LIQUIDITY

The Company's primary sources of liquidity have historically been cash flows from operations and the borrowing capacity available under its Credit Agreement. Its business is highly seasonal, with significant operating cash flow historically being generated in the fiscal fourth quarter. Liquidity is needed to satisfy the Company's operating cash flow needs, to meet debt service obligations as they come due under the Credit Agreement, and to provide for any necessary capital maintenance spending to support operations.

As a result of profit shortfalls in the third quarter of fiscal 2011, and noncompliance with the leverage ratio covenant (as defined, Total Funded Debt to EBITDA) at the end of the third quarter of fiscal 2011, the Company entered into an amendment (the "First Amendment") to the Credit Agreement (the “Credit Agreement”) on December 16, 2011, which suspended the leverage ratio test for the quarter ended November 12, 2011; reduced the revolving commitment from $105 million to $90 million; and suspended dividend and other restricted payments, including share repurchases.

The reduction in available borrowing capacity resulting from the First Amendment, coupled with a significant reduction in earnings and operating cash flow, has resulted in significant liquidity challenges for the Company. The Company incurred a net loss of $60.1 million for the 40 weeks ended November 10, 2012, and used $13.0 million of cash for operations. As of November 10, 2012, the Company's current liabilities of $136.4 million (including $79.4 million due under its Credit Agreement) exceeded current assets of $20.8 million, and there was a total stockholders' deficit of $118.6 million.

At February 4, 2012 and April 28, 2012, the Company was not in compliance with several covenants under the Credit Agreement. On May 23, 2012, the Company entered into a forbearance agreement with its lenders that, among other items, suspended the lenders rights and remedies under the Credit Agreement through July 21, 2012. Based on the Company's default status under the Credit Agreement, the lenders had the right to provide the Company with notice to call the loan. Under the forbearance agreement, that right was relinquished until July 21, 2012 and certain restrictions were placed on the Company during the forbearance period. On June 6, 2012, the Company entered into the Second Amendment to the Credit Agreement (the “Second Amendment”), which waived the existing defaults and terminated the forbearance period.

The Second Amendment provided for revolving commitment limits of $90 million on June 6, 2012, $94 million on June 12, 2012, $95 million on July 22, 2012, $94 million on September 15, 2012, $90 million on November 10, 2012 and $85 million on December 11, 2012 and thereafter, subject to the Company's satisfaction of certain conditions and covenants. The Credit Agreement, as amended by the Second Amendment, matures on December 31, 2012 and bears interest at an annual base rate of 3.25% payable in cash on a monthly basis. Additionally, under the Second Amendment, all outstanding revolving loans (including both base-rate loans and LIBOR loans) and all outstanding accumulated and unpaid interest other than the 3.25% cash interest are now defined as Payment in Kind ("PIK") Obligations and accrue interest at a rate of fourteen percent (14%) per annum (“PIK interest”). This PIK interest accrues monthly and is due and payable in full, in cash upon termination of the Credit Agreement. Fifteen business days after the quarters ending July 21, 2012 and November 10, 2012, the amount by which adjusted EBITDA (as defined, net earnings from continuing operations before interest expense, income taxes, depreciation and amortization and other non-cash charges) exceeded ($4.8) million and $1.4 million, respectively, was to be paid in cash to reduce the PIK Obligation. At the end of each week, any cash amounts exceeding $5.0 million must be paid to reduce the revolving loans under the Credit Agreement within two (2) business days. In connection with the Second Amendment, the Company is required to pay to the lenders an amendment fee of $1.8 million, which is payable at maturity.

Other terms of the Second Amendment include, but are not limited to:


•	The Company granted the lenders warrants to purchase an aggregate amount equal to 19.9% of the common stock of the Company, calculated on a fully-diluted basis at the time of exercise. See further discussion in Note 9.


•	The Company is required to provide financial statements for each 4-week period, weekly 13-week cash flow statements and weekly compliance certificates to the lenders.


•	The Company engaged a Chief Restructuring Officer.

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The Company engaged an Investment Bank to solicit offers to purchase the Company and/or the debt outstanding under the Credit Agreement. The Company began soliciting offers during the third quarter of fiscal year 2012 and expects a targeted close during the first quarter of 2013. Management has developed a plan for an orderly liquidation in the event the Company is unable to execute restructuring alternatives that are acceptable to the lenders.


•	In connection with the Second Amendment, the Company executed amendments to its host agreements with Walmart and Sears, which, among other items, deferred payment of certain lease charges and fees.


•	The financial covenants included in the Credit Agreement were replaced with:


◦	Minimum Period Cumulative EBITDAR - assigned for each 4 week period for periods five through 11, which totals $5.2 million;


◦	Minimum Weekly Cumulative Gross Sales Revenue - gross sales related to the Sears and Walmart contracts are established on a weekly basis and total $169.8 million for the period May 27, 2012 through January 5, 2013;


◦	Minimum Weekly Cash - not permitted to be less than $2.3 million for any calendar week.

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The Company's properties in St. Louis, Missouri, Matthews, North Carolina, and Charlotte, North Carolina were sold during fiscal year 2012. Proceeds from these sales were applied to pay down the revolving loans with net proceeds obtained from the sale of the Charlotte, North Carolina facility permanently reducing the borrowing commitment levels. Also during fiscal year 2012, the Company transitioned all of the processing activities formerly in Charlotte, North Carolina to its processing facility in St. Louis, Missouri.

On August 28, 2012, the Company entered into the Third Amendment to the Credit Agreement (the "Third Amendment"), which eliminated the excess EBITDA required payment after the quarter ending July 21, 2012 and extended the permanent reduction of borrowing commitment levels related to the net proceeds obtained from the sale of the Charlotte, North Carolina facility until December 1, 2012.

On November 9, 2012, the Company entered into the Fourth Amendment to the Credit Agreement (the "Fourth Amendment"), which extended the revolving commitment of $94 million to November 12, 2012 and increased the revolving commitment limit from $90 million to $91.2 million from November 13, 2012 to and including November 20, 2012. Subsequently, the limit was reduced to $90 million as originally stipulated in the Second Amendment.

As of November 10, 2012, the Company was not in compliance with certain provisions of its Credit Agreement, as amended, including the Minimum Period Cumulative EBITDAR covenant and certain studio closure and lease abandonment provisions. Since that time, the Company has also fallen out of compliance with several additional covenants and such noncompliance exists as of December 31, 2012. The Company is currently negotiating a forbearance agreement with the lenders to, among other items, delay them from exercising their rights and remedies under the Credit Agreement until mid-January. There can be no assurances that the lenders will grant such waivers or amendments on commercially reasonable terms, if at all.

If sales trends do not improve, our available liquidity from cash flows from operations will be materially adversely affected. There can be no assurance that we will be able to improve cash flows from operations, or that we will be able to comply with the terms of the Credit Agreement, as amended. Currently, the Company does not have sufficient resources to repay amounts as they become due under the Credit Agreement. If we are unable to address our liquidity shortfall or comply with the terms of our Credit Agreement, as amended, then our business and operating results would be materially adversely affected, and the Company may then need to further curtail its business operations, reorganize its capital structure, or liquidate.

The Credit Agreement and amounts owed thereunder are currently due. The Company is currently negotiating a forbearance agreement with the lenders to, among other items, delay them from exercising their rights and remedies under the Credit Agreement until mid-January. If the Company is unable to secure additional amendments to the Credit Agreement, the Company may be forced into an orderly liquidation or bankruptcy. The outcome of restructuring and sale initiatives required by the Credit Agreement, as amended, is uncertain and involves matters that are outside of the Company's control.

The Company's interim consolidated financial statements have been prepared assuming that it will continue as a going concern; however, the conditions noted above raise substantial doubt about the Company's ability to do so. The interim consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount of and classification of liabilities that may result should the Company be unable to continue as a going concern.