LONG TERM DEBT, NOTES PAYABLE, AND CAPITAL LEASE OBLIGATIONS

In August and September of 2012 (subsequently modified on December 18, 2013 and September 5, 2014), the Company entered into revolving credit, equipment financing and two mortgage agreements with a bank, as follows:

Revolving Credit Facility. The revolving credit facility provides up to $2 million of credit with borrowings limited to the lesser of (a) 80% of eligible accounts receivable, as defined, less $600,000 or (b) $1,000,000. The new agreement provides for interest at the lower of (i) Libor plus 3.5% (previously Libor plus 2.75% or 2.90% as of June 30, 2014) or (ii) the bank’s alternative base rate plus 2.5% (previously 1.75% or 5.00% as of June 30, 2014), plus 0.25% per annum assessed on the unused portion of the credit commitment. The maturity date is September 30, 2015 and is renewable for an additional year on each anniversary date upon mutual agreement of the parties.

Equipment Financing Facility. The equipment financing facility provided up to $1.25 million of financing for the cost of new and already-owned or leased equipment. The agreement provided for interest at the bank’s cost of funds plus 3% (3.89% as of June 30, 2014). The maturity date for each “schedule” of equipment is up to four years from the borrowing date. The facility expired on August 14, 2014.

Hollywood Way and Vine Street Mortgages. In September 2012, the Company entered into two real estate term loan agreements with respect to its Hollywood Way and Vine Street locations for $5.5 million and $3.1 million, respectively. The Vine mortgage was paid off upon sale of the building in June 2014. The remaining Hollywood Way loan provides for interest at Libor plus 3% (3.15% as of June 30, 2014). Repayment is based on monthly payments with a 25-year amortization, with all principal due in 10 years. The real estate loan is secured by a first trust deed on the property.

General Terms. All amounts due under the revolving credit facility, equipment financing facility and term mortgage facilities are secured by all personal property and real estate of the Company. While amounts were outstanding under the prior credit arrangements, the Company will be subject to financial covenants measured quarterly as follows:

Minimum tangible net worth (TNW) of $8.5 million (the Company’s actual TNW was $6.9 million as of June 30, 2014).

Minimum quarterly EBITDA (as defined) of $750,000, provided that EBITDA may be a minimum of $500,000 in any one quarter within four consecutive quarters (the Company’s EBITDA was $0.2 million for the quarter ended June 30, 2014).

Minimum quarterly fixed charge ratio (as defined) of 1.25 (the Company’s fixed charge ratio was 0.69 for the quarter ended June 30, 2014).

Minimum trailing 12 month (TTM) fixed charge ratio (as defined) of 1.25 measured quarterly (the Company’s TTM fixed charge ratio was a negative 0.24 for the TTM ended June 30, 2014).

While amounts are outstanding under the new credit arrangements, the Company will be subject to financial covenants measured quarterly as follows:

Minimum TNW rising from $6.25 million at September 30, 2014 to $7 million after March 31, 2015.

Minimum EBITDA (as defined) rising from $250,000 for the quarter ended September 30, 2014 to $750,000 in subsequent quarters, provided that EBITDA may be a minimum of $500,000 in any one quarter within four consecutive quarters.

Minimum fixed charge ratio (as defined) rising from 0.70 for the quarter ended September 30, 2014 to 1.25 in subsequent quarters.

Minimum TTM fixed charge ratio (as defined) rising from 0.25 for the TTM ending September 30, 2014, to 0.75 for the TTM ending December 31, 2014, and 1.25 in subsequent TTM periods.

All obligations to the bank are cross collateralized. The agreements contain certain other terms and conditions common with such arrangements.

As of June 30, 2014 the Company did not meet the TNW, the minimum quarterly EBITDA, and the minimum quarterly and TTM fixed charge ratio covenants, and obtained a default waiver from the bank. At the date of issuance of these financial statements, based on current projections, the Company believes that it is probable that the Company will not be in compliance with certain of its debt covenants within the next 12 months. Accordingly, the balance owed for mortgage debt and capital lease financing provided by the bank has been classified as a current liability on the balance sheet as of June 30, 2014.

Amounts Borrowed. As of June 30, 2014, the Company had no outstanding borrowings under the revolving credit facility and $0.3 million borrowed under the equipment financing facility.

In connection with the termination of a prior credit agreement, the Company paid a $30,000 break-up fee, which was reflected in other income/expense in the year ended June 30, 2013.

In connection with the September 2012 financing of the Hollywood Way mortgage, the Company received $126,000 (the difference between the new $5,526,000 loan and the $5,400,000 payoff amount of the old loan). The Company used cash of $491,000 (the difference between $3,566,000 payoff of the old loan and $3,075,000 provided by the new loan) in the Vine refinancing. The cash used for both transactions was $365,000, net of transaction costs.

In June 2014, the Vine building was sold yielding approximately $1.6 million of cash after pay off of the related mortgage and selling expenses.

Annual maturities for debt under term note and capital lease obligations as of June 30, 2014 are as follows:

2015	$	5,485,000
2016		-
2017		-
2018		-
2019		-
Thereafter		-
	$	5,485,000