DEBT

The Company has a Credit Agreement (the “Agreement”) with Bank of America to provide a senior financing facility consisting of term debt and a revolving line of credit. Under the Agreement, as amended, the Company became obligated on

$12,000,000

of debt in the form of a term note to refinance the previous senior term debt and to fund repayment of a portion of its outstanding subordinated debt. Additionally, the Agreement includes a

$5,000,000

revolving line of credit that can be used for the purchase of fixed assets, to fund acquisitions, to collateralize letters of credit, and for operating capital.

The Agreement amortizes the term debt over a

five

year period with

equal monthly installments of

$133,333

plus interest and a final payment of

$4,133,333

due in

May 2020.

The revolving line of credit matures in

May 2018.

There are various restrictive covenants under the Agreement, and the Company is prohibited from entering into other debt agreements without the bank’s consent. The Agreement also prohibits the Company from paying dividends without the prior consent of the bank.

Effective

September 12, 2016,

the Company amended its Agreement with the Bank (the “Second Amendment”). Under the Second Amendment, interest is paid at a rate of

one

-month LIBOR plus a margin based on the achievement of a specified leverage ratio. As of

January 31, 2018,

the margin was

2.50%

for the term note and

2.25%

for the revolving line of credit. The Company fixed the interest rate on a portion of its term debt by entering into an interest rate swap. As of

January 31, 2018,

the Company had

$3,867,000

of the term debt subject to variable interest rates. The

one

-month LIBOR was

1.56%

January 31, 2018

resulting in total variable interest rates of

4.06%

and

3.81%,

for the term note and the revolving line of credit, respectively, as of

January 31, 2018.

The Second Amendment requires the Company to be in compliance with certain financial covenants as follows: (i) a maximum annual limit for capital expenditures of

$4,000,000

each fiscal year,

(ii) consolidated adjusted operating cash flows to consolidated total debt service ratio, as defined, to be

less than

1.5

for any reference period ending on or after

October 31, 2016

and (iii) senior funded debt to consolidated adjusted EBITDA, as defined, to be

greater than

2.5

as of the end of any fiscal quarter ending on or after

October 31, 2016.

The Amendment also allows payments of interest on Subordinated Notes. As of

January 31, 2018,

the Company was

not

in compliance with (ii) and (iii) of the financial covenants. The Bank waived the covenant compliance requirements for (ii) and (iii) for the period ended

January 31, 2018.

June 13, 2017,

the Company entered into a Third Amendment (the “Third Amendment”) to the Agreement.

The Third Amendment increases the aggregate principal amount available under the revolving line of credit from

$5,000,000

$6,000,000.

The Third Amendment allows the Company to use up to

$2,000,000

of proceeds from the revolving line of credit to make payments on the Subordinated Debt. The Third Amendment also allows for prepayments on Subordinated Debt up to

$4,500,000

in the aggregate. Subsequently, in fiscal

2017,

the Company paid an aggregate of

$4,500,000

of subordinated debt principal payments.

January 31, 2018,

there was a balance of

$2,015,200

outstanding on the line of credit and a letter of credit issued for

$1,327,000

to collateralize the Company’s liability insurance program as of that date. Consequently, as of

January 31, 2018,

there was

$2,658,000

available to borrow from the revolving line of credit. The line of credit matures in

May 2018.

There was

$7,733,000

outstanding on the term note as of

January 31, 2018.

In addition to the senior debt, as of

January 31, 2018,

the Company had subordinated debt owed to Peter and John Baker in the aggregate principal amount of

$4,500,000

that is due

November 20, 2020.

The interest rate on each of these notes is

12%

per annum.

The notes are secured by all of the assets of the Company but specifically subordinated, with a separate agreement with the subordinated debt holders, to the senior financing facility (Credit Agreement) described above.