Contingent Liabilities and Liquidity

9 Months Ended

Jun. 30, 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.  However, as discussed above we have entered into a Stock Purchase Agreement for $2,000,000 of convertible preferred stock which will increase our net worth in excess of the $2,500,000 requirement. Additionally, a condition of the amended note agreement requires any remaining balance on the note to be paid from any proceeds of the sale of stock in the Company. We anticipate paying off the remaining balance of $276,000 prior to September 30, 2012. In addition, for the quarter ended June 30, 2012, the Company was required to have an EBITDA coverage ratio of .3 to 1 (and increasing thereafter). As of June 30, 2012 the Company was in compliance with the required EBITDA coverage ratio of .3 to 1.