Contingent Liabilities and Liquidity

6 Months Ended

Mar. 31, 2012

Contingent Liabilities and Liquidity

Note 5.           Contingent Liabilities and Liquidity

We remain contingently liable on various leases underlying restaurants that were previously sold to franchisees.  We have never experienced any losses related to these contingent lease liabilities, however if a franchisee defaults on the payments under the leases, we would be liable for the lease payments as the assignor or sublessor of the lease.  Currently we have not been notified nor are we aware of any leases in default by the franchisees, however there can be no assurance that there will not be in the future which could have a material effect on our future operating results.

In December 2011 the Company amended its note payable to Wells Fargo Bank. At the time the Company was not in compliance with certain loan covenants. Under terms of the amended note agreement, the Company is required to have tangible net worth of not less than $2.5 million as of December 31, 2012, which is greater than the Company’s current tangible net worth.  In addition, for the quarter ended June 30, 2012, the Company is required to have an EBITDA coverage ratio of .3 to 1 (and increasing thereafter). The Company is also required to repay this note to the extent any new equity is sold in the Company. While no assurances can be given that the Company will be able to achieve these covenants, the Company believes that it is probable through additional financing, improved EBITDA performance and other alternatives the Company is currently pursuing, it will be able to remain in compliance with the amended covenants. If not, and if the bank elected to accelerate the note, it could adversely impact future operations.  However, the Company has paid down the outstanding balance on this loan as of March 31, 2012 to $320,000, of which $175,000 is recorded as a current liability.  In addition, the Company is under contract for a sale leaseback transaction and has entered into a contract for the sale of one company-owned restaurant (both are subject to certain buyer contingencies) which together will pay off the PFGI II loan of $1,634,000 in full and add approximately $400,000 of additional working capital to the Company’s balance sheet if such transactions are closed as contemplated.