Note 3. Debt

At the dates indicated, debt consisted of the following:

	October 31,
	2015		2014
Term Note A dated October 7, 2013, due in monthly installments of $50,000 plus interest payments equal to the prime rate of interest plus 2% maturing April 1, 2017, collateralized by substantially all of the assets of the Company	$	8,750,000	$	9,850,000
Installment notes payable to banks, due in monthly installments plus interest at rates approximating the bank’s prime rate or the prime rate subject to various floors maturing in various periods ranging from November 2015-October 2017, collateralized by equipment and vehicles.		634,998		475,908
Notes payable to shareholders. The shareholder note of $2.5 million plus all accrued interest was initially due in one balloon payment in September 2014; pursuant to Term Note A, the maturity was adjusted to April 2015. The interest is accrued on this note at a rate of 3.25%. See discussion below for more detail. (1)		2,500,000		2,500,000
Note payable to a bank, due November 2015 ($0.45 million) and January 2016 ($0.3 million), including interest accrued at 5.00%, collateralized by specific accounts receivable of the Company. (2)		750,000		750,000
Capital lease obligation for printing equipment at an imputed interest rate of 6.02% per annum		28,380		43,312
Note, payable to a bank in monthly installments of $8,441 including interest at 5.00% collateralized by equipment		443,208		-
Note, payable to a bank in monthly installments of $4,197 including an imputed interest rate of 0.0% collateralized by equipment		147,694		-
Unamortized debt discount		-		(138,520)
		13,254,280		13,480,700
Less current portion long-term debt		1,179,358		10,197,218
Less short-term notes payable to related party (1)		2,500,000		2,500,000
Less current portion obligation under capital lease		15,852		14,931
Less short-term debt (2)		750,000		750,000
Less debt discount		-		(138,520)
Long-term debt, net of current portion and capital lease obligation	$	8,809,070	$	157,071

Continuing operations:
Long-term debt, net of current portion	$	8,796,542	$	128,690
Long-term capital lease obligation		12,528		28,381
Current portion of long-term debt		1,179,358		10,197,218
Short-term notes payable to related party (1)		2,500,000		2,500,000
Short-term debt (2)		750,000		750,000
Current portion of capital lease obligation		15,852		14,931
Debt Discount		-		(138,520)
Total indebtedness	$	13,254,280	$	13,480,700

(1) On June 15, 2015 the Company’s Board of Directors approved the conversion of the Company’s $2.5 million related party debt to Preferred Stock equity. The Preferred Stock will pay a 6.00% or 0.00% annual dividend contingent on the Company’s income after income taxes. If the Company's income after income taxes is $1.0 million or greater, the dividend rate is 6.00%; if the Company's income after income taxes is less than $1.0 million, the dividend rate is 0.00%.

This conversion will reduce the Company’s liabilities by $2.5 million and increase its equity by $2.5 million. In addition, this conversion will reduce the Company’s annual interest expense by $0.1 million. However, contingent on the after income tax income, this conversion could trigger the payment of an annual Preferred Stock dividend of $0.2 million or zero. If the $1.0 million after income tax income target is achieved, the Company’s annual cash outflow would increase $0.1 million, or decrease $0.1 million if the $1.0 million after income tax income target is not achieved.

This conversion is pending a shareholder vote to amend the Company’s Articles of Incorporation to allow for the issuance of Preferred Stock. This will be part of the Company's definitive Proxy Statement, expected to be dated January 25, 2016, with respect to the Annual Meeting of Shareholders to be held on March 21, 2016. The Company will continue to accrue interest on the related party debt equal to the prime rate until such conversion has been consummated.

(2) These notes are short-term borrowings associated with large furniture projects that are on terms of 120 days or less. These borrowings were subsequently paid upon collection of the collateral in November 2015 and January 2016.

Maturities of debt and capital lease obligations for each of the next five years beginning November 1, 2015 are as follows:

November 1, 2015 through October 31, 2016	$	4,445,210	*
November 1, 2016 through October 31, 2017		8,473,148
November 1, 2017 through October 31, 2018		135,770
November 1, 2018 through October 31, 2019		97,644
November 1, 2019 through October 31, 2020		98,352
Residual		4,156
	$	13,254,280

*Includes $2.5 million debt to shareholder that the Company intends to convert to preferred stock equity. See the discussion on the prior page for more details.

Debt 2015:

In May 2015, the Company signed the Extension Agreement of the October 2013 Credit Agreement. The Extension Agreement extended the maturity of the Company's debt to Big 4 until April 2017. The terms of the October 2013 Credit Agreement were unchanged by the execution of the Extension Agreement; the only exception is that there will be no debt premium associated with the Extension Agreement. The $0.5 million premium associated with the original agreement was paid to Big 4 in April 2015. During the extension period, the Company will focus on operations and weigh its financing options as results of its turnaround efforts are available.

We have historically funded our working capital needs from operations, bank borrowings, and capital from shareholders. Presently, our principal sources of liquidity are generated from our operations and loans from commercial banks and private companies. Our working capital requirements are influenced by the level of our operations, the volume of our sales, and the timing of accounts receivable collections.

Debt 2014:

The Company's October 2013 Credit Agreement expired April 1, 2015. At that time, the Company was obligated to repay $9.6 million to Big 4. Management expected to be able to refinance all of its short term loans based on past experience, ability to generate sufficient cash flows from operations and the Company's credit history, and was successful in doing so. The Company pursued opportunities for longer term financing from a traditional financial institution to repay its outstanding debt to Big 4, but was not successful given time and historical performance constraints. The Company worked with Big 4 and was able to extend the October 2013 Credit Agreement for a two year period.

Debt 2013:

The Company operated under the provisions of the Restated Credit Agreement until the event of default notice received on March 25, 2013. From that date the Company operated under an event of default pursuant to two default notifications defined herein.

The Company received a notice of default on March 25, 2013 in a letter dated March 22, 2013, which was reported pursuant to item 2.04 of Form 8-K filed March 26, 2013. This notice of default advised that the Administrative Agent had not waived any event of default and the Lender Parties expressly reserved all rights and remedies available to them under the Restated Credit Agreement.

The Company received a notice of default on April 30, 2013 in a letter dated April 25, 2013, which was reported pursuant to item 2.04 of Form 8-K filed May 3, 2013. This notice of default advised that the Administrative Agent had not waived any event of default and the Lender Parties expressly reserved all rights and remedies available to them under the Restated Credit Agreement.

The Notices of Default and Reservation of Rights specifically advised that Events of Default had occurred and continued to exist for the Company under Section 7.1(b) of the Credit Agreement by reason of: (a) Borrower's noncompliance with the minimum EBITDA covenant, set forth in Section 6.20(d) of the Credit Agreement, for the Test Periods ended February 28 and March 31, 2013 and for the Notices of Default filed May 3, 2013 (b) the Company's failure to perform the covenant set forth in Section 6.31(d) of the Credit Agreement (failure to complete, no later than March 31, 2013, the Designated Transaction).

On May 31, 2013, the Administrative Agent, the Lenders, all of its subsidiaries and Marshall T. Reynolds entered into the May 2013 Forbearance Agreement which provided, among other things, that during a forbearance period commencing on May 31, 2013, and ending on September 30, 2013 (unless terminated sooner by default of the Company under the May 2013 Forbearance Agreement), the Lenders were willing to temporarily forbear exercising certain rights and remedies available to them, including acceleration of the obligations or enforcement of any of the liens provided for in the Restated Credit Agreement. The Company acknowledged in the May 2013 Forbearance Agreement that as a result of the existing defaults, the Lenders were entitled to decline to provide further credit to the Company, to terminate their loan commitments, to accelerate the outstanding loans, and to enforce their liens.

The May 2013 Forbearance Agreement provided that during the forbearance period, so long as the Company met the conditions of the May 2013 Forbearance Agreement, it could continue to request credit under the revolving credit line.

The May 2013 Forbearance Agreement required the Company to:

(a)	Enter into various Designated Transactions referred to as Designated Transaction No. 1 and Designated Transaction No. 2 pursuant to applicable approvals from secured lenders regarding pricing or other actions, including letters of intent no later than June 14, 2013 setting forth the terms and conditions for Designated Transaction No. 1 that shall be satisfactory to the Required Lenders. The Company was also required to use its reasonable best efforts to enter into a letter of intent, no later than June 7, 2013, for Designated Transaction No. 2. There were also various targeted dates upon acceptance of applicable letters of intent for Designated Transactions which would result in various actions to be achieved by the applicable milestone dates or if not achieved might be considered an event of default.
(b)	Acknowledge in a writing, satisfactory to the Required Lenders, that approval of the Company’s shareholders shall not be required for Designated Transaction No. 1, whether considered separately or together with Designated Transaction No. 2.
(c)	The Company was be subject to a minimum EBITDA covenant commencing with the month ended June 30, 2013 based on a buildup starting April 1, 2013 of $1,378,394 at June 30, 2013, $2,198,509 at July 31, 2013 and $2,506,722 at August 31, 2013
(d)	Continued retention of Timothy D. Boates, RAS Management Advisors, LLC as its Chief Restructuring Officer who shall continue to be subject to the sole authority, direction and control of the Company’s Board of Directors and to report directly to the Board.
(e)	Expenditure limitations as defined in CRO report and under direct control of the CRO.
(f)	The requirement of a general reserve of $1,000,000 in the definition of “Borrowing Base” in the Restated Credit Agreement shall be waived for the duration of the Forbearance Period.
(g)	Removal of requirement to maintain $750,000 concentration account minimum balances.
(h)	Temporary Overadvance on the borrowing base in an amount not to exceed $1,200,000 subject to the aggregate revolving credit commitment limit of $10,000,000. Overadvance shall be repaid upon receipt of project receivables and such repayment shall be a permanent reduction in the Temporary Overadvance. Such Overadvance shall be repaid in full upon the earliest Designated Transaction No.1 or Designated Transaction No.2 or September 30, 2013.
(i)	Excess availability of $500,000.

On August 28, 2013, the Administrative Agent, the Lenders, all of its subsidiaries and Marshall T. Reynolds entered into a First Limited Forbearance and Waiver Agreement and Second Amendment to Amended and Restated Credit Agreement (“August 2013 Forbearance Amendment”). This Agreement decreased the Revolving Credit Commitments from $10,000,000 in the aggregate to $8,000,000 in the aggregate, modified certain financial covenants and provided the consent to the sale of certain assets.

The Company, various Company subsidiaries, as Guarantors, Marshall T. Reynolds, as shareholder and Big 4 Investments, LLC (“Administrative Agent and Lender”) as Lender and Administrative Agent entered into a Third Amended and Restated Credit Agreement dated October 7, 2013. Administrative Agent and Lender purchased the Company’s outstanding syndicated debt from Fifth Third Bank and the other Lenders (“Previous Secured Lenders”) for a price of $10.0 million. The Administrative Agent and Lender then simultaneously entered into the October 2013 Credit Agreement with the Company pursuant to the provisions of Term Note A for $10.0 million and related Guaranty Agreement and Stock Pledge and Security Agreement all dated October 7, 2013. The indebtedness immediately prior to the note sale reflected a balance pursuant to the Loan Purchase Agreement between Administrative Agent and Lender and the Previous Secured Lenders of approximately $19.9 million representing Term Loan A, Term Loan B and Revolving Loans plus accrued deferred fee and accrued interest of approximately $1.2 million.

The October 2013 Credit Agreement and related Term Note A, Guaranty Agreement and Stock Pledge and Security Agreement as further described herein amended various provisions of the Restated Credit Agreement dated October 19, 2012, including but not limited to:

●		October 2013 Credit Agreement maturity of April 1, 2015.
●		Existing debt restructured from Term Loan A, Term Loan B, and Revolving Credit Facility to Term Note A in the amount of $10,000,000.
●		The Company's debt will not have a revolving credit facility component.
●		Interest rate at the Wall Street Journal prime rate of interest plus two percent.
●		Principal payments due monthly at $50,000 per month.
●		$500,000 maturity or prepayment premium.
●		Financial covenant of maximum capital expenditures of $3,000,000 during any fiscal year.
●		Personal guaranty of Marshall T. Reynolds.
●		Stock Pledge and Security Agreement providing a third party credit enhancement to support the credit facility underwritten by the Administrative Agent.
●		In consideration for the personal Guaranty Agreement of Marshall T. Reynolds and Stock Pledge and Security Agreement, the warrants held by the Previous Secured Lenders were assigned to Marshall T. Reynolds. The warrants represent $0.001 per share warrants issued for up to 30% (on a post-exercise basis) of the outstanding common stock of the Company in the form of non-voting Class B common stock and associated Investor Rights Agreement.

The Company reviewed applicable GAAP and determined that extinguishment accounting should be applied in relation to the October 2013 Credit Agreement.