of offering costs of $99 228 1,138 - 1,138 Shares repurchased (4) (15) - (15) Net loss - - (482) (482) BALANCE, MARCH 31, 1999 4,081 7,188 (365) 6,823 Issuance of common stock, net of issue costs of $22 800 3,578 - 3,578 Exercise of common stock options under option plan 2 8 - 8 Shares repurchased (1) (3) - (3) Net loss - - (1,290) (1,290) BALANCE, MARCH 31, 2000 4,882 $10,771 $(1,655) $9,116 See notes to financial statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION - Real Goods Trading Corporation (the "Company") was organized on July 1, 1990 and sells primarily environmentally related, "healthy living" and renewable energy products through mail order catalogs, four retail stores, the Internet, and direct sales from its renewable energy department. 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. CHANGE IN PRESENTATION - Included in net sales for fiscal years 2000 and 1999 are shipping and handling fees collected from customers of $1,388,000 and $1,516,000, respectively. Included in cost of sales for fiscal years 2000 and 1999 are freight out expenses of $1,118,000 and $1,152,000 respectively. Previously, these amounts were presented as a net amount in selling, general and administrative expenses. Such sales and cost of sales have been reclassified into net sales and cost of sales for the periods presented because management believes this more accurately represents the Company's true sales and cost of sales amounts. CASH AND MARKETABLE SECURITIES - Marketable securities are classified as available-for-sale and are available to support current operations or to take advantage of other investment opportunities. Marketable securities are stated at estimated fair value based upon market quotes and consist of bonds, commercial paper and Federal agency securities. As of March 31, 2000, fair value approximated cost and no unrealized gain or loss was included in retained earnings. Realized gains and losses are included in other income. Interest earned is included in interest income. The Company has deposits in money funds in excess of federally insured levels. These deposits are placed with quality financial institutions. Inventories are stated at the lower of cost (first-in/first-out method) or market. Inventories include expenses associated with acquiring the inventory. 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, generally eighteen weeks. 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. INTERNET SITE COSTS - Costs capitalized in accordance with AICPA Statement of Position (SOP) 98-1 and EITF 00-2 in connection with construction of Internet site. PROPERTY HELD FOR SALE - The building and land which were the former Snow Belt Store are currently held for sale. NOTE RECEIVABLE - AFFILIATE - The note receivable represents net funds advanced to the Real Goods Institute for Solar Living ("ISL") and bears interest at 5.25% per year. Interest only is payable until the ISL becomes self-funding. PRE-OPENING COSTS for retail stores are expensed as incurred. 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. LOSS PER SHARE - Basic loss per share is computed by dividing net loss by the weighted average number of shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if contracts to issue common stock were exercised or converted to common stock. Dilutive stock options were not included for the fiscal years ended March 31, 2000 and 1999, as the Company incurred a net loss in each year and the effect would be antidilutive. RECLASSIFICATION - The 1999 financial statements have been reclassified in order to conform to the March 31, 2000 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, marketable securities, 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 Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". COMPREHENSIVE INCOME - Comprehensive loss and net loss are the same. 2. MARKETABLE SECURITIES During the year ended March 31, 2000, the Company purchased marketable securities consisting of bonds and commercial paper. The following is a summary of short-term investments included in marketable securities (in thousands):
Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Loses Value March 31, 2000: Corporate Bonds $ 411 $ - $ - $ 411 Federal agency securities 579 - - 579 Commercial Paper 578 - - 578 $ 1,568 $ - $ - $ 1,568
All short-term investments mature within one year of March 31, 2000. 3. PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following at March 31 (in thousands): 2000 1999 Land $ 480 $ 480 Land improvements 783 783 Buildings and leasehold improvements 1,821 1,551 Equipment, furniture and fixtures 2,219 1,732 Internet site costs 139 - Construction in progress 84 15 Total 5,526 4,561 Less accumulated depreciation (1,463) (1,008) Property, equipment and improvements, net $ 4,063 $ 3,553
4. LINE OF CREDIT The Company has a line of credit agreement for $1,500,000 with National Bank of the Redwoods (the "Bank"), which expires on February 28, 2001. Borrowings bear interest at 1.5% over the prime rate, payable in monthly installments. At March 31, 2000 and 1999, no amounts were outstanding on the Company's line of credit. The 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 Chairman and largest shareowner. 5. DEBT
Long term debt consists of the following at March 31 (in thousands): 2000 1999 Small Business Administration term loan, interest at 7.77%, payable through September 2016, secured by land and building in Hopland, California. $ 551 $ 568 Other - - Total 551 568 Less: current portion 17 16 Long-term portion $ 534 $ 552
Principal payments on long-term debt are as follows (in thousands): Fiscal Year ending March 31: 2001 $ 17 2002 19 2003 20 2004 22 2005 23 Thereafter 450 Total $ 551
6. ASSET HELD FOR SALE The Company owns land and buildings in Amherst, Wisconsin which it is seeking to sell. At March 31, 1999 and 2000, the land and building had a net book value of $78,000 and was rented out while it is being offered for sale. 7. LEASES The Company has operating leases for its offices, warehouse facilities, the Eugene and Berkeley stores and certain equipment, which expire from October 2000 through March 2010. Rental expense for the years ended March 31, 2000 and 1999 was $403,000 and $308,000 respectively. (CAPTION> Future minimum annual lease payments under operating leases are as follows (in thousands): Fiscal Year ending March 31: 2001 $ 533 2002 525 2003 463 2004 456 2005 193 Thereafter 631 Total $ 2,801
8. INCOME TAXES
Income tax benefits consist of the following for the years ended March 31 (in thousands): 2000 1999 Current: Federal $ - $ - State 1 1 Total 1 1 Deferred - federal (570) (151) Total benefit $ (569) $ (150)
The income tax benefit 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): 2000 1999 Federal income taxes at statutory income tax rate (34%) $ (632) $ (215) State taxes net of federal tax benefit (112) (14) Effect of permanent differences 6 8 Valuation allowance 100 107 Other 69 (36) Benefit $ (569) $ (150)
The components of the net deferred tax asset (liability) at year-end are as follows (in thousands): 2000 1999 Deferred tax assets: Benefit of net operating loss carryforwards $ 792 $ 183 Allowance for doubtful accounts 110 - Stock option compensation 14 14 Reduction in cost of property 30 15 Other 1 10 947 222 Less valuation allowance (283) (183) Non-current deferred tax asset 664 39 Deferred tax assets (liabilities): Inventory reserves 47 99 Catalog costs (22) (37) Accruals 24 32 Other 3 (5) Current deferred tax assets 52 89 Less valuation allowance (18) - Current deferred tax asset 34 89 Net deferred tax asset $ 698 $ 128
Because of the uncertain nature of their ultimate utilization, a partial valuation allowance is recorded against the deferred tax assets associated with the net operating losses. At March 31, 2000, the Company has net operating losses available for carryforward of approximately $1,950,000 and $1,536,000 for federal and state purposes, respectively. The federal net operating loss and $430,000 of the state net operating losses will expire in 2013 through 2020. The remaining state net operating losses expire through 2005. The Company intends to use various tax planning strategies to fully utilize the loss carryforwards prior to expiration. 9. SHAREOWNER AGREEMENTS The Chairman of the Board, founder and largest shareowner has a renewable one-year employment agreement with the Company which provides for an annual salary of $125,000. As of April 1, 2000 the Chairman voluntarily agreed to a reduction in such salary to $110,000 on a month to month basis. The Company also has a split dollar life insurance agreement with this individual 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 certain shares of the Company stock owned by the Chairman of the Board have been pledged as additional collateral during the period in which the premiums exceed the cash surrender value. The net cash surrender value at March 31, 2000 was $215,000 and is included in other assets. 10. SHAREOWNERS' EQUITY On August 11, 1997 the Company commenced a direct public offering of up to 1,000,000 shares of newly issued stock and 300,000 shares offered by a selling shareholder at $5.50 per share. The offering closed on June 30, 1998. Through March 31, 1999, the Company had issued 676,641 new shares of common stock, generating gross proceeds of $3,620,000, and had incurred costs of $697,000 related to the direct public offering. In August 1998, the Company was authorized to repurchase up to $100,000 of common stock in open market and private transactions. In fiscal 1999, 3,900 shares were repurchased for $14,850. In fiscal 2000, 800 shares were repurchased for $2,750. Through March 31, 2000, a total of 13,884 shares had been repurchased for $66,643. On September 23, 1999 WholePeople.com purchased 800,000 shares of common stock for $3,578,000, net of issuance costs of $22,000. Subsequent to year-end, in April 2000, the Company repurchased 50,000 shares for $100,000. 11. BENEFIT PLANS AND STOCK OPTIONS The Company sponsors a 401(k) retirement plan. The plan does not require matching funds from the Company, and the Company has made no contributions to the plan. Under the Company's Third Amended and Restated Fiscal 1993 Stock Incentive Plan ("Employee Plan") the Company can grant incentive and non-qualified options to purchase 1,200,000 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 five years from the date of grant. Options expire ten years from date of grant. As of March 31, 2000, options to purchase 1,110,550 shares were outstanding In September 1998 the Board of Directors revised the exercise price of all outstanding Employee Plan options to $4.50 per share. The Company has reserved 100,000 shares of common stock for its Non-Employee Directors' Stock Option Plan ("Director's Plan"). As of March 31, 2000, options to purchase 75,000 shares were outstanding and none have been exercised.
Weighted Average Number of Exercise Shares Price (in thousands) Outstanding at March 31, 1998 344 $ 5.37 Granted 448 4.50 Forfeited (125) 5.37 Terminated as a result of option repricing (341) 5.39 Issued as a result of option repricing 341 4.50 Outstanding at March 31, 1999 667 4.59 Granted 838 4.50 Forfeited (317) (4.52) Exercised (2) (4.50) Outstanding at March 31, 2000 1,186 $ 4.57 Shares exercisable at March 31, 2000 194 $ 4.54 Shares available for grant at March 31, 2000 114 Range of exercise prices $3.38 to $7.12 Weighted average remaining contractual life at March 31, 2000 7.5 years
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 1999 or 1998. 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 tradable, 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 calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: Expected life, 120 months following vesting in fiscal 2000 and fiscal 1999, stock volatility, 32% in fiscal 1999 and 55% in fiscal 2000; risk free interest rate 5.50% in fiscal 1999 and 5.65 % in fiscal 2000; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are calculated at a 50% rate, based on the Company's historical experience. If the computed fair values of the fiscal 2000 and fiscal 1999 awards had been amortized to expense over the vesting period of the awards, pro forma net loss would have been $569,000 or $.14 per share in fiscal 1999, and the pro forma net loss would have been $1,549,000 or $ .35 per share in fiscal 2000. 12 SEGMENT INFORMATION The Company has three divisions (Catalog, Retail and Renewables), all of which sell products purchased from other suppliers for sale directly to customers. The customer bases of all three divisions overlap to some extent, and the purchases and delivery processes to customers overlap as well.
Each of the three divisions qualifies as a reportable segment because each is more than 10% of the combined revenue of all operating segments. Contribution is defined as net sales less cost of goods sold and direct expenses. Financial information for the Company's business segments was as follows: FY 2000 FY 1999 Net Sales: Catalog Division $11,699 $11,914 Retail Division 4,046 3,743 Renewables Division 3,234 3,079 Consolidated Net Sales $18,979 $18,736 Contribution: Catalog Division $ 5,327 $ 5,459 Retail Division 1,519 1,400 Renewables Division 988 973 Consolidated Contribution $ 7,834 $ 7,832 Reconciliation of Contribution to net loss: Selling, general & administrative expenses Catalog Division $ 5,757 $ 5,687 Retail Division 2,267 1,748 Renewables Division 1,351 1,032 Solar Living Center 27 30 Consolidated S G & A expenses 9,402 8,497 Interest (income) expense (63) (42) Loss on sales of assets 354 9 Income tax benefit (569) (150) Net Loss $(1,290) $ (482)
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. At the Meeting of the Board of Directors of the Company on January 8, 2000, it was determined to dismiss Deloitte and Touche LLP as the independent accountants for the Company and to engage Moss Adams LLP. The report of Deloitte and Touche LLP on the financial statements for each of the past two years did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty of scope or accounting principles. The Audit Committee concurred in the determination of the Board of Directors. PART III Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. A. General Information Regarding Directors and Executive Officers Information about (i) each director nominee and (ii) the executive officers of the Company who are not directors is set forth below as of June 29, 2000 Name Age Office Director Term Since Expires John Schaeffer 50 Chief Executive Office 1990 2000 and Chairman of the Board Stehphen Morris 53 Director 1993 2000 Samuel Salkin 50 Director August 1998 2000 John Lenser 56 Director May 1996 2000 Barry Reder 55 Director May 1996 2000 Rich Cundiff 43 Director Jan 2000 2000 Mark A. Swedlund 49 President N/A N/A Les Seely 56 Chief Financial Officer N/A N/A and Secretary
B. Professional Experience of Executive Officers and Directors: JOHN SCHAEFFER. Mr. Schaeffer founded the Company's predecessor in 1986 and since 1990 has been the Company's Chief Executive Officer and Chairman of the Board. Mr. Schaeffer has been involved in retail businesses since 1978. In 1994 Mr. Schaeffer was named California Small Businessperson of the Year. Mr.Schaeffer received a B.A. degree in anthropology from the University of California at Berkeley in 1971. STEPHEN MORRIS. Mr. Morris joined the Company's Board of Directors in October 1993. On July 1, 1994, Mr. Morris became Executive Vice President and Chief Operating Officer of the Company. He resigned from such position in June, 1995. Prior to July 1, 1994 and subsequent to June, 1995, Mr. Morris has been the principal of Stephen Morris Associates, a provider of sales and marketing consulting services. He is currently the President and Publisher at Chelsea Green Publishing Co. in Vermont. Mr. Morris received an B.A. degree in Psychology from Yale University in 1970. SAMULE SALKIN. Mr. Salkin joined the Company's Board of Directors in August 1998. Mr. Salkin has held the position of VP Merchandising for more.com, an e-commerce start-up specializing in health and wellness. In 1997 and 1998, Mr. Salkin was Chief Operating Officer for the San Francisco Jewish Community Federation and from 1994 to 1996 served as President and CEO of Peet's Coffee & Tea, Inc. Mr. Salkin has also held high level positions with other consumer product and direct marketing companies and is a visiting lecturer at The Haas School of Business at UC Berkeley. He holds his BS and MS degrees from Cornell University. JOHN LENSER. Mr. Lenser joined the Company's Board of Directors in May 1996. Mr. Lenser was President of Hearthsong and David Kay Catalog from 1992 to 1995. Mr. Lenser has been an independent consultant from 1994 to the present. Mr. Lenser received a B.A. degree in 1966 and a Masters Degree in 1969 from the University of California at Berkeley. BARRY REDER. Mr. Reder joined the Company's Board of Directors in May 1996. Since October 1993, Mr. Reder has been a partner at the San Francisco firm of Coblentz, Patch, Duffy & Bass, a California law firm. Mr. Reder has served as counsel to the Company since 1990. He is general corporate and securities counsel for a broad range of businesses throughout the United States. His expertise is in mergers and acquisitions, venture capital, contracts and real estate. Mr. Reder received a B.A. degree from Wesleyan University in 1966 and a J.D. degree from Cornell Law School in 1969 He is also a director of HS Resources, Inc. RICH CUNDIFF. Mr. Cundiff was elected to the Board of Directors on January 8, 2000. He currently serves as President, Southern Pacific Region of Whole Foods Market, and has worked with Whole Foods since 1988. Previously he was a Merchandise Manager and buyer for Macy's and has over 20 years of retail experience. He received his B.A. in Marketing and his Masters in Finance from the University of Texas at Austin. MARK SWEDLUND. Mr. Swedlund was elected President of the Company on June 14, 1999. Mr. Swedlund served as Senior Vice President and Division President of Foster & Gallagher, Inc. from 1990 to 1997. From 1982 to 1990 he was a partner of The Silbert Group, a consulting firm specializing in providing strategic services to consumer catalog marketers. From 1978 to 1982, he was a consultant with Kestnbaum & Company. Mr. Swedlund is a 1973 graduate of the College of the University of Chicago and received a Masters in Business Administration from that institution in 1978. LES SEELY. Mr. Seely was appointed Chief Financial Officer and Secretary of Real Goods in June, 1998. Prior to joining the Company, Mr. Seely served as Chief Financial Officer for Schurman Fine Papers from 1991 to 1997 and prior to that as Chief Financial Officer of Dakin Inc. from 1984 to 1990. He received his B.A. degree from the University of Colorado in 1966, his MBA degree from the Wharton Graduate School of Business in 1970 and his CPA certificate in 1975. There is no family relationship among the directors, executive officers or persons nominated or chosen by the Company to become directors or executive officers. C. Reports Required by Section 16(A) Section 16(a) of the Exchange Act requires the Company's directors and executive officers and persons who own more than ten percent (10%) of the Company's Common Stock to file with the Securities and Exchange Commission and any exchange on which the Company's stock is traded reports of ownership and changes in ownership of the Company's Common Stock. Based solely on its review of the copies of Forms 3, 4 and 5 received by the Company or written representations from certain reporting persons that no Form 5 reports were required for such persons, the Company has determined that, during the fiscal year ended March 31, 2000, the following Section 16(a) filing requirements applicable to its officers, directors and 10% shareholders were filed late: Form 3 - options as to 70,000 shares granted to Mr. Seely; options as to 20,000 shares granted to Mr. Salkin; 1,000 shares purchased by Mr. Salkin; options as to 200,000 shares granted to Mr. Swedlund, and 3,000 shares purchased by Mr. Swedlund. Form 4 - options as to 10,000 shares each granted to Mr. Morris and Mr. Lenser; options as to 250,000 shares granted to Mr. Schaeffer. The Company believes that all necessary filings under section 16(A) of the Exchange Act have been brought to a current status as of March 31, 2000. Item 10. EXECUTIVE COMPENSATION. A. Remuneration of Directors Under the Company's Amended and Restated Non-Employee Directors' Plan (the "Amended Directors' Plan") each Director receives an option to purchase 10,000 shares of the Company's Common Stock upon election, and an option to purchase 2,000 shares of stock on the sixth and each succeeding anniversary of service thereafter. In accordance with policies of his law firm, Mr. Reder has disclaimed participation in the Amended Directors' Plan. Each non-employee director of the Company receives an annual cash retainer fee of $6,000 per year, and each non-employee director who chairs the Compensation Committee and Audit Committee of the Board receives an additional $3,000 per year for chairing each such committee. Mr. Reder is the chairman of the Audit Committee and the Compensation Committee. The directors are reimbursed for their extraordinary travel expenses in connection with their service on the Company's Board. B. Compensation of Executive Officers The following table sets forth the cash, bonus and other annual compensation received by Mr. Schaeffer, the Company's Chairman of the Board and Chief Executive Officer, and the compensation of each other officer in excess of $100,000 per year for the three fiscal years ending on March 31, 1998 through 2000, respectively. Mr. Schaeffer received no bonuses, reportable perquisites, securities or property, long term compensation awards in the form of restricted stock awards, option or SAR awards, or payouts pursuant to any long term incentive plan during fiscal 1999 or the two preceding fiscal years. In July 1999, Mr Schaeffer was granted options to purchase 250,000 shares of the Company's common stock at $6.00 per share. In May 1999, Mr. Seely was granted options to purchase 20,000 shares of the Company's common stock at $3.38 per share.
Summary Compensation Table Name and Principal Fiscal Annual All Other Position Year Compensation Compensation 3 Salary 1,2 John Schaeffer, 2000 $130,423 $ 15,387 Chairman of the Board 1999 $ 82,199 $ 12,966 and Chief Executive 1998 $ 69,225 $ 10,509 Officer Les Seely 2000 $107,884 $ - Chief Financial Officer1999 $ 80,267 - and Secretary 1998 - -
1 Includes amounts deferred at the election of Mr. Schaeffer pursuant to the Company's 401(k) Plan established pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended. 2 Includes certain amounts accrued during the year indicated and paid the following year. 3 Consists entirely of the cash value benefit to Mr. Schaeffer of split-dollar life insurance premiums paid by the Company on a $2,500,000 life insurance policy owned by the Schaeffer 1994 Irrevocable Trust. The figure was established using the demand loan valuation method and assuming a long-term interest rate of 7.5%. Such split-dollar life insurance policy and the arrangement between Mr. Schaeffer, the Schaeffer 1994 Irrevocable Trust and the Company regarding such policy is discussed under "Employment Contracts, Employment Termination and Change-in-Control Arrangements" below. C. Employment Contracts, Employment Termination and change-in-Control Arrangements John Schaeffer has had an employment agreement with the Company since June 1990. The agreement is renewable on an annual basis, commencing February 28th of each year, and is terminable by Mr. Schaeffer upon thirty (30) days' notice, or by the Company upon sixty (60) days' notice. Mr. Schaeffer's base salary is subject to annual increase by the Board as determined by the Board. Mr. Schaeffer is also eligible to participate in the Company's benefit plans, including option, profit sharing, insurance and similar plans. If Mr. Schaeffer becomes disabled during the term of his employment, his disability benefits will be paid through the remaining term of the agreement. The agreement requires Mr. Schaeffer's full-time service to the Company. Mr. Schaeffer owns 1,783,014 shares of the Company's Common Stock. Mr. Schaeffer and the Company have been advised that on the death of Mr. Schaeffer the estate may be required to sell all or a substantial portion of such shares to satisfy estate tax obligations. The sale of such number of shares would likely destabilize the market for the Company's stock. The Company agreed to pay a portion of the premiums due on a life insurance policy for Mr. Schaeffer (the "Policy"). The Policy is owned by the Schaeffer 1994 Irrevocable Trust (the "Trust") established for the benefit of Mr. Schaeffer's children. Pursuant to a Split-Dollar Agreement dated May 15, 1995, among the Company, Mr. Schaeffer and the Trustee of the Trust, the Company will be reimbursed for the amount of the premiums it pays on the policy at such time as the Split-Dollar Agreement is terminated, the Trust surrenders or cancels the Policy, or when the Policy's death benefit proceeds are paid. Such repayment has been secured by the collateral assignment of the Policy by the Trust to the Company. Mr. Morris, Mr. Lenser and Mr. Salkin have all served as part-time consultants to the Company on an infrequent basis. In fiscal 2000, aggregate fees paid to all three were less than $10,000. Mr. Morris may exercise stock options to purchase 31,300 shares of Company Common Stock at any time until 30 days after his term as a part-time consultant has ended. Future Transactions Any future transactions (including loans) between the Company and any officer, director, principal shareholder or affiliate of the Company will be approved by a majority of the directors disinterested in such transactions and by a majority of the independent outside directors, each of whom shall have determined that the transaction is fair to the Company and its shareowners and that the terms of such transaction are no less favorable to the Company than could be obtained from unaffiliated parties. Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of June 29, 2000, by (i) each person (including any "group" as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934 (the "Exchange Act")) who is known by the Company to own beneficially 5% or more of the Common Stock, (ii) each director of the Company, and (iii) all directors and executive officers as a group. Unless otherwise indicated, all persons listed below have sole voting power and investment power with respect to such shares. Name and Address of Share Amount Percentage Beneficial Owner and Nature of of Class Beneficial Ownership* John Schaeffer 3440 Airway Drive 1,796,614 1 36.5 Santa Rosa, CA 95403 WholePeople.com 1500 E. 128th Avenue 800,000 16.4 Thornton, CO 80214 Les Seely 3440 Airway Drive 15,250 2 ** Santa Rosa, CA 95403 Mark Swedlund 3440 Airway Drive 3,000 ** Santa Rosa, CA 95403 Stephen Morris 3440 Airway Drive 35,300 3 ** Santa Rosa, CA 95403 Sam Salkin 3440 Airway Drive 3,000 4 ** Santa Rosa, CA 95403 John Lenser 3440 Airway Drive 8,000 5 ** Santa Rosa, CA 95403 Barry Reder 222 Kearny Street, 7th Floor None 6 ** San Francisco, CA 94108 All directors and officers 1,847,564 37.8 as a group (7 persons)
* The amounts and percentages indicated as beneficially owned were calculated pursuant to Rule 13d-3(d)(1) under the Exchange Act which provides that beneficial ownership of a security is acquired by a person if that person has the right to acquire beneficial ownership of such security within 60 days through the exercise of a right such as the exercise of an option or the conversion of a convertible security into common stock. Any securities not outstanding which are subject to options or conversion privileges are deemed outstanding for the purpose of computing the percentage of outstanding securities of the class owned by the person who owns the option or conversion privilege but are not deemed outstanding for the purpose of computing the percentage of the class owned by any other person. ** Less than one percent of such class of stock. 1 The amount reported excludes 13,600 shares by an irrevocable trust established for the benefit of Mr. Schaeffer's children. Mr. Schaeffer does not have voting or investment powers over these shares, and Mr. Schaeffer disclaims beneficial ownership of all of the shares held in this irrevocable trust. 2 15,250 shares subject to issuance within 60 days after May 20, upon exercise of stock options. 3 35,300 shares subject to issuance within 60 days after May 20, 2000 upon the exercise of stock options. 4 1,000 shares owned in Individual Retirement Account; includes 2,000 shares subject to issuance within 60 days after May 20, 2000 upon exercise of stock options. 5 Includes 6,000 shares subject to issuance within 60 days after May 20, 1999 upon the exercise of stock options. 6 The policies of Mr. Reder's law firm prohibit him from owning shares of the Company's common stock. Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Stephen Morris, a director of the Company, currently serves as the publisher at, and owns 10% of the Common Stock of, Chelsea Green Publishing Co. ("CGP") in Vermont, a company which has co-published twenty books with the Company and is a distributor of the Company's Real Goods Solar Living Sourcebook. All transactions between the Company and CGP resulted in total gross payments of $108,949 made by the Company to CGP from April 1, 1999 through March 31, 2000. Item 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) 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 27th day of June, 2000. REAL GOODS TRADING CORPORATION (Registrant) By:[S]LESLIE B. SEELY Leslie B. Seely 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]LESLIE B.SEELY Chief Financial Officer Leslie B. Seely [S]JOHN SCHAEFFER Chief Executive Officer John Schaeffer [S]MARK SWEDLUND President Mark Swedlund [S]RICH CUNDIFF Director Rich Cundiff [S]JOHN LENSER Director John Lenser [S]STEPHEN MORRIS Director Stephen Morris [S]BARRY REDER Director Barry Reder [S]SAMUEL SALKIN Director Samuel Salkin Item 13. INDEX TO EXHIBITS. Exhibit No. Description 3.1* Articles of Incorporation 3.2* Bylaws 3.2^^ Amendments to Article II of the Bylaws, adopted March 13, 1999. 10.1* Form of Indemnification Agreement with Directors 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 10.14**** 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 10.18^ Term Loan agreement between the Company and Small Business Administration, dated June 17, 1996 and certain ancillary documents. 10.20** Loan Agreement between the Company and National Bank of the Redwoods dated April 7, 1998 and cer- tain ancillary documents. 10.23** Lease of 1324 Tenth St., Berkeley, California. 10.25^^ Changes in Terms of Loan Agreement between the Company and National Bank of the Redwoods dated April 7, 1999. 10.26^^ Lease of 3440 Airway Drive, Santa Rosa, California. 10.27^^ Lease of 205 Clara Street, Unit A, Ukiah, California. 10.28^^ Lease of 77 W. Broadway, Eugene, Oregon. 10.29^^ Lease of 1031 N. State Street, Ukiah, California. 10.30^^ Agreement with Mark Swedlund dated June 1, 1999. 10.31 Lease of 15954 Los Gatos Blvd., Los Gatos, CA 10.32 Lease of 11666 National Blvd., Los Angeles, CA 10.33 Stock Purchase Agreement dated September 23, 1999 by and among Real Goods Trading Corporation and Whole Foods Market, Inc. 10.34 Strategic Alliance Agreement dated September 23, 1999 by and between Whole Foods Market,Inc. and Real Goods Trading Corporation. 23.2 Independent Auditors' Consent. * Incorporated by reference to the Company's for 10KSB filed with the Securities and Exchange Commission on October 1, 1993. ** Incorporated by reference to the Company's for 10KSB filed with the Securities and Exchange Commission on June 19, 1998. *** 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. ^^ Incorporated by reference to the Company's Form 10-KSB filed with the Securities and Exchange Commission on June 25, 1999. EX-1 2 0002.txt Table of Contents Premises 3 Term 4 Renewal Option 4 Holding Over 5 Assignment and Subletting 5 Minimum Rent 7 Additional Rent 7 Personal Property Taxes 10 Use 11 Use Prohibited 11 Compliance With Law 11 Repairs 12 Reconstruction 13 Alterations and Additions 15 Liens 16 Hold Harmless 16 Insurance 17 Subrogation 18 Default by Lessee 18 Remedies in Default 19 Default by Lessor 21 Entry by Lessor 21 Rules and Regulations 21 Parking and Common Areas 21 Signs 22 Displays 23 Hours of Business 23 Auctions 24 Merchants Association 24 Security Deposit 24 General Provisions 24 Eminent Domain 28 No Personal Liability of Lessor 29 Estoppel Certificate 29 Contruction of Leasehold Improvements 29 Brokers 31 Surrender of Premises 31 Modification for Lenders 31 Other Tenancies 32 Exhibit A - Site Plan 33 Exhibit B - Rent Schedule 34 Exhibit C - Lessor's Workletter 35 Exhibit D - Sign Program 36 Exhibit E - Commencement Date Memorandum 37 Exhibit F - Rules and Regulations 37 CORNERSTONE OF LOS GATOS, LLC LEASE THIS LEASE, dated as of the Second day of September 1999, (herein called the "Lease Date") is made by and betweenCornerstone of Los Gatos, LLC, (herein called "Lessor"), and Real Goods, Inc.(herein called "Lessee"), a corporation with its principal place of business at Santa Rosa, California. This Lease is subject to the terms, covenants and conditions herein set forth and the Lessee covenants as a material part of the consideration for this Lease to keep and perform each and all of said terms, covenants and conditions by it to be kept and performed. 1. PREMISES. Lessor does hereby lease to Lessee and Lessee hereby leases from Lessor that certain space (herein called the "Premises") that is designated on the site plan (described below) of the shopping center currently known as Cornerstone of Los Gatos (the "Shopping Center"), located in the Town of Los Gatos, County of Santa Clara, State of California. The Premises are located within the building designated as Building 2 (the "Building") on the site plan. The site plan is attached to this Lease as Exhibit A and is hereby incorporated by reference. The Premises contain approximately 3,448 square feet of gross floor area, measured as follows: the frontage dimensions of the Premises are measured from the center of the interior walls and from the outside of the exterior walls of the Premises, and, using the same procedure, the depth dimensions of the Premises are measured from the rear exterior wall to the front exterior wall. "Premises" does not include, and Lessee has no right in, the land or improvements below the floor slab of the Premises or above the interior ceiling of the Premises. Lessor and Lessee shall verify and acknowledge the gross floor area on the COMMENCEMENT DATE MEMORANDUM, Exhibit E of this lease. The terms and conditions of the Lease that are calculated on a per square foot basis shall be adjusted accordingly. For the term of this Lease, Lessor also grants Lessee and its employees, agents, customers and invitees, the nonexclusive right, in common with Lessor and all others to whom Lessor has or may grant the right, to use the Common Areas, subject to Lessee's compliance with any rules and regulations enacted or modified by Lessor from time to time that govern the use of the Common Areas. Lessor agrees to enforce such rules and regulations in a nondiscriminatory manner (except where Lessor's ability to do so is limited by pre-existing leases). As used herein, "Common Areas" means all areas, facilities, space, equipment and signs made available by Lessor at any time for the common and joint use and benefit of Lessor, Lessee, and other lessees and occupants of the Shopping Center, including their respective employees, agents, customers and invitees. "Common Areas" includes the following, to the extent provided by Lessor: parking areas, driveways, access roads, landscaped areas, truck serviceways, loading facilities, pedestrian malls, stairs, ramps, sidewalks and public restrooms. Lessee agrees at all times to abide by and cause its employees, agents, customers, contractors and invitees to abide by Lessor's rules and regulations for the Common Areas. Subsequent to this lease Lessor may lease space in the Building to a restaurant. In doing so Lessor may designate a certain portion of the Common Areas for the restaurant's exclusive use. Without limiting the generality of the foregoing, Lessee acknowledges and agrees that the area designated as the "Outside Dining Area" on Exhibit A will not be available for use as part of the Common Areas during the term of this Lease. In that event, the "Outside Dining Area" shall be excluded from the Common Areas in the calculation of Taxes or Shopping Center Operating Expenses. 2. TERM. The lease term ("Term") shall be sixty (60) full calendar months (the "Primary Term"), starting with the date (the "Commencement Date") which is the earlier of Lessee's opening for business or 60 days after Lessor's delivery of the Premises. Time is of the essence and Lessee shall diligently pursue opening for business. The Commencement Date (COMMENCEMENT DATE MEMORANDUM, Exhibit E) shall be confirmed and acknowledged in writing by letter from Lessor to Lessee. 3. RENEWAL OPTION. A. Lessee shall have the right to extend the term of this Lease for one (1) additional renewal term of sixty (60) months on the same terms and conditions set forth in this Lease except as expressly provided to the contrary herein. Should Lessee elect to exercise the renewal option, it shall do so by written notice to Lessor at least six (6) months but not more than twelve (12) months prior to the expiration of the Primary Term. Notwithstanding anything herein to the contrary, Lessee's right to exercise the renewal option is conditioned on no Event of Default existing hereunder either at the time that Lessee exercises such renewal option or at the conclusion of the Primary Term of this Lease. B. The Minimum Rent payable during the renewal term shall equal the fair market rental value of space of comparable size and quality and of comparable location, quality, size and character (the "Fair Market Rental Value"), determined as set forth below. C. Within thirty (30) days after Lessee delivers notice of its election to exercise the renewal option, Lessor and Lessee shall attempt to agree upon the Minimum Rent for the renewal term. If Lessor and Lessee cannot agree within the specified time period, Lessor and Lessee shall each select, within fifteen (15) days thereafter, an appraiser who must be a MAI member of the Appraisal Institute, or its successor organization, with not less than five years experience in valuing commercial property in Santa Clara County. The appraiser (hereinafter referred to as "Appraiser") shall determine the Fair Market Rental Value of the Premises as of the commencement date of the lease extension and based on its highest and best use as part of the Shopping Center. If one party fails to so designate an Appraiser within the time required, the determination of the Fair Market Rental Value of the one Appraiser who has been designated by the other party within the time required shall be binding on both parties. The Appraisers shall submit their determinations of the Fair Rental Value to both parties within thirty (30) days after their selection. A written summary of each Appraiser's findings shall be sufficient for this determination. If the difference between the two determinations is ten percent (10%) or less of the higher determination, then the average of the determinations shall be the Fair Market Rental Value. If said difference is greater than ten percent (10%), then the two Appraisers shall within five (5) days of the date the second determination is submitted to the parties designate a third appraiser who must also be a qualified member of the Appraisal Institute, or its successor organization, with not less than five years experience in valuing commercial property in Santa Clara County. A written report of the Appraisers' determination of Fair Market Value shall be delivered to the third Appraiser. The sole responsibility of the third Appraiser will be to determine which of the determinations made by the first two Appraisers is most accurate. The third Appraiser shall have no right to propose a middle ground or any modification of either of the determinations made by the first two Appraisers. The third Appraiser's choice shall be submitted to the parties within fifteen (15) days after his or her selection. Such determination shall bind both parties and shall establish the Fair Market Rental Value. Each party shall pay the fees and expenses of the Appraisers selected by it, and each shall pay one-half of the fees and expense of the third Appraiser. Any of the foregoing to the contrary notwithstanding, in no event shall the initial Minimum Rent for the renewal term be less than the Minimum Rent for the final month of the Primary Term. If the first two appraisers cannot agree on a third appraiser then the third appraiser shall be selected by the presiding judge of the Superior Court. D. The Minimum Rent during the option period shall be increased at the commencement of the thirteenth month of the option period, and annually thereafter, by an amount equal to 4% of the Minimum Rent for the period next preceding. 4. HOLDING OVER. If Lessee remains in possession of the Premises or any part thereof after the expiration of the term hereof with the express written consent of Lessor, such occupancy shall be a tenancy from month-to-month at a monthly rent equal to 150% of the last monthly Minimum Rent (hereinafter defined), plus all other charges payable hereunder, and upon all the terms hereof applicable to a month-to-month tenancy. Provided that, if Lessee shall fail to surrender the Premises to Lessor upon the termination of this Lease, in addition to any other liabilities to Lessor arising therefrom, Lessee shall indemnify, defend and hold harmless Lessor from any loss or liability resulting from such failure, including, without limitation, claims made by any succeeding lessee of the Premises. 5. ASSIGNMENT AND SUBLETTING. A. Transfers; Consent. Lessee shall not, without the prior written consent of Lessor, (a) assign, transfer, mortgage, hypothecate, or encumber this Lease or any estate or interest herein, whether directly, indirectly or by operation of law, (b) permit any other entity to become a Lessee hereunder by merger, consolidation, or other reorganization, (c) if Lessee is a corporation, partnership, limited liability company, limited liability partnership, trust, association or other business entity (other than a corporation whose stock is publicly traded), permit, directly or indirectly, the transfer of any ownership interest in Lessee so as to result in (i) a change in the current control of Lessee or (ii) a transfer of twenty-five percent (25%) or more in the aggregate in any twelve (12) month period in the beneficial ownership of such entity, (d) sublet any portion of the Premises, (e) grant any license, concession, or other right of occupancy of or with respect to any portion of the Premises, or (f) permit the use of the Premises by any party other than Lessee (each of the foregoing events being referred to herein as a "Transfer"). If Lessee requests Lessor's consent to any Transfer, then concurrently with such request, Lessee shall provide Lessor with a written description of all terms and conditions of the proposed Transfer and all consideration therefor (including a calculation of the Transfer Profits described below), copies of the proposed documentation, and the following information about the proposed transferee: name and address; information reasonably satisfactory to Lessor about the proposed transferee's business and business history; its proposed use of the Premises; banking, financial, and other credit information; and general references sufficient to enable Lessor to determine the proposed transferee's creditworthiness and character. Lessor shall not unreasonably withhold its consent to any assignment or subletting of the Premises, provided that the parties agree that it shall be reasonable for Lessor to withhold any such consent if Lessor determines in good faith that (A) the proposed transferee is not of a reasonable financial standing or is not creditworthy, (B) the proposed transferee has the power of eminent domain, is a governmental agency or an agency or part of a foreign government, (C) the proposed transferee, or any affiliate thereof, is then an occupant in the Shopping Center has engaged in discussions with Lessor concerning a lease of direct space in the Shopping Center, or (D) the proposed Transfer would result in a breach of any obligation of Lessor or permit any other Lessee in the Shopping Center to terminate or modify its lease. Lessor may withhold its consent to any other form of Transfer in its sole and absolute discretion. Any Transfer made without Lessor's consent shall be void and at Lessor's election, shall constitute a default by Lessee. Lessee shall also reimburse Lessor immediately upon demand therefor for all of its attorneys' fees and other costs reasonably incurred in connection with considering any request for consent to a proposed Transfer. If Lessor consents to a proposed Transfer, then the proposed transferee shall deliver to Lessor, in a form reasonably satisfactory to Lessor, a written agreement whereby the proposed transferee expressly assumes the Lessee's obligations hereunder. Lessor's consent to a Transfer shall not release Lessee from its obligations under this Lease, but rather Lessee and its transferee shall be jointly and severally liable for all obligations under this Lease allocable to the space subject to such Transfer. Lessor's consent to any Transfer shall not waive Lessor's rights as to any subsequent Transfers. Upon Lessor's consent, such consent shall not be unreasonably withheld, Lessee may assign the Lease, or sublet the Premises (a) to a corporation or other entity with which Lessee may merge or consolidate, or (b) in connection with the sale of all or a substantial portion of Lessee's assets, or (c) to any Affiliates (as defined below), or (d) in connection with the sale of stock in a public offering. The withholding of Lessor's consent will be considered reasonable in the event of: (i) any unapproved change of use of the Premises, (ii) any expected lowering of the character and quality of the Lessee, or, (iii) if anticipated changes in the Premises are not in keeping for a first class shopping center in the Town of Los Gatos. The term "Affiliate" shall mean any corporation, limited liability company or other entity which controls, is controlled by, or is under common control with Lessee. The term "control" shall mean ownership of more than fifty percent (50%) of all of the voting stock of a corporation or more than fifty percent (50%) of all of the legal and equitable interest of any other business entity. B. CANCELLATION AND RECAPTURE. Except as provided in the second paragraph of Subsection A above, Lessor may in its sole and absolute discretion, within thirty (30) days after submission of Lessee's written request for Lessor's consent to a Transfer, cancel this Lease as to the portion of the Premises that is subject to the proposed Transfer as of the date such proposed Transfer is proposed to be effective and, thereafter, Lessor may lease such portion of the Premises to the prospective transferee (or to any other person or entity or not at all) without liability to Lessee. If Lessor does not cancel this Lease within such thirty-day period and notwithstanding any Lessor consent to the proposed Transfer, Lessee shall pay to Lessor, immediately upon receipt thereof any and all consideration paid to Lessee directly or indirectly for the assignment by Lessee of its leasehold interest, and 100% of any and all subrentals payable by sublessees to Lessee which are in excess of the Minimum Rent and Additional Rent payable by Lessee hereunder. If Lessor cancels this Lease as provided in this Subparagraph B. then Lessor shall make a lump sum payment to Lessee for the unamortized portion of Lessee's capital improvements to the Premises, per GAAP accounting methods, to the extent that such capital improvements shall be used by the subsequent lessee. Lessee is entitled to deduct from the amount required to be paid to Lessor pursuant to the second sentence of Section 5(B) (i) reasonable leasing commissions paid by Lessee; (ii) other reasonable out-of-pocket costs paid by Lessee (including attorney fees, advertising costs, and expenses of readying the Premises for occupancy by the transferee); and (iii) any consideration paid to the transferee or any third party to induce the transferee to consummate the assignment or subletting, provided these expenses shall only be deducted from amounts in excess of Rent (as defined below). 6. MINIMUM RENT. A. Lessee agrees to pay to Lessor as minimum monthly rent ("Minimum Rent"), without notice or demand, beginning on the Commencement Date, in advance on or before the first day of each and every successive calendar month, the amount shown in the schedule attached hereto as "Exhibit B". The Minimum Rent for any period which is for less than one (1) month shall be a prorated portion of the monthly installment herein based upon a thirty (30) day month. Said Minimum Rent shall be paid to Lessor, without any deduction or offset whatsoever, in lawful money of the United States of America at such place as Lessor may from time to time designate in writing. Concurrently with Lessee's execution of this Lease, Lessee shall pay to Lessor the sum of EIGHT THOUSAND SIX HUNDRED EIGHTY-NINE AND NO/100 DOLLARS ($8,689.00) as an advance payment of the Minimum Rent payable by Lessee hereunder for the first full calendar month of the Term. 7. ADDITIONAL RENT. A. (1) In addition to the Minimum Rent payable by Lessee under this Lease, any other monetary sum required under this Lease to be paid by Lessee to Lessor or to others (including but not limited to the payments required by this Section) is deemed under this Lease to be additional rent payable by Lessee ("Additional Rent"), whether or not the monetary sum is so designated as Additional Rent. Unless otherwise provided, all Additional Rent is due and payable at the same time as Minimum Rent, and Lessor has the same remedies for Lessee's failure to pay Additional Rent as it has for Lessee's failure to pay Minimum Rent. The term "Rent" as used in this Lease shall mean Minimum Rent and Additional Rent, collectively. (2) With respect to each calendar year during the term of the Lease, Lessor shall endeavor to deliver to Lessee by March 1 of the following year (or as soon thereafter as is reasonably practical), an itemized statement of the total actual Shopping Center Operating Expenses, Taxes and Insurance for such calendar year. If the statement discloses an underpayment by Lessee for the calendar year covered by the statement, Lessee shall pay Lessor the amount of the underpayment within 30 days after the date of the statement. If the statement discloses an overpayment by Lessee, the overpayment will be applied to the following month's estimated payment therefor unless the overpayment is more than twice the estimated payment due for the following month, in which the excess shall be refunded within 30 days after receipt of the statement from Lessor, provided Lessee is not in default of the Lease at the time the refund is due. Lessor shall endeavor to maintain accurate, detailed records of all costs and expenses of the Shopping Center at Lessor's office for at least twelve (12) months after delivery of the Lessor's annual statement to Lessee. Lessee and Lessee's agent, at Lessee's expense, may inspect, copy and/or audit said records at Lessor's offices one (1) time per year with seven (7) days prior written notice to Lessor. B. (1) Lessee shall pay to Lessor, as Additional Rent, a proportionate share of Shopping Center Operating Expenses (defined below). Lessee's proportionate share of these costs shall be a sum equal to the product obtained by multiplying (1) the total actual Shopping Center Operating Expenses for the calendar year in question by (2) a fraction, the numerator of which is the number of square feet of gross floor area of the Premises, and the denominator of which is the number of total square feet of gross floor area of all areas in the Shopping Center that are available for the exclusive use and occupancy of lessees of the Shopping Center. As of the lease date, the fraction representing Lessee's proportionate share of the leasable area of the Shopping Center is 3,448/59,080 = 5.84% (2) Concurrently with its monthly payment of Minimum Rent to Lessor, Lessee shall pay its proportionate share of Shopping Center Operating Expenses in the estimated amount determined and billed by Lessor. The amount paid monthly shall be based on Lessor's estimate of Shopping Center Operating Expenses for the current calendar year. That estimate shall not exceed by more than 10% the total Shopping Center Operating Expenses for the immediately preceding calendar year, except that in any year in which resurfacing is contemplated Lessor shall be permitted to include the anticipated cost as part of the estimated Shopping Center Operating Expenses. For the period of this Lease from the Commencement Date to the end of the 1999 calendar year, the estimated monthly payments for Shopping Center Operating Expenses and Taxes shall be $0.31 per square foot per month. (3) "Shopping Center Operating Expenses" means all costs and expenses of managing, operating, repairing and maintaining the Shopping Center in a manner deemed reasonable and appropriate by Lessor, including but not limited to all costs and expenses of or relating to the following: operating, heating, cooling, ventilating, repairing, cleaning, replacing, lighting, painting and maintaining the Common Areas; security services for the Shopping Center; garbage and trash removal for the Shopping Center; the premiums for the insurance maintained by Lessor with respect to the Shopping Center (including the insurance described in Section 17 below) and the amount of any deductibles payable thereunder; regulation of traffic; repairing and replacing paved surfaces, roofs, landscaping, drainage, electrical lines and heating and air-conditioning systems; all on-site personnel used for the management, operation and maintenance of the Shopping Center; trucks and other equipment used for the management, operation and maintenance of the Shopping Center; depreciation of machinery, equipment and other non-real estate assets used in the maintenance and operation of the Shopping Center; and measures undertaken by Lessor to comply with any environmental or similar law, ordinance or regulation. Further, "Shopping Center Operating Expenses" shall include a management fee paid to Lessor or to a management company employed by Lessor which shall not exceed 10% of the total Shopping Center Operating Expenses, excluding property taxes and insurance premiums. "Shopping Center Operating Expenses" shall not include sums payable by Lessee pursuant to Paragraph F of this Section. In addition, "Shopping Center Operating Expenses" shall not include (a) costs of leasing space in the Shopping Center (including brokerage commissions, legal expenses, improvement costs or allowances, and costs of enforcement or negotiation of leases), (b) Lessor's debt service or ground lease payments, charges for goods and services provided by affiliates of Lessor, to the extent greater than the amounts charged for similar goods and services by unaffiliated parties on a competitive basis, (c) fines, penalties, damage awards or other amounts for which Lessor is liable as a result of violating any law or any agreement to which Lessor is a party, or costs to correct violations of Applicable Laws, or (d) expenses for which Lessor is reimbursed by insurance proceeds or by any third party. C. (1) Except for utility services provided by Lessor pursuant to subparagraph (2) of this paragraph C, Lessee shall apply to the appropriate local utility companies to begin service on the Premises on or before the Commencement Date, and shall pay the cost of any required deposit, hook-up fee, metering charge, or other charge by the utility provider. Throughout the Term of this Lease, Lessee shall pay, prior to delinquency, the cost of all utilities used on the Premises (including but not limited to water, rubbish disposal, gas, heat, light, power, sewer charges and telephone service), whether supplied by a local utility company or by Lessor. When any service is separately metered and supplied by a local utility company, Lessee shall arrange for the utility company to bill Lessee directly. In the case of any utility services provided by Lessor directly to Lessee, Lessor shall bill Lessee for those services monthly at the same time Lessor bills Lessee for its proportionate share of Shopping Center Operating Expenses, and Lessee shall pay the bill for those services at the same time Lessee is required to pay its share of Shopping Center Operating Expenses. For utility services provided by Lessor that are not separately metered and that are used by Lessee in common with other Lessees of the Shopping Center, Lessee shall pay Lessor a proportionate share based on total square footage of gross floor area of all lessees using the common utility services. (2) Lessor shall furnish, at Lessee's expense, the following utilities to the Premises: water and sewer, and, if the Premises are not separately metered, gas and electricity. Further, Lessor may elect at any time during the Term of this Lease to furnish, or to select an agent or independent contractor to furnish, other utilities to the Premises (excluding telecommunications and data transmission services). In that case, Lessee agrees to accept the furnished utility services to the exclusion of any other provider, provided the charge to Lessee for the furnished service is competitive with other providers or has been approved by the appropriate regulatory agency. On at least 30 days' prior written notice to Lessee, Lessor may discontinue furnishing any utility service previously provided to Lessee. In that event, Lessor shall be responsible for connecting the Premises to a new provider, but shall have no other responsibility toward Lessee. Lessor has no responsibility for the interruption, curtailment or suspension of any utility services to the Premises provided by a local utility company or other provider, or in the case of services furnished by Lessor, for any interruption, curtailment or suspension necessitated by repairs, action of public authority, strikes, acts of God or public enemy, other similar causes beyond the reasonable control of Lessor, or a default by Lessee under this Lease unless such interruption, curtailment or suspension is caused by the gross negligent acts of Lessor or Lessor's agents, servants, employees or invitees. Interruption, curtailment or suspension of utility services shall not constitute a constructive eviction under this Lease or entitle Lessee to any abatement in Rent. D. (1) Lessor shall pay all Taxes (defined below) that maybe levied or assessed against the land, buildings or other improvements in the Shopping Center; provided, however, that Lessee shall pay a proportionate share of Taxes as provided in this Paragraph D. In no event shall Lessee be obligated to pay any penalty or interest which may result from the delinquency payment of Real Estate Taxes by Lessor, unless such delinquency is due to the failure by Lessee to pay its proportionate share of Taxes as provided in this Paragraph D. "Taxes" means any real property taxes, assessments, and other levies or charges imposed by a governmental entity that are or may be levied, assessed, imposed, become a lien on, or arise in connection with the ownership, use, occupancy or possession of all or any portion of the Shopping Center or the land, buildings or other improvements in the Shopping Center. "Taxes" do not include any inheritance, estate, succession, transfer, gift, franchise, corporation, income or profit tax that is or may be levied or imposed on Lessor; provided, however, that the term "Taxes" does include any tax, assessment or charge (a) that is imposed or levied on Lessor (directly or indirectly) by a taxing authority with jurisdiction over the Shopping Center, and (b) that is measured, computed or determined in whole or in part based on rents paid by lessees in the Shopping Center. "Taxes" do not include sums payable by Lessee pursuant to Paragraph F of this Section. (2) Lessee's annual share of Taxes for each Tax Year (defined below) of the Term of the Lease shall be a sum equal to the product obtained by multiplying the total amount of all Taxes payable during a Tax Year by a fraction, the numerator of which is a number equal to the total square feet of gross floor area in the Premises, and the denominator of which is a number equal to the total square feet of gross floor area in the Shopping Center designed for the exclusive use and occupancy of lessees. Lessee's annual share of Taxes shall be paid in advance on a monthly basis in equal installments in the amount billed by Lessor, concurrently with Lessee's payment of Minimum Rent under this Lease. In the absence of anything other than regular annual tax increases, and at Lessor's option, Lessor may estimate the amount of Lessee's monthly share of Taxes. If some other event causes an increase in taxes, Lessor will notify Lessee in writing and, upon doing so, Lessor may increase Lessee's estimated monthly share of Taxes accordingly. An official tax bill or copy of the tax bill shall be conclusive evidence of any amount taxed or levied. (3 "Tax Year" means the 12 full calendar months of the term beginning on January 1 immediately following the Commencement Date and ending on December 31 of that same calendar year, and each successive twelve-month period in the Term of this Lease; provided, however, that the first Tax Year under this Lease shall begin on the Commencement Date and shall end on December thirty first of the same calendar year. When the Commencement Date is a date other than January 1 or when this Lease terminates on a date other than December 31, Lessee's proportionate share of Taxes for either year, as the case may be, shall be equitably prorated. (4) Lessee shall not and shall have no right to contest the amount of any Taxes assessed or levied or the underlying valuation giving rise to the Taxes for purposes of obtaining a tax reduction or for any other purpose. If Lessor obtains a refund of Taxes previously paid for a Tax Year and for which Lessee has fully paid its proportionate share, Lessor shall refund to Lessee its net proportionate share after first deducting all costs and expenses incurred by Lessor in obtaining the refund, including attorneys' and appraisers' fees. Lessor shall have no duty to contest the amount of any Taxes imposed or levied on the Shopping Center. E. [Intentionally Deleted] F. Lessee shall pay to Lessor within 10 days following Lessor's demand, as Additional Rent, 100% of (1) the costs of maintenance and repair performed by Lessor for the primary benefit of Lessee and (2) all real estate taxes, sewer taxes, and premiums for insurance which arise or are required due to the nature of Lessee's business and/or any improvements or alterations to the Premises. G. Even though the Lease has expired and Lessee has vacated the Premises, when the final determination is made of Additional Rent payable by Lessee for the year in which this Lease terminates, Lessee shall within 30 days of receipt of invoice pay any increase due over the estimated Additional Rent previously paid and, conversely, any overpayment made shall, within thirty(30) days, be rebated by Lessor to Lessee. H. Failure of Lessor to submit statements as called for herein shall not be deemed to be a waiver of Lessee's requirement to pay sums as herein provided. I. Lessee may question a component of the Additional Rent calculation only by providing Lessor with written notice thereof within sixty (60) days following Lessee's receipt of Lessor's annual statement therefor. If Lessee does not provide such notice within such sixty (60) day period, then the annual statement in question shall be binding on Lessee. If Lessee timely questions a component of the Additional Rent calculation, Lessor shall, within thirty (30) days of Lessee's request therefor, provide Lessee with a copy of the actual invoices or other reasonable documentation reasonably acceptable to Lessee substantiating such component. 8. PERSONAL PROPERTY TAXES. Lessee shall pay or cause to be paid, before delinquency, any and all taxes levied or assessed and which become payable upon all Lessee's leasehold improvements, equipment, furniture, fixtures and any other personal property located in, on or about the Premises. In the event any such taxes are included as part of Taxes, then Lessee shall pay the taxes thereon to Lessor within ten (10) days after delivery to Lessee by Lessor of a statement in writing setting forth the amount of such taxes applicable to such improvements, equipment, furniture, fixtures and other personal property. 9. USE. Lessee shall use and occupy the Premises for THE RETAIL SALE OF ENVIRONMENTALLY FRIENDLY PRODUCTS, RENEWABLE ENERGY PRODUCTS, and shall not use or permit the Premises to be used for any other purpose or purposes without the prior written consent of Lessor, which consent may be withheld by Lessor in its sole discretion. 10. USE PROHIBITED. Lessee shall not do or permit anything to be done in or about the Premises nor bring or keep anything therein which is not within the permitted use of the Premises which will in any way increase the existing rate of or affect any fire or other insurance upon the Shopping Center or any of its contents, or cause a cancellation of any insurance policy covering said Shopping Center or any part thereof or any of its contents. Lessee shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other lessees or occupants of the Shopping Center or injure or annoy them or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose; nor shall Lessee cause, maintain or permit any nuisance in, on, or about the Premises. Lessee shall not commit or allow to be committed any waste in or upon the Premises. This Lease shall be subject to all existing and future covenants, restrictions, conditions and easements of record affecting the Shopping Center, and Lessee agrees to at all times comply with and observe, and shall cause all its employees, agents, contractors, customers and invitees to comply with and observe, all such covenants, restrictions, conditions and easements, provided, as to future covenants, restrictions, conditions and easements, that the same will not materially affect Lessee's rights under this Lease or increase Lessee's obligations with respect to the Premises. 11. COMPLIANCE WITH LAW. Lessee shall not use the Premises, or permit any thing to be done in or about the Premises, which will in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Lessee shall, at its sole cost and expense promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force and with the requirements of any board of fire underwriters or other similar bodies now or hereafter constituted relating to or affecting the condition, use or occupancy of the Premises, excluding pre-existing conditions as of the Commencement Date, if any, and/or structural changes not related to or affected by Lessee's improvements, alterations or particular use of the Premises. The judgment of any court of competent jurisdiction or the admission of Lessee in any action against Lessee, whether Lessor be a party thereto or not, that Lessee has violated any law, statute, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as between the Lessor and Lessee. Lessor represents to Lessee that, on the date the Premises is delivered to Lessee, the Premises complies with all laws, statutes, ordinances and governmental rules, regulations and requirements ("Applicable Laws") applicable thereto, including, without limitation, the ADA and all Applicable Laws relating to Toxic Materials. 1. Lessor indemnifies and will defend Lessee against damages and claims relating to Toxic Materials in, on or about the Shopping Center as of the Commencement Date, except for Toxic Materials brought onto the Premises by Lessee. 2. The Certificate of Occupancy from the Town of Los Gatos demonstrates that the Premises is in compliance with applicable codes. In particular, Lessee, at its sole cost, shall comply with all laws, statutes, ordinances and governmental rules, regulations and requirements relating to Lessee's storage, use, handling, and disposal of hazardous, toxic or radioactive matter, including but not limited to those materials identified in Sections 66680 through 66685 of Title 22 of the California Administrative Code, Division 4, Chapter 30, as they may be amended from time to time (collectively "Toxic Materials"). If Lessee does store, handle, use or dispose of any Toxic Materials (except for customary cleaning and office supplies used in the ordinary course of Lessee's business conducted on the Premises or other Toxic Materials approved by Lessor), Lessee shall notify Lessor in writing at least ten (10) days prior to their first appearance on the Premises. Lessee shall be solely responsible for and shall defend, indemnify and hold Lessor and its employees, agents and representatives harmless from and against all claims, costs and liabilities, including attorneys' fees and costs and costs and expenses of removal, clean-up and restoration, arising out of or in connection with the storage, use, handling or release and disposal of Toxic Materials in, on or about the Premises and the Shopping Center by Lessee, its employees, agents, contractors, customers and invitees. Lessee's obligations hereunder shall survive the expiration or sooner termination of this Lease. 12. REPAIRS. A. By entering into this Lease, Lessee shall have accepted the Premises as being in good, sanitary order, condition and repair. Lessee shall, at Lessee's sole cost and expense, keep the Premises and every part thereof in good condition and repair (except as hereinafter provided with respect to Lessor's obligations) including without limitation, the maintenance, replacement and repair of storefront glass, equipment, exterior doors, window casements, glazing, heating and air-conditioning system (when there is an air-conditioning system, Lessee shall obtain a service contract for repair and maintenance of said system, said maintenance contract to conform to the requirements under the warranty, if any, on said system and shall otherwise be subject to Lessor's approval), plumbing, pipes, electrical wiring and conduits. Lessor reserves the right to obtain an HVAC service contract at Lessee's cost (Lessee to pay or reimburse Lessor for the cost of such service within 10 days after receipt of Lessor's invoice therefor) if Lessee fails to maintain the HVAC system to Lessor's satisfaction. Lessee shall, upon the expiration or sooner termination of this Lease, surrender the Premises to the Lessor in accordance with Section 37 below. Any damage to adjacent premises or any other portion of the Shopping Center caused by Lessee's use of the Premises shall be repaired at the sole cost and expense of Lessee. Lessor will inspect and service HVAC system in order to assure Lessee that the system is in good working order as of the Commencement Date. If Lessee is required to make repairs or replacements to the HVAC which (i) are of a capital nature under generally accepted accounting principles and (ii) are not caused by Lessee's negligent maintenance, Lessor shall make such repairs or replacements and Lessee shall pay to Lessor, in equal monthly installments hereunder with Minimum Rent, the portion of the cost thereof allocable to the remaining Term (determined by amortizing the cost of the HVAC repairs or replacements on a straight-line basis over the useful life of such repairs or replacements). Lessee shall have no obligation to repair any damage or defects caused by any intentional act or negligence of Lessor, its agents or contractors; or which may be caused by or result from any repairs, alterations, replacements or other improvements or installations made by Lessor, its agents or contractors, except that Lessee shall maintain, as provided above, alterations and other improvements or installations made to the Premises by Lessor, its agents or contractors for the benefit of Lessee. B. Notwithstanding the provisions of this Section, Paragraph A, above, Lessor shall repair and maintain the structural portions of the Shopping Center including the exterior walls, roof and storefront, excluding glazing, window casements and doors, unless such maintenance and repairs are necessitated in part or in whole by the act, neglect, fault or omission of any duty by the Lessee,its agents, servants, employees, invitees, contractors or customers, or any damage caused by breaking and entering, in which case Lessee shall pay to Lessor the actual cost of such maintenance and repair within 10 days following Lessor's demand therefor. Lessor shall not be liable for any failure to make such repairs or to perform any maintenance unless such failure shall persist for an unreasonable time after written notice of the need of such repairs or maintenance is given to Lessor by Lessee. Except as provided in this Lease, there shallbe no abatement of Rent and no liability of Lessor by reason of any injury to or interference with Lessee's business arising from the making of any repairs, alterations or improvements in or to any portion of the Shopping Center or the Premises or in or to fixtures, appurtenance and equipment therein. Repairs,alterations or improvements which Lessor may perform in the Shopping Center, including the Premises, shall not unreasonably interfere with the intended use of and usual access to the Premises by Lessee's customers and suppliers without affording reasonable alternative means of access; and all such work shall be done as promptly as reasonably possible and so as to cause as little interference to Lessee's business as reasonably possible. Lessee waives the right to make repairs at Lessor's expense or terminate this lease due to the condition of the Premises under any law, statute or ordinance now or hereafter in effect except in the case of emergency and after notice to Lessor and Lessor's failure to act. In the event of an emergency and upon Lessee's notification to Lessor and Lessor's failure to respond within a reasonable time, Lessee may undertake immediate repairs with respect to the Premises of such a nature as would normally be Lessor's responsibility and notify Lessor promptly after such repairs have been undertaken. The reasonable billing for such Repairs will be reimbursed by Lessor to Lessee within ten days upon presentation of the paid invoice for the repairs. C. Lessee shall promptly replace any windows on the Premises broken or damaged during the Term, or extended term, of this lease, at its sole cost and expense. D. Lessor agrees to maintain the Shopping Center and the Common Areas at all times as a first class shopping center consistent with the highest standards of operation applicable to comparable centers in the vicinity. 13. RECONSTRUCTION. In the event the Premises are damaged by fire or other perils covered by Lessor's insurance, Lessor agrees to forthwith repair same, and this Lease shall remain in full force and effect, except that Lessee shall be entitled to a proportionate reduction of the Minimum Rent and Additional Rent from the date of damage and while such repairs are being made, such proportionate reduction to be based upon the extent to which the damage and making of such repairs shall reasonably interfere with the business carried on by the Lessee in the Premises. If the damage is due to the fault or neglect of Lessee or its employees, there shall be no abatement of rent (except to the extent Lessor receives rent loss insurance proceeds therefor), and Lessee shall pay to Lessor the actual cost of repairs, subject to Section 18 below. In the event the Premises are damaged as a result of any cause other than insured perils required under this Lease covered by Lessor's insurance, then Lessor shall forthwith repair the same, provided the extent of the destruction be less than ten (10%) percent of the then full replacement cost of the Premises. In the event the destruction of the Premises is to an extent of ten (10%) percent or more of the full replacement cost then Lessor shall have the option, exercisable in its sole discretion: (1) To repair or restore such damage, this Lease continuing in full force and effect, but the Minimum Rent to be proportionately reduced as herein above in this Section provided; or (2) Give notice to Lessee at any time within sixty (60) days after such damage, terminating this Lease as of the date specified in such notice, which date shall be no more than thirty (30) days after the giving of such notice. In the event of giving such notice, this Lease shall expire and all interest of the Lessee in the Premises shall terminate on the date so specified in such notice and the Minimum Rent reduced by a proportionate reduction, based upon the extent, if any, to which such damage interfered with the business carried on by the Lessee in the Premises, shall be paid up to date of said such termination. Notwithstanding anything to the contrary contained in this Section, (a) Lessor shall not have any obligation whatsoever to repair, reconstruct or restore the Premises when (1) damage of over twenty-five (25%) percent of the floor area in which the Premises are located has resulted from any casualty covered under this Section and such damage has occurred during the last twenty-four (24) months of the Term of this Lease or, (2) if in Lessor's reasonable estimation, the repair, reconstruction or restorationion question will take more than 180 days to complete following the occurrence of the damage in question; and (b) Lessor shall not be obligated to expend for repairs or rebuilding an amount in excess of the net insurance proceeds for damage to the Premises recovered by it. "Net insurance proceeds" means the total amount of proceeds recovered for damage to the Premises, less any expenses incurred by Lessor in recovering the proceeds; and less any amounts of such proceeds required to be paid to Lessor's lender. Upon the occurrence of either of the matters described in subsection (a) above or if the estimated cost of the repairs or rebuilding in question is in excess of the net insurance proceeds, then, in such event, Lessor shall have the options described in subsection (1) and (2) of this Section 13 above. Lessor shall not be required to repair any injury or damage by fire or other cause, or to make any repairs or replacements of any leasehold improvements, equipment, fixtures, or other personal property of Lessee. If, by virtue of the foregoing provisions, Lessor elects not to fully restore the Premises, or is not required to fully restore the Premises (due to the lack of net insurance proceeds or otherwise), or if Lessor determines in accordance with the foregoing provisions that the repair, reconstruction or restoration in question will take more than 180 days to complete following the occurrence of the damage in question, Lessee shall have the right to terminate this Lease by giving written notice of termination to Lessor not later than 30 days after Lessor advises Lessee that the Premises will not be fully restored, or that the restoration will take more than 180 days to complete, as the case may be. Such termination will be effective as of the date of such notice, unless Lessee continues to operate its business from the Premises, in which case the termination will be effective on the date that Lessee surrenders possession of the Premises to Lessor, in which case Minimum Rent, reduced by a proportionate reduction based upon the extent, if any, to which such damage interfered with the business carried on by the Lessee in the Premises, shall be paid up to date of said such termination. 14. ALTERATIONS AND ADDITIONS. Lessee shall not make or allow to be made any alterations, additions or improvements to the Premises or to the exterior of the Premises without first obtaining the written consent of Lessor, which consent may be withheld in Lessor's sole discretion. In the event Lessor consents to the making of any alterations, additions or improvements to the Premises by Lessee, the same shall be made by Lessee at Lessee's sole cost and expense and in accordance with the terms and conditions of this Lease, including this Section 14. Upon the expiration or sooner termination of the Lease, Lessee shall, upon written demand by Lessor, at Lessee's sole cost and expense, forthwith and with all due diligence, remove any alterations, additions, or improvements made by Lessee, designated by Lessor to be removed as a condition of approval of Lessee's improvement plans. Lessee shall forthwith and with all due diligence, at its sole cost and expense, repair any damage to the Premises caused by such removal. Lessee's right to make alterations, additions or improvements when permitted by this Section shall be deemed conditioned, without limitation, upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the alterations, additions or improvements to Lessor prior to commencement of the work thereon (which plans and specifications shall be subject to Lessor's prior written approval), (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner and (iv) such other conditions and Lessor may impose. All alterations, additions or improvements by Lessee during the Term of this Lease shall be done by duly licensed contractors in a good and workmanlike manner, with good and sufficient materials, and in compliance with all applicable laws. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor.[ Lessor may (but without obligation to do so) condition its consent to any requested alterations, additions or improvements upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such alterations, additions or improvements and/or upon Lessee's posting an additional security deposit with Lessor under Section 30 hereof.] Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or the Shopping Center or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises and the Shopping Center against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises and the Shopping Center. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises and the Shopping Center free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in participating in such action if Lessor shall decide, in its sole discretion, it is to its best interest to do so. Real Goods shall be allowed to install a total of 6 solar panels on the roof provided that: 1. The panels do not impose a significant structural load requiring additional structural bracing for the building. 2. The panels are not an obstruction to the maintenance and service of other rooftop equipment. 3. The panels are installed carefully and the panels and associated equipment, lines and support structure do not cause roof leaks. 4. The panels are lower than the mansard roof so that they are not visible when viewed from a position level with the mansard. 15. LIENS. Lessee shall, at all times, keep the Shopping Center and the Premises and the property in which the Premises are situated free from any liens arising out of any work performed, materials furnished or obligation incurred by or on behalf of Lessee. 16. HOLD HARMLESS. To the fullest extent permitted by law, Lessee shall defend, indemnify and hold harmless Lessor against and from any and all claims arising from Lessee's use of the Premises or from the conduct of its business or from any activity, work, or other things done, permitted or suffered by the Lessee in or about the Premises or the Shopping Center, and shall further defend, indemnify and hold harmless Lessor against and from any and all claims arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any act or negligence of the Lessee, or any officer, agent, employee, contractor, customer, or invitee of Lessee (except to the extent any such claims arise (i) from the gross negligence or willful misconduct of Lessor or its authorized agents, contractors or employees, or (ii) from any default by Lessor under this Lease, and, in either instance, are not otherwise covered by the insurance required to be carried by Lessee under this Lease), and from all costs, attorney's fees, and liabilities incurred in or about the defense of any such claim or any action or proceeding brought thereon and in case any action or proceeding be brought against Lessor by reason of such claim, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor. Lessee shall give prompt notice to Lessor in case of casualty in the Premises. The obligations of Lessee under this Section 16 shall survive the expiration or sooner termination of this Lease. Lessor or its agents shall not be liable for any loss or damage to persons or property resulting from fire, earthquake, explosion, falling plaster, steam, gas, electricity, water or rain which may leak from any part of the Premises or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface or from any other place resulting from dampness or any other cause whatsoever, unless caused by or due to the gross negligence of Lessor, its agents, servants or employees, or any default by Lessor resulting in one of the above conditions; provided, however, in no event shall Lessor or its agents be liable for any consequential damages, opportunity costs or loss profits incurred or suffered by Lessee. Lessor or its agents shall not be liable for interference with the light, air, or for any defect in the Premises. 17. INSURANCE. A. LESSEE'S COVERAGE. Lessee agrees to maintain in full force and effect at all times following delivery of possession of the Premises and continuing until the expiration or sooner termination of this Lease, at its own expense, for the protection of Lessee and Lessor, as their interests may appear, policies of insurance issued by a responsible carrier to the reasonable satisfaction of Lessor which afford the following coverages: (1). Comprehensive general liability insurance in an amount not less than Five Million and no/100ths Dollars ($5,000,000.00) (or such greater amount as may in the future be typical for a business similar to that of Lessee operating in the vicinity of the Shopping Center) combined single limit for both bodily injury and property damage which includes blanket contractual liability broad form property damage, personal injury, completed operations, product liability, and legal expenses naming Lessor and any Lenders (as defined below), and their respective and its agents as additional insureds. (2). Risk of Direct Physical Loss Special Form property insurance (including, without limitation, vandalism, malicious mischief, and sprinkler leakage endorsement) on Lessee's equipment, trade fixtures and other personal property located on or in the Premises. Such insurance shall be in the full amount of the replacement cost, as the same may from time to time increase as a result of inflation or otherwise, and shall be in a form providing coverage comparable to the coverage provided in the standard ISO Risk of Direct Physical Loss Special Form. As long as this Lease is in effect, and except as provided for herein to the contrary (i.e. damage terminating this Lease), the proceeds of such policy shall be used for the repair or replacement of such items so insured. Lessor shall have no interest in the insurance upon Lessee's personal property. Lessee may self-insure the coverages required to be carried pursuant to subparagraph (A)(2) or such coverages may be obtained by an endorsement on a blanket insurance policy covering other Lessee stores. B. INCREASED COVERAGE. Upon demand, Lessee shall provide Lessor, at Lessee's expense, with such increased amount of existing insurance, and such other insurance as Lessor or Lessor's lender may reasonably require to afford Lessor and Lessor's lender adequate protection. C. CO-INSURER. If, on account of the failure of either Lessor or Lessee (the "failing party") to comply with the foregoing provisions, and if the other party is adjudged a co-insurer by its insurance carrier, then, any loss or damage that that party shall sustain by reason thereof, including attorneys' fees and costs, shall be borne by the failing party and shall be immediately paid by the failing party upon receipt of a bill therefor and evidence of such loss. D. INSURANCE REQUIREMENTS. All such insurance shall be in a form reasonably satisfactory to Lessor and shall be carried with companies that have a general policy holder's rating of not less than "A" and a financial rating of not less than Class "VII"in the most current edition of Best's Insurance Reports; shall provide that such policies shall not be subject to material alteration or cancellation except after at least thirty (30) days' prior written notice to Lessor; and shall be primary as to Lessor. Executed certificates evidencing the insurance to be maintained by Lessee hereunder shall be deposited with Lessor prior to the delivery of possession of the Premises to Lessee, and upon renewal of such policies, within thirty (30) days of the expiration of the term of such coverage. If Lessee fails to procure and maintain the insurance required hereunder, Lessor may, but shall not be required to, order such insurance at Lessee's expense and Lessee shall reimburse Lessor after Lessee has been afforded at least ten (10) days notice. Such reimbursement shall include all costs incurred by Lessor including Lessor's reasonable attorneys' fees, with interest thereon at the Applicable Rate (as defined below). Lessor shall maintain comprehensive general liability insurance on the Shopping Center and all buildings and improvements located thereon, protecting Lessor against loss, cost or expense by reason of injury to or death of persons or damage to or destruction of property. Such insurance shall be carried with companies that have a general policy holder's rating of not less than "A" and a financial rating of not less than Class "VII" in the most current edition of Best's Insurance Reports; and shall have limits of at least $5,000,000.00 for each occurrence, bodily injury and property damage combined. Lessor shall also maintain property insurance adequate to fully insure the Shopping Center and all buildings and improvements thereon. Lessor shall also maintain earthquake insurance on the Shopping Center and all buildings and improvements thereon provided it is available at commercially reasonable rates or is otherwise required by any Lenders. The cost of all such insurance (including any deductibles payable by Lessor thereunder) shall be included as part of Shopping Center Operating Expenses. 18. SUBROGATION. Lessor and Lessee each waives any claim, loss and cost it might have against the other for any injury to or death of any person or persons or damage to or theft, destruction, loss, or loss of use of any property, to the extent the same is insured against under any insurance policy that covers the Shopping Center, the Premises, Lessor's or Lessee's fixtures, equipment, personal property, leasehold improvements or business, or is otherwise required to be insured against under the terms of this Lease, regardless of whether the negligence of the other party caused such loss; however, such waiver shall not include any deductible amounts required to be paid under any insurance policies or to any coinsurance penalty which a party may sustain. Each party shall cause its insurance carrier to endorse all applicable policies waiving the carrier's rights of recovery under subrogation or otherwise against the other party. 19. DEFAULT BY LESSEE. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Lessee (each is called an "Event of Default"): A. The vacating or abandonment of the Premises by Lessee for more than three (3) days or any breach by Lessee of the covenants set forth in Section 27 below. B. The failure by Lessee to make any payment of Rent or any other payment required to be made by Lessee hereunder, as and when due and such failure continues for five (5) days after due date. C. The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by the Lessee, other than described in this Section, Paragraph A and B, above, where such failure shall continue for a period of fifteen (15) days after written notice thereof by Lessor to Lessee; provided, however, that if the nature of Lessee's default is such that more than fifteen (15) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commences such cure within said fifteen (15) days period and thereafter diligently prosecutes such cure to completion. D. The making by Lessee of any general assignment or general arrangement for the benefit of creditors; or the filing by or against Lessee of a petition to have Lessee adjudged a bankrupt, or a petition or reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); or the appointment of a trustee or a receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged in thirty (30) days. 20. REMEDIES IN DEFAULT. Upon the occurrence of any Event of Default by Lessee, Lessor shall have, in addition to any other remedies available to Lessor at law or in equity (all of which remedies shall be distinct, separate, and cumulative), the option to pursue any one (1) or more of the following remedies, each and all of which shall be cumulative and non-exclusive, without any notice or demand whatsoever: (a) Terminate this Lease, in which event Lessee shall immediately surrender the Premises to Lessor and if Lessee fails to do so, Lessor may, without prejudice to any other remedy which it may have for possession or arrearages in Rent, enter (in any lawful manner) upon and take possession of the Premises and expel or remove Lessee and any other person who may be occupying the Premises or any part thereof, without being liable for prosecution or any claim or damages therefor[)], and Lessor may recover from Lessee the following: (i) The worth at the time of any unpaid rent which has been earned at the time of such termination; plus, (ii) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Lessee proves could have been reasonably avoided; plus, (iii) The worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Lessee proves could have been reasonably avoided; plus, (iv) Any other amount necessary to compensate Lessor for all the detriment proximately caused by Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom (specifically including, without limitation, brokerage commissions and advertising expenses incurred, expenses of remodeling the Premises or any portion thereof for a new tenant, whether for the same or a different use, and any special concessions made to obtain a new tenant); and, (v) At Lessor's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. The term "rent" as used in this Section 20(a) shall be deemed to be and to mean all sums of every nature required to be paid by Lessee pursuant to the terms of this Lease, whether to Lessor or to others. As used in Sections 20(a)(i) and (ii), above, the "worth at the time of award" shall be computed by allowing interest at the Applicable Rate, but in no case greater than the maximum amount of such interest permitted by law. As used in Section 20(a)(iii) above, the "worth at the time of the award" shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). (b) Lessor shall have the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's breach and abandonment and recover rent as it becomes due, if lessee has the right to sublet or assign, subject only to reasonable limitations). Accordingly, if Lessor does not elect to terminate this Lease on account of any Event of Default by Lessee, Lessor may, from time to time, without terminating this Lease, enforce all of its rights and remedies under this Lease, including the right to recover all rent as it becomes due. (c) Lessor shall at all times have the rights and remedies (which shall be cumulative with each other and cumulative and in addition to those rights and remedies available under Sections 20(a) and 20(b) above, or any law or other provision of this Lease), without prior demand or notice except as required by applicable law, to seek any declaratory, injunctive, or other equitable relief, and specifically enforce this Lease, or restrain or enjoin a violation or breach of any provision hereof. (d) Additionally: (i) Intentionally omitted. (ii) In the event that Lessor shall elect to relet, then rentals received by Lessor from such reletting shall be applied: first, to the payment of any indebtedness (other than Rent) due hereunder from Lessee to Lessor; second, to the payment of any cost of such reletting (including brokerage commissions); third, to the payment of the cost of any alterations and repairs to the Premises; fourth, to the payment of Rent due and unpaid hereunder; and the residue, if any, shall be held by Lessor and applied in payment of future Rent as the same may become due and payable hereunder. Should reletting, during any month to which such Rent is applied, result in the actual payment of rentals at less than the Rent payable during that month by Lessee hereunder, then Lessee shall pay such deficiency to Lessor immediately upon demand therefor by Lessor. Such deficiency shall be calculated and paid monthly. Lessee shall also pay to Lessor as soon as ascertained, any costs and expenses incurred by Lessor in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. (iii) No lawful re-entry or taking of possession of the Premises by Lessor pursuant to this Section 20 shall be construed as an election to terminate this Lease unless a written notice of such election shall be given to Lessee or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Lessor, Lessor may, at any time after such reletting, elect to terminate this Lease for any such default. Upon the occurrence of an Event of Default by Lessee under Section 20, if the Premises or any portion thereof are sublet, Lessor may, at its option and in addition and without prejudice to any other remedies herein provided or provided by law, collect directly from the sublessee all rentals becoming due to the Lessee and apply such rentals against other sums due hereunder to Lessor. (iv) Without prejudice to any other right or remedy of Lessor, if Lessee shall be in default under this Lease, Lessor may cure the same at the expense of Lessee (A) immediately and without notice in the case (1) of emergency, (2) where such default unreasonably interferes with any other tenant in the Shopping Center, or (3) where such default will result in the violation of law or the cancellation of any insurance policy maintained by Lessor, and (B) in any other case if such default continues for 10 days from the receipt by Lessee of notice of such default from Lessor. All costs incurred by Lessor in curing such default(s), including, without limitation, attorneys' fees, shall be reimbursable by Lessee as Rent hereunder upon demand, together with interest thereon, from the date such costs were incurred by Lessor, at the Applicable Rate. (v) Lessee hereby waives for Lessee and for all those claiming under Lessee all rights now and hereafter existing to redeem by order or judgment of any court or by any legal process or writ, Lessee's right of occupancy of the Premises after any termination of this Lease. Notwithstanding any provision of this Lease to the contrary, the expiration or termination of this Lease and/or the termination of Lessee's rights to possession of the Premises shall not discharge, relieve, or release Lessee from any obligation or liability whatsoever under any indemnity provision of this Lease. 21. DEFAULT BY LESSOR. Lessor shall not be in default of this Lease unless Lessor fails to perform obligations required of Lessor within thirty (30) days after written notice by Lessee to Lessor; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 22. ENTRY BY LESSOR. Upon twenty-four (24) hours notice except in the event of an emergency (in which case no notice shall be required), Lessor shall have the right to enter the Premises to inspect the same, to submit said Premises to prospective purchasers or lessees, to post notices of non-responsibility, to repair the Premises and any portion of the building of which the Premises are a part that Lessor may deem necessary or desirable, without abatement of rent, and may for that purpose erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, always providing that the entrance to the Premises shall not be unreasonably blocked thereby, and further providing that Lessor shall use reasonable efforts to minimize any interference with the business of the Lessee. Lessee hereby waives any claim for damages or for any injury or inconvenience to or interference with Lessee's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby. Lessor shall have the right to use any and all means which Lessor may deem proper to open said doors in an emergency, in order to obtain entry to the Premises without liability to Lessee except for any failure to exercise due care under the circumstances for Lessee's property and any entry to the Premises obtained by Lessor by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Lessee from the Premises or any portion thereof. 23. RULES AND REGULATIONS. Subject to the provisions of Section 1 of this Lease, Lessee shall faithfully observe and comply with, and shall cause all its employees, agents, contractors, customers and invitees to observe and comply with, the reasonable rules and regulations that Lessor shall from time to time promulgate and/or modify, including, without limitation, the rules and regulations attached hereto as Exhibit "F". The rules and regulations shall be binding upon the Lessee upon delivery of a copy of them to Lessee. Lessor shall not be responsible to Lessee for the nonperformance of any said rules and regulations by any other lessees or occupants. Notwithstanding any provision to the contrary contained in this Lease, in the event of any conflict between the rules and regulations and the provisions of this Lease, the provisions of this Lease shall govern and control. 24. PARKING AND COMMON AREAS. Subject to the terms and conditions of this Lease, Lessor covenants that the Common Areas shall be at all times available for the non-exclusive use of Lessee during the Term of this Lease, provided that the condemnation or other taking by a public authority, or sale in lieu of condemnation, of any or all of the Common Areas or the occurrence of any other matters beyond the reasonable control of Lessor shall not constitute a violation of this covenant. Lessor reserves the right to change the design, entrances, exits, traffic lanes and the boundaries and locations of such parking area or areas, provided, however, that anything to the contrary notwithstanding contained in this Section, said parking area or areas shall include the number of parking spaces required by the Town of Los Gatos at the time that this Lease is executed and shall include the maximum number of compact parking stalls allowed in the Town now or in the future. In addition, Lessor reserves the right to make changes in, additions to and deletions from the Common Areas and the purposes to which they are devoted and to close portions of the Common Areas from time to time for the purpose of making repairs and alterations thereto and for any other commercially reasonable purposes. The foregoing right of Lessor shall include, without limitation, the right to erect additional buildings on the Common Area or change the location of buildings or other structures set forth on the site plan attached hereto as Exhibit "A" to any location in the Shopping Center including the Common Area. Upon erection or change of location, the portion of the Shopping Center upon which buildings or structures have been erected shall no longer be deemed to be part of the Common Area. Notwithstanding any provision to the contrary contained in this Lease, Lessor warrants to Lessee that throughout the Term the Shopping Center shall contain at least the number of parking spaces required by applicable law. Lessor shall not grant the right to use the Common Areas to any party other than lessees of the Shopping Center, their agents, customers, employees, business invitees and suppliers, except for marketing and promotional events only and with agreement of 2/3 of the lessees represented by their leased area. Unless required by law or a governmental agency having authority, no direct charge shall be made for the parking of vehicles in the Shopping Center. A. The Lessor shall keep the Common Areas in a neat, clean and orderly condition and shall repair any damage, periodically reseal and repave the facilities thereof, but all expenses in connection therewith shall be included as part of Shopping Center Operating Expenses and prorated in the manner set forth in Section 7 hereof. B. Subject to the terms and conditions of this Lease Lessee, for the use and benefit of Lessee, its agents, employees, customers and sub-lessees, shall have, subject to Section 1 hereof, the non-exclusive right in common with Lessor and other present and future owners, lessees and their agents, employees, customers, business invitees and suppliers, to use the Common Areas during the entire Term of this Lease, for ingress and egress, and automobile parking. C. Lessee, in the use of said Common Areas, agrees to comply with such reasonable rules, regulations and charges for parking as the Lessor may adopt from time to time for the orderly and proper operation of said Common Areas. Such rules may include but shall not be limited to the following: (1) The restricting of employee parking to a limited, designated area; and (2) Lessee is responsible for disposing of rubbish in an acceptable, sanitary manner. 25. SIGNS. The Lessee may affix and maintain upon the glass panes and supports of the show windows and of the Premises within twelve (12) inches of any window and upon the exterior walls of the Premises only such signs, advertising placards, names, insignia, trademarks and descriptive material as shall have first received the written approval of the Lessor and the Town of Los Gatos as to type, size, color, location, copy nature and display qualities. Anything to the contrary in this Lease notwithstanding, Lessee shall not affix any sign to the roof. Lessee shall however, erect signs on the front of the Premises in accordance with a design to be prepared by Lessee in accordance with Lessor's sign program set forth in Exhibit D and approved in writing by Lessor. Lessee will be permitted, subject to obtaining necessary governmental approvals, to install Lessee's signage and logo on the entry tower in front of the Premises, such signage having been approved by Lessor prior to the execution of this Lease. Installation of signs shall be performed at Lessee's sole cost and expense by a reputable sign contractor selected by Lessee and approved by Lessor in writing. Such installation shall be made in accordance with all applicable governmental laws, ordinances and permits. Upon the expiration or sooner termination of the Lease, Lessee shall cause its signage to be removed and any damage caused thereby repaired to the reasonable satisfaction of Lessor, all at Lessee's sole cost and expense. 26. DISPLAYS. The Lessee may not display or sell merchandise or allow merchandise to be stored or to remain outside the defined exterior walls and permanent doorways of the Premises except as approved in writing by the Lessor. Lessee further agrees not to install any exterior lighting, amplifiers or similar devices or use in or about the Premises any advertising medium which may be heard or seen outside the Premises, such as flashing lights, searchlights, loudspeakers, phonographs or radio broadcasts. 27. HOURS OF BUSINESS. Lessee covenants to open for business within the Premises upon the later of (i) the Commencement Date, or (ii) the completion of the leasehold improvements pursuant to Section 35 below and Lessee's receipt of all governmental permits, certificates and approvals necessary for the performance of Lessee's Work and the lawful use and occupancy of the Premises for the uses permitted under this Lease. Lessee agrees to use its best efforts to complete such leasehold improvements and obtain such permits, certificates and approvals on or before the Commencement Date; provided, however, that this Lease is conditioned upon Lessee obtaining all such permits, certificates and approvals, and may be terminated by Lessee if, notwithstanding Lessee's best efforts, such licenses, permits and approvals are not obtained within sixty (60) days from delivery of premises. From and after the later of (i) the Commencement Date, or (ii) the completion of such leasehold improvements and Lessee's receipt of such permits, certificates and approvals, and continuing for the balance of the Term, subject to the provisions of Section 13 hereof, Lessee shall continuously, during the entire term hereof, conduct and carry on Lessee's business in the Premises and shall keep the Premises open for business and cause Lessee's business to be conducted therein for a minimum of eight (8) hours per day on weekdays and seven (7) hours per day on Saturdays, all between the hours of 9:00 a.m. and 8:00 p.m., and such additional hours as Lessee may desire subject to Lessor's approval. Lessee may elect to be open or closed on Holidays. For the purposes of this Section, Holidays are identified as: Thanksgiving, Christmas, and other Federally-observed Holidays. This provision shall not apply if the Premises should be temporarily closed and the business of Lessee temporarily discontinued therein on account of repairs or refurbishment to the Premises, strikes, lockouts or similar causes beyond the reasonable control of Lessee. Lessee shall keep the Premises adequately staffed with sufficient sales personnel to care for the patronage, and to at all times conduct said business in accordance with sound business practice. In the event of breach by the Lessee of any of the conditions contained in this Section, the Lessor shall have, in addition to any and all remedies herein provided, the right at its option to collect not only the Minimum Rent and Additional Rent herein provided, but Additional Rent at the rate of one-thirtieth (1/30) of the Minimum Rent herein provided for each and every day that the Lessee shall fail to conduct its business as herein provided. 28. AUCTIONS. Lessee shall not conduct or permit to be conducted any sale by auction in, upon or from the Premises whether said auction be voluntary, involuntary, pursuant to any assignment for the benefit of creditors or pursuant to any bankruptcy or other insolvency proceeding. 29. MERCHANTS' ASSOCIATION. If the Lessor and a majority of lessees in the Shopping Center shall determine that it is in the best interests of the Shopping Center, Lessee will become a member of, and participate fully in, and remain in good standing in a Merchants Association ("Association") (if and when the same has been formed), organized for lessees occupying premises in the Shopping Center, and Lessee will abide by the regulations of such Association. Each member lessee shall have one (1) vote, and the Lessor shall also have one (1) vote, in the operation of said Association. The objects of such Association shall be to encourage its members to deal fairly and courteously with their customers, to encourage ethical business practices, and to assist the business of the lessees by sales promotion and center-wide advertising. The Lessee agrees to pay minimum dues to the Association, provided however, that in no event shall the dues paid by Lessee in any fiscal year of said Association be in excess of fifteen percent (15%) of the monthly Minimum Rent for any full month during said fiscal year. For example, Association dues during the first year of the term of this Lease may not exceed $1,303.35 per annum (15% of $8,689, which is one month's Minimum Rent). Association dues constitute Additional Rent for purposes of this Lease. 30. SECURITY DEPOSIT. Concurrently with Lessee's execution of this Lease, Lessee shall deposit with Lessor a sum equal to EIGHT THOUSAND SIX HUNDRED AND EIGHTY-NINE AND NO/100 Dollars ($8,689.00). Said sum shall be held by Lessor as security for the faithful performance by Lessee of all the terms, covenants and conditions of this Lease to be kept and performed by Lessee during the Term. If Lessee defaults with respect to any provision of this Lease, including but not limited to the provisions relating to the payment of Rent, Lessor may (but shall not be required to) use, apply or retain all or any part of this security deposit for the payment of any Rent or any other sum in default, or for the payment of any amount which Lessor may spend or become obligated to spend by reason of Lessee's default, or to compensate Lessor for any other loss or damage which Lessor may suffer by reason of Lessee's default, Lessor's right to the possession of the Premises for non-payment of Rent or for any other reason shall not in any event be affected by reason of the fact that the Lessor holds this security. If any portion of said deposit is so used or applied then Lessee shall, within five (5) days after written demand therefor, deposit cash with Lessor in an amount sufficient to restore the security deposit to its original amount and Lessee's failure to do so shall be a default under this Lease. Lessor shall not be required to keep this security deposit separate from its general funds, and Lessee shall not be entitled to interest on such deposit. If Lessee shall fully and faithfully perform every provision of this Lease to be performed by it, the security deposit or any unapplied balance thereof shall be returned to Lessee (or, at Lessor's option, to the last assignee of Lessee's interest hereunder) within fifteen (15) days following expiration of the Term. 31. GENERAL PROVISIONS. A. PLATS AND RIDERS. Clauses, plats, riders and addenda, if any, affixed to this Lease are a part hereof. B. WAIVER. No waiver of any term, condition or covenant of this Lease shall be presumed or implied. Any such waiver must be expressly made in writing by the party waiving the term, condition or covenant. One or more waivers of any covenant or condition by Lessor shall not be construed as a waiver of a subsequent breach of the same covenant or condition, and the consent or approval by Lessor to or of any act by Lessee requiring Lessor's consent or approval shall not be deemed to waive or render unnecessary Lessor's consent or approval to or of any subsequent similar act by Lessee. The acceptance by Lessor from Lessee of any amount paid for any reason under this Lease in a sum less than what is actually owing shall not be deemed a compromise, settlement, accord and satisfaction, or other final disposition of the amount owing unless Lessor agrees otherwise in writing. C. JOINT OBLIGATION. If there be more than one person or entity comprising "Lessee", the obligations hereunder imposed on Lessee shall be joint and several. D. MARGINAL HEADINGS. The marginal headings and Section titles to the Sections of this Lease are not a part of the Lease and shall have no effect upon the construction or interpretation of any part hereof. E. TIME. Time is of the essence of this Lease and each and all of its provisions in which performance is a factor. F. SUCCESSORS AND ASSIGNS. The covenants and conditions herein contained, subject to the provisions as to assignment and subletting, apply to and bind the heirs, successors, executors, administrators and assigns of the parties hereto. G. RECORDING. Lessee shall not record this Lease. Upon request of Lessor, Lessee agrees to sign and acknowledge a short form Lease in recordable form which may be recorded. H. QUIET POSSESSION. Upon Lessee paying the rent reserved hereunder and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire term hereof as against any person claiming the same by, through or under Lessor, subject to all the provisions of this Lease. I. LATE CHARGES AND INTEREST. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by terms of any mortgage or trust deed covering the Premises. Therefore, if any installment of Minimum Rent or any payment of Additional Rent due from Lessee is not received by Lessor in good funds by the fifth (5th) day from the applicable due date, Lessee shall pay to Lessor an additional amount equal to five percent (5%) of the amount overdue as a late charge for every month or portion thereof that such amount remains unpaid. Lessee is responsible for any attorneys' fees incurred by Lessor by reason of Lessee's failure to pay rent and/or other charges when due hereunder, whether or not legal action is commenced. The parties hereby agree that such late charges represent a fair and reasonable estimate of the cost that Lessor will incur by reason of the late payment by Lessee. Acceptance of payment for such late charges by the Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In addition to the foregoing late charge, any Rent due under this Lease that is not paid to Lessor within five (5) days of the date when due shall commence to bear interest at the Applicable Rate (as defined below) until fully paid. Neither accrual nor the payment of interest shall cure any default by Lessee under this Lease. For purposes of this Lease, the term "Applicable Rate" shall mean the greater of ten percent (10%) per annum or five percent (5%) in excess of the discount rate of the Federal Reserve Bank of San Francisco in effect on the 25th day of the calendar month immediately prior to the event giving rise to the Applicable Rate imposition; provided, however, in no event shall the Applicable Rate exceed the maximum interest rate permitted to be charged by applicable law. J. Prior Agreements. This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease, and no prior agreements or understanding pertaining to any such matters shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. This Lease shall not be effective or binding on any party until fully executed by both parties hereto. Submission of this Lease for examination or signature by Lessee does not create a reservation or option to lease the Premises. K. Inability to Perform. Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God or Nature, inability to obtain labor or materials or reasonable substitutes therefor, governmental restrictions, governmental regulations, governmental controls, judicial orders, enemy or hostile governmental action, civil commotion, fire or other casualty, and other causes beyond the reasonable control of the party obligated to perform, shall excuse the performance by such party for a period equal to the period of any such prevention, delay or stoppage, except the obligations imposed on Lessee with regard to the payment of Rent and other charges, which obligations shall not be affected thereby. L. Partial Invalidity. Any provision of this Lease which shall prove to be invalid, void, or illegal shall in no way affect, impair or invalidate any other provision hereof and such other provision shall remain in full force and effect. M. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, whenever possible, be cumulative with all other remedies at law or in equity. N. Choice of Law. This Lease shall be governed by the laws of the State in which the Premises are located. O. Attorneys' Fees. In the event of any action o rproceeding brought by either party against the other under this Lease the prevailing party shall be entitled to recover for the fees of its attorneys in such action or proceeding, in such amount as the court may adjudge reasonable as attorneys' fees and costs. P. Sale of Premises by Lessor. The term "Lessor" as used in this Lease, so far as covenants and obligations on the part of Lessor are concerned, shall be limited to mean and include only the owner or owners at the time in question of the Premises. In the event of any sale, transfer or gifting of the Premises by Lessor, Lessor shall be and is hereby entirely freed and relieved of all liability under any and all of its covenants and obligations contained in or derived from this Lease arising out of any act, occurrence or omission occurring after the consummation of such sale, transfer or gift; and the purchaser, transferee or donee, at such sale, transfer or gifting or any subsequent sale, transfer or gifting of the Premises shall be deemed, without any further agreement between the parties or their successors in interest or between the parties and any such purchaser, transferee or donee, to have assumed and agreed to carry out any and all of the covenants and obligations of the Lessor under this Lease. Q. SUBORDINATION; ATTORNMENT. This Lease and all of Lessee's rights in this Lease shall be subject and subordinate to any mortgage, deed of trust, ground lease or other instrument of encumbrance (collectively referred to in this paragraph as a "security instrument") that is now or hereafter placed against any part of the real property on which the Shopping Center is located, the Premises, or any or all of the buildings currently or in the future located in the Shopping Center. Lessor or any Lender (as defined below) shall have the right, at its election, to subordinate or cause to be subordinated any such security instrument to this Lease. Within 10 days following written request of the holder of any security instrument (a "Lender") or Lessor, Lessee shall execute, acknowledge and deliver any documents evidencing subordination or superiority, as applicable, of this Lease to Lender's security instrument that the Lender or Lessor may reasonably request; provided, that for each further security instrument that is made superior to this Lease, the Lender shall agree in writing that, in the event of a foreclosure under the security instrument, Lender shall not terminate this Lease and shall not disturb Lessee's right to possession under this Lease, provided no Event of Default then exists under this Lease and Lessee continues thereafter to fully perform all of its obligations under this Lease. If Lessor transfers its interest in the Premises or if any proceeding is brought to foreclose any mortgage, deed of trust or instrument to secure debt affecting the Premises or any ground lease made by Lessor, Lessee shall attorn, upon request, to the purchaser or transferee of Lessor's interest in the Premises and this Lease, and to execute, acknowledge and deliver within ten (10) days following request any documents reasonably requested by such purchaser or transferee to evidence such attornment. R. Notices. All notices and demands which may or are to be required or permitted to be given by either party on the other hereunder shall be in writing. All notices and demands by the Lessor to the Lessee shall be sent by United States Mail, postage prepaid, personal delivery or overnight courier, in each instance, addressed to the Lessee at the Premises, and to the address herein below, or to such other place as Lessee may from time to time designate in a notice to the Lessor. All notices and demands by the Lessee to the Lessor shall be sent by United States Mail, postage prepaid, personal delivery or overnight courier, in each instance, addressed to the Lessor at the address set forth herein, and to such other person or place as the Lessor may from time to time designate in a notice to the Lessee. TO LESSOR AT: 1631 Willow St. Suite 225 San Jose, CA 95125 TO LESSEE AT: 3440 Airway Drive, Suite E Santa Rosa, CA 94503-2065 S. AUTHORITY OF LESSEE. If Lessee is a corporation, partnership or limited liability company, each individual executing this Lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation, partnership or limited liability company, in accordance with the bylaws or other organizational documents of said corporation, partnership or limited liability company, and that this Lease is binding upon this corporation, partnership or limited liability company. Within ten (10) days following written request by Lessor, Lessee shall deliver to Lessor evidence reasonably satisfactory to Lessor of such signatory's authority to execute this Lease and bind such corporation, partnership or limited liability company hereunder. T. NON-LIABILITY. Lessor shall not be responsible or liable to Lessee for any loss, liability or damage that may be occasioned by or through the acts or omissions of persons (other than Lessor and Lessor's agents, contractors and employees) occupying any part of the Shopping Center. U. CHANGE OF NAME OR ADDRESS. Lessor shall have the right, from time to time, exercisable in its sole discretion and without liability to Lessee, to change the name and/or the street address of the Shopping Center and/or building of which the premises are a part. V. CHRONIC DELIQUENCY. In the event that Lessee defaults in its obligations under this Lease more than three (3) times in any twelve-month period at any time during the Term or any extended term of this Lease, and based upon at least three (3) of any such defaults in any twelve-month period Lessor serves Lessee with a notice or notices pursuant to California Code of Civil Procedure Section 1161, then (i) upon the service of the third such notice, any option to extend the Term of this Lease granted to Lessee pursuant to this Lease hereof shall become automatically null and void and of no further force or effect, and (ii) upon the occurrence of an additional default within such twelve-month period that results in the service of an additional notice by Lessor pursuant to California Code of Civil Procedure Section 1161, the Minimum Rent and Additional Rent payable by Lessee pursuant to Section 6 and Section 7 hereof shall immediately become due and payable quarterly in advance, throughout the remainder of the term and any extended Term hereof. 32. EMINENT DOMAIN. If more than ten (10%) percent of the Premises shall be taken or appropriated by any public or quasi-public authority under the power of eminent domain (including by sale under the threat or proposal of such taking), Lessor shall have the right, at its option, within sixty (60) days after said taking, to terminate this Lease upon thirty (30) days written notice. If either less than ten (10%) percent of the Premises are taken, or more than ten (10%) percent of the Premises are taken and Lessor elects not to terminate as herein provided, the Minimum Rent thereafter to be paid shall be reduced on the basis of a formula using the square footage of the Premises taken by eminent domain as it relates to the area of the Premises prior to the taking. If 10% or more of the Shopping Center other than the Premises be so taken or appropriated, Lessor shall within sixty (60) days of said taking have the right at its option to terminate this Lease upon written notice to Lessee. In the event of any taking or appropriation (including sale under threat or proposal of the same) whatsoever, Lessee shall have no claim whatsoever for the value of any unexpired term of tHis Lease. If Lessor receives notice of the intention of any authority to appropriate, take or condemn any portion of the Premises or Shopping Center for public or quasi-public use under any right of eminent domain, condemnation or other law (collectively, "Taking"), Lessor shall promptly notify Lessee thereof. In the event of any such Taking or sale under the threat or proposal of a Taking, then any award, settlement or proceeds shall be distributed to the parties in proportion to the value of their respective interests in the Premises; provided, however, that in the event that this Lease is terminated as a result of a Taking, the Lessee's portion of the award shall not exceed the unamortized cost of the improvements constructed by Lessee in the Premises (including any additions, replacements or renovations thereto), plus Lessee's relocation costs incurred as a result of vacating the Premises. In the event of such Taking or like proceeding, the parties shall represent their own interests and shall present and prosecute their own claims for damages insofar as possible, subject to the limitations of this Section 32. If the parties are not permitted to proceed as separate parties, they shall jointly select counsel to present and prosecute their claim, and all costs thereof shall be paid by the parties in proportion to the amount of the award, settlement or sale proceeds that each receives. 33. NO PERSONAL LIABILITY OF LESSOR. Lessee agrees that Lessor shall have no personal liability with respect to any provision of this Lease, and that in the event Lessor fails to perform any obligation under this Lease or otherwise breaches this Lease, Lessee shall look solely to Lessor's ownership interest in the real property and improvements constituting the Shopping Center (including any rents, issues and profits therefrom), to insurance proceeds received by Lessor relating to the Shopping Center, and/or to sales proceeds received by Lessor from a sale of the Shopping Center by Lessor following the entry of a judgment in favor of Lessee against Lessor, for satisfaction of any judgment or any other remedy of Lessee, subject to any prior rights of any holder of a security instrument covering the Shopping Center. No other assets of Lessor shall be subject to levy, execution, or other judicial process for the satisfaction of Lessee's claim. The foregoing limitation of personal liability shall apply to any failure by Lessor to perform its obligations under this Lease, but shall not apply to the tortious acts of Lessor or its authorized agents, contractors or employees. 34. ESTOPPEL CERTIFICATE. Lessee agrees to execute, in recordable form, and deliver to Lessor or a Lender, when requested by Lessor or a Lender, an estoppel certificate regarding the status of this Lease. The certificate shall be in the form reasonably designated by Lessor or the Lender and may contain, without limitation, the following: (1) a statement that the Lease is in full force and effect with no modifications, or a statement that the Lease is in full force and effect as modified, together with a description of the modifications; (2) the Commencement Date and expiration date of this Lease; (3) the amount of advance rent, if any, paid by Lessee, and the date to which the rent has been paid; (4) the amount of any security deposit deposited with Lessor; (5) a statement indicating whether or not Lessor is, in Lessee's good faith opinion, in default under any of the terms of this Lease, and if so, a description of the alleged default and of any defense or offset claimed by Lessee relating thereto; and (6) any other certifications or information reasonably required by Lessor or Lender. Lessee shall deliver the certificate to the requesting party not later than 10 business days after receipt of the written request for the statement. Lessee's failure to deliver the certificate within the foregoing time period shall constitute an acknowledgment by Lessee that (except as otherwise stated in the certificate) this Lease has not been assigned or modified, that the Lease is in full force and effect, and that all rent payable under this Lease has been fully paid up to but not beyond the due date immediately preceding the date of Lessor or Lender's written request for the statement. Such an acknowledgment may be relied on by any person holding or intending to acquire any interest in the Premises or the Shopping Center. Lessee's failure to timely deliver the required certificate shall also constitute, as between Lessee and the persons entitled to rely on the statement, a waiver of any defaults by Lessor not listed in such certificate, and of Lessee's defenses or offsets (unless listed in such certificate) against the enforcement of this Lease that may exist prior to the date of the written request for the statement. Lessor may also treat Lessee's failure to timely deliver the certificate as a default under this Lease. In addition, within 10 days following receipt of Lessor's written request, Lessee shall furnish to Lessor financial statements and other information and documentation reflecting Lessee's current financial condition, all certified by Lessee to be true, accurate and correct. Copies of the most recent Form 10-K (and if applicable, Forms 10-Q) filed by Lessee with the SEC shall be deemed to satisfy the foregoing requirement. 35. CONSTRUCTION OF LEASEHOLD IMPROVEMENTS. A. Lessee shall be responsible for constructing the leasehold improvements in the Premises ("Lessee's Work") in accordance with this Section and the Leasehold Improvement Workletter which is attached hereto as Exhibit C and incorporated herein by reference. B. Except for the Work Letter Agreement, Lessor shall not be responsible for, nor shall Lessee construct any additional improvements on the Premises unless Lessee complies with the provisions of Section 14 of this Lease with respect thereto. C. From and after the full execution of this Lease ("Effective Date"), Lessee may enter the Premises at Lessee's sole risk and expense, for the sole purpose of constructing and installing the leasehold improvements in the Premises; provided, however, that prior to any such entry, Lessee shall pay for and provide Lessor with evidence of the insurance to be provided by Lessee pursuant to the provisions of Section 17 above. D. Within thirty (30) days following the Effective Date of this Lease, Lessee shall deliver to Lessor for its written approval one (1) set of scale drawings depicting Lessee's Work ("Plans"). Lessor shall have five (5) days within which to approve or disapprove Lessees drawings. If the plans are disapproved, Lessee shall make such reasonable changes to the Plans as are required by Lessor and shall again submit one (1) sets to Lessor for approval. The foregoing procedure shall be followed until a mutually satisfactory set of plans is approved by Lessor. Notwithstanding the foregoing, if Lessor disapproves Lessee's plans, the Commencement Date shall be delayed by seven (7) business days on the Lessor's first review of Lessee's plans and three (3) business days on Lessor's subsequent review of Lessee's plans. Upon the approval by Lessor of the Plans and Lessee's acquisition of all governmental permits and approvals necessary for the lawful installation and construction of Lessee's Work, Lessee shall thereupon immediately proceed with due diligence, at its own expense, to install thereon Lessee's property (meaning all items of Lessee's Work and Lessee's trade fixtures, equipment and merchandise) without interference with other work, if any, being done in the Shopping Center or the use and occupancy of the Shopping Center by any other lessee, and in compliance with all reasonable rules which Lessor, its architect and its contractors may make. Lessee shall, upon final completion of its work, furnish Lessor with all certificates and approvals relating to any work or installations done by Lessee that may be required by any governmental or insurance requirements. Lessor shall have no responsibility for any loss of or damage to any of Lessee's property so installed or left on the Premises. Lessee's entry shall be subject to all of the provisions of this Lease other than the payment of rent and other charges to Lessor; and at all times after such entry, Lessee shall maintain or cause to be maintained in effect insurance complying with this Lease. All constructions and installations undertaken by Lessee shall be performed in accordance with all applicable governmental laws and ordinances, all at Lessee's sole cost and expense, and shall be accomplished in a good and workmanlike manner, free of defects. E. Lessee's work shall include, but not be limited to, the purchase and/or installation and/or performance of any and all of the items required by Lessee in its plans, including all applicable governmental, architectural and engineering fees therefore. F. All work performed on the Premises by Lessee shall be performed by certified licensed (in good standing) contractors, workers, subcontractors and material men. At the time Lessee submits its drawings to Lessor for approval, under this Section, Lessee shall also submit the bid list of its General Contractor(s) and significant subcontractors for approval. Lessor shall have fifteen (15) days to approve or disapprove such contractors (approval shall not be unreasonably withheld). If Lessor disapproves one or more contractors, Lessee shall submit additional names for which Lessor shall have fifteen (15) days to approve or disapprove. Lessor's approval shall not be unreasonably withheld. All contractors, workers, subcontractors and materialmen shall be required to carry such insurance coverages as Lessor may reasonably require, with evidence thereof being provided to Lessor prior to the commencement of work.[ In addition, at Lessor's election, Lessee shall obtain and provide to Lessor, at Lessee sole cost and expense, a lien and completion bond, the form and amount of which shall be subject to the approval of Lessor. G. Any Lessee roof penetrations shall be made by Lessor's roofing contractor if required to maintain roof guarantee and the cost thereof shall be reimbursed by Lessee. All construction debris must be removed from Premises by Lessee. Any construction debris remaining for more than five (5) days shall be removed by Lessor and cost of removal billed to Lessee. H. Lessee shall at all times keep the Premises free and clear of all liens, claims and encumbrances in any way arising out of, in connection with, or by reason of, any improvements carried out as a part of Lessee's work under this Lease. The terms and provisions of the fourth paragraph of Section 14 above shall apply to any such liens, claims and/or encumbrances. In addition, and subject to the fourth paragraph of Section 14 above, if any such liens, claims and/or encumbrances are recorded and not discharged within 10 days, then this Lease shall be in default and Section 20 of this Lease shall apply. I. Lessee and Lessee's representatives and contractors shall keep the work site and all Common Areas clean and safe and free of debris during the construction of the tenant improvements. In the event that Lessor believes Lessee has not properly maintained its work site or the Common Areas, Lessor, with two days prior notice, may contract with a company to provide such clean up services and the expenses for such services shall be paid by Lessee on demand. 36. BROKERS. Each party represents and warrants to the other that neither had any dealings or negotiations with any broker or finder with respect to the Premises or this Lease other than JOHN CUMBELICH, CB-RICHARD ELLIS. THE BROKERAGE FOR THIS LEASE IS GOVERNED PER A SEPARATE AGREEMENT DATED JULY 21, 1999 BETWEEN JOHN CUMBELICH AND CARL CILKER. In the event of any claim for payment or compensation by any other agent or broker with respect to Lessee's lease of the Premises is asserted based on the dealings with a party hereto or their agents or representatives, then, the responsible party agrees to defend, indemnify and hold the other harmless from and against all costs, fees, liabilities and other claims incurred by the indemnified party as a result of the claim. The obligations under this Section 36 shall survive the expiration or sooner termination of this Lease. 37. SURRENDER OF PREMISES. At the expiration or sooner termination of this Lease, Lessee will surrender and deliver up the Premises to the Lessor, or those having the Lessor's estate therein, in good repair and condition as at the commencement of Lessee's occupancy, reasonable wear and tear, damages or destruction by fire or other casualty and repairs which Lessor is obligated under this Lease to perform excepted. Lessee shall remove those improvements identified for removal at Lessee's termination of occupancy of the Premises and repair any damage to the Premises caused by such removal, all at Lessee's sole cost and expense. Identification of improvements to be removed shall be detailed in a separate letter from Lessor to Lessee and shall be accompany Lessor's approval of Lessee's improvement plans. With regard to Lessee's subsequent improvements to the Premises, additions to the letter may be made upon Lessor's review of improvements pursuant to Section 14 of this lease. In addition, Lessee shall cause all trade fixtures, furnishings, equipment and other personal property of Lessee to be completely removed from the Premises upon the expiration or sooner termination of this Lease. 38. MODIFICATIONS FOR LENDERS. If, in connection with obtaining financing for the Shopping Center or any portion thereof, Lessor's prospective lender shall request reasonable modifications to this Lease as a condition to such financing, Lessee shall not unreasonably withhold, delay or condition its consent thereto, provided such modifications do not adversely affect Lessee's rights hereunder. Lessee's failure to so consent shall constitute an Event of Default under this Lease. 39. [INTENTIONALLY DELETED] 40. OTHER TENANCIES. Lessor reserves the absolute right to effect such other tenancies in the Shopping Center as Lessor shall determine to best promote the interests of the Shopping Center. Lessee does not rely on the fact nor does Lessor represent that any specific tenant or number of tenants shall occupy any space in the Shopping Center during the Term of this Lease. [SIGNATURE BLOCK FOLLOWS] SIGNATURES: LESSOR: LESSEE: Cornerstone of Los Gatos, LLC Real Goods, Inc. by: [S]CARL A. CILKER by: [S] MARK A. SWEDLUND Carl A. Cilker Mark A. Swedlund Chief Financial Officer Date: Sept. 7, 1999 Date: Septemer 3, 1999 by: [S]ELIZABETH J.C. SMITH by: [S]LESLIE B. SEELY Elizabeth J.C. Smith Leslie B. Seely Chief Financial Officer Date: September 7, 1999 Date: September 3, 1999 by: [S]WILLIAM H. CILKER William H. Cilker Date: September 7, 1999 Cornerstone of Los Gatos, LLC/Real Goods Lease, Inc. Exhibit A Site Plan Exhibit B Rent Schedule Cornerstone of Los Gatos, LLC/Real Goods Lease, Inc. Exhibit C Lessor's Workletter A. Except as set forth herein, Lessee shall be responsible for constructing the leasehold improvements in the Premises, and Lessor's prior written consent shall be required for any alteration and/or improvements to the Premises and to any exterior portion of the Premises. All such leasehold improvements constructed and installed by Lessee shall be at Lessee's sole cost and expense. B. Lessor shall provide the following improvements and installations in the Premises: 1) Water, gas, electrical and telephone service stubbed to the space. 2) Storefront in keeping with the architecture of the shopping center (existing). 3) Demising walls with sheet rock and insulation. 4) Concrete slab floor. 5) Present HVAC system. Lessee is responsible for the maintenance of the system. 6) Fire Protection Sprinkler System (existing). 7) Interior lighting equivalent to front to rear, open type, 2' x 4' fluorescent fixtures. (With Lessor approval, expenditure amount may be credited to a style of Lessee's preference.) 8) One handicapped accessible restroom (existing). Cornerstone of Los Gatos/Real Goods Lease Exhibit D Sign Program Cornerstone of Los Gatos, LLC/Real Goods, Inc. Lease EXHIBIT E COMMENCEMENT DATE MEMORANDUM LESSEE: LESSOR: LEASE DATE: PREMISES: GROSS FLOOR AREA: Pursuant to Section 3 of the above referenced Lease, the Commencement Date is hereby established as Dated: LESSEE: By: Its: By: Its: Dated: LESSOR: By:[S]CARL A. CILKER Carl A. Cilker [S]ELIZABETH J.C. SMITH Elizabeth J.C. Smith Cornerstone of Los Gatos/Real Goods Lease Exhibit F Rules and Regulations Which Constitute a Part of the Lease A. No awning or shade shall be affixed or installed over or in the show windows or the exterior of the Premises except with the prior written consent of Lessor. Lessor and Lessee will use good faith efforts to agree on design, color, and placement of awnings. If Lessee desires window drop curtains in the show windows of the Premises, the same must be of such uniform shape, color, material, and make as may be prescribed by Lessor and must be put up as directed by Lessor, and paid for by Lessee. B. No boring or cutting for wires shall be allowed in the exterior walls, the demising wall(s), the floor or roof, except as provided in working drawings or with the prior written consent of Lessor. C. Lessee shall not use any machinery within the Premises even though its installation may have been permitted, which may cause any unreasonable noise or jar, or tremor to the floors or walls, or which by its weight might injure the floors of the Premises. D. Lessor may limit weight, size and position of all safes, fixtures and other equipment used in the Premises. In the event Lessee shall require extra heavy equipment, Lessee shall notify Lessor of such fact and shall pay the cost of structural bracing to accommodate same. All damage done to the Premises or Shopping Center by putting in or taking out, or maintaining extra heavy equipment shall be repaired at the expense of Lessee. E. Lessee and Lessee's officers, agents and employees shall not make nor permit any loud, unusual or improper noises nor interfere in any way with other lessees or those having business with them, not bring into nor keep within the Shopping Center any animal or bird (with the exception of the authorized pet store, automobile or other vehicle, except such vehicle as Lessor may from time to time permit. Lessee and Lessee's officers, agents, employees, customers or invitees shall not throw refuse or other substances or litter of any kind in or about the Shopping Center, except in receptacles placed therein for such purposes by Lessor or government authorities. F. Except as provided in this Lease, no radio or television or other device shall be installed without first obtaining in each instance Lessor's consent in writing. No aerial shall be erected on the roof or exterior walls of the Premises, or on the grounds, without in each instance, the written consent of Lessor. Any aerial so installed without such written consent shall be subject to removal without notice at any time at Lessee's sole cost and expense. G. All garbage, including wet garbage, refuse or trash shall be placed by the Lessee in the receptacles provided by the Lessor for that purpose and only during those times prescribed by the Lessor. H. Lessee shall not burn any trash or garbage at any time in or about the Premises or any area of Shopping Center. I. Lessee shall use, at Lessee's cost, such pest extermination contractor to be selected by Lessor and at such intervals as Lessor may require. If Lessee fails to provide adequate pest control for its premises then Lessor may select and hire an agent to provide such control for the Premises at Lessee's sole cost and expense. Such cost and expense shall be reasonable and competitive for the trade area surrounding the Shopping Center. Lessee will pay pest control expenses within 30 days of receipt of invoice for work performed. J. Lessees are required to observe all security regulations issued by the Lessor and to comply with instructions and/or directions of the duly authorized security personnel for the protection of the Shopping Center and all lessees therein. K. Any requests of Lessee consistent with the terms of the Lease will be attended to only upon written application to Lessor at the General Offices of the Shopping Center. L. No waiver of any rule or regulation by Lessor shall be effective unless expressed in writing and signed by Lessor or their authorized agent. M. Lessor reserves the right to exclude or expel from the Shopping Center any person who, in the judgment of Lessor, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of the law or the rules and regulations of the Shopping Center. N. Lessor reserves the right at any time to change or rescind any one or more of these rules or regulations or to make such other and further reasonable rules and regulations as in Lessor's judgment may from time to time be necessary for the management, operation, safety, care and cleanliness of the Shopping Center, and for the preservation of good order therein, as well as for the convenience of other occupants and lessees of the Shopping Center. Lessor shall not be responsible to Lessee or to any other person for the nonobservance or violation of the rules and regulations by any other lessee or other person. Lessee shall be deemed to have read these rules and to have agreed to abide by them, together with any modifications hereof and/or further rules and regulations made by Lessor from time to time, as a condition to its occupancy of the space hereinleased. In addition, Lessee shall cause all its employees,agents, customers, contractors and invitees to abide by these rules and regulations, together with any modifications hereof and/or further rules and regulations made by Lessor from time to time. O. Lessee shall abide by any additional rules or regulations which are ordered or requested by any governmental or military authority. P. In the event of any conflict between these rules and regulations or any further or modified rules and regulations from time to time issued by lessor and the Lease provisions, the Lease provisions shall govern and control. Q. Lessor specifically reserves to itself or to any person or firm it selects, the right to place in and upon the Shopping Center, coin operated vending machines in the Common Areas for the sale of goods or services and the revenue resulting therefrom, including the sale of goods which may compete with those which Lessee is permitted to sell. In no event shall any vending machines be placed in the common area outside of Lessee's store front. R. Lessee and Lessee's employee's shall not obstruct any walkway of the building. This includes storage, even on a temporary basis, of boxes, goods and like items. S. Distribution of handbills, brochures or fliers, etc. or any other form of solicitation in the Common Area of the Shopping Center is expressly prohibited. T. Lessee shall keep the Premises neat and orderly. A reason for Lessee's interest in this space is its high visibility in the Shopping Center. Lessee therefore has the responsibility to maintain its Premises with the awareness that it is on display. If in Lessor's sole judgement Lessee is not maintaining its business in a neat and orderly way, Lessor will notify Lessee in writing. Lessee shall have no more than 3 days to correct the items noted by Lessor. If Lessee does not correct the items so noted to Lessor's satisfaction, then, in addition to any other right or remedy, Lessor shall have the right, without obligation, to take corrective action and Lessee shall be responsible for any costs incurred with such corrective action. Lessee shall reimburse Lessor within 10 days for such costs. Any bill remaining unpaid shall be subject to interest and penalties as provided for in Section 31.I. U. Toilets, urinals and wash basins shall not be used for any purpose other than those for which they were constructed and no rubbish, newspapers, food or other substance of any kind shall be put into them. The expenses of repairing any breakage, stoppage or damage resulting from a violation of this rule shall be borne by Lessee EX-2 3 0003.txt SUBLEASE 11670 NATIONAL BOULEVARD WEST LOS ANGELES, CALIFORNIA THIS SUBLEASE ("SUBLEASE"), is made and entered into as of this 8th day of December, 1999, by and between MRS. GOOCH'S NATURAL FOOD MARKETS, INC., a California corporation ("SUBLANDLORD"), and REAL GOODS TRADING CORPORATION, a California corporation ("SUBTENANT"). RECITALS A. Allaseba H. Gorham and Carol H. Richards (the "LANDLORD") and Hersh & Ziff Inc., dba Westward Ho Markets, the predecessor-in-interest to Sublandlord, entered into a Lease Agreement dated January 1, 1980, as amended by Amendment of Lease and Agreement dated July 27, 1988, and Assignment and Amendment to Lease Agreement dated November 10, 1994 (hereinafter collectively referred to as the "MASTER LEASE") pursuant to which Sublandlord leased approximately 21,000 square feet of retail space ("PREMISES") from Landlord located at 11666 National Blvd., Los Angeles, CA 90064. B. Sublandlord now desires to sublet unto Subtenant, and Subtenant desires to sublease from Sublandlord a portion of the Premises. NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: 1. SUBLEASED PREMISES. Sublandlord hereby subleases to Subtenant, and Subtenant hereby subleases from Sublandlord, a portion of the Premises, consisting of approximately 3,065 square feet, as indicated on EXIHIBIT A attached hereto and incorporated herein by this reference (the "SUBLEASED PREMISES"), to have and to hold, subject to the terms of the Master Lease and upon the terms and conditions set forth herein. The remaining portion of the Premises, which is not subleased to Subtenant, shall be hereinafter referred to as the "MASTER PREMISES". The obligations of the parties hereunder shall be conditioned on Sublandlord obtaining and delivering to Subtenant, prior to the Tender Date, as hereinafter defined, a termination of the existing sublease, as described in Paragraph 12 hereof (the "APOCARE TERMINATION"), Landlord's written consent to this Sublease in the form attached as EXHIBIT D hereto (the "CONSENT TO SUBLEASE"). If the Apocare Termination or Consent to Sublease has not been obtained by the Tender Date, the Tender Date, the Commencement Date and the Expiration Date shall be automatically extended to the date ten (10) days following the date that the Apocare Termination and Consent to Sublease are effective, copies of which will be delivered to Subtenant. If the Apocare Termination and the Consent to Sublease have not been obtained by March 1, 2000, Subtenant shall have the right to terminate this Sublease by delivering written termination notice to Sublandlord within 30 days after March 1, 2000. 2. TERM AND SUBTENANT IMPROVEMENTS. (a) The term of this Sublease (the "SUBLEASE TERM") shall commence on April 1, 2000 (the "COMMENCEMENT DATE") and shall terminate on March 31, 2010 ("EXPIRATION DATE"), provided that Subtenant shall have the right, by giving written termination notice to Sublandlord not later than September 30, 2004, to terminate this Sublease effective as of March 31, 2005 (in which case such date shall be the Expiration Date), and further provided that the Sublease Term shall be subject to extension as provided in Paragraph 3. Sublandlord will deliver the Subleased Premises to Subtenant on or before January 1, 2000 ("TENDER DATE"). In the event Sublandlord fails to tender the Subleased Premises to Subtenant on or before the Tender Date, the Commencement Date and the Expiration Date shall be extended one day for each day Sublandlord delays the tender of the Subleased Premises. (b) The Subleased Premises are leased and will be delivered to Subtenant in an "as-is" condition, broom clean. Sublandlord makes no representation or warranty of title for any trade fixtures or equipment which may be located at the Subleased Premises on the date of this Sublease or on the Tender Date, and Subtenant shall have the right to use or to dispose of any personal property located within the Subleased Premises on the Tender Date. (c) After the Tender Date, Subtenant will perform certain alterations to the Subleased Premises (the "INITIAL ALTERATIONS")described in EXHIBIT B. In performing the Initial Alterations, Subtenant shall comply with all applicable laws or ordinances pertaining thereto. Sublandlord acknowledges that it has specifically approved the plans and specifications for the Initial Alterations, including the installation on the roof of the building of certain signs, solar panels, and wind generators described by size, dimension, and location on EXHIBIT B. Any other signs, solar panels, wind generators or other equipment or fixtures located outside the Subleased Premises, or any changes to the specifications on EXHIBIT B or any displays visible from the Master Premises shall be subject to Sublandlord's consent, which consent may be withheld for any reason. So long as such items are of a size and quality consistent with the customary character of a first class retail shopping center, do not block the visibility or access to the Master Premises, and comply with all applicable laws and ordinances, Sublandlord will agree to be reasonable in its consideration of such items, however, Sublandlord may still object to their size, placement, or location for all items that are visible, or impede the visibility of Sublandlord's Master Premises or signs. Subtenant will undertake commercially reasonable efforts (but not including an obligation to perform work outside customary working hours in the construction trades) to minimize interference with Sublandlord's occupancy and use of the Master Premises while Subtenant is performing its Initial Alterations at the Subleased Premises or in the common areas of the Shopping Center around the Master Premises. (d) Following completion of the Initial Alterations, Subtenant may make subsequent alterations or improvements to the Subleased Premises from time to time upon compliance with any applicable provisions of the Master Lease (as incorporated herein pursuant to Paragraph 10 below), and subject also to Subtenant obtaining Sublandlord's prior written consent (which may be withheld for any reason) if such alterations or improvements will affect the roof, any structural supporting elements of the building in which the Subleased Premises are located, or are visible from the Master Premises, or will require work to be performed on common plumbing, electrical or other utility systems serving both the Subleased Premises and the Master Premises. 3. OPTION TO EXTEND. Subtenant shall have one option to extend the Sublease Term for an additional five years, to March 31, 2015 (the "EXTENDED TERM"), upon all the terms and conditions of this Sublease except that the Fixed Minimum Rent shall be as follows: On 4/1/10 through 3/31/15, the annual Fixed Minimum Rent then in effect shall be increased by the lesser of (i) twelve and one half of one percent (12.5%), or (ii) the cumulative increase in the CPI (as hereinafter defined) during the timeperiod from the 4/1/05 to 3/31/10 calculated by (X) dividing (a) the CPI published on the 4/1/05, by (b) the CPI published on 3/31/10, (Y) subtracting one (1) from such quotient. Subtenant shall give Sublandlord written notice of Subtenant's intent to exercise Subtenant's option to extend the Sublease Term on or before October 1, 2009. In the event that Subtenant fails to deliver Sublandlord written notice of Subtenant's exercise of this option on or before October 1, 2009, the Sublease will expire as of the Expiration Date. This option to extend will be of no further force and effect if Subtenant does not timely exercise its option, or if Subtenant is in default under this Sublease after notice and the expiration of the applicable cure period at the time Subtenant exercises this option. 4. USE. The Subleased Premises are to be used and occupied by Subtenant for the retail sale of environmentally friendly and renewable energy hardware, dry goods and equipment or products as are typically sold in other "Real Goods" retail stores as of the date of this Sublease. In addition, a portion of the Subleased Premises may be devoted to storage of inventory and supplies and incidental general office and other uses related to the operation of Subtenant's business in the Subleased Premises, as approved on the attached plans and specifications. Subtenant shall not be permitted to sell any grocery items or products at the Subleased Premises in competition with the products sold in the Master Premises or in violation of the Master Lease; provided however Subtenant shall be entitled to sell products in the Subleased Premises that are also sold in the Master Premises if such items are purchased by Sublandlord from Subtenant for such sale in the Master Premises. In no event is the Subleased Premises to be used for any other purpose, the specific use granted herein being material consideration for this Sublease, regardless of whether or not the change in use is by further sublease, assignment or a change in Subtenant's nature of its business. 5. RENT. Subtenant agrees to pay Sublandlord as rent for the Subleased Premises the following amounts: (a) FIXED MINIMUM RENT. Commencing on the earlier of: (a)seven(7)calendar dates after the date Subtenant opens for business to the public or (b) the Commencement Date, Subtenant shall pay to Sublandlord, in monthly installments in advance, without any prior demand therefor and (except as may be otherwise expressly set forth herein) without offset or abatement, throughout the Sublease Term, the amount set forth in subparagraph 5(b) hereof ("FIXED MINIMUM RENT"), on or before the first day of each calendar month, except that Fixed Minimum Rent for the first full calendar month of the Sublease Term shall be paid upon execution of this Sublease. If the Commencement Date is not the first day of a calendar month, on the first day of the calendar month immediately following the Commencement Date, Subtenant shall pay Sublandlord, an amount equal to the pro rata portion of Fixed Minimum Rent for the number of days from the Commencement Date to the end of such fractional month, based on a thirty day month. Fixed Minimum Rent for any fractional month at the end of the Sublease Term shall also be prorated. Prorations for any fractional month shall be made on the basis of a 30 day month regardless of the actual number of days in such fractional month. (b) MONTHLY FIXED MINIMUM RENT. The Fixed Minimum Rent during the Sublease Term (excluding the Extended Term, which Fixed Minimum Rent is specified above) shall be as follows: (1) On the Commencement Date through 3/31/05, the annual Fixed Minimum Rent shall be equal to $112,176.00, which is equal to a monthly Fixed Minimum Rent of $ 9,348.00. (2) On 4/1/05 through 3/31/10, the annual Fixed Minimum Rent then in effect shall be increased by the lesser of (i) twelve and one half of one percent (12.5%), or (ii) the cumulative increase in the CPI (as hereinafter defined) during the timeperiod from the Commencement Date to 3/31/05 calculated by (X) dividing (a) the CPI published on the Commencment Date, by (b) the CPI published on 3/31/05, (Y) subtracting one (1) from such quotient.(3) As used herein, the term "CPI" shall mean the Consumer Price Index for All Urban Consumers (1982 - 1984 = 100), Los Angeles, California Metropolitan Area - All Items published by the United States Department of Labor, Bureau of Labor Statistics (the "Bureau"). In the event that (i) the Bureau ceases to use the 1982-84, average of 100 as the basis of calculation and the Bureau does not recalculate the then applicable CPI number for all years including 1982-84, or (ii) Landlord and Tenant mutually agree in writing that the CPI does not accurately reflect the purchasing power of the dollar, or (iii) the CPI shall be discontinued for any reason, then the parties shall thereafter accept and use such other CPI or comparable statistics on the cost of living for the United States as shall be computed and published by an agency of the United States or by a responsible financial periodical of recognized authority selected by Landlord and Tenant. In the event of the use of comparable statistics of the CPI as above mentioned, there shall be made in the method of computation provided for, such revisions as the circumstances may require to carry out the intent of the parties as set forth herein. (c) PERCENTAGE RENT. In addition to Fixed Minimum Rent, Subtenant shall pay to Sublandlord, without any prior demand therefor and (except as may be otherwise expressly set forth herein) without offset or abatement, in accordance with the following provisions, the amount by which five percent (5%) of Gross Sales for each calendar year during the term, exceeds Fixed Minimum Rent for such year ("PERCENTAGE RENT"). Percentage Rent shall be paid in quarterly installments commencing each calendar year with the calendar quarter in which Gross Sales for such calendar year exceed the product of (x) twenty (20), times (y) Annual Fixed Minimum Rent for such year (such product, the "BREAKPOINT"). The amount of each such payment shall be five percent (5%) of Gross Sales for the current calendar year, computed to the effective date of such statement, less amounts previously paid by Subtenant for Fixed Minimum Rent or previous installments of Percentage Rent for such year. For each calendar quarter, not later than 30 days following the end of such quarter (or, if applicable, within ten (10) days following the date Subtenant files its Form 10-Q for such quarter with the Securities and Exchange Commission), Subtenant shall submit to Sublandlord a written statement ("QUARTERLY REPORT") setting forth the Gross Sales (and deductions and exclusions therefrom) for the calendar quarter and the year to date, together with any payment of Percentage Rent required to be made at such time. Such reports may be in the form customarily kept by Subtenant for such location (e.g. register receipts or unaudited summaries of sales). In addition, within sixty (60) days after the end of each calendar year(or, if applicable, within ten (10) days following the date Subtenant files its Form 10-K for such year with the Securities and Exchange Commission), Subtenant shall submit to Sublandlord a written statement setting forth the Gross Sales and permitted deductions therefrom for the final quarter of such calendar year and for such calendar year (the "ANNUAL REPORT"), accompanied by any shortfall in the payment of Percentage Rent shown on such Annual Report to be due and payable for such year. Each Annual Report shall contain a certification by an authorized officer of Subtenant that, to the best of such officer's knowledge and belief, such report has been prepared in accordance with generally accepted accounting principles (except as noted therein) and is complete and accurate. With respect to any partial calendar year at the beginning or end of the Sublease Term, Percentage Rent shall equal five percent of Gross Sales for such partial calendar year, less any amounts paid on account of Percentage Rent for such partial year, and the Breakpoint shall equal $2,000,000.00 prorated on the basis of a 365 day year. (d) STATEMENTS OF AND ACCOUNT FOR GROSS SALES. For a period of two (2) years after the applicable Annual Report is submitted to Sublandlord (and thereafter until any audit conducted under subparagraph 5(e) below has become final), Subtenant shall keep at the Subleased Premises or at its principal corporate headquarters, true and accurate records of Subtenant's Gross Sales for the period covered by such Annual Report. Subtenant's records shall be sufficient to permit an audit of Subtenant's Gross Sales to be conducted in accordance with generally accepted accounting principles and auditing practices. (e) AUDIT. During the twelve (12) month period after an Annual Report is submitted to Sublandlord (except the Annual Report for the last full calendar year and any partial year at the end of the term, for which the period shall be six (6) months following delivery of such Annual Report), Sublandlord may, upon thirty (30) days' prior written notice to Subtenant, audit Subtenant's records of Gross Sales on one (1) occasion for the period covered by such Annual Report. Such audit shall be conducted during regular business hours at the Subleased Premises, by a certified public accountant or accounting firm that has not been employed by either party during the prior year ("AUDITOR"). The Auditor shall be selected by Sublandlord, subject to Subtenant's reasonable approval. Subtenant and Sublandlord hereby specifically consent to Sublandlord performing the audit with Sublandlord's own personnel, if such personnel are qualified to perform such audit, in Sublandlord's reasonable discretion. Subtenant may require the Auditor to execute aconfidentiality agreement satisfactory to Subtenant and its counsel with respect to nondisclosure of sales and other proprietary information disclosed to the Auditor in connection with such audit. The Auditor will be permitted to examine, but not copy, Subtenant's accounting records relating to Gross Sales. Sublandlord acknowledges that only the Auditor, will be permitted to review Subtenant's books and records of Gross Sales (and claimed exclusions). The Auditor shall be afforded a reasonable period of time to conduct and complete the audit, and Subtenant will cooperate with the Auditor in conducting the audit. Within a reasonable period, not exceeding sixty (60) days, following completion of the audit, the Auditor shall issue a report of its conclusions, specifying the amount of additional Percentage Rent due from Subtenant or the amount of Percentage Rent overpaid by Subtenant. The report of the audit shall be delivered to both Sublandlord and Subtenant. If the audit shows that Subtenant paid less Percentage Rent than was actually due, Subtenant shall pay the amount of the deficiency to Sublandlord within thirty (30) days after Subtenant's receipt of such audit. If the audit shows that Subtenant paid more Percentage Rent than was actually due, Sublandlord shall, at Subtenant's election, pay said excess to Subtenant within thirty (30) days after completion of such audit or Subtenant may deduct such excess from the next due payment(s) of rent. If such audit shows an understatement of Gross Sales for the period covered by such Annual Report in excess of three percent (3%) of Gross Sales, then the reasonable fees and expenses actually incurred by Sublandlord in conducting such audit shall be reimbursed by Subtenant; otherwise, such fees and expenses shall be paid by Sublandlord. If Subtenant protests the conclusions of such audit, Subtenant may contest Sublandlord's determination by giving Sublandlord written notice within thirty (30) days following Subtenant's receipt of the audit report. If Sublandlord and Subtenant cannot mutually agree as to the Percentage Rent due within thirty (30) days after Sublandlord's receipt of Subtenant's notice of protest, Sublandlord and Subtenant shall jointly choose an independent Certified Public Accountant, whose determination shall be binding upon the parties hereto. If Sublandlord and Subtenant fail to agree upon an independent Certified Public Accountant, the parties agree to proceed forthwith to arbitrate the issue in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The cost of the independent Certified Public Accountant or the cost of arbitration shall be borne equally by the parties, but the cost of the audit shall be borne by either Sublandlord or Subtenant as aforesaid. (f) PAYMENT OF RENT. All rent shall be payable at the office of Sublandlord located at 15315 Magnolia Boulevard, Suite 320, Sherman Oaks, California 91403, or at such other address as Sublandlord may specify by written notice to Subtenant. (g) ADDITIONAL RENT. In addition to Fixed Minimum Rent and Percentage Rent, Subtenant shall reimburse Sublandlord monthly during the Sublease Term, Subtenant's pro rata share of operating expenses, taxes, insurance and other charges or additional rent paid pursuant to the terms of the Master Lease by Sublandlord to Landlord (other than any late fee, penalty or interest resulting from Sublandlord's delinquent payment of any amount due Landlord), within fifteen (15) days following receipt of an invoice for such expenses from Sublandlord. Subtenant agrees to reimburse Sublandlord for Subtenant's pro rate share of any adjustments in such additional rent billed annually or otherwise to Sublandlord by Landlord under the Master Lease, and Sublandlord agrees to refund Subtenant's proportionate share of any overpayment when such refund is received by Sublandlord. Subtenant's pro rata share shall be determined by multiplying the (i) the amount of such additional rent charged to Sublandlord under the Master Lease, by (ii) a fraction, the numerator of which shall be 3,065 (the rentable area in the Subleased Premises) and the denominator of which shall be 21,000 (the total rentable area of the premises leased under the Master Lease) ("PRO RATA SHARE"). Subtenant, upon request, shall be entitled to copies of invoices or other reasonable documentation received from Landlord to verify the additional rent charged under the Master Lease. (h) GROSS SALES. "Gross Sales" as used herein shall mean the entire amount of Subtenant's actual receipts, whether cash or otherwise, from all sales of food, beverages, merchandise, services or sales from mechanical or other vending devices placed or made in, on or from the Subleased Premises, subject to the adjustments and exclusions described below). Notwithstanding the foregoing, Gross Sales shall not include (or if included there shall be deducted, but only to the extent previously included) the amount of (i) customer and employee discounts; (ii) bottle refunds, trading stamps and all trade or discount coupons; (iii) returns of overstock, defective or otherwise unsold merchandise for credit to shippers, suppliers, purveyors, distributors or manufacturers; (iv) any cash or credit refunds, uncollectible credit card charges, bank charge backs for counterfeit currency or unnegotiable checks (provided that if such losses are actually collected in a later year, the amount recovered shall be included in Gross Sales for such later year), or any sale made where the merchandise sold or some part thereof is thereafter returned by the purchaser and accepted by Subtenant; (v) automated teller machine proceeds and receipts for the cashing of checks or negotiable instruments; (vi) sale of incidental services (e.g.shipping or delivery charges) provided to customers on a non-profit basis by Subtenant or by unaffiliated licensees or concessionaires of Subtenant but only to the extent that such licensees or concessionaires retain the proceeds of such sale; (vii) sales of equipment, furniture or trade fixtures not in the ordinary course of business; (viii) any interest, delivery or service charges received with respect to sales of merchandise or service; (ix) sales taxes, based upon present or future laws, collected directly from customers by Subtenant, and any other tax, excise or duty which is levied or assessed against Subtenant by any governmental authority based on sales of specific merchandise sold on, or the privilege or license to sell or distribute specific merchandise from the Subleased Premises, whether or not the amount thereof is passed on to or collected by Subtenant from any purchaser thereof; (x) lottery ticket, admission ticket and other ticket sales, except to the extent of the amount of commissions received thereon; (xi) receipts from postage machines and public telephones; (xii) direct expenses of credit card and debit card sales paid by Subtenant to the issuers of such cards; (xiii) sales discounts, sums raised for donations or donations to nonprofit, charitable or religious organizations; (xiv) wholesale and/or bulk sales of merchandise or services to other retail stores operated by Subtenant or an affiliate of Subtenant; (xv) transfers by Subtenant from the Subleased Premises to another place of business owned or operated by Subtenant (where such transfers are made solely for the convenient operation of Subtenant's business and not for the purpose of consummating a sale which has theretofore been made in, on or from the Subleased Premises or for the purpose of depriving Sublandlord of the benefit of a sale which otherwise would be made in, on or from the Subleased Premises); and (xvi) any sums or credits received in settlement of claims for loss or damage to merchandise which is not part of Subtenant's actual receipts set forth above. Each charge or sale upon installment or credit shall be treated as a sale for the full price in the month during which such charge or sale shall be made (and the direct expenses of such credit card sales shall be deducted in such month), regardless of the time when Subtenant shall receive payment (whether full or partial) therefor. As used in this Paragraph, the term "Subtenant" shall include any subsidiary, subtenant, concessionaire or licensee of Subtenant conducting business at the Subleased Premises with Subtenant's approval. 6. TAXES. In addition to Subtenant's Pro Rata Share under subparagraph 5(f) of real estate taxes payable by Sublandlord pursuant to the Master Lease, Subtenant shall pay, but without duplication of any amount otherwise being paid by Subtenant under subparagraph 5(f), any taxes or assessments (a) measured by or reasonably attributable to the cost or value of Subtenant's equipment, furniture, fixtures and other personal property located in the Subleased Premises; (b) upon or measured by the rent payable hereunder; or (c) upon or with respect to the possession, leasing, operation, management , maintenance, alteration, repair, use or occupancy by Subtenant of the Subleased Premises. 7. UTILITIES. Subtenant shall contract for and pay directly to the utility companies which provide service, in a timely fashion, the costs for any utilities which are separately metered or submetered to the Subleased Premises. Subtenant shall pay to Sublandlord, as additional rent, the reasonably allocated costs of utility service charges (the "UTILITY EXPENSE"), based on usage by Subtenant, for electricity, sewage, and any other utility services furnished to the Subleased Premises which are not separately metered (but without duplication of any amount otherwise payable by Subtenant under subparagraph 5(f) above). Subtenant's payment for its Utility Expense will be made monthly, within 15 days of receipt of an invoice for the Utility Expense. Any delay or failure of Sublandlord to estimate Subtenant's Utility Expense will not impair the continuing obligation of Subtenant to make the Utility Expense payment. Sublandlord will not be liable for any reason for any loss or damage resulting from an interruption of any of these services. 8. SECURITY DEPOSIT. Simultaneously with the execution of this Sublease, Subtenant shall deposit the sum of $9,348.00 with Sublandlord to be held on deposit by Sublandlord as security for the performance required of Subtenant hereunder. Upon the expiration or termination of the Sublease Term, Sublandlord shall refund such deposit (or the balance thereof which has not been applied to pay any unpaid obligation of Subtenant to Sublandlord hereunder) promptly following Subtenant's surrender of possession of the Subleased Premises. 9. SUBLETTING AND ASSIGNMENT. Neither Subtenant nor Subtenant's legal representative or successors in interest by operation of law or otherwise shall assign this Sublease or sublease the Subleased Premises or any part thereof or mortgage, pledge or hypothecate its leasehold interest or grant anyconcession or license within the Subleased Premises (any of the foregoing, a "TRANSFER"), without the prior written consent of Sublandlord, which consent may be withheld for any reason. (a) In any case where Sublandlord consents to any assignment, sublease, grant of a concession or license or mortgage, pledge or hypothecation of the leasehold, Subtenant will nevertheless remain directly and primarily liable for the performance of all of the covenants, duties and obligations of Subtenant hereunder, and such consent will not be deemed a consent to any further subletting or assignments. (b) Notwithstanding the foregoing, however, Subtenant may Transfer its subleasehold (by mortgage, leasehold deed of trust or similar instrument) as collateral security, provided that if the written consent of Landlord would be required by the Master Lease for a similar Transfer by Sublandlord, then the written consent of both Landlord and Sublandlord shall be obtained. Sublandlord agrees in such case not to unreasonably withhold its consent. (c) Notwithstanding the foregoing, however, Sublandlord's consent shall not be required in connection with a Transfer: (1)to a corporation or other entity with which Subtenant may merge or consolidate, or (2) in connection with the sale of all or a substantial portion of Subtenant's assets, or (4) to any Affiliate (as defined below) of Subtenant, or (5) in connection with the sale of stock or other securities of Subtenant in a public offering. The previous sentence shall not permit Subtenant to make any change in the use of the Subleased Premises. The term "Affiliate" shall mean any corporation, limited liability company or other entity which controls, is controlled by, or is under common control with Subtenant. The term "control" shall mean ownership of more than fifty percent (50%) of all of the voting stock of a corporation or more than fifty percent (50%) of all of the legal and equitable interest of any other business entity. 10. MASTER LEASE. Subtenant acknowledges that Subtenant has received a copy of the documents comprising the Master Lease, which are listed on Exhibit C, attached hereto and incorporated by this reference. Subtenant also acknowledges that the Subleased Premises are referred to in the Master Lease as the "drugstore" portion of the leased premises. To the extent not otherwise inconsistent with the agreements and understanding expressed in this Sublease, and except for the provisions applicable only to the original parties to the Master Lease, the terms, provisions, covenants, and conditions in the Master Lease, to the extent applicable to the Subleased Premises are hereby incorporated herein by reference as a part of this Sublease, subject to and as modified by the terms, provisions, covenants, and conditions stated above and the following specific agreements between Sublandlord and Subtenant: (a) Subtenant expressly agrees to perform and comply with all of the terms, provisions, covenants and conditions of the Master Lease required of "Tenant" under the Master Lease arising and performable during the term of this Sublease to the extent the same are applicable to the Subleased Premises and occupancy thereof and shall indemnify and hold harmless Sublandlord from and against all claims, loss, liability, cost, and expense (including, without limitation, reasonable attorneys' fees) resulting from any default by Subtenant with respect to any such covenants, provisions or obligations. (b) In any case where the "Landlord" under the Master Lease reserves the right to enter the Subleased Premises, said right shall inure to the benefit of Sublandlord as well as to the Landlord. (c) With respect to work, services, maintenance, repairs, restoration or the performance of other obligations required of the Landlord under the Master Lease with respect to the Subleased Premises, Sublandlord's sole obligation, with respect thereto, shall be to request the same, upon request in writing by Subtenant, and to use reasonable efforts to obtain the same from the Landlord under the Master Lease. (d) Subtenant acknowledges that possession of the Subleased Premises must be surrendered to Sublandlord at the expiration of the Sublease. Subtenant agrees to indemnify and save Sublandlord harmless from and against all claims, loss, liability, cost and expense (including, without limitation reasonable attorneys' fees) resulting from delay by Subtenant in failing to so surrender the Subleased Premises, including, without limitation, any claims made by Landlord or any succeeding tenant founded on such delay. (e) If the Master Lease terminates, this Sublease shall also terminate. (f) Subtenant agrees that Sublandlord shall have the right to enter into amendments of the Master Lease from time to time without the consent of Subtenant, provided such amendment. 11. INDEMNITIES. Subtenant covenants to defend and save Sublandlord harmless from any and all losses which may occur with respect to any person or persons, corporation, property or chattels on the Subleased Premises, or to the property itself, resulting from Subtenant's acts or omissions, except (i) when such loss results from a default by Sublandlord under this Sublease or the willful conduct or negligent act or omission of Sublandlord, its respective agents, employees, independent contractors or invitees, or (ii) to the extent of any insurance proceeds received (or receivable ) by or credited to Sublandlord, or payable under Sublandlord's insurance as a result of Sublandlord's contributory culpability. With respect to any loss from which Sublandlord claims Subtenant is required to hold Sublandlord harmless, Sublandlord shall promptly notify Subtenant of (a) any acts or omissions causing such loss, and (b) any proceedings initiated in connection with such acts or omissions. Subtenant's obligations under this Paragraph shall be reduced to the extent that Subtenant is not promptly notified as aforesaid and such failure prejudices Subtenant. 12. LEASING COMMISSIONS. Sublandlord and Subtenant represent to each other that no brokers have been involved in this transaction and the parties each agree to indemnify the other for any commission claimed by, through, or under such party. 13. TERMINATION FO EXISTING SUBLEASE. Sublandlord's obligations under this Sublease are conditioned upon the termination of the existing sublease between Sublandlord and Apocare Pharmacy, Inc., the existing subtenant at the Subleased Premises. If Apocare Pharmacy, Inc. agrees to terminate its sublease, but is not able to tender the Subleased Premises on or before the Tender Date, this Sublease shall be effective; however, the Tender Date, the Commencement Date and the Expiration Date shall be extended as provided in Paragraph 2 of this Sublease. If, however, the Tender Date has not occurred by March 1, 2000, Subtenant may terminate this Sublease as provided in Paragraph 2 hereof. 14. LANDLORD'S CONSENT. Sublandlord's and Subtenant's obligations under this Sublease are conditioned upon Landlord's consent hereto. If Landlord's consent has not been obtained by the Tender Date, the Tender Date, the Commencement Date and the Expiration Date shall be automatically extended as provided in Paragraph 2 of this Sublease. 15. RESTRICTION ON OTHER RETAIL STORES. Subtenant covenants and agrees that neither it, nor any franchisor of Subtenant,franchisee under a franchise agreement with Subtenant, or any other entity which controls Subtenant, is controlled by Subtenant, or is under common control with Subtenant, is related in ownership to Subtenant or is managed or co-managed by Subtenant or Subtenant's affiliates or parent corporation will open any other retail store during the Sublease Term within three (3) miles of the Subleased Premises which sells the same or similar items to those sold at the Subleased Premises. In the event a retail store is opened in violation of this clause, in addition to the other remedies available to Sublandlord under this Sublease, Sublandlord shall have, the right to collect Percentage Rent based on the cumulative Gross Sales of the Subleased Premises and the other store or stores within said area. 16. NOTICES. Any notices given by one party to the other pursuant to this Sublease shall be in writing and shall be deemed to have been properly given when received by the other party, or on the third day after deposit with the U.S. Postal Service, certified or registered mail, postage prepaid, addressed to the other party at the address specified below, or to such other place as such party may from time to time designate by notice hereunder: Sublandlord's address: Mrs. Gooch's Natural Food Markets, Inc. 15315 Magnolia Blvd., Suite 320 Sherman Oaks, CA 91403 Attention: Regional President With copies to: Mrs. Gooch's Natural Food Markets, Inc. 11666 National Blvd Los Angeles, CA 90064 Attention: Store Team Leader Whole Foods Market, Inc. 601 N. Lamar Boulevard, Suite 300 Austin, Texas 78703-5413 Attention: Chief Financial Officer Slivka Robinson Waters & O'Dorisio, P.C. 1099 - 18th Street, suite 2600 Denver, Colorado 80202 Attention: Karen Samuels Jones Subtenant's address: Real Goods Trading Corporation 3440 Airway Drive, Suite E Santa Rosa, CA 95403-2065 Attention: Real Estate Administration with a copy to: Coblentz, Patch, Duffy & Bass, LLP 222 Kearny Street, Suite 700 San Francisco, CA 94108 Attention: Jeffrey B. Maso, Esq. 17. COUNTERPARTS. This Sublease may be executed in one or more counterparts, each of which shall have the force and effect of an original, and all of which shall together constitute one and the same instrument. 18. QUIET ENJOYMENT. Subtenant covenants and warrants that, provided Subtenant pays the rent and performs its other obligations hereunder, subject to the terms of the Master Lease, Subtenant may peaceably and quietly enjoy the Subleased Premises throughout the Sublease Term. 19. SUCCESSORS. The terms, covenants and conditions of this Sublease shall be binding upon and inure to the benefit of Sublandlord and Subtenant and their respective successors and assigns. SUBLANDLORD: MRS. GOOCH'S NATURAL FOOD MARKETS, INC. By: [S]RICHARD CUNDIFF Name: Richard Cundiff Title: President SUBTENANT: REAL GOODS TRADING CORPORATION, a California corporation By: [S]LESLIE B. SEELY Name: Leslie B. Seely Title: Chief Financial Officer By: [S]MARK A. SWEDLUND Name: Mark A. Swedlund Title: President EXHIBIT A Floor Plan EXHIBIT B Alterations Sub-Tenant, at its sole cost and expense, will do the following work: [and attach detailed plans and specification for all signs, solar panels, wind generators] EXHIBIT C Master Lease Documents 1. Lease Agreement dated as of January 1, 1980, by and between Allaseba H. Gorham and Carol H. Richards, as landlord and Hersh & Ziff, Inc. as tenant. 2. Amendment of Lease and Agreement dated July 27, 1989, by and between Westward Ho Markets, Inc. and Allaseba H. Gorham and Carol H. Richards. 3. Assignment and Amendment to Lease Agreement dated November 10, 1994, by and among The Howard Company, Westward Ho Markets, Inc., and Mrs. Gooch's Natural Food Markets, Inc. EX-3 4 0004.txt STRATEGIC ALLIANCE AGREEMENT This Strategic Alliance Agreement (this "Agreement") is made this 23rd day of September, 1999, by and between Whole Foods Market, Inc., a Texas corporation ("WFM"), and Real Goods Trading Corporation, a California corporation ("RG"). WHEREAS, WFM and RG desire to collaborate for mutual brand building and to promote each other's retail, Internet and/or catalog channels of distribution; NOW THEREFORE, in consideration of the mutual covenants contained herein, the receipt and sufficiency of which is hereby acknowledged, the parties agree as set forth below. 1. DEFINITIONS. The following terms shall have the following meanings: "Annual Product Revenues" means the cumulative aggregate Product Revenues from the commencement of WFM's fiscal year through the date of determination in such fiscal year. "GAAP" means generally accepted accounting principles. "Product Revenues" means WFM's gross sales of RG Products through the WFM Site, less returns, as computed in accordance with GAAP consistently applied by WFM. "RG Catalog" means the mail order catalogs distributed by RG to current and prospective customers in the ordinary course of RG's business. "RG Domain Name" means the URL's designated by RG for the RG Site from time to time. "RG Marks" means the RG Domain Name and the RG logos, servicemarks, and trademarks. "RG Products" means all products (including sale items) available from time to time in the RG Catalog, but excluding cleaning products which are currently otherwise for sale on the WFM Site. "RG Site" means the current or future sites owned and operated by RG through which RG Products are offered for sale online. "RG Stores" means the retail store locations operated by RG at which it offers environmentally related products for sale to consumers. "WFM Domain Name" means the URL's designated by WFM for the WFM Site from time to time. "WFM Site" means the principal site owned and operated by WFM through which WFM offers products and services for sale online. "WFM Store" means a natural foods supermarket owned and operated by WFM. 2. E-COMMERCE. 2.1. SALE OF RG PRODUCTS. WFM will offer for sale on the "Whole Planet" portion of the WFM Site all of the RG Products at the same price that RG sells RG Products through the RG Catalog. RG will provide WFM with SKU's, product information and graphics for all RG Products so that WFM may insert same on the WFM Site. All RG Products will be branded as "Real Goods" using the appropriate RG Marks and shall be given at least equal prominence with all comparable products offered for sale on the "Whole Planet" portion of the WFM Site. WFM will be responsible for, and shall have sole discretion with respect to, the appearance and content of the WFM Site; provided, however, that the pages featuring the RG Products shall be subject to the mutural satisfaction of the parties. 2.2. ORDER FULFILLMENT. WFM will electronically transfer customer orders placed through the WFM Site for RG Products to RG at least once a day, seven days per week. In accordance with the customer service and fulfillment standards listed on Exhibit A hereto, RG will fulfill all orders for RG Products originating on the WFM Site using its own box but with WFM packaging labels and insert literature(furnished to RG at WFM's expense). RG may insert its own literature or catalogs in these orders with WFM's prior written approval (which may be withheld in WFM's sole discretion notwithstanding Section 12(l) below). RG shall track all shipping and handling charges incurred for the RG Products and shall invoice such amounts to WFM on a monthly basis; and WFM shall remit such amounts to RG within 30 days of invoice. 2.3. PRODUCT INFORMATION. RG will provide informational content to WFM regarding the RG Products, as reasonably requested by WFM. 2.4. CUSTOMER BILLING AND REVENUES. WFM will be responsible for the billing of customers purchasing the RG Products through the WFM Site, the collection of Product Revenues from such customers, and the payment of all bank charges associated therewith. No later than the 15th day after the end of each fiscal period, WFM will remit to RG all of the Product Revenues, less a deduction of the following sales commission: 11.5% of the first $2 million of Annual Product Revenues; 16.5% of the next $3 million of Annual Product Revenues; 19.0% of the next $5 million of Annual Product Revenues; and 21.5% of all amounts in excess of $10 million of Annual Product Revenues. 2.5. TAXES. WFM will be responsible for, and will indemnify and hold RG harmless from, payment of all taxes (other than taxes based on RG's income), fees, duties and other governmental charges, and any related penalties and interest, arising from the payment of amounts owed by WFM in respect of sales of the RG Products through the WFM Site. WFM will provide RG with official receipts issued by the appropriate taxing authority, or such other evidence as RG may reasonably request, to establish that such taxes have been paid. 2.6. CUSTOMER FILES. The customer file information of persons who purchase RG Products through the WFM Site shall be the joint property of WFM and RG, and as such, each party shall have access to such information. In connection with the sharing of customer file information, WFM and RG shall develop, adopt and publish a mutually acceptable, shared customer privacy policy. 3. CO-LOCATION OF RG STORES. During the term of this Agreement, WFM and RG shall devote their reasonable best efforts to identify prospective sites for the co-location of RG Stores next to existing and/or future WFM Stores for their mutual benefit, up to a maximum of 20 such co-located RG stores during such term, unless otherwise agreed. RG is currently siting an RG Store next to WFM's Los Gatos, California store and is working jointly to site an RG Store next to WFM's West Los Angeles store by mid-November 1999. In the event a site has been identified for the co-location of an RG Store and WFM Store and RG agrees to proceed with the co-location of such Center, WFM shall lead the real estate negotiations related to these proposed sites for the Centers on behalf of RG; and WFM shall provide RG with periodic updates regarding such negotiations. WFM shall use its reasonable best efforts to negotiate the lowest possible lease rate for the proposed Centers, and if possible, secure a lease rate equal to or less than the lease rate for the co-located WFM Store. Nothing contained herein shall require WFM to provide any guarantee, letter of credit or similar financial arrangement on behalf of RG, nor shall WFM be required to offer any financial concession to a lessor in consideration of the lessor's agreement to co-locate an RG Store, nor shall WFM be required to contribute financially to the construction, opening or operation of the RG Store. Nothing contained herein shall require RG to execute a lease which it determines, in its sole discretion, to be unsatisfactory. RG has advised WFM that it desires to concentrate initially on co-location opportunities in the Western United States, and due to such geographic concentration, RG understands that the goal of 20 co-locations may fail to be obtained. 4. KIOSK PROGRAM. WFM and RG will use their reasonable best efforts to establish "kiosks" in five of the more successful WFM Stores. Each "kiosk" (designed, maintained and operated by WFM) would constitute approximately 100 square feet of selling space and feature RG Products, educational information and catalog/web access. It is presently intended that RG will supply RG Products to WFM on a wholesale basis, and WFM would offer such products at the same price that RG sells such products at the RG Stores. If the test provides at least a 40% blended gross profit for WFM and is otherwise successful, the parties intend to use their reasonable best efforts to establish kiosks in 100 WFM Stores over a five year period. Upon the termination of this Agreement, WFM shall not materially discount the price of the RG Products or otherwise jeopardize the goodwill of the RG brand; and RG, at its option, may elect to repurchase from WFM all RG Products which are unsold and remaining in inventory as of the date of termination at WFM's wholesale cost, plus shipping. 5. Potential New Ventures. WFM and RG will continue to explore and discuss the feasibility of additional alliances, such as (i) marketing Amrion products through the RG catalog, website and RG Stores, (ii) establishing mutual links between the WFM Site and RG Site, (iii) establishing mutual chat rooms on the WFM Site and RG Site discussing issues of value to cultural creatives (such as renewable energy and genetically altered foods) and (iv) co-branding certain RG products. 6. Notice of Other Alliances. Each party agrees to (i) inform the other in advance of entering into similar arrangements with companies that the other party would reasonably deem to be competitive and (ii) consider issues which such party might reasonably raise. Notwithstanding the foregoing, each party reserves all rights to continue with its respective e-commerce affiliate programs (including, with respect to WFM, a potential strategic alliance with Gaiam; it being understood that WFM will keep RG informed as to the status of negotiations regarding such alliance). 7. License of Marks. RG hereby grants to WFM (for use on the WFM Site and WFM store kiosks, each as contemplated herein, and, with RG's consent, on other materials and for other uses) a limited, non-exclusive, license to reproduce and display the RG Marks during the term of this Agreement, and for such additional period after termination as is necessary to wind-down the parties' obligations under Section 11. WFM will use the RG Marks exactly in the form provided. WFM hereby admits and recognizes RG's exclusive ownership of the RG Marks and shall not challenge the validity of or attempt to register any of the RG Marks or its interest therein as a licensee, nor will it adopt any derivative or confusingly similar names, brands or marks or create any combination marks with the RG Marks. WFM shall place a (r) or (tm) (as appropriate) with all uses and/or applications of the RG Marks and as reasonably requested by RG. 8. Confidentiality. All tangible technical or business information disclosed by one party to the other party and marked as proprietary ("Confidential Information") shall be deemed to the property of the disclosing party and shall be returned upon request. The receiving party shall: (i) hold Confidential Information in confidence after any termination of this Agreement; (ii) restrict disclosure of Confidential Information solely to its employees and employees of its affiliated companies with a need to know; (iii) use a reasonable degree of care (in no event less than the same degree of care as it uses for its own proprietary information) to prevent the unauthorized disclosure, use or publication of Confidential Information; and (iv) only use Confidential Information for the purposes contemplated under this Agreement. The receiving party shall have no obligation to preserve the confidentiality of any information which: (i) was previously known to the receiving party or any of its affiliated companies free of any confidentiality obligation; (ii) is disclosed to third parties by the disclosing party without restrictions; (iii) becomes publicly available except as a result of a breach of this Agreement; (iv) was not identified as confidential or proprietary; or (v) is independently developed by the receiving party. Within ten days after the termination or expiration of this Agreement, each party shall (i) return all Confidential Information received from the other party or destroy such Confidential Information, if any, and (ii) provide the other party with a signed statement from an officer certifying that it has complied with the foregoing obligations. 9. Mutual Indemnification. (a) Each party (each, an "Indemnifying Party") shall and hereby agrees to defend, indemnify and hold harmless the other party and each of its officers, directors, employees and agents (each, an "Indemnitee") against and in respect of any loss, debt, liability, damage, obligation, claim, demand, judgment or settlement of any nature or kind, known or unknown, liquidated or unliquidated, including without limitation all reasonable costs and expenses incurred (legal, accounting or otherwise)(collectively, "Damages") arising out of, resulting from or based upon any pending or threatened claim, action, proceeding or suit by any third party (a "Claim") based upon any breach of any representation, warranty, undertaking or other obligation of such Indemnifying Party under this Agreement. (b) RG shall and hereby agrees to defend, indemnify and hold harmless WFM against and in respect of any Damages arising out of a Claim based upon any alleged defect or breach of warranty of merchantability or fitness of any RG Product. (c) The Indemnifying Party shall defend any action or suit brought against the Indemnitee for any loss, cost, claim, liability, damage or expense including reasonable attorney's fees relating to or arising out of the performance of this Agreement. The Indemnitee shall notify the Indemnifying Party promptly, in writing, of any written claims, lawsuits or demands for which the indemnified party alleges that the Indemnifying Party is responsible under this Section 9. The Indemnitee shall cooperate in every reasonable matter with the defense or settlement of such claim, demand, or lawsuit. The Indemnifying Party shall not be liable under this Section 9 for settlement by the Indemnitee of any claim, demand or lawsuit unless the Indemnifying Party has approved the settlement in advance or unless the Indemnifying Party has approved the settlement in advance or unless defense of the claim, demand or lawsuit has been tendered to the Indemnifying Party in writing and the Indemnifying Party has failed promptly to undertake the defense. The Indemnitee may participate in the defense of the matter, with counsel of the choosing of the Indemnitee, at the cost of the Indemnitee. 10. Press Releases. Neither party shall issue a press release regarding this relationship without the other party's prior written approval. Neither party shall disclose the terms of this Agreement to any third party, except the legal, accounting and fiduciary advisors to such party, unless (a) required by law, (b) the other party provides prior written approval, or (c) such third party executes and delivers a confidentiality/nondisclosure agreement in a form mutually agreed upon by the parties. 11. Term; Termination. (a) Unless sooner terminated under the provisions of this Agreement, this Agreement shall remain in effect for three years from the date hereof. No later than the end of the second anniversary, WFM and RG shall mutually determine whether to further extend the term of this Agreement (thus affording the parties sufficient time to prepare for the termination of this Agreement otherwise scheduled for the third anniversary of the date hereof). (b) Either party may terminate this Agreement immediately on written notice to the other party if the other party commits a material breach or is in material default of any warranty, representation or other material provision hereof, which breach or failure is incapable of cure or which, being capable of cure, has not been cured within 30 calendar days after receipt of written notice of such breach or failure or such additional cure period as the notifying party may authorize in writing, provided that the exercise of such right of termination shall be in addition to, and not in lieu of, any other remedies the terminating party may have by virtue of such breach. Further, each party shall have the right to terminate this Agreement if (i) such party is reasonably able to demonstrate to the other that the formula in Section 2.4 is resulting in a continuing operating loss (as determined in accordance with GAAP as consistently applied by the party demonstrating such loss) to such party, (ii) such party negotiates in good faith for a period of 60 days with the other to modify the financial provisions of this Agreement and (iii) such negotiations have not resulted in a satisfactory amendment of this Agreement. 12. General. (a) Governing Law. This Agreement will be governed and construed in accordance with the laws of the State of Colorado without giving effect to principles of conflicts of laws. (b) Arbitration. Any controversy or dispute among the parties arising in connection with this Agreement shall be submitted to a panel of three arbitrators and finally settled by arbitration in accordance with the commercial arbitration rules of the American Arbitration Association. Each of the disputing parties shall appoint one arbitrator, and these two arbitrators shall independently select a third arbitrator. Arbitration shall take place in Denver, Colorado, or such other location as the arbitrators may select. The prevailing party in such arbitration shall be entitled to the award of all costs and attorneys' fees in connection with such action. Any award for monetary damages resulting from nonpayment of sums due hereunder shall bear interest from the date on which such sums were originally due and payable. Judgment upon the award rendered may be entered in any court having jurisdiction or application may be made to such court for judicial acceptance of the award and an order of enforcement, as the case may be. (c) Amendment. This Agreement may be amended, modified or supplemented only by a written instrument executed by the parties against which enforcement of the amendment, modification or supplement is sought. (d) Force Majeure. Any party's delay in the performance of any duties or obligations under this Agreement (except the payment of money owed) will not be considered a breach of this Agreement if such delay is caused by a labor dispute, shortage of materials, fire, earthquake, flood or any other event beyond the control of the party, provided that the party uses reasonable efforts, under the circumstances, (i) to notify the other party of the circumstances causing the delay and (ii) to resume performance as soon as possible. (e) Notices. Any notices given under this Agreement shall be in writing and shall be delivered to the addresses set forth below the signatures of the parties or at such other address as the party shall specify in writing. Notices shall be deemed effectively given: (i)upon the next business day after being sent overnight by a major U.S. express document courier; or (ii) upon receipt of confirmation following transmission by a facsimile machine. (f) No Assignment. Neither party can assign its rights or delegate its obligations to any third party (other than a wholly-owned or majority-owned direct or indirect subsidiary of such party), without the prior written consent of the other party in its sole discretion. Any assignment or delegation in violation of this Section shall be void and of no effect. No assignment or delegation pursuant to this Section will expand the rights or obligations of the parties. (g) Severability; Waiver. If any provision of this Agreement is held to be invalid or unenforceable for any reason, the remaining provisions will continue in full force and effect without being impaired or invalidated in any way. The parties agree to replace any invalid provision with a valid provision which most closely approximates the intent and economic effect of the invalid provision. The waiver by any party of a breach of any provision of this Agreement will not operate or be interpreted as a waiver of any other or subsequent breach. (h) Headings. Headings used in this Agreement are for reference purposes only and in no way define, limit, construe or describe the scope, intent, or extent of the section or in any way affect this Agreement. (i) Independent Contractors; No Agency. The parties to this Agreement are independent contractors, and no agency, partnership, joint venture, or employee-employer is intended or created by this Agreement. Neither party is the agent of the other, and neither party shall have the power to obligate or bind the other party. Personnel supplied by each party shall work exclusively for that party, and shall not, for any purpose, be considered employees or agents of the other party, and each party assumes full responsibility for the acts of personnel supplied by it while performing services hereunder and, with regard to any personnel supplied by it, each party shall be solely responsible for their supervision, direction and control, compensation, benefits, and taxes. Any rights not expressly granted by WFM or RG to the other hereunder are expressly reserved by each of WFM and RG. (j) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which shall be taken together and deemed to be one instrument. (k) Entire Agreement. This Agreement, including the Exhibits attached hereto, sets forth the entire understanding and agreement between the parties regarding the subject matter of this Agreement, and supersedes any and all oral or written agreements or understandings between the parties as to that subject matter. It may changed only by a writing signed by both parties. Neither party is relying upon any warranties, representations, assurances, or inducements not expressly set forth herein. (l) Covenant of Fair Dealing. Each of the parties hereto covenants to deal fairly and in good faith with the other party in respect of all matters described herein. In Witness Whereof, each of the parties hereto have executed this Agreement as of the date first written above. Whole Foods Market, Inc. By: [S]GLENDA FLANAGAN Glenda Flanagan Address: 601 North Lamar Blvd., Suite 300 Austin, Texas 78703 Attn: Chief Financial Officer Fax: 512-477-1069 Real Goods Trading Corporation By:[S]JOHN SCHAEFFER John Schaeffer Address: 3140 Airway Drive Santa Rosa, California 95403 Attention: President Fax: 707-744-2104 Exhibit A Fulfillment/Customer Service Standards Fulfillment 1. 90% of orders must be picked, packed and shipped within standard. 2. Orders for goods kept in RG inventory must be picked packed and shipped by the end of the business day following the placement of the order. 3. Orders for inventory shipped from other facilities will be shipped in compliance with promises made to customers on the web site. These may vary from product to product. 4. 100% count verification and 10-15% detailed spot checking of orders or 100% electronic product verification during pick process. 5. 95% or better complete order (final fill) rate. 6. Letter of apology for incomplete orders. 7. Backorder standards to be developed by mutual agreement. 8. Returns processed within two business days of receipt. 9. 24-hour order processing. Customer Service 1. Customer service available seven days per week (6:30a - 9:00p M-F; 8:00a - 5:00p Sat/Sun). 2. 80% of calls answered in less than 20 seconds by a live operator. No busy signals. Less than 4.0% abandonment. 3. 3-hour maximum response to customer e-mails during customer service hours. 4. "Sorry for your trouble" gift certificate or other incentive for customers who experience system problems. EX-4 5 0005.txt STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT is made as of the 23rd day of September, 1999, by and among Real Goods Trading Corporation, a California corporation (the "Company"), and Whole Foods Market, Inc., a Texas corporation (the "Investor"). The parties hereby agree as follows: 1. Purchase and Sale of Stock. 1.1 SALE AND ISSUANCE OF COMMON STOCK. Subject to the terms and conditions of this Agreement, the Investor agrees to purchase at the Closing (as defined below), and the Company agrees to sell and issue to the Investor, 800,000 shares (the "Shares") of common stock, without par value, of the Company ("Common Stock") at a purchase price equal to $4.50 per Share. 1.2 CLOSING. The purchase and sale of the Shares shall take place at the offices of the Investor in Austin, Texas, at 9:00 a.m., on the date hereof, or at such other time and place as the Company and the Investor mutually agree upon orally or in writing (which time and place are designated as the "Closing"). At the Closing, the Company shall deliver to the Investor a certificate representing the Shares against delivery to the Company by the Investor of a check in the amount of $3,600,000, payable to the Company's order or by wire transfer of funds in such amount to the Company's designated bank account. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to the Investor that, except as set forth on a Schedule of Exceptions, attached hereto as Exhibit A, furnished to the Investor, which exceptions shall be deemed to be representations and warranties as if made hereunder: 2.1 ORGANIATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect (a "Company Material Adverse Effect") on (i) the business, operations, assets or financial condition of the Company or (ii) the validity or enforceability of, or the ability of the Company to perform its obligations under, this Agreement. 2.2 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement, the Registration Rights Agreement in the form of Exhibit B hereto (the "Registration Rights Agreement") and the Director Designation Agreement in the form of Exhibit C hereto (the "Director Agreement") (the Registration Rights Agreement and Director Agreement being referred to collectively as the "Ancillary Agreements"), the performance of all obligations of the Company hereunder and thereunder and the authorization, issuance (or reservation for issuance) and delivery of the Shares being sold hereunder has been taken or will be taken prior to the Closing; and this Agreement and any Ancillary Agreements constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. 2.3 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state, local or provincial governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement or the Ancillary Agreements. 2.4 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in violation or default of any provisions of its Articles of Incorporation or Bylaws (each as amended to date) or of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound or, to its knowledge, of any provision of federal or state statute, rule or regulation applicable to the Company, except where such violation or default would not have a Company Material Adverse Effect. The execution, delivery and performance of this Agreement or any Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization, or approval applicable to the Company, its business or operations or any of its assets or properties. 2.5 CAPITALIZATION. The authorized capital of the Company consists of 10 million shares of Common Stock, of which 4,079,942 shares are outstanding immediately prior to the issuance and delivery of the Shares. An additional number of shares of Common Stock are reserved for issuance upon the exercise of stock options granted, or eligible for future grant, under the stock option plans of the Company, as described in the "Company SEC Reports" (defined hereinbelow). Except as stated above, there is no outstanding subscription, contract, convertible or exchangeable security, option, warrant, call or other right obligating the Company to issue, sell, exchange, or otherwise dispose of, or to purchase, redeem or otherwise acquire, shares of, or securities convertible into or exchangeable for, capital stock of the Company. 2.6 VALID ISSUANCE OF COMMON STOCK. The Shares which are being purchased by the Investor hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable and, based in part upon the representations of the Investor in this Agreement, will be issued in compliance with all applicable federal and state securities laws. 2.7 COMPANY SEC REPORTS. The Company has made available to the Investor (i) the Company's Annual Report on Form 10-KSB for the year ended March 31, 1999 (ii) the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1999, (iii) the proxy statements relating to the Company's 1999 meeting of stockholders and (iv) all other reports or registration statements (as amended or supplemented prior to the date hereof), filed by the Company with the Securities and Exchange Commission (the "SEC") since April 1, 1999, including all exhibits thereto and items incorporated therein by reference (items (i) through (iv) being referred to as the "Company SEC Reports"). As of their respective dates, the Company SEC Reports did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Since April 1, 1997, the Company has filed all material forms (with necessary amendments), reports and documents with the SEC required to be filed by it pursuant to the federal securities laws and the SEC rules and regulations thereunder, each of which complied as to form, at the time such form, report or document was filed, in all material respects with the applicable requirements of the federal securities laws and the applicable rules and regulations thereunder. 2.8 FINANCIAL STATEMENTS. The Company has made available to the Investor true, correct and complete copies of the following financial statements (the "Company Financial Statements"): (a) the financial statements of the Company as of March 31,1998 and 1999 and for the years then ended, including the notes thereto, in each case examined by and accompanied by the reportof Deloitte & Touche (collectively, the "Company Year-End Statements"); and (b) the unaudited balance sheet of the Company as of June 30, 1999 (the "Company Balance Sheet"), with any notes thereto, and the related unaudited statement of income for the three months then ended (collectively, the "Company Quarterly Statements"). The Company Year-End Statements and Company Quarterly Statements have been prepared from, and are in accordance with, the books and records of the Company and present fairly, in all material respects, the financial position of the Company as of the dates thereof and the results of operations and cash flows thereof for the periods then ended, in each case in conformity with generally accepted accounting principles, consistently applied, except for normal year-end adjustments and as noted therein. Since March 31, 1999, there has been no change in accounting principles applicable to, or methods of accounting utilized by, the Company, except (i) as noted in the Company Financial Statements and (ii) the Company is now recognizing gross shipping and handling revenues and expenses, rather than netting such items. 2.9 ABSENCE OF CERTAIN CHANGES. Since June 30, 1999, the Company has not, except as otherwise set forth or contemplated in the Company SEC Reports: (a) suffered any adverse change in the business, operations, assets, or financial condition, except for such changes that would not result in a Company Material Adverse Effect; (b) suffered any material damage or destruction to or loss of the assets of the Company, whether or not covered by insurance, which property or assets are material to the operations or business of the Company; (c) entered into or terminated any material agreement, commitment or transaction, or agreed or made any changes in material leases or agreements, other than renewals or extensions thereof and leases, agreements, transactions and commitments entered into or terminated in the ordinary course of business; (d) declared, paid or set aside for payment any dividend or distribution with respect to the Company's capital stock; or (e) entered into any agreement to do any of the foregoing. 2.10 NO MATERIAL UNDISCLOSED LIABILITIES. To the Company's knowledge, there are no liabilities or obligations of the Company of any nature, whether absolute, accrued, contingent, or otherwise, other than: (a) the liabilities and obligations that are reflected, accrued or reserved against on the Company Balance Sheet, or referred to in the footnotes to the Company Balance Sheet, or incurred in the ordinary course of business and consistent with past practices since June 30, 1999; or (b) liabilities and obligations which in the aggregate would not result in a Company Material Adverse Effect. 2.11 LITIGATION. There is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened in writing against the Company which questions the validity of this Agreement or any Ancillary Agreements, or the right of the Company to enter into any of them, or to consummate the transactions contemplated hereby or thereby, or which might result, either individually or in the aggregate, in a Company Material Adverse Effect. 2.12 TAX RETURNS; TAXES. The Company has duly filed all U.S. federal and material state, county, local and foreign tax returns and reports required to be filed by it, including those with respect to income, payroll, property, withholding, social security, unemployment, franchise, excise and sales taxes and all such returns and reports are correct in all material respects; has either paid in full all taxes that have become due as reflected on any return or report and any interest and penalties with respect thereto or have fully accrued on its books or have established adequate reserves for all taxes payable but not yet due; and has made cash deposits with appropriate governmental authorities representing estimated payments of taxes, including income taxes and employee withholding tax obligations. No extension or waiver of any statute of limitations or time within which to file any return has been granted to or requested by the Company with respect to any tax. No unsatisfied deficiency, delinquency or default for any tax, assessment or governmental charge has been claimed, proposed or assessed against the Company, nor has the Company received notice of any such deficiency, delinquency or default. 2.13 MATERIAL CONTRACTS. The Company has furnished or made available to the Investor accurate and complete copies of the Material Contracts (as defined herein) applicable to the Company. There is not under any of the Material Contracts any existing breach, default or event of default by the Company nor event that with notice or lapse of time or both would constitute such a breach, default or event of default that would have a Company Material Adverse Effect. As used herein, the term "Material Contracts" shall mean all contracts and agreements filed, or required to be filed, as exhibits to Company's Annual Report on Form 10-KSB for the year ended March 31, 1999 and any contracts and agreements entered into since March 31, 1999 which would be required to be filed as an exhibit to Company's Annual Report on Form 10-KSB for the year ending March 31, 2000. 2.14 PERMITS. To the Company's knowledge: (i) the Company has all material franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could have a Company Material Adverse Effect; and (ii) the Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. 2.15 INTELLECTUAL PROPERTY. The Company owns or has valid, binding and enforceable rights to use all material patents, trademarks, trade names, service marks, service names, copyrights, applications therefor and licenses or other rights in respect thereof ("Intellectual Property") used or held for use in connection with the business of the Company, without any known conflict with the rights of others, except for such conflicts as do not have a Company Material Adverse Effect. The Company has not received any written notice from any other person pertaining to or challenging the right of the Company to use any Intellectual Property or any trade secrets, proprietary information, inventions, know-how, processes and procedures owned or used or licensed to Company, except with respect to rights the loss of which, individually or in the aggregate, would not have a Company Material Adverse Effect. 2.16 LABOR AGREEMENTS AND ACTIONS. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the knowledge of the Company threatened in writing, which could have a material adverse effect on the assets, properties, financial condition, operating results or business of the Company, nor is the Company aware of any labor organization activity involving its employees. 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor hereby represents and warrants that: 3.1 AUTHORIZATION. This Agreement constitutes its valid and legally binding obligation, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. The Investor represents that it has full power and authority to enter into this Agreement. 3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. The Shares to be purchased by the Investor will be acquired for investment for the Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and the Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Investor further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person, with respect to any of the Shares. 3.3 DISCLOSURE OF INFORMATION. It believes it has received all the information it considers necessary or appropriate for deciding whether to purchase the Shares. The Investor further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Shares. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the Investor to rely thereon. 3.4 INVESTMENT EXPERIENCE. The Investor acknowledges that it is able to fend for itself, can bear the economic risk of its investment and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Shares. 3.5 ACCREDITED. The Investor is an "accredited investor" within the meaning of SEC Rule 501 of Regulation D, as presently in effect. 3.6 RESTRICTED SECURITIES. It understands that the Shares are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act of 1933, as amended (the "Act"), only in certain limited circumstances. In this connection, the Investor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 3.7 LEGENDS. It is understood that the certificates evidencing the Shares may bear one or all of the following legends: (a) "These securities have not been registered under the Securities Act of 1933. They may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act or an opinion of counsel satisfactory to the Company that such registration is not required or unless sold pursuant to Rule 144 of such Act." (b) Any legend required by the laws of any state. 4. Conditions of Investor's Obligations at Closing. The obligations of the Investor at the Closing to the Company under of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions: 4.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in Section 2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of such Closing. 4.2 PERFORMANCE. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. 4.3 COMPLIANCE CERTIFICATE. The chief executive officer of the Company shall deliver to the Investor at the Closing a certificate certifying that the conditions specified in Sections 4.1 and 4.2 have been fulfilled. 4.4 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to the Investor, and they shall have received all such counterpart original and certified or other copies of such documents as they may reasonably request. 4.5 OPIONION OF COMPANY COUNSEL. The Investor shall have received from corporate counsel for the Company, an opinion, dated as of the Closing, in form and substance satisfactory to the counsel to the Investor, with respect to the matters set forth in Sections 2.1 through 2.6 above. 5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLSOING. The obligations of the Company at the Closing to the Investor under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions by the Investor: 5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Investor contained in Section 3 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 5.2 COMPLIANCE CERTIFICATE. An executive officer of the Investor shall deliver to the Company at the Closing a certificate certifying that the conditions specified in Section 5.1 has been fulfilled. 5.3 PAYMENT OF PURCHASE PRICE. The Investor shall have delivered the purchase price specified in Section 1.1. 6. MISCELLANEOUS. 6.1 SURVIVAL OF WARRANTIES. The warranties, representations and covenants of the Company and the Investor contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Investor or the Company. 6.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 6.3 GOVERNING LAW; ARBITRATION. This Agreement shall be governed by and construed under the laws of the State of Colorado. Any controversy or dispute among the parties arising in connection with this Agreement shall be submitted to a panel of three arbitrators and finally settled by arbitration in accordance with the commercial arbitration rules of the American Arbitration Association. Each of the disputing parties shall appoint one arbitrator, and these two arbitrators shall independently select a third arbitrator. Arbitration shall take place in Denver, Colorado, or such other location as the arbitrators may select. Any award for monetary damages resulting from nonpayment of sums due hereunder shall bear interest from the date on which such sums were originally due and payable. Judgment upon the award rendered may be entered in any court having jurisdiction or application may be made to such court for judicial acceptance of the award and an order of enforcement, as the case may be. 6.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 6.5 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not considered in construing or interpreting this Agreement. 6.6 NOTICES. Any notices given under this Agreement shall be in writing and shall be delivered to the addresses set forth below the signatures of the parties or at such other address as the party shall specify in writing. Notices shall be deemed effectively given: (i) upon the next business day after being sent overnight by U.S. Express Mail or by a major U.S. express document courier; or (ii) upon receipt of confirmation following transmission by a facsimile machine. 6.7 FINDER'S FEE. Each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. The Investor agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Investor or any of its officers, employees or representatives is responsible. The Company agrees to indemnify and hold harmless the Investor from any liability for any commission or compensation in the nature of a finders' fee and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 6.8 EXPENSES. Each party shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement or the other documents entered into in connection herewith, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 6.9 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived only with the written consent of the Company and the Investor. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities are convertible), each future holder of all such securities, and the Company. 6.10 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 6.11 ENTIRE AGREEMENT. This Agreement and the documents referred to herein constitute the entire agreement among the parties and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth herein or therein. 6.12 PUBLIC DISCLOSURE. Neither the Company nor the Investor shall make any public announcement regarding the terms hereof of or the transactions contemplated herein without the prior written consent of the other, except as required by law. 6.13 COVENANT OF GOOD FAITH AND FAIR DEALING. Each of the parties hereby covenants to use its good faith and to deal fairly in connection with the matters described herein. In Witness Whereof, each of the parties hereto have executed this Agreement as of the date first written above. WHOLE FOODS MARKET, INC By: [S]GLENDA FLANAGAN Glenda Flanagan Address: 601 North Lamar Blvd., Suite 300 Austin, Texas 78703 Attn: Chief Financial Officer Fax: 512-477-1069 REAL GOODS TRADING COPORATIONn By: [S]JOHN SCHAEFFER John Schaeffer Chief Financial Officer Address: 3140 Airway Drive Santa Rosa, California 95403 Attention: President Fax: 707-744-2104 152446.2 EX-5 6 0006.txt [ARTICLE] 5 [PERIOD-TYPE] YEAR [FISCAL-YEAR-END] MAR-31-2000 [PERIOD-END] MAR-31-2000 [CASH] 876 [SECURITIES] 1,568 [RECEIVABLES] 158 [ALLOWANCES] 6 [INVENTORY] 3,165 [CURRENT-ASSETS] 6,326 [PP&E] 5,526 [DEPRECIATION] 1,463 [TOTAL-ASSETS] 11,444 [CURRENT-LIABILITIES] 1,794 [BONDS] 0 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [COMMON] 10,771 [OTHER-SE] 1,655 [TOTAL-LIABILITY-AND-EQUITY] 11,444 [SALES] 18,979 [TOTAL-REVENUES] 18,979 [CGS] 11,145 [TOTAL-COSTS] 11,145 [OTHER-EXPENSES] 9,402 [LOSS-PROVISION] 0 [INTEREST-EXPENSE] 63 [INCOME-PRETAX] 1,859 [INCOME-TAX] 569 [INCOME-CONTINUING] 1,290 [DISCONTINUED] 0 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 1,290 [EPS-BASIC] .29 [EPS-DILUTED] .29
-----END PRIVACY-ENHANCED MESSAGE-----