** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549-1004**

 

**FORM 10-K**

**(Mark One)**

 
| **ý**                                     |       | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**     |
|------------------------------------------------|------------|------------------------------------------------------------------------------------------------|
| ** **                                     |
| **For the Fiscal Year Ended October 28, 2004** |
| ** **                                     |
| **o**                                          | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

** **

**For the transition period from                        to                        **

 

**Commission File Number: 333-117263**

 

**VICORP RESTAURANTS, INC.**

(Exact name of registrant as specified in itscharter)

 
| ***Colorado***                           | *** *** | ***84-0511072***    |
|------------------------------------------|--------------|---------------------|
| (State or other jurisdiction             |         | (I.R.S. Employer    |
| of incorporation or organization)        |         | Identification No.) |
|                                     |         |                |
| ***400 West 48th Avenue, Denver, CO***   | *** *** | ***80216***         |
| (Address of principal executive offices) |         | (Zip Code)          |

 

**303-296-2121**

(Registrant’s telephone number, includingarea code)

 

Securities registered pursuant to Section12(b) of the Act:

**None**

 

Securities registered pursuant to Section12(g) of the Act:

**None**

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months and (2) has been subject to such filing requirements forthe past 90 days.  YES   ý   NO   o

 

Indicateby check mark if disclosure of delinquent filers, pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of the Form 10-K or any amendment to thisform 10-K: ý

 

Indicateby check mark if the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act): YES   o   NO   ý

 

The aggregate market valueof voting stock held by non-affiliates of the registrant is not determinable assuch shares were privately placed and there is no public market for suchshares.

 

Number of shares of CommonStock, $.0001 par value, outstanding at January 24, 2005: 1,421,800, excludingtreasury shares.

 

 

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Our annual reports on Form10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and anyamendments to the reports will be provided without charge upon written requestaddressed to: Investor Relations, VICORP Restaurants, Inc., 400 West 48thAvenue, Denver, Colorado 80216. Additionally, our consolidated financial statements are available at ourwebsite, www.vicorpinc.com, under the “Our Company – Investor Relations”headings.

 

#### **FORM 10-K INDEX**

 
| ** **   | ** ** | ** **                                                                                  | **Page** |
|--------------|------------|---------------------------------------------------------------------------------------------|----------|
|         |       |                                                                                        |     |
| **PART I**   |
|         |       |                                                                                        |     |
| Item 1       |       | Business                                                                                    | 3        |
|         |       |                                                                                        |     |
| Item 2       |       | Properties                                                                                  | 17       |
|         |       |                                                                                        |     |
| Item 3       |       | Legal Proceedings                                                                           | 19       |
|         |       |                                                                                        |     |
| Item 4       |       | Submission of Matters to a  Vote of Security Holders                                        | 19       |
|         |       |                                                                                        |     |
| **PART II**  |
|         |       |                                                                                        |     |
| Item 5       |       | Market for the Registrant’s  Common Equity and Related Stockholder Matters             | 19       |
|         |       |                                                                                        |     |
| Item 6       |       | Selected Financial Data                                                                     | 20       |
|         |       |                                                                                        |     |
| Item 7       |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 24       |
|         |       |                                                                                        |     |
| Item 7a      |       | Quantitative  and Qualitative Disclosures About Market Risk                                 | 39       |
|         |       |                                                                                        |     |
| Item 8       |       | Financial  Statements and Supplementary Data                                                | 40       |
|         |       |                                                                                        |     |
| Item 9       |       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure       | 40       |
|         |       |                                                                                        |     |
| Item 9A      |       | Controls  and Procedures                                                                    | 40       |
|         |       |                                                                                        |     |
| Item 9B      |       | Other  Information                                                                          | 40       |
|         |       |                                                                                        |     |
| **PART III** |
|         |       |                                                                                        |     |
| Item 10      |       | Directors  and Executive Officers of the Registrant                                         | 40       |
|         |       |                                                                                        |     |
| Item 11      |       | Executive  Compensation                                                                     | 42       |
|         |       |                                                                                        |     |
| Item 12      |       | Security  Ownership of Certain Beneficial Owners and Management                             | 44       |
|         |       |                                                                                        |     |
| Item 13      |       | Certain  Relationships and Related Transactions                                             | 45       |
|         |       |                                                                                        |     |
| Item 14      |       | Principal  Accounting Fees and Services                                                     | 46       |
|         |       |                                                                                        |     |
| **PART IV**  |
|         |       |                                                                                        |     |
| Item 15      |       | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K                           | 47       |

 

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**FORWARD-LOOKING STATEMENTS**

 

*This Annual Report on Form 10-K and the documents incorporatedby reference into the Annual Report on Form 10-K include forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934.  These forward-looking statements can beidentified by the use of forward-looking terminology, including the words “believes,”“estimates,” “anticipates,” “expects,” “intends,” “may,” “will” or “should,”or, in each case, their negative or other variations or comparableterminology.  These forward-lookingstatements include all matters that are not historical facts.  They appear in a number of places throughoutthis Annual Report on Form 10-K and include statements regarding ourintentions, beliefs or current expectations concerning, among other things, ourresults of operations, financial condition, liquidity, prospects, growth,strategies and the industry in which we operate.*

 

*By their nature, forward-looking statements involve risksand uncertainties because they relate to events and depend on circumstancesthat may or may not occur in the future. We caution you that forward-looking statements are not guarantees offuture performance and that our actual results of operations, financialcondition and liquidity, and the development of the industry in which weoperate may differ materially from those made in or suggested by theforward-looking statements contained in this Annual Report on Form 10-K.  In addition, even if our results oroperations, financial condition and liquidity, and the development of theindustry in which we operate are consistent with the forward-looking statementscontained in this Annual Report on Form 10-K, those results or developments maynot be indicative of results or developments in subsequent periods.*

 

*The following listing represents some, but not necessarilyall, of the factors that may cause actual results to differ from thoseanticipated or predicted:*

 

•                  Our level ofindebtedness;

•                  Our developmentand expansion plans;

•                  Our ability toprofitably implement our growth strategy;

•                  Competitivepressures and trends in the restaurant industry;

•                  Our exposure tocommodity prices;

•                  Our dependenceupon frequent deliveries of food and other supplies;

•                  Food-borne illnessincidents;

•                  Adverse publicityand litigation;

•                  Seasonality of ourbusiness and weather conditions;

•                  Governmentregulations;

•                  Our vulnerabilityto changes in consumer preferences and economic conditions;

•                  Integration offuture acquisitions into our business;

•                  Our reliance inpart on our franchisees;

•                  Our ability toattract and retain employees;

•                  Our liquidity andcapital resources;

•                  the loss of keyemployees; and

•                  the impact ofhaving a controlling shareholder.

 

*These forward-looking statements are subject to numerousrisks, uncertainties and assumptions about us, including the factors describedunder “Item 1. Business - Risk factors.” The forward-looking events we discuss in this Annual Report on Form 10-Kspeak only as of the date of such statement and might not occur in light ofthese risks, uncertainties and assumptions. We undertake no obligation anddisclaim any obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.*

 

*Unless otherwise provided in this Annual Report on Form10-K, references to “the Company,” “VICORP,” “we,” “us” and “our” refer to VIAcquisition Corp. and our consolidated subsidiaries including VICORPRestaurants, Inc.*

 

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**PART I**

 

**Item 1****.****          ****Business.**

 

**Our company**

 

We operate family-diningrestaurants under two proven and well-recognized brands, Village Inn and BakersSquare. As of October 28, 2004, our company, which was founded in 1958, had 374restaurants in 25 states, consisting of 271 company-operated restaurants and103 franchised restaurants.  ** **Ourrestaurant locations are concentrated in particular regions in order tomaximize operating efficiencies, including regional management, purchasing andadvertising penetration. In addition to our restaurants, we operate threestrategically located pie production facilities that produce premium pies thatare offered in our restaurants and sold to third-party customers. Our revenuesincreased from $379.9 million in 2001 to $399.7 million in 2004, while sameunit sales decreased an average of 0.1% per year during that same period. Bothof our restaurant concepts operate in the stable family-dining segment of therestaurant industry. Over our 46-year history, we have concentrated onproviding our customers great-tasting, high-quality food at reasonable priceswith fast and friendly service. Our commitment to an attractive price-to-valuerelationship has enabled us to develop a stable base of repeat customers.

 

We continually seek toincrease the efficiency of our operations, increase customer visits and salesper customer, provide new menu options for our guests and increase sales ofhigher margin items. Significant investments in our brands and operationalimprovements, including an investment of approximately $7.2 million to upgradeour information and restaurant point-of-sale (“POS”) systems in 2002 and 2003,ongoing remodeling of our restaurants and reductions in purchasing andmanufacturing costs have enabled us to improve our prime margin, which is ourprofitability expressed as a percentage of restaurant sales after deducting ourtwo most significant costs, food and labor. Prime margin improved from 38.8% in 2001 to 41.6% in 2004.  In addition, we have increased our margins byproviding our managers with extensive training and the tools necessary toeffectively operate our business, such as on-line ordering and bill processingand real-time information on key business metrics. We continually engage inselective menu engineering and the development of updated menu items for ourrestaurants such as our signature oven-roasted focaccia sandwiches in ourVillage Inn restaurants, seasonal offerings such as artisan-style bread bowlsfilled with hearty soups and stews in our Bakers Square restaurants and a “CarbCounter” menu in our Village Inn restaurants. Our other efforts to drive salesgrowth include creative marketing programs, such as our successful newelectronic gift card program, and expansion of our third-party customer basefor our pies.

 

***Village Inn***

 

We opened our first VillageInn restaurant in 1958, and as of October 28, 2004 we had 224 locations, 121 ofwhich were operated by our company and 103 of which we franchised. Ourcompany-operated Village Inn restaurants are located in nine states, primarilyin the Rocky Mountain region, the Midwest, the Northwest and Florida, includingattractive markets such as Denver (26 units), Phoenix (19 units), Omaha (13units) and Salt Lake City (11 units). Village Inn is focused on family diningand appeals to a large segment of the population, and we believe it has astrong reputation for fast and friendly service, fresh food and reasonableprices. We are known for serving fresh breakfast items throughout the day,including our Ultimate Skillet meals, Pecan Roll French Toast, made-from-scratchbuttermilk pancakes and fluffy three-egg omelets. Breakfast items accounted for63% of Village Inn sales in 2004. We have also successfully leveraged ourstrong breakfast heritage to establish a well-developed brand platformencompassing a broad selection of traditional American fare for lunch anddinner, at price points that position us in the mid-range of the family-diningsegment. Signature items on our lunch and dinner menus include our PortabellaChicken Skillet and our All-World Double Cheeseburger®. We frequently reviewand update our menus with the assistance of our team of in-house research anddevelopment chefs to enhance the attractiveness of our menu offerings to ourcustomers. Customer loyalty is one of Village Inn’s strongest characteristics,with a significant number of customers who patronize our restaurants three ormore times a month.

 

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Our Village Inn restaurantsare predominantly free-standing units which average approximately 5,000 squarefeet in size and can seat between 120 and 180 people. We are typically openfrom 6 a.m. to 12 a.m., allowing us to effectively generate revenue in allthree day parts. Our typical entrée prices range from $4.29 to $9.69 forbreakfast items and from $4.99 to $10.69 for lunch and dinner items, with anaverage per-person check of $7.65 overall in 2004. In order to improve ourefficiency and purchasing power, our menus are standardized throughout theUnited States, with some variations driven by regional preferences. In 2004,Village Inn’s average unit sales were $1.5 million, and corresponding averagerestaurant operating cash flow was $275,000, representing an 18.7% margin.

 

***Bakers Square***

 

The Bakers Square conceptbegan in 1983 when we acquired 59 Poppin Fresh Pies restaurants from thePillsbury Restaurant Group. Since then, we have grown Bakers Square to 150company-operated restaurants as of October 28, 2004. Our Bakers Squarerestaurants are located in eight states, including California (50 units),Illinois (44 units) and Minnesota (25 units). The foundation of the BakersSquare concept is our signature freshly-baked pies, which accounted for 25% ofBakers Square’s sales in 2004. Building upon our reputation for quality pies,we have extended our offerings to include popular traditional American fare forbreakfast, lunch and dinner. Bakers Square offers dozens of varieties ofmulti-layer specialty pies made from premium ingredients, which differentiatesthe concept from our family-dining competitors. Many of our customerscomplement their lunch or dinner with a serving of pie, while others purchasewhole pies for at-home consumption throughout the year, and particularly aroundthe holidays. As with Village Inn, we use our team of in-house research anddevelopment chefs to regularly update the Bakers Square menu offerings toattract a wider demographic range of diners and increase repeat business fromexisting customers. For example, we have successfully promoted ourartisan-style bread bowls filled with hearty soups and stews, along withpopular menu favorites like our Stir-Fry Chicken Pita, Slow-Roasted TurkeyFocaccia, Honey Mustard Chicken and Portabella Pot Roast.

 

Our Bakers Squarerestaurants are free-standing units which average approximately 4,500 squarefeet in size and can generally seat between 120 and 160 people. We aretypically open from 7 a.m. to 11 p.m., with our highest traffic generated atlunch and dinner. Our typical entrée prices range from $4.49 to $9.99 forbreakfast items and from $6.29 to $10.99 for lunch and dinner items, with anaverage per-person check of $8.70 overall in 2004. As with Village Inn, ourmenus are standardized across the United States, with some variations driven byregional preferences. In 2004, Bakers Square’s average unit sales were $1.5million, and corresponding average restaurant operating cash flow was $179,000,representing a 12.2% margin.

 

Recently, we completed thefirst phase of a broad-based Bakers Square re-positioning review.  In fiscal 2005, we expect to refine thechanges to the brand and to initiate selective market trials.

 

***Pie production operations***

 

Complementing our restaurantoperations, we produce premium pies for the Bakers Square and Village Innrestaurants and for sale to select third-party customers. In 2004, we produced17.6 million premium pies. By producing pies at our three strategically locatedfacilities, we are able to control the quality, consistency and freshness ofour pies and enhance our distribution capabilities. We differentiate ourselvesfrom other pie manufacturers by producing multi-layer pies, using premiumingredients such as fresh cream, whole fruits and high quality pie crusts, andmaintaining a strict shelf life policy of no more than three days for the freshpies in our restaurants. At the 2004 National Pie Championships, we won 31blue-ribbon awards, which was more than any other competitor.

 

We have improved theefficiency of our pie production operations and increased sales of our pies tothird parties, including the addition of several new accounts. We have used ourenterprise resource planning system to manage inventory and costs, concentratedour frozen pie production in our high volume Chaska, Minnesota facility toachieve economies of scale and restructured our delivery arrangements to obtainsubstantial savings.

 

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**Industryoverview**

 

The restaurant industry is asignificant contributor to the U.S. economy, with total 2002 sales of $279billion, the eleventh consecutive year of real growth. We believe this growthcan be attributed to several key lifestyle and demographic trends, includingthe continued increase in spending on food consumed away from home andrestaurant dining, and the continued growth in disposable incomes and key agegroups of the population. The restaurant industry can be divided into twoprimary operating segments: full service restaurants (“FSR”) and limitedservice restaurants (“LSR”). Restaurants operating in the FSR segment presentbroad menu choices that are served to patrons by a waitstaff, while restaurantsoperating in the LSR segment serve customers at a counter or through adrive-thru window.

 

Our Village Inn and BakersSquare concepts operate in the “family-dining” category of the FSR segment. Thefamily-dining category is the largest category in the FSR segment, withapproximately $32 billion in sales in 2002. Family-dining sales grew at acompound annual growth rate of 1.6% from 1997 to 2002 and are projected to growat a 1.0% compound annual growth rate for the period from 2002 to 2007,according to Technomic, Inc. The family-dining category is relativelyfragmented, with the top 100 chains representing approximately 33% of totalcategory sales in 2002. While not exhibiting the higher growth of certain othersegments, we believe the family-dining category has a loyal customer base andstable characteristics. We believe that family-dining restaurants offerconsumers a consistent dining experience with quality food at a lower cost per checkthan other FSR dining options.

 

**Ourbackground**

 

We opened our firstrestaurant under the name “Village Inn Pancake House” in Denver, Colorado in1958. Due to the success of the Village Inn concept, we began franchising thebrand, and our first franchise restaurant opened in 1961. We introduced theBakers Square concept in 1983 when we acquired 59 Poppin Fresh Pies restaurantsfrom the Pillsbury Restaurant Group. We transformed the Poppin Fresh Piesrestaurants, all of which were located in the Midwest, into the Bakers Squareconcept. In 1984, we acquired 175 former Sambo’s restaurants in California,Florida and Arizona. We converted these restaurants in California into BakersSquare restaurants, which served as the basis for our expansion to the West Coast,and we converted the Florida and Arizona restaurants into Village Innrestaurants.

 

We completed an initialpublic offering in 1982 and changed our name from Village Inn Pancake House,Inc. to VICORP Restaurants, Inc. Following our initial public offering, we werepublicly traded until we were acquired in a going-private transaction led bythe private equity firms Goldner Hawn Johnson & Morrison and BancBostonCapital in May 2001. In June 2003, we were acquired in a transaction led by theprivate equity firm Wind Point Partners.

 

**Our sponsor**

 

Wind Point Partners is aprivate equity investment firm that manages over $1 billion in commitments andhas invested in more than 75 companies since its founding in 1983. Wind Point’sstrategy is to partner with top caliber CEOs and to align its economicinterests closely with those of company management teams through significantequity participation. Wind Point typically invests between $20 million and $70million in transactions such as leveraged buyouts, recapitalizations, industryconsolidations and expansion capital transactions involving companies withrevenue between $50 million and $500 million.

 

**Operationsand controls**

 

To maintain a consistentlyhigh level of food quality and service in our restaurants, we have establisheduniform operational standards relating to the quality of ingredients,preparation of food, menu selection, maintenance of premises and employeeconduct. We require each of our restaurants to operate in accordance with theserigorous standards, and our managers are responsible for implementing thesestandards.

 

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To reduce costs and improvethe management of our restaurant and pie production operations, we haverecently updated our information systems, including our ReMACS back-officesystem, our POS system and our enterprise resource planning system. Our ReMACSinformation system provides our restaurant managers with improved electronicfood ordering, inventory, ideal and actual food cost reporting, cash controland labor management tools. By using our recently upgraded POS system in ourrestaurants, we are able to track sales, product mix, labor dollars and hours,and credit card and cash deposit information for each of our restaurants on a dailybasis. We use an SAP enterprise resource planning system in our pie productionfacilities to measure and reduce waste, labor costs and inventory levels. Inaddition, to enable us to better understand and manage our operations, wemaintain a central database of information and data relating to decisionssupport, cash and sales, enterprise resource planning and our vital systems.

 

**Sitedevelopment and expansion**

 

We believe that thelocations of our restaurants are critical to our long-term success, and wedevote significant time and resources to analyzing each prospective site. Weplan to expand in a number of ways, including through the development of newsites, the conversion of competitors’ sites, and the purchase of franchisedsites from franchisees. The costs of opening a Bakers Square or Village Innrestaurant may vary by restaurant depending upon, among other factors, thelocation of the site, the method of acquisition and the amount of constructionrequired. With an average projected investment of approximately $450,000 forleased units, we believe we have a low-cost economic model for the continueddevelopment of new restaurants. At times, we receive landlord developmentand/or rent allowances for leasehold improvements, furniture, fixtures and equipment.In addition, we anticipate that we will enter into sale-leaseback transactionsand other leasing arrangements with respect to our newly constructed restaurantproperties. The standardized decor and interior design of each of ourrestaurant concepts can be readily adapted to accommodate different types ofbuilding configurations.

 

We use our in-housedevelopment team, including real estate, design and legal professionals, tofind, evaluate and negotiate new sites for our restaurants. We evaluate potentialsites based on a number of criteria, including surrounding population density,demographic information, median household income and size, location, arearestaurant competition, traffic, access, visibility, potential restaurant size,parking and signage capability. We also selectively use outside consultants whospecialize in site evaluation to provide independent validation of our salespotential estimates for new sites. In fiscal 2004, we opened six newlyconstructed restaurants.

 

We may also purchase ourcompetitors’ sites and convert them to our restaurant concepts. We evaluateeach potential conversion site using the same criteria that we use to evaluatenew restaurant sites. We believe that conversion can be a cost-effective methodfor adding new restaurants. In fiscal 2004, we converted two of our competitors’restaurants to one of our concepts.

 

We also may grow bypurchasing franchised Village Inn restaurants from our franchisees. Theseopportunities may arise as our franchisees retire or seek liquidity for theirinvestment. For example, in 2003 we acquired eight franchised Village Innrestaurants located in the Albuquerque, New Mexico area.

 

**Restaurantstaffing and training**

 

Attraction and retention ofquality employees, continuous employee development, regular communication ofexpectations and regular performance feedback are critical factors that help usachieve customer satisfaction. We believe we distinguish ourselves by thequality of personnel and longevity of service among our Regional Managers,restaurant general managers and hourly staff. We attribute much of our successin retaining our management and employees to our extensive training programs,attractive cash incentive compensation program and competitive benefitprograms.

 

Each of our restaurants istypically managed by one general manager, one associate manager and oneassistant manager. On average, general managers possess over eight years ofexperience with us. Each of our general managers has primary responsibility forday-to-day operations in one of our restaurants, including hiring/firing,scheduling, cleanliness of the restaurant and restaurant cash flows. Therestaurant managers are supported by Regional Managers, Regional VicePresidents (or District Managers in California) and our corporate office. As ofOctober 28, 2004, we had 31 Regional Managers, each of whom is responsible formanaging approximately nine restaurants in a designated geographic region in amanner consistent with our strategies, policies and standards of quality. TheRegional Managers report to one of three Regional Vice Presidents of Operationsor two District Managers (in California). Our Regional Vice Presidents ofOperations participate in every aspect of our restaurant operations, fromorganizing quality management teams for the restaurants to routine visits toeach location.

 

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Our training programs aredesigned to equip our employees and franchisees with the skills necessary tohelp us achieve our objectives. We focus on outcome-based training, emphasizingthe acquisition of basic skills and behavior that result in desired performancefor specific positions. The average time in training for a manager new to ourcompany is eight to ten weeks.  At thesuccessful completion of training they are placed in a restaurant as anassistant manager.  At this point themanager continues to be trained and developed, utilizing a program calledManagement Development Criteria.  Thisongoing training challenges the new manager to thoroughly understand anddemonstrate proficiency in all facets of management of our restaurants.  Upon completion, the manager is eligible toparticipate in our bonus program.  Inaddition to these programs, we conduct field training for our restaurantmanagers covering a variety of topics such as new products, food safety andmanagement development. For each of our franchised restaurants, we require thata minimum of two managers receive certification through our management trainingprogram. Additionally, we require our franchisees to successfully complete ourmanagement training program prior to the scheduled opening of any of ourfranchised restaurants.

 

**Marketing,advertising and menu development**

 

The family-dining segment inwhich our restaurant concepts operate attracts customers seeking quality,consistency, variety and value, with an average per-person check typicallybetween $6 and $9. Our mid-range price positioning in the family-dining segmentprovides the competitive advantage of flexibility in menu choices by offeringhigher or lower priced items based on customer preferences. We use variousmarketing techniques, such as television and radio (in geographic markets wherewe have sufficient market penetration), newspaper, direct mail and point-of-purchasematerials to promote our restaurant concepts and gain market share. Othermarketing initiatives include our successful electronic gift card program. Wesold $3.0 million worth of gift cards from the introduction of this program inNovember 2003 through October 2004.

 

In our ongoing effort tomaximize our sales and profitability, we engage in careful menu engineering andthe development of new menu items. We maintain a modern test kitchen at ourheadquarters staffed by highly qualified food professionals who create new menuofferings as well as new pie recipes. Before new items are introduced, aprogram of testing is undertaken to assess customer acceptance andimplementation considerations. In preparing menu items, we emphasize qualityand freshness, as well as trends in the family-dining segment as illustrated byour introduction of “Carb Counter” menu items in our Village Inn restaurants.New items may be offered on a promotional or seasonal basis, serve as specialitems to provide variety to our regular menus, or become a permanent part ofour offerings.

 

**Purchasingand distribution**

 

Our ability to maintainconsistent quality throughout our restaurants depends in large part upon ourability to acquire food products and related items from reliable sources inaccordance with our specifications. We make centralized, national purchasingdecisions for most menu ingredients to gain favorable prices and maintainquality and freshness levels. We negotiate directly with our major suppliers toobtain competitive prices and use purchase agreements in an effort to stabilizethe potentially volatile pricing associated with certain commodities. We alsoroutinely negotiate with prospective suppliers in an effort to obtaincompetitive pricing. We believe that we have good relationships with oursuppliers and that alternative supply sources are readily available ifnecessary.

 

We deliver our pies from ourthree pie manufacturing facilities to all of our restaurants and to ourthird-party customers using external distributors and transportation companies.We recently restructured our delivery and distribution arrangements to obtainsubstantial savings.

 

**Franchiseprogram**

 

We established our firstVillage Inn franchise in 1961. As of October 28, 2004 we had a total of 103franchised Village Inn restaurants, operated by 25 franchisees, each with oneto eleven restaurants. We believe that we currently enjoy solid workingrelationships with our franchisees. We presently intend to focus our expansionefforts on company-operated restaurants but may pursue selected franchisingopportunities.

 

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We generally seekfranchisees that have related business experience and access to capital tobuild out and support the Village Inn concept. We also provide our franchiseeswith access to training, marketing, quality control, purchasing/distributionand operations assistance. A franchisee is required to pay an initial franchisefee for a 15 year franchise term. Until the end of their first year ofoperation, our franchisees also pay us a royalty fee of $1,154 a week and amarketing fee of $577 a week. A franchisee is also typically obligated to pay afee for renewal of a franchise agreement beyond the initial term. After thefirst year of operation, our franchisees are required to pay royalty fees of 4%of gross sales as well as marketing fees of 2% of gross sales. Our standardfranchise agreement gives our franchisees the right to use our trademarks,service marks, trade dress and our recipes, systems, manuals, processes andrelated items. Our franchise consultants work toward visiting each of ourVillage Inn franchisees four times a year to monitor their business and toensure that their stores meet with our quality standards.

 

**Competition**

 

The restaurant industry ishighly competitive with respect to price, quality and speed of service, andquality and value of the food products offered. The number and location ofunits, attractiveness of facilities, effectiveness of advertising and marketingprograms, and new product development are also important competitive factors.Changes in consumer tastes and preferences, economic conditions or populationdemographics as well as shifts in traffic patterns, can also impact operationsand profitability.

 

We compete in thefamily-dining category within the full-service segment of the restaurantindustry. Key competitors in this category for Village Inn include Denny’s,International House of Pancakes (“IHOP”), Perkins, and, to a lesser extent,Country Kitchen, Cracker Barrel, Shoney’s and Waffle House. Our Midwest BakersSquare restaurants face competition from Denny’s, IHOP, independent restaurantsand, to a lesser extent, Bob Evans, Embers and Perkins. Competitors for ourCalifornia Bakers Square restaurants include Coco’s, Denny’s, Marie Callender’sand, to a lesser extent, Carrow’s, Hof’s Hut and Polly’s. Some of thesecompetitors have greater financial, distribution and brand resources than wedo. Our restaurants, like all other restaurants, also face heightenedcompetition from supermarkets, many of which are increasing the breadth oftheir meal offerings in the form of fresh entrées and side dishes.

 

**Intellectualproperty**

 

We have an extensiveportfolio of registered service marks, trademarks and logos, including “BakersSquare®,” “Village Inn®,” “Village Inn Pancake HouseÒ,” “Best Pie in AmericaÒ,” “Great Food. Unbelievable Pie.Ò,” “The Skillet ExpertsÒ ,” “Good Food ... Good FeelingsÒ,” “The Breakfast ExpertsÒ“ and “J. Horner’sÒ.” We believe that our service marks,trademarks and logos are valuable to the operation of our restaurants and areimportant to our marketing strategy. Our policy is to actively pursue andmaintain registration of our service marks, trademarks and logos where ourbusiness strategy requires us to do so and to oppose vigorously anyinfringement or dilution of our service marks, trademarks or logos. However, wecannot predict whether steps taken by us to protect our proprietary rights willbe adequate to prevent misappropriation of these rights or the use by others ofrestaurant features based upon, or otherwise similar to, our concepts. It maybe difficult for us to prevent others from copying elements of our concepts,and any litigation to enforce our rights will likely involve significant costs.

 

**Environmentalmatters**

 

Our operations are subjectto federal, state and local laws and regulations relating to environmentalprotection, including regulation of discharges into the air and water. Undervarious federal, state and local laws, an owner or operator of real estate maybe liable for the costs of removal or remediation of hazardous or toxicsubstances on or in such property. Such liability may be imposed without regardto whether the owner or operator knew of, or was responsible for, the presenceof such hazardous or toxic substances.

 

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Some of our properties arelocated on or adjacent to sites that we know or suspect to have been used byprior owners or operators as retail gas stations or industrial facilities. Suchproperties previously contained underground storage tanks, and some of theseproperties may currently contain abandoned underground storage tanks. We do notbelieve that we have contributed to the contamination at any of our properties.It is possible that petroleum products and other contaminants may have beenreleased at or migrated beneath our properties into or through the soil orgroundwater. Under applicable federal and state environmental laws, we, as thecurrent owner or operator of these sites, may be jointly and severally liablefor the costs of investigation and remediation of any contamination. While weseek to obtain certain assurances relating to environmental issues at theproperties that we purchase from the prior owners of the properties or fromthird parties, there can be no assurances that we will not be liable forenvironmental conditions relating to our prior, existing or future restaurantsor restaurant sites. If we are found liable for the costs of remediation ofcontamination at any of these properties, our operating expenses would likelyincrease and our operating results would be materially adversely affected.

 

**Governmentalregulation**

 

We are subject to variousfederal, state and local laws affecting the operation of our business, as areour franchisees, including various health, sanitation, fire and safetystandards. Each of our restaurants and pie production facilities is subject tolicensing and regulation by a number of governmental authorities, which includezoning, health, safety, environmental, sanitation, building and fire agenciesin the jurisdiction in which the restaurant is located. We are also subject tothe rules and regulations of the Federal Trade Commission and various state lawsregulating the offer and sale of franchises. In addition, all of ourrestaurants located in California sell beer and wine. As a result, we arerequired to comply with applicable alcohol licensing requirements and alcoholicbeverage control regulations.

 

We also are subject to theFair Labor Standards Act, the Immigration Reform and Control Act of 1986 andvarious federal and state laws governing such matters as minimum wages,overtime and other working conditions. A significant portion of our hourlystaff is paid at rates consistent with the applicable federal or state minimumwage and, accordingly, increases in the minimum wage will increase our laborcost.

 

The federal Americans withDisability Act prohibits discrimination on the basis of disability in publicaccommodations and employment. We are required to comply with the Americanswith Disabilities Act and regulations relating to accommodating the needs ofthe disabled in connection with the construction of new facilities and withsignificant renovations of existing facilities.

 

**Employees**

 

As of October 28, 2004, wehad 11,382 employees, consisting of 7,413 part-time employees and 3,969full-time employees. We employ 172 employees at our corporate headquarters. Ouremployees are not covered by any collective bargaining agreement, and weconsider our employee relations to be good. In 2003, employees at one of ourpie manufacturing facilities conducted an election to unionize our 138employees at that facility. This effort was unsuccessful; however, our employeescould engage in future unionization efforts that may succeed.

 

**Risk factors related to ourbusiness**

 

**Our levelof indebtedness could adversely affect our ability to raise additional capitalto fund our operations, limit our ability to react to changes in the economy orour industry and prevent us from meeting our obligations under ourindebtedness.**

 

9

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We are significantlyleveraged. The following chart shows our level of indebtedness and certainother information as of October 28, 2004:

 
| **(In millions)**                   | ** ** | **As of  October 28,  2004** | ** ** |
|-------------------------------------|------------|------------------------------|------------|
| Senior secured credit facility      | ** ** | ** **                   | ** ** |
| Revolving credit facility(1)        |       | $                            | 1.4        |   |
| Term loan                           |       | 15.0                         |       |
| 10 1⁄2% senior unsecured notes   |       | 126.5                        |       |
| Unamortized original issue discount |       | (1.4                         | )          |
| Capitalized leases                  |       | 3.7                          |       |
| Total indebtedness                  |       | 145.2                        |       |
| Stockholders’ equity           |       | 72.2                         |       |
|                                     |            |                              |            |  |

 

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(1)          Does not include $7.3 million of outstanding letters of credit thatwere issued under the senior secured revolving credit facility as of October28, 2004. We are able to borrow under the senior secured revolving creditfacility the lesser of (a) $30.0 million and (b) 1.2 times trailing twelvemonths Adjusted EBITDA (as defined in the senior secured credit facility) minusthe original principal amount of our senior secured term loan. Our seniorsecured revolving credit facility has a $15.0 million sublimit for letters ofcredit. As of October 28, 2004, our borrowing base supported $30.0 million ofborrowings.

 

Our substantial degree ofleverage could have important consequences, including the following:

 

•                  it may limit our ability to obtainadditional debt or equity financing for working capital, capital expenditures,new restaurant development, debt service requirements, acquisitions and generalcorporate or other purposes;

 

•                  a substantial portion of our cashflows from operations must be dedicated to the payment of principal andinterest on our indebtedness and is not available for other purposes, includingour operations, capital expenditures and future business opportunities;

 

**•**                  the debt servicerequirements of our other indebtedness could make it more difficult for us tomake payments on our indebtedness;

 

•                  certain of our borrowings, includingborrowings under our senior secured credit facility, are at variable rates ofinterest, exposing us to the risk of increased interest rates;

 

•                  it may limit our ability to adjust tochanging market conditions and place us at a competitive disadvantage comparedto our competitors that have less debt; and

 

•                  we may be vulnerable in a downturn ingeneral economic conditions or in our business, or we may be unable to carryout capital spending that is important to our growth.

 

10

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**We may havedifficulty implementing our expansion strategy.**

 

Our ability to open newrestaurants is dependent upon a number of factors, many of which are beyond ourcontrol, including our ability to:

 

•                  find suitable locations;

 

•                  reach acceptable agreements regardingthe lease or purchase of prospective locations for our restaurants;

 

•                  comply with applicable zoning, landuse and environmental regulations;

 

•                  raise or have available an adequateamount of money for construction and opening costs;

 

•                  hire, train and retain the skilledmanagement and other employees necessary to meet staffing needs in a timely andcost-effective manner;

 

•                  obtain required permits andapprovals; and

 

•                  efficiently manage the amount of timeand money used to build and open each new restaurant.

 

Historically, there is a “ramp-up”period of time before we expect a new restaurant location to achieve ourtargeted level of performance. This phenomenon is due to higher operating costscaused by start-up and other temporary inefficiencies associated with openingnew restaurants, such as lack of market familiarity and acceptance when weenter new markets and unavailability of experienced staff. We may not be ableto attract enough customers to new restaurants because potential customers maybe unfamiliar with our restaurants or our restaurants’ atmosphere or menusmight not appeal to them.

 

**We may notbe able to open new restaurants profitably, which could negatively affect ourgrowth strategy.**

 

We have historically added,and plan to continue to add, new restaurants through new construction, acquisitionsand conversions. We have traditionally used cash flow from operations andsale-leaseback transactions as the primary funding sources for additionalrestaurants. We cannot guarantee that our cash flows will be sufficient toachieve the desired development levels if our revenues, profitability or cashflow from operations decline. Opening a new restaurant in an existing marketalso could reduce the revenue of our existing restaurants in that market.

 

**Ourrestaurants may not be able to compete successfully with other restaurants.**

 

We operate in a highlycompetitive industry. Price, restaurant location, food quality and type,service and attractiveness of facilities are important aspects of competitionin the restaurant industry, and the competitive environment is often affectedby factors beyond a particular restaurant management’s control, includingchanges in the public’s taste and eating habits, population, traffic patternsand general economic conditions. Competitive pressures may have the effect oflimiting our ability to increase prices, which may adversely affect ouroperating earnings. This competitive environment makes it more difficult for usto continue to provide high levels of service while maintaining our reputationfor value without adversely affecting operating margins. Additionally, to theextent we raise prices, our customer traffic may decline. Our restaurantscompete with a large number of other restaurants, including national andregional restaurant chains and franchised restaurant operations, as well asindependently owned restaurants, for customers, restaurant locations, qualifiedmanagement and other restaurant staff. Many of our competitors have greaterfinancial and other resources than we have. In addition, the restaurant industryhas few non-economic barriers to entry, and therefore new competitors mayemerge at any time. We may not be able to compete successfully against ourcompetitors in the future, and competition may have a material adverse effecton our operations.

 

11

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**The successof our restaurants is highly dependent on their location.**

 

The success of ourcompany-operated and franchised restaurants is significantly influenced bylocation. There can be no assurance that our current locations will continue tobe attractive, as demographic patterns change and the economic conditions whereour restaurants are located could change. The success of new restaurants thatwe open will be substantially dependent on the locations that we select and theavailability of desirable locations.

 

**We arevulnerable to fluctuations in the cost, availability and quality of ouringredients.**

 

The cost, availability andquality of the ingredients we use to prepare our food are subject to a range offactors, many of which are beyond our control. We depend on frequent deliveriesof fresh ingredients, thereby subjecting us to the risk of shortages orinterruptions in supply. Fluctuations in economic and political conditions,weather and demand could adversely affect the cost of our ingredients. Ourefforts to pass along price increases may be subject to delays associated withour cycle of updating our menus. We have no control over fluctuations in theprice of commodities, and we may be unable to pass through cost increases toour customers. For example, we did not pass on to our customers the 75%increase in the price of eggs (one of our largest food costs) which occurredduring the 2004 fiscal year. We currently do not enter into futures contracts withrespect to potential price fluctuations in the cost of food and other supplies,which we purchase at prevailing market or contracted prices. Although we attimes enter into arrangements locking in the price of certain ingredients for aspecified period of time, we typically do not rely on long-term writtencontracts with our suppliers. Our suppliers could implement significant priceincreases. All of these factors could adversely affect our financial results.

 

**We dependheavily on our suppliers and distributors.**

 

We currently purchase ourraw materials from various suppliers. Most of our suppliers drop-ship directlyto our restaurants, as well as to our pie production facilities. Our relianceon our suppliers subjects us to a number of risks, including possible delays orinterruptions in delivery of supplies, diminished control over quality and apotential lack of adequate raw material capacity. If any of these suppliers donot perform adequately or otherwise fail to distribute products or supplies toour restaurants or pie production facilities, we may be unable to replace thesuppliers in a short period of time on acceptable terms. For example, labordisputes at any of our suppliers could result in those suppliers being unableto provide us with raw materials or supplies that we depend upon to run ourbusiness. Our inability to replace the suppliers in a short period of time onacceptable terms could increase our costs and could cause shortages at ourrestaurants or pie production facilities of food and other items.

 

We depend on ourdistribution system to distribute our food products to our restaurantlocations. If there is any disruption in our distribution system, it could havea material adverse effect on our results of operations.

 

**Food-borneillness incidents, claims of food-borne illness and adverse publicity couldreduce our restaurant sales.**

 

Claims of illness or injuryrelating to food quality or food handling are common in the food serviceindustry, and a number of these claims may exist at any given time. We cannotguarantee that our internal controls and training will be effective inpreventing all food-borne illnesses. Some food-borne illness incidents could becaused by third-party food suppliers and transporters outside of our control.New illnesses resistant to our current precautions may develop in the future,or diseases with long incubation periods could arise, such as Bovine SpongiformEncephalopathy (also known as Mad Cow Disease), that could give rise to claimsor allegations on a retroactive basis. We could be adversely affected bynegative publicity resulting from food quality or handling claims at one ormore of our restaurants. Food-borne illnesses spread at restaurants havegenerated significant negative publicity at other restaurant chains in thepast, which has had a negative impact on their results of operations. One ormore instances of food-borne illness in one of our restaurants could negativelyaffect our restaurants’ image and sales. These risks exist even if it werelater determined that an illness was wrongly attributed to one of ourrestaurants.

 

In addition, the impact ofadverse publicity relating to one of our restaurants may extend beyond thatrestaurant to affect some or all of our other restaurants. The risk of negativepublicity is particularly great with respect to our franchised restaurantsbecause we have limited ability to control their operations, especially on areal-time basis. A similar risk exists with respect to unrelated food servicebusinesses if customers mistakenly associate them with our operations.

 

12

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**We face therisk of litigation in connection with our operations.**

 

We are from time to time thesubject of complaints or litigation from our consumers alleging illness, injuryor other food quality, health or operational concerns. Adverse publicityresulting from these allegations may materially adversely affect us, regardlessof whether the allegations are valid or whether we are ultimately held liable.In addition, employee claims against us based on, among other things,discrimination, harassment, wrongful termination or wage, rest break and mealbreak issues, including those relating to overtime compensation, may divert ourfinancial and management resources that would otherwise be used to benefit thefuture performance of our operations. We have been subject to such claims fromtime to time.

 

In 2001, we settled anindividual labor-related legal claim and two class actions relating to overtimeand other wage payments at our Bakers Square restaurants in California for atotal of $8.9 million plus attorneys’ fees and expenses.

 

We are currentlydefendants in two purported class action claims in California. The first classaction claim was brought in October 2003 by two former employees and onecurrent employee of ours, and the second class action claim was brought in May2004 by two former employees of ours. The complaints allege that we violatedCalifornia law with regard to rest and meal periods, bonus payment calculations(in the October 2003 complaint), overtime payments (in the May 2004 complaint)and California law regarding unfair business practices. The classes andsubclasses alleged in the actions have not been certified by the respectivecourts at the current stages of the litigation, but generally are claimed inthe 2003 complaint to include persons who have been employed by us inCalifornia since October 17, 1999 in the positions of food server,restaurant general manager and assistant restaurant manager, and generally areclaimed in the 2004 complaint to include persons who have been employed by usin California since May 21, 2000 in the positions of restaurant generalmanager and restaurant associate manager. No dollar amount in damages is requestedin either complaint, and the complaints seek statutory damages, compensatorydamages, interest and attorneys’ fees in unspecified amounts.

 

During the fourthquarter of fiscal 2004, we established a reserve of $3.2 million in connectionwith our agreement in principle to settle these class action lawsuits.  The parties in both lawsuits are in theprocess of finalizing the settlement, which is subject to approval of thecourt. Under the terms of the proposed settlements, we have agreed to pay up toan aggregate of $6.55 million for the alleged claims and associated legal fees.

 

We filed a lawsuiton December 3, 2004 against the former shareholders of Midway InvestorsHoldings Inc. (the former parent of VICORP Restaurants, Inc.), includingcertain members of current management, in the Circuit Court of Cook County,Illinois seeking indemnification for all of the damages related to suchlitigation under the purchase agreement dated June 14, 2003 pursuant to whichVICORP Restaurants, Inc. was acquired, in addition to the assertion of otherclaims.  The former shareholders ofMidway Investors Holdings Inc. filed a lawsuit on December 22, 2004 in SuffolkCounty Superior Court in Massachusetts. The former shareholders of Midway Investors Holdings Inc. claim, amongother allegations, that we improperly sought indemnification and are denyingliability for the portion of the damages in the previously mentioned classaction lawsuits that arose following the closing of the June 2003 acquisition,and for certain settlements for which they claim they did not receiveappropriate notice or approval rights.

 

While we believethat our claims against the former shareholders of Midway Investors HoldingsInc. are meritorious and that we will prevail, in the event we do not fully prevailon our indemnification claims, management estimates that the Company’s maximumexposure under the settlement agreements is the $3.2 million amount reserved.See “Item 3. Legal Proceedings.”

 

**Ouroperating results may fluctuate significantly due to the seasonality of ourbusiness and weather conditions.**

 

Our business is subject toseasonal fluctuations that may vary depending upon the region in which aparticular restaurant is located. In addition, the sales of our pies typicallyincrease during holiday periods, in particular during November and December ofeach year, and decrease significantly following holiday periods. Accordingly,results for any one quarter are not necessarily indicative of results to beexpected for any other quarter or for any year. Adverse weather conditions canalso negatively impact our financial results. For example, unusually coldtemperatures or above-average rainfall tends to adversely affect sales inaffected markets. These fluctuations can make it more difficult for us to predictaccurately and address in a timely manner factors that may have a negativeimpact on our business.

 

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**We mayincur additional costs or liabilities and lose revenues and profits as a resultof government regulation.**

 

Our business is subject toextensive federal, state and local government regulation, including regulationsrelated to the preparation and sale of food, the sale of alcoholic beverages,the use of tobacco, zoning and building codes, land use and employee, health,sanitation and safety matters. One or more of our restaurants could be subjectto litigation and governmental fine, censure or closure in connection withissues relating to our food and/or our facilities. Our franchise operations arealso subject to regulation by the Federal Trade Commission. We and ourfranchisees must also comply with state franchising laws and a wide range ofother state and local rules and regulations applicable to our business. Thefailure to comply with federal, state and local rules and regulations couldimpair our ability to continue operating our business.

 

All of our restaurantslocated in California sell beer and wine. Typically, each restaurant’s licenseto sell alcoholic beverages must be renewed annually and may be suspended orrevoked at any time for cause. Alcoholic beverage control regulations relate tovarious aspects of daily operations of our restaurants, including the minimumage of patrons and employees, hours of operation, advertising, wholesale purchasingand inventory control, handling and storage.

 

Our restaurants that sellbeer and wine are also subject to “dram shop” laws, which allow a person to sueus if that person was injured by a legally intoxicated person who waswrongfully served alcoholic beverages at one of our restaurants. A judgmentagainst us under a dram shop law could exceed our liability insurance coveragepolicy limits and could result in substantial liability for us and have amaterial adverse effect on our profitability.

 

To the extent thatgovernmental regulations impose material additional obligations on oursuppliers, including, without limitation, regulations relating to theinspection or preparation of meat, food and other products used in ourbusiness, product availability could be limited and the prices that oursuppliers charge us could increase. The costs of operating our restaurants mayalso increase if there are changes in laws and regulations such as thosegoverning access for the disabled, including the Americans with DisabilitiesAct. If any of these costs increased and we were unable to offset the increaseby increasing our menu prices or by other means, we would generate lowerprofits, which could have a material adverse effect on our business and resultsof operations. See “Business—Governmental regulation.”

 

**We may belocked into long-term and non-cancelable leases that we want to cancel, and maybe unable to renew leases that we want to extend at the end of their terms.**

 

Many of our current leasesare non-cancelable and typically have terms ranging from 15 to 20 years andrenewal options for terms ranging from ten to 20 years. Leases that we enterinto in the future likely will also be long-term and non-cancelable and havesimilar renewal options. If we close a restaurant, we may remain committed toperform our obligations under the applicable lease, which would include, amongother things, payment of the base rent for the balance of the lease term. As ofOctober 28, 2004, we were responsible for lease payments at two closedrestaurant locations. Additionally, the potential losses associated with ourinability to cancel leases may result in our keeping open restaurant locationsthat are performing significantly below targeted levels. As a result, ongoinglease operations at closed or underperforming restaurant locations could impairour results of operations.

 

In addition, at the end ofthe lease term and any renewal period for a restaurant, we may be unable torenew the lease without substantial additional cost, if at all. As a result, wemay be required to close or relocate a restaurant, which could subject us toconstruction and other costs and risks, and could have a material adverseeffect on our business and results of operations.

 

**Changingconsumer preferences and discretionary spending patterns could have an adverseeffect on our business.**

 

Food service businesses areoften affected by changes in consumer tastes, national, regional and localeconomic conditions and demographic trends. Factors such as traffic patterns,local demographics and the type, number and location of competing restaurantsmay adversely affect the performance of individual locations. In addition,inflation and increased food and energy costs may harm the restaurant industryin general and our locations in particular. Adverse changes in any of thesefactors could reduce consumer traffic or impose practical limits on pricing,which could harm our business. Our continued success will depend in part on ourability to anticipate, identify and respond to changing consumer preferencesand economic conditions.

 

14

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The success of ourrestaurants is significantly influenced by the attractiveness and condition ofour facilities. We periodically update the exterior and interior of ourlocations. If we temporarily close a restaurant for renovation, we will losethe revenue that the restaurant would otherwise receive had it remained open.In addition, renovated restaurants may also experience a significant reductionin revenue after they reopen if our existing customers change their dininghabits as a result of the temporary closing of the restaurants.

 

In addition, our businessmay be adversely affected by laws restricting smoking in restaurants,particularly in areas where smoking is only allowed in restaurants that servealcohol, since most of our restaurants do not serve alcohol. Adverse changesinvolving any of these factors could further reduce our guest traffic andimpose practical limits on pricing, which could further reduce our revenues andoperating income.

 

**If we makeacquisitions in the future, we may experience assimilation problems anddissipation of management resources, and we may need to incur additionalindebtedness.**

 

Our future growth may be afunction, in part, of acquisitions of other restaurants. To the extent that wegrow through acquisitions, we will face the operational and financial riskscommonly encountered with that type of a strategy. We would also faceoperational risks, such as failing to assimilate the operations and personnelof the acquired businesses, disrupting our ongoing business, dissipating ourlimited management resources and impairing relationships with employees andcustomers of the acquired business as a result of changes in ownership andmanagement. Additionally, we may incur additional indebtedness to financefuture acquisitions, as permitted under our senior secured credit facility andour indenture, in which case we would also face certain financial risks associatedwith the incurrence of this indebtedness, such as reductions in our liquidity,access to capital markets and financial stability.

 

**Anyprolonged disruption in our pie manufacturing business could harm our business.**

 

We operate three piemanufacturing plants which produce pies for Bakers Square and Village Inn aswell as third-party customers that account for a portion of current production.Any prolonged disruption in the operations of any of these plants, whether as aresult of technical or labor difficulties, destruction or damage to thefacilities or other reasons, could result in increased costs and reducedrevenues, and our relationships with third-party customers could be harmed.

 

**We rely inpart on our franchisees.**

 

We rely in part on ourVillage Inn franchisees and the manner in which they operate their locations todevelop, promote and operate our Village Inn business. Our Village Innfranchises generated revenues to us of $5.1 million during the 2004 fiscalyear. Although we have developed criteria to evaluate and screen prospectivefranchisees, there can be no assurance that franchisees will have the businessacumen or financial resources necessary to operate successful franchises intheir franchise areas. The failure of franchisees to operate franchisessuccessfully could have a material adverse effect on Village Inn’s reputationand its brands. While we try to ensure that the quality of the Village Innbrand is maintained by all of our franchisees, franchisees could take actionsthat adversely affect the value of our intellectual property or reputation.

 

**We couldface labor shortages that could slow our growth and increase our labor costs.**

 

Our success depends in partupon our ability to attract, motivate and retain qualified employees, includingrestaurant managers, kitchen staff and servers, in quantities sufficient tokeep pace with our expansion schedule and meet the needs of our existingrestaurants. A sufficient number of qualified individuals of the requisitecaliber to fill these positions may be in short supply in some areas.Additionally, competition for qualified employees could require us to payhigher wages, which could result in higher labor costs. Any future inability torecruit and retain qualified individuals may delay the planned openings of newrestaurants and could adversely impact our existing restaurants. Any suchdelays, any material increases in employee turnover rates in existingrestaurants or any widespread employee dissatisfaction could have a materialadverse effect on our operations. Additionally, any labor disruption resultingfrom unionization efforts or otherwise could result in increased costs andreduced revenues. In 2003, employees at one of our pie manufacturing facilitiesconducted an election to unionize our workforce of 138 employees at thatfacility. This effort was unsuccessful; however, future unionization effortscould result in our being subject to collective bargaining agreements that areon terms that are not as economically attractive as our current arrangementswith our employees.

 

15

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**Changes inemployment laws may adversely affect our business.**

 

Various federal and statelabor laws govern our relationship with our employees and affect operatingcosts. These laws include minimum wage requirements, overtime and tip credits,working conditions, unemployment tax rates, workers’ compensation rates andcitizenship requirements. Significant additional government-imposed increasesin the following areas could materially affect our results of operations:

 

•                  minimum wages;

 

•                  mandated healthbenefits;

 

•                  paid leaves ofabsence;

 

•                  tax reporting;or

 

•                  revisions in thetax payment requirements for employees who receive gratuities.

 

**We may notbe able to protect our trademarks, service marks, logos and other proprietaryrights.**

 

We believe that ourtrademarks, service marks, logos and other proprietary rights are important toour success and our competitive position. Accordingly, we protect ourtrademarks, service marks, logos and proprietary rights. However, the actionstaken by us may be inadequate to prevent imitation of our products and conceptsby others or to prevent others from claiming violations of their trademarks,service marks, logos and proprietary rights by us. In addition, ourintellectual property rights may not have the value that we believe they have.If we are unsuccessful in protecting our intellectual property rights, or ifanother party prevails in litigation against us relating to our intellectual propertyrights, we may incur significant costs and may be required to change certainaspects of our operations.

 

**We facerisks associated with environmental laws.**

 

We are subject to federal,state and local laws, regulations and ordinances that:

 

•                  govern activitiesor operations that may have adverse environmental effects, such as dischargesto air and water, as well as handling and disposal practices for solid andhazardous wastes; and

 

•                  impose liabilityfor the costs of cleaning up, and certain damages resulting from, sites of pastspills, disposals or other releases of hazardous materials.

 

In particular, underapplicable environmental laws, we may be responsible for remediation ofenvironmental conditions and may be subject to associated liabilities resultingfrom lawsuits brought by private litigants, relating to our restaurants and theland on which our restaurants are located, regardless of whether we lease orown the restaurants or land in question and regardless of whether suchenvironmental conditions were created by us or by a prior owner or tenant. Someof our properties are located on or adjacent to sites that we know or suspectto have been used by prior owners or operators as retail gas stations orindustrial facilities. Such properties previously contained underground storagetanks, and some of these properties may currently contain abandoned undergroundstorage tanks. It is possible that petroleum products and other contaminantsmay have been released at or migrated beneath our properties into or throughthe soil or groundwater. Under applicable federal and state environmental laws,we, as the current owner or operator of these sites, may be jointly andseverally liable for the costs of investigation and remediation of anycontamination. If we are found liable for the costs of remediation ofcontamination at any of these properties, our operating expenses would likelyincrease and our operating results could be materially adversely affected.Environmental conditions relating to our prior, existing or future restaurantsor restaurant sites could have a material adverse effect on our business andresults of operations.

 

**We dependon the services of key executives, the loss of whom could materially harm ourbusiness.**

 

Our senior executives areimportant to our success because they have been instrumental in setting ourstrategic direction, operating our business, identifying, recruiting andtraining key personnel, identifying expansion opportunities and arrangingnecessary financing. Losing the services of any of these individuals couldadversely affect our business until a suitable replacement could be found. See “Item10. Directors and Executive Officers of the Registrant.”

 

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**We arecontrolled by affiliates of Wind Point**.

 

As a result of their controlof VI Acquisition Corp., which is our parent, investment funds affiliated withWind Point have the power to elect a majority of our directors, to appointmembers of management, to approve all actions requiring the approval of theholders of our common stock, including adopting amendments to our certificateof incorporation and approving mergers, acquisitions or sales of all orsubstantially all of our assets, and to direct our operations.

 

The interests of Wind Pointmay not in all cases be aligned with the interests of our other equity holdersand the holders of our indebtedness. For example, if we encounter financialdifficulties or are unable to pay our debts as they mature, the interests ofWind Point as a holder of equity might conflict with the interests of our otherequity holders and the holders of our indebtedness. Wind Point also may have aninterest in pursuing acquisitions, divestitures, financings or othertransactions that, in its judgment, could enhance its equity investment, eventhough such transactions might involve risks to other equity holders and theholders of our indebtedness.

 

We have only one independentdirector (as defined under the federal securities laws) on our Board of Directorsand, as a result, our Board of Directors and Audit Committee have not met, anddo not meet, the standard “independence” requirements that would be applicableif our equity securities were traded on the Nasdaq National Market or the NewYork Stock Exchange.

 

**Item 2****.    Properties.**

 

We own our executive officesconsisting of approximately 93,050 square feet in Denver, Colorado. Inaddition, we own two pie production facilities, each with approximately 63,000square feet, located in Chaska, Minnesota and Oak Forest, Illinois, and welease a pie production facility consisting of approximately 68,000 square feetlocated in Santa Fe Springs, California. We believe that our current office andoperating space is suitable and adequate for its intended purposes and that wehave the ability to increase production at our pie production facilitieswithout significant capital expenditures.

 

Our restaurants for bothVillage Inn and Bakers Square provide seating capacity for approximately 120 to180 customers and typically average around 5,000 square feet. We currently ownthe land and building at eight of our restaurant properties. The rest of ourcompany-operated restaurants are leased, in whole or in part.

 

We also lease 11 restaurantsthat we sublease to franchisees and lease six restaurants that we sublease toothers. All of our other franchise restaurants are leased or owned directly bythe respective franchisees.   As ofOctober 28, 2004, we had three idle properties, two of which were leased andone was owned in fee.

 

Our senior secured creditfacility is secured by a lien on all of our assets, including our realproperties.

 

**Locations*.***  As of October 28, 2004, we andour franchisees operated 374 restaurants as follows:

 

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**Village Innrestaurants:**

 
| **State of operation** | ** ** | **Number of  company-  operated  restaurants** | ** ** | **Number of  franchised  restaurants** | ** ** | **Total  number of  restaurants** | ** ** |
|------------------------|------------|------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------|------------|
| Alaska                 |       | —                                         |       | 3                                      |       | 3                                 |       |
| Arizona                |       | 22                                             |       | —                                 |       | 22                                |       |
| Arkansas               |       | —                                         |       | 4                                      |       | 4                                 |       |
| Colorado               |       | 33                                             |       | 16                                     |       | 49                                |       |
| Florida                |       | 11                                             |       | 16                                     |       | 27                                |       |
| Illinois               |       | 2                                              |       | 1                                      |       | 3                                 |       |
| Iowa                   |       | 16                                             |       | 4                                      |       | 20                                |       |
| Kansas                 |       | —                                         |       | 10                                     |       | 10                                |       |
| Minnesota              |       | —                                         |       | 3                                      |       | 3                                 |       |
| Missouri               |       | —                                         |       | 4                                      |       | 4                                 |       |
| Nebraska               |       | 16                                             |       | 3                                      |       | 19                                |       |
| New Mexico             |       | 9                                              |       | 5                                      |       | 14                                |       |
| North Dakota           |       | —                                         |       | 2                                      |       | 2                                 |       |
| Oklahoma               |       | —                                         |       | 6                                      |       | 6                                 |       |
| Oregon                 |       | 1                                              |       | 3                                      |       | 4                                 |       |
| Texas                  |       | —                                         |       | 8                                      |       | 8                                 |       |
| Utah                   |       | 11                                             |       | 2                                      |       | 13                                |       |
| Virginia               |       | —                                         |       | 1                                      |       | 1                                 |       |
| Washington             |       | —                                         |       | 3                                      |       | 3                                 |       |
| Wyoming                |       | —                                         |       | 9                                      |       | 9                                 |       |
| Total                  |       | 121                                            |       | 103                                    |       | 224                               |       |

 

**BakersSquare restaurants:**

 
| **State of operation** | ** ** | **Number of  company-  operated  restaurants** | ** ** | **Number of  franchised  restaurants** | ** ** | **Total  number of  restaurants** | ** ** |
|------------------------|------------|------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------|------------|
| California             |       | 50                                             |       | —                                 |       | 50                                |       |
| Illinois               |       | 44                                             |       | —                                 |       | 44                                |       |
| Indiana                |       | 4                                              |       | —                                 |       | 4                                 |       |
| Iowa                   |       | 3                                              |       | —                                 |       | 3                                 |       |
| Michigan               |       | 8                                              |       | —                                 |       | 8                                 |       |
| Minnesota              |       | 25                                             |       | —                                 |       | 25                                |       |
| Ohio                   |       | 8                                              |       | —                                 |       | 8                                 |       |
| Wisconsin              |       | 8                                              |       | —                                 |       | 8                                 |       |
| Total                  |       | 150                                            |       | —                                 |       | 150                               |       |

 

**Lease expirations**

 

In fiscal 2005, leases for14 of our properties are scheduled to expire. Of these expiring leases, we plan to exercise options to extend thelease term on nine properties.  Of the fiveleases we expect to let expire, one is associated with a currently operatedrestaurant which will close, two are associated with closed restaurants and twoare associated with restaurants subleased to others.

 

18

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**Item 3****.    Legalproceedings.**

 

We are parties to lawsuits,revenue agent reviews by taxing authorities and legal proceedings, of which themajority involve workers’ compensation, employment practices liability andgeneral liability claims arising in the ordinary course of business.

 

We are currently defendants in twopurported class action claims in California. The first class action claim wasbrought in October 2003 by two former employees and one current employee ofours, and the second class action claim was brought in May 2004 by two formeremployees of ours. The complaints allege that we violated California law withregard to rest and meal periods, bonus payment calculations (in the October2003 complaint), overtime payments (in the May 2004 complaint) and Californialaw regarding unfair business practices. The classes and subclasses alleged inthe actions have not been certified by the respective courts at the currentstages of the litigation, but generally are claimed in the 2003 complaint toinclude persons who have been employed by us in California since October 17,1999 in the positions of food server, restaurant general manager and assistantrestaurant manager, and generally are claimed in the 2004 complaint to includepersons who have been employed by us in California since May 21, 2000 inthe positions of restaurant general manager and restaurant associate manager.No dollar amount in damages is requested in either complaint, and thecomplaints seek statutory damages, compensatory damages, interest and attorneys’fees in unspecified amounts.

 

Duringthe fourth quarter of fiscal 2004, we established a reserve of $3.2 million inconnection with our agreement in principle to settle these class actionlawsuits.  The parties in both lawsuitsare in the process of finalizing the settlement, which is subject to approvalof the court. Under the terms of the proposed settlements, the we have agreedto pay up to an aggregate of $6.55 million for the alleged claims andassociated legal fees.

 

Wefiled a lawsuit on December 3, 2004 against the former shareholders of MidwayInvestors Holdings Inc. (the former parent of VICORP Restaurants, Inc.),including certain members of current management, in the Circuit Court of CookCounty, Illinois seeking indemnification for all of the damages related to suchlitigation under the purchase agreement dated June 14, 2003 pursuant to whichVICORP Restaurants, Inc. was acquired, in addition to the assertion of otherclaims.  The former shareholders ofMidway Investors Holdings Inc. filed a lawsuit on December 22, 2004 in SuffolkCounty Superior Court in Massachusetts. The former shareholders of Midway Investors Holdings Inc. claim, amongother allegations, that we improperly sought indemnification and are denyingliability for the portion of the damages in the previously mentioned class actionlawsuits that arose following the closing of the June 2003 acquisition, and forcertain settlements for which they claim they did not receive appropriatenotice or approval rights.

 

Whilewe believe that our claims against the former shareholders of Midway InvestorsHoldings Inc. are meritorious and that we will prevail, in the event we do notfully prevail on our indemnification claims, management estimates that theCompany’s maximum exposure under the settlement agreements is the $3.2 millionamount reserved.

 

We believe that thesematters, individually and in the aggregate, will not have a significant adverseeffect on our financial condition, and that established reserves adequatelyprovide for the estimated resolution of these claims. However, a significantincrease in the number of these claims or an increase in the number ofsuccessful claims would materially adversely affect our business, prospects,financial condition, operating results or cash flows.

 

**Item 4****.    Submissionof Matters to a Vote of Security Holders****.**

 

Nomatters were submitted to a vote of security holders of the Company during thefiscal year covered by this report.

 

**Item 5****.    Marketfor the Registrant’s Common Equity and Related Stockholder Matters.**

 

Ouroutstanding common stock is privately held and is not traded on any publicmarket. A majority of our outstanding common stock, as of the date of thisfiling, was owned by affiliates of our sponsor, Wind Point Partners.  See “Item 12. Security Ownership of CertainBeneficial Owners and Management.”

 

19

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**Item 6****.   ****Selected Financial Data.**

 

The table below presentsselected historical consolidated financial data. The selected historicalconsolidated financial data for, and at the end of, the fiscal year endedOctober 27, 2002, the period from October 28, 2002 to June 13, 2003, the periodfrom June 14, 2003 to October 26, 2003 and the fiscal year ended October 28,2004 have been derived from our audited consolidated financial statementsincluded elsewhere herein. The selected historical consolidated financial datafor, and at the end of, the fiscal year ended October 29, 2000, the period fromOctober 30, 2000 to May 13, 2001 and the period from May 14, 2001 to October28, 2001 have been derived from our audited consolidated financial statementsfor those periods not included elsewhere herein.

 

On May 14, 2001, MidwayInvestors Holdings Inc. purchased VICORP Restaurants, Inc., which was apublicly-owned company prior to the acquisition. On June 14, 2003, VIAcquisition Corp. purchased Midway Investors Holdings Inc. Neither of theseholding companies has had any independent operations, and consequently theconsolidated statements of operations of VI Acquisition Corp. and MidwayInvestors Holdings Inc. are substantially equivalent to those of VICORPRestaurants, Inc. However, as a result of applying the required purchaseaccounting rules to these acquisitions, our financial statements for periodsfollowing the transactions were significantly affected. The application ofpurchase accounting rules required us to revalue our assets and liabilities atthe two respective acquisition dates which resulted in different accountingbases being applied in different periods. As a result of these changes, thesummary financial information presented below relate to the entity specifiedbelow for the following periods:

 

| Fiscal year ended October  29, 2000 |   | VICORP Restaurants, Inc.        |
|-------------------------------------|--------|---------------------------------|
| October 30, 2000 to May  13, 2001   |   | VICORP Restaurants, Inc.        |
| May 14, 2001 to October  28, 2001   |   | Midway Investors Holdings  Inc. |
| Fiscal year ended October  27, 2002 |   | Midway Investors Holdings  Inc. |
| October 28, 2002 to June  13, 2003  |   | Midway Investors Holdings  Inc. |
| June 14, 2003 to October  26, 2003  |   | VI Acquisition Corp.            |
| Fiscal year ended October  28, 2004 |   | VI Acquisition Corp.            |

 

The following data should beread in conjunction “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and our consolidated financial statementsand notes thereto included elsewhere in this Annual Report on Form 10-K.

 

20

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| ** **                                                                            | ** ** | **VICORP  Restaurants, Inc.**              | ** ** | **Midway  Investors Holdings Inc.**                   | ** ** | **VI  Acquisition Corp.**                           | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In  thousands)**                                                                   | ** ** | **Fiscal  year  ended  October 29,  2000** | ** ** | **Period  from  October 30,  2000 to  May 13,  2001** | ** ** | **Period  from May 14,  2001 to  October 28, 2001** | ** ** | **Fiscal  year  ended  October 27,  2002** | ** ** | **Period  from  October 28,  2002 to  June 13,  2003** | ** ** | **Period  from  June 14,  2003 to  October 26,  2003** | ** ** | **Fiscal  year  ended  October 28,  2004** | ** ** |
| **Income  statement data:**                                                           | ** ** | ** **                                 | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                             |       |                                       |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Restaurant  operations                                                                |       | $                                          | 367,397    |                                                  | $          | 203,494                                             |       | $ | 170,326 |   | $ | 377,630 |   | $ | 243,157 |   | $ | 138,696 |   | $ | 394,667 |   |
| Franchise  operations                                                                 |       | 6,201                                      |       | 3,219                                                 |       | 2,902                                               |       | 5,796 |   | 3,448 |   | 1,916 |   | 5,057 |   |
| Total revenues                                                                        |       | 373,598                                    |       | 206,713                                               |       | 173,228                                             |       | 383,426 |   | 246,605 |   | 140,612 |   | 399,724 |   |
| ** **                                                                            |       |                                       |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| **Cost and  expenses:**                                                               |       |                                       |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Restaurant costs:                                                                     |       |                                       |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Food                                                                                  |       | 109,496                                    |       | 60,423                                                |       | 49,319                                              |       | 104,298 |   | 66,186 |   | 37,219 |   | 106,294 |   |
| Labor                                                                                 |       | 121,109                                    |       | 66,359                                                |       | 56,388                                              |       | 122,850 |   | 79,016 |   | 45,500 |   | 127,251 |   |
| Other operating  expenses(1)                                                          |       | 89,099                                     |       | 50,455                                                |       | 45,850                                              |       | 100,002 |   | 65,629 |   | 40,531 |   | 111,663 |   |
| Franchise  operating expenses                                                         |       | 2,880                                      |       | 1,242                                                 |       | 1,851                                               |       | 3,092 |   | 1,583 |   | 1,032 |   | 2,490 |   |
| General and  administrative expenses                                                  |       | 27,366                                     |       | 15,049                                                |       | 12,344                                              |       | 26,598 |   | 16,533 |   | 9,447 |   | 25,193 |   |
| Litigation  settlement                                                                |       | —                                     |       | —                                                |       | —                                              |       | — |   | — |   | — |   | 3,168 |   |
| Goodwill  amortization(2)                                                             |       | —                                     |       | —                                                |       | 462                                                 |       | — |   | — |   | — |   | — |   |
| Transaction  expenses(3)                                                              |       | —                                     |       | 15,993                                                |       | —                                              |       | 279 |   | 9,436 |   | 1,226 |   | 125 |   |
| Management fees                                                                       |       | —                                     |       | —                                                |       | —                                              |       | 1,000 |   | 674 |   | 185 |   | 552 |   |
| Asset impairments                                                                     |       | —                                     |       | —                                                |       | —                                              |       | — |   | 96 |   | — |   | 1,159 |   |
| Operating profit  (loss)                                                              |       | 23,648                                     |       | (2,808                                                | )          | 7,014                                               |       | 25,307 |   | 7,452 |   | 5,472 |   | 21,829 |   |
| Interest expense                                                                      |       | 817                                        |       | 292                                                   |       | 4,524                                               |       | 9,786 |   | 5,550 |   | 5,330 |   | 15,161 |   |
| Debt  extinguishment costs(3)                                                         |       | —                                     |       | —                                                |       | —                                              |       | — |   | 6,516 |   | — |   | 6,856 |   |
| Other income, net                                                                     |       | 494                                        |       | 102                                                   |       | 625                                                 |       | 787 |   | 433 |   | 147 |   | 522 |   |
| Income (loss)  before income taxes                                                    |       | 23,325                                     |       | (2,998                                                | )          | 3,115                                               |       | 16,308 |   | (4,181 | ) | 289 |   | 334 |   |
| Provision for  income taxes (benefit)                                                 |       | 8,654                                      |       | (2,316                                                | )          | 233                                                 |       | 5,779 |   | (1,986 | ) | (280 | ) | (359 | ) |
| Net income (loss)                                                                     |       | $                                          | 14,671     |                                                  | $          | (682                                                | )          | $ | 2,882 |   | $ | 10,529 |   | $ | (2,195 | ) | $ | 569 |   | $ | 693 |   |
| ** **                                                                            |       |                                       |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| **Balance  sheet data (at end of period):**                                           |       |                                       |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                                            |       | $                                          | 1,003      |                                                  | $          | 11,510                                              |       | $ | 5,568 |   | $ | 16,021 |   | $ | 9,036 |   | $ | 5,326 |   | $ | 1,332 |   |
| Working  capital(4)                                                                   |       | (21,585                                    | )          | (10,600                                               | )          | (27,954                                             | )          | (14,797 | ) | (61,150 | ) | (25,719 | ) | (16,545 | ) |
| Total assets                                                                          |       | 195,213                                    |       | 196,120                                               |       | 187,384                                             |       | 193,850 |   | 186,658 |   | 278,302 |   | 290,380 |   |
| Total debt(5)                                                                         |       | 4,740                                      |       | 3,272                                                 |       | 97,351                                              |       | 95,088 |   | 83,974 |   | 146,516 |   | 145,217 |   |
| Total  stockholders’ equity                                                      |       | 126,697                                    |       | 134,987                                               |       | 38,221                                              |       | 48,836 |   | 9,915 |   | 70,679 |   | 72,266 |   |
|                                                                                  |       |                                       |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| **Cash  flow and other financial data:**                                              |       |                                       |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Adjusted  EBITDA(6)                                                                   |       | $                                          | 42,096     |                                                  | $          | 23,043                                              |       | $ | 15,862 |   | $ | 41,783 |   | $ | 27,032 |   | $ | 12,614 |   | $ | 42,141 |   |
| Net rent  expense:(7)                                                                 |       |                                       |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Net rent expense,  less amortization of rent- related purchase accounting adjustments |       | 15,351                                     |       | 8,643                                                 |       | 11,003                                              |       | 23,922 |   | 15,788 |   | 10,150 |   | 28,843 |   |
| Amortization of  rent-related purchase accounting adjustments                         |       | —                                     |       | —                                                |       | (139                                                | )          | (301 | ) | (222 | ) | 322 |   | 837 |   |
| Capital  expenditures(8)                                                              |       | 27,064                                     |       | 6,929                                                 |       | 4,265                                               |       | 10,599 |   | 9,904 |   | 10,845 |   | 15,868 |   |
| Depreciation and  amortization                                                        |       | 17,880                                     |       | 9,756                                                 |       | 8,331                                               |       | 15,330 |   | 8,948 |   | 5,306 |   | 14,670 |   |
| Cash flow from  operating activities                                                  |       | 38,259                                     |       | 18,346                                                |       | (6,361                                              | )          | 29,119 |   | 12,299 |   | 5,579 |   | 22,520 |   |
| Cash flow from  investing activities                                                  |       | (24,099                                    | )          | (6,870                                                | )          | (120,631                                            | )          | (10,278 | ) | (11,137 | ) | (138,640 | ) | (19,297 | ) |
| Cash flow from  financing activities                                                  |       | (41,251                                    | )          | (969                                                  | )          | 121,050                                             |       | (8,388 | ) | (8,147 | ) | 129,351 |   | (7,217 | ) |
|                                                                                  |       |                                       |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| **Ratio  data:**                                                                      |       |                                       |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Ratio of earnings  to fixed charges(9)                                                |       | 4.3                                        | x          | 0.2                                                   | x          | 1.4                                                 | x          | 1.0 | x | 0.8 | x | 1.0 | x | 1.0 | x |
| Ratio of total  debt to Adjusted EBITDA                                               |       | 0.1                                        | x          |                                                  |       |                                                |       | 2.3 | x |   |   |   |   | 3.4 | x |
| Ratio of Adjusted  EBITDA to interest expense                                         |       | 51.5                                       | x          | 78.9                                                  | x          | 3.5                                                 | x          | 4.3 | x | 4.8 | x | 2.3 | x | 2.8 | x |
|                                                                                  |       |                                       |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| **Operating  data:**                                                                  |       |                                       |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Village Inn  company-operated locations (at end of period)                            |       | 107                                        |       | 108                                                   |       | 109                                                 |       | 109 |   | 117 |   | 118 |   | 121 |   |
| Bakers Square  company-operated locations (at end of period)                          |       | 149                                        |       | 150                                                   |       | 147                                                 |       | 148 |   | 148 |   | 149 |   | 150 |   |
| Village Inn  franchised locations (at end of period)                                  |       | 115                                        |       | 116                                                   |       | 115                                                 |       | 115 |   | 106 |   | 105 |   | 103 |   |
| Change in same  unit sales—Village Inn                                           |       | 1.9                                        | %          | 0.4                                                   | %          | (0.9                                                | )%         | 0.2 | % | (0.2 | )% | 0.4 | % | 2.2 | % |
| Change in same  unit sales—Bakers Square                                         |       | 1.7                                        | %          | (0.6                                                  | )%         | (0.1                                                | )%         | 1.8 | % | (1.3 | )% | (4.7 | )% | (1.0 | )% |
| Change in total  same unit sales                                                      |       | 1.8                                        | %          | (0.2                                                  | )%         | (0.4                                                | )%         | 1.1 | % | (0.8 | )% | (2.6 | )% | 0.4 | % |

 

21

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(1)          Other operating expense consists primarily of rent, utilities,depreciation and marketing expenses.

 

(2)          We adopted Statement of Financial Accounting Standards (“SFAS”) No.142, “Goodwill and Other Intangible Assets,” effective in fiscal 2002. UnderSFAS No. 142, goodwill and intangible assets deemed to have indefinite livesare no longer amortized but are subject to annual impairment tests.

 

(3)          We incurred various expenses directly related to the May 2001 and June2003 acquisitions of the predecessor companies. The components of thetransaction expenses are as follows:

 
| ** **                                                 | ** ** | **VICORP Restaurants, Inc.**              | ** ** | **Midway Investors Holdings Inc.**                    | ** ** | **VI Acquisition Corp.**                              | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **(In thousands)**                                         | ** ** | **Fiscal year  ended  October 29,  2000** | ** ** | **Period from   October 30,  2000 to  May 13,  2001** | ** ** | **Period from   May 14,  2001 to  October 28,  2001** | ** ** | **Fiscal year  ended  October 27,  2002** | ** ** | **Period from   October 28,  2002 to  June 13,  2003** | ** ** | **Period from  June 14,  2003 to  October 26,  2003** | ** ** | **Fiscal year  ended  October 28,  2004** | ** ** |
| Transaction expenses:                                      | ** ** | ** **                                | ** ** | ** **                                            | ** ** | ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Employment contract termination and stock  compensation(a) |       | $                                         | —     |                                                  | $          | 6,018                                                 |       | $ | — |   | $ | — |   | $ | 5,574 |   | $ | — |   | $ | — |   |
| Legal, accounting and other professional  fees             |       | —                                    |       | 1,675                                                 |       | —                                                |       | 279 |   | 3,862 |   | 49 |   | 75 |   |
| Severance costs(b)                                         |       | —                                    |       | —                                                |       | —                                                |       | — |   | — |   | 1,177 |   | — |   |
| Legal settlements(c)                                       |       | —                                    |       | 8,300                                                 |       | —                                                |       | — |   | — |   | — |   | 50 |   |
| Total transaction expenses                                 |       | $                                         | —     |                                                  | $          | 15,993                                                |       | $ | — |   | $ | 279 |   | $ | 9,436 |   | $ | 1,226 |   | $ | 125 |   |
| Debt extinguishment costs:(d)(e)                           |       |                                      |       |                                                  |       |                                                  |       |   |   |   |   |   |   |   |   |
| Debt prepayment penalties                                  |       | $                                         | —     |                                                  | $          | —                                                |       | $ | — |   | $ | — |   | $ | 1,298 |   | $ | — |   | $ | 2,305 |   |
| Write-off of deferred debt financing costs                 |       | —                                    |       | —                                                |       | —                                                |       | — |   | 3,322 |   | — |   | 4,344 |   |
| Derivative termination                                     |       | —                                    |       | —                                                |       | —                                                |       | — |   | 1,896 |   | — |   | 207 |   |
| Total debt extinguishment costs                            |       | $                                         | —     |                                                  | $          | —                                                |       | $ | — |   | $ | — |   | $ | 6,516 |   | $ | — |   | $ | 6,856 |   |

 

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(a)          We recognized $6.0 million of compensation expense associated with theexercise of stock options in connection with the May 2001 acquisition. Inconnection with the June 2003 acquisition we paid senior employees a total of$2.1 million to terminate their existing employment contracts and recognized$3.5 million of compensation expense associated with the exercise of stockoptions.

 

(b)         We made severance payments totaling $1.2 million, primarily related toour former chief executive officer, pursuant to contractual provisions triggeredby the June 2003 acquisition.

 

(c)          We settled two class-action legal claims and one individuallabor-related legal claim for $8.9 million, offset by $0.6 million of insuranceproceeds received in respect of those claims, as a condition to the May 2001 acquisition.

 

(d)         In connection with the June 2003 acquisition, we incurred $6.5 millionof debt extinguishment costs, including prepayment penalties of $1.3 millionrelating to the prepayment of existing debt, $3.3 million of noncash write-offsof unamortized deferred debt financing costs related to prior credit facilitiesand $1.9 million of costs related to terminating interest rate swaps effectedto hedge interest rate risk on existing debt.

 

(e)          In connection with the April 2004 refinancing, we incurred $6.9 millionof debt extinguishment costs, including prepayment penalties of $2.3 million,$4.4 million of noncash write-offs of unamortized deferred financing costs and$0.2 million of costs relating to terminating interest rate swaps.

 

(4) Working capital isdefined as current assets less current liabilities.

 

(5) Total debt at the end ofeach of the periods presented represents the following:

 

VICORP Restaurants,Inc.—Capital lease obligations and other long-term debt;

 

Midway Investors HoldingsInc.—Term loan and revolving borrowings outstanding under a senior securedcredit facility, subordinated debt (net of original issue discounts), capitallease obligations and redeemable preferred stock;

 

VI Acquisition Corp.(October 26, 2003) —Term loan and revolving borrowings under our prior seniorsecured credit facility, subordinated debt (net of original issue discounts),capital lease obligations and a letter of credit secured by our capital stock;and

 

VI Acquisition Corp.(October 28, 2004) —Senior unsecured notes payable, term loan and revolvingborrowings under our senior secured credit facility, subordinated debt (net oforiginal issue discounts) and capital lease obligations.

 

22

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(6)          EBITDA represents net income (loss) before interest expense, incometaxes, depreciation on property plant and equipment and amortization onfranchise rights. Adjusted EBITDA excludes the transaction expenses and debtextinguishment costs discussed above in footnote 3, noncash compensation costsrelated to option issuances, and noncash impairment expense and amortization ofrent-related purchase accounting adjustments. EBITDA and Adjusted EBITDA arenot recognized terms under GAAP and do not purport to be alternatives to netincome as a measure of operating performance or to cash flow from operatingactivities as a measure of liquidity. Additionally, EBITDA and Adjusted EBITDAare not intended to be measures of free cash flow for management’sdiscretionary use, as they do not consider certain cash requirements such asinterest payments, tax payments and debt service requirements. Because not allcompanies use identical calculations, these presentations of EBITDA andAdjusted EBITDA may not be comparable to similarly titled measures of othercompanies. We believe that the inclusion of supplementary adjustments to EBITDAapplied in presenting Adjusted EBITDA is appropriate to provide additionalinformation to investors about certain unusual items that we do not expect toincur in the future and certain noncash items.

 

The following tablereconciles EBITDA and Adjusted EBITDA to net income (loss).

** **
| ** **                                                        | ** ** | **VICORP Restaurants, Inc.**              | ** ** | **Midway Investors Holdings Inc.**                    | ** ** | **VI Acquisition Corp.**                              | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **(In thousands)**                                                | ** ** | **Fiscal year  ended  October 29,  2000** | ** ** | **Period from  October 30,   2000 to  May 13,  2001** | ** ** | **Period from   May 14,  2001 to  October 28,  2001** | ** ** | **Fiscal year  ended  October 27,  2002** | ** ** | **Period from   October 28,   2002 to  June 13,  2003** | ** ** | **Period from   June 14,  2003 to  October 26,  2003** | ** ** | **Fiscal year   ended  October 28,  2004** | ** ** |
|                                                              |       |                                      |       |                                                  |       |                                                  |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                 |       | $                                         | 14,671     |                                                  | $          | (682                                                  | )          | $ | 2,882 |   | $ | 10,529 |   | $ | (2,195 | ) | $ | 569 |   | $ | 693 |   |
| Provision for income taxes (benefit)                              |       | 8,654                                     |       | (2,316                                                | )          | 233                                                   |       | 5,779 |   | (1,986 | ) | (280 | ) | (359 | ) |
| Interest expense                                                  |       | 817                                       |       | 292                                                   |       | 4,524                                                 |       | 9,786 |   | 5,550 |   | 5,330 |   | 15,161 |   |
| Depreciation and amortization                                     |       | 17,880                                    |       | 9,756                                                 |       | 8,331                                                 |       | 15,330 |   | 8,948 |   | 5,306 |   | 14,670 |   |
| Asset retirements                                                 |       | 74                                        |       | —                                                |       | 31                                                    |       | 88 |   | 237 |   | 141 |   | 438 |   |
| Asset impairments                                                 |       | —                                    |       | —                                                |       | —                                                |       | — |   | 96 |   | — |   | 552 |   |
| EBITDA                                                            |       | 42,096                                    |       | 7,050                                                 |       | 16,001                                                |       | 41,512 |   | 10,650 |   | 11,066 |   | 31,155 |   |
| Litigation settlement                                             |       | —                                    |       | —                                                |       | —                                                |       | — |   | — |   | — |   | 3,168 |   |
| Transaction expenses                                              |       | —                                    |       | 15,993                                                |       | —                                                |       | 279 |   | 9,436 |   | 1,226 |   | 125 |   |
| Debt extinguishment costs                                         |       | —                                    |       | —                                                |       | —                                                |       | — |   | 6,516 |   | — |   | 6,856 |   |
| Noncash compensation expense                                      |       | —                                    |       | —                                                |       | —                                                |       | 293 |   | 652 |   | — |   | — |   |
| Amortization of rent- related purchase  accounting adjustments(7) |       | —                                    |       | —                                                |       | (139                                                  | )          | (301 | ) | (222 | ) | 322 |   | 837 |   |
| Adjusted EBITDA                                                   |       | $                                         | 42,096     |                                                  | $          | 23,043                                                |       | $ | 15,862 |   | $ | 41,783 |   | $ | 27,032 |   | $ | 12,614 |   | $ | 42,141 |   |

 

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(7)          Increases in net rent expense over the periods presented are primarilydue to the sale-leaseback transactions that were entered into in connectionwith the May 14, 2001 acquisition of VICORP Restaurants, Inc., relating to 48restaurants, and the June 14, 2003 acquisition of Midway Investors HoldingsInc., relating to ten restaurants. Net rent expense also includes the effectsof recording the known escalations in our rent expense on a straight-line basisover the committed term of the lease. Additionally, net rent expense includesamortization of the fair market rent adjustments which we were required torecognize under purchase accounting at the time of each of the May 2001 andJune 2003 acquisitions.

 

(8)          Capital expenditures include capital spent for new stores, remodelingprojects, restaurant maintenance and corporate capital projects.

 

(9)          For purposes of calculating the ratio of earnings to fixed charges,earnings represent earnings before income taxes, plus fixed charges (excludingamortization of capitalized interest). Fixed charges include interest expense(including amortization of deferred debt financing costs), capitalized interestand the portion of operating rental expense, which management believes isrepresentative of the interest component of rent expense.

 

23

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**Item 7****.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

*Thefollowing discussion contains forward-looking statements that involve numerousrisks and uncertainties. Our actual results could differ materially from thosediscussed in the forward-looking statements as a result of these risks anduncertainties, including those set forth in this Annual Report on Form 10-Kunder “Forward-looking statements” and under “Risk factors.” You should readthe following discussion in conjunction with “Item 6. Selected financial data”and our audited consolidated financial statements and notes appearing elsewherein this Annual Report on Form 10-K.*

 

**Companyprofile**

 

We operate family-diningrestaurants under two well-recognized brands, Village Inn and Bakers Square. Asof October 28, 2004, our company, which was founded in 1958, had 374restaurants in 25 states, consisting of 271 company-operated restaurants and103 franchised restaurants.  We alsoproduce premium pies at three strategically located facilities that we serve inour restaurants or sell to third parties.

 

Our Village Inn restaurantsare known for serving fresh breakfast items throughout the day, and we haveleveraged our breakfast heritage to include traditional American fare at lunchand dinner. Our Bakers Square restaurants have built upon the reputation of oursignature pies to offer quality meals at breakfast, lunch and dinner. Our broadoffering of affordable menu items is designed to appeal to a demographicallydiverse customer base, including families, senior citizens and othervalue-oriented diners.

 

The following table setsforth the changes to the number of company-operated and franchised restaurantsfor the periods presented below.

 
| **(Units)**                                 | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Village Inn company-operated restaurants:   |       |     |       |     |       |     |       |
| Beginning of period                         |       | 109      |       | 109      |       | 118      |       |
| Acquired from franchisee                    |       | —   |       | 8        |       | 1        |       |
| Openings                                    |       | —   |       | 2        |       | 5        |       |
| Conversion to a Bakers Square               |       | —   |       | —   |       | (1       | )          |
| Closings                                    |       | —   |       | (1       | )          | (2       | )          |
| End of period                               |       | 109      |       | 118      |       | 121      |       |
| Bakers Square company-operated restaurants: |       |     |       |     |       |     |       |
| Beginning of period                         |       | 147      |       | 148      |       | 149      |       |
| Openings                                    |       | 1        |       | 3        |       | 3        |       |
| Conversion from a Village Inn               |       | —   |       | —   |       | 1        |       |
| Closings                                    |       | —   |       | (2       | )          | (3       | )          |
| End of period                               |       | 148      |       | 149      |       | 150      |       |
| Total company-operated restaurants          |       | 257      |       | 267      |       | 271      |       |
| Village Inn franchised restaurants:         |       |     |       |     |       |     |       |
| Beginning of period                         |       | 115      |       | 115      |       | 105      |       |
| Openings                                    |       | 4        |       | 2        |       | —   |       |
| Acquired by our company                     |       | —   |       | (8       | )          | (1       | )          |
| Closings                                    |       | (4       | )          | (4       | )          | (1       | )          |
| End of period                               |       | 115      |       | 105      |       | 103      |       |
| Total restaurants                           |       | 372      |       | 372      |       | 374      |       |

 

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Our Village Inn and BakersSquare concepts operate in the “family-dining” segment of the full servicerestaurant category. Full service restaurants offer broad menu choices that areserved to patrons by a waitstaff, while restaurants operating in the “limitedservice” segment serve customers at a counter or through a drive-thru window.We believe the family-dining category has a loyal customer base and stablecharacteristics. According to Technomic, Inc., the family-dining segment grewat a compound growth rate of 1.6% from 1997 to 2002 and is projected tocontinue to grow at 1.0% per year over the next four years. In the family-diningcategory, the average per-person check generally ranges from $6 to $9, anddiners in this category are sensitive to changes in price. In 2004, the averageper-person check at Village Inn was $7.65 and the average per person check atBakers Square was $8.70. One of the important elements of our business strategyis to provide our customers with an attractive value by offering quality foodat reasonable prices. As a result, we continually strive to maintain andimprove the efficiency of our operations.

 

**Managementoverview**

 

Our restaurant revenues areaffected by restaurant openings and closings and same unit sales performance.Same unit sales is a measure of the percentage increase or decrease of thesales of units open at least 18 months relative to the same period in the prioryear. We do not use new restaurants in our calculation of same unit sales untilthey are open for 18 months in order to allow a new restaurant’s operations andsales time to stabilize and provide more meaningful results.  Same unit sales is an important indicatorwithin the restaurant industry because small changes in same unit sales canhave a proportionally higher impact on operating margins because of the highdegree of fixed costs associated with operating restaurants.

 

Within both Village Inn andBakers Square, the restaurant count has only increased modestly over the lastthree years.  However, with our newstrategic focus, we intend to increase the number of company-operated VillageInn and Bakers Square restaurants more significantly over the next severalyears.  We currently expect to open anestimated 23 to 27 new restaurants in fiscal 2005.

 

Like much of the restaurantindustry, we view same unit sales as a key performance metric, at theindividual unit level, within regions, across each chain and throughout ourcompany. With our field-level and corporate information systems, we monitorsame unit sales on a daily, weekly and four-week period basis from the chainlevel down to the individual unit level. The primary drivers of same unit salesperformance are changes in the average per-person check and changes in thenumber of customers, or customer count. Average check performance is primarilyaffected by menu price increases and changes in the purchasing habits of ourcustomers. We also monitor entrée count, exclusive of take-out business, andsales of whole pies, which we believe is indicative of overall customer trafficpatterns. To increase average unit sales, we focus marketing and promotionalefforts on increasing customer visits and sales of particular products. We alsoselectively increase prices, but are constrained by the price sensitivity ofcustomers in our market segment and our desire to maintain an attractiveprice-to-value relationship that is a fundamental characteristic of ourconcepts. For example, we raised prices in our Bakers Square units in fiscal2002 and fiscal 2003, and while some unit sales increased in fiscal 2003, guesttraffic declined. As a result, we generally have increased prices in line withincreases in the consumer price index, and expect to continue to do so in thefuture. Same unit sales performance is also affected by other factors, such asfood quality, the level and consistency of service within our restaurants, theattractiveness and physical condition of our restaurants, as well as local andnational economic factors. From fiscal 2000 through fiscal 2004, Village Innrecorded average annual same unit sales growth of 0.8% and Bakers Squarerecorded a modest average annual same unit sales decline of 0.1%.

 

As of October 28, 2004, wehad 103 franchised Village Inn restaurants in eight states, operated by 25franchisees which operate one to eleven restaurants each.  Our revenue attributable to franchiseoperations, consisting primarily of royalty income has averaged approximately1.4% of our total revenues over the last three years. On February 24, 2003, weacquired eight restaurants from a franchisee in Albuquerque, New Mexico for$4.6 million, which subsequently reduced our franchise revenue and increasedour company-operated restaurant revenue. Although we may increase franchiserevenues by increasing the number of franchised Village Inn restaurants, weexpect that our franchise revenues will decline as a percentage of our totalrevenue as we emphasize growth in the number of company-operated units.

 

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In addition to unit sales,the other major factor affecting the performance of our restaurants is the costassociated with operating our restaurants. We monitor and assess these costsprincipally as a percentage of a restaurant’s revenues, or on a margin basis.The operating margin of a restaurant is the profitability, expressed as apercentage of sales, of the restaurant after accounting for all direct expensesof operating the restaurant. Another key performance metric is the primemargin, which is the profitability, expressed as a percentage of sales, of therestaurants after deducting the two most significant costs, labor and food. Dueto the importance of both labor cost and food cost, we closely monitor primemargin from the chain level down to the individual restaurant. We have systemsin place at each restaurant to assist the restaurant managers in effectivelymanaging these costs to improve prime margin.

 

Labor is our largest costelement. The principal drivers of labor cost are wage rates, particularly forthe significant number of hourly employees in our restaurants, and the numberof labor hours utilized in serving our customers and operating our restaurants,as well as health insurance costs for our employees. Wage rates are largelymarket driven, with increases to minimum wage rates causing correspondingincreases in our pay scales. Differences in minimum wage laws among the variousstates impact the relative profitability of the restaurants in those states. InJanuary 2004, the minimum wage rate for the state of Illinois increased and isscheduled to do so again in January 2005. The state of Florida’s minimum wage is scheduled to increase in June2005.

 

While the wage rates arelargely externally determined, labor utilization within our restaurants is moresubject to our control and is closely monitored. We seek to staff eachrestaurant to provide a high level of service to our customers, withoutincurring more labor cost than is needed. We have included labor schedulingtools in each of our company-operated restaurants’ back office systems toassist our managers in improving labor utilization. We monitor labor hoursactually incurred in relation to sales and customer count on a restaurant-by-restaurant basis throughout each week. We have been able to modestly reduceour labor cost percentage from 32.3% in fiscal 2001 to 31.8% in fiscal 2004 asa result of modifying our internal processes to provide our restaurant managersgreater control over employee utilization and overtime.

 

In managing prime margin, wealso focus on percentage food cost, which is food cost expressed as apercentage of total revenues. Our food cost is affected by several factors,including market prices for the food ingredients, our effectiveness atcontrolling waste and proper portioning, and shifts in our customers’ buyinghabits between low-food-cost and high-food-cost menu items. Our ReMACS foodcost management system within each restaurant measures actual ingredient costsand actual customer product purchases against an “ideal” food cost standard.Ideal food cost is calculated within each restaurant based on the cost ofingredients used, assuming proper portion size, adherence to recipes, limitedwaste and similar factors. We track variances from ideal food cost within eachrestaurant and seek to address the causes of such variances, to the extent theyare within our control, in order to improve our percentage food cost. Inaddition, our centralized purchasing department buys a majority of the productsused in both Village Inn and Bakers Square (as well as our pie productionoperations), leveraging the purchasing volumes of our restaurants and ourfranchisees to obtain favorable prices. We attempt to stabilize potentiallyvolatile prices for certain high-cost ingredients such as chicken, beef, coffeeand dairy products for three to twelve month periods by entering into purchasecontracts when we believe that this will improve our food cost. We also use “menuengineering” to promote menu items which have a lower percentage food cost.However, we are vulnerable to fluctuations in food costs. Given our customers’sensitivity to price increases and since we only reprint our full menus everysix months, our ability to adjust prices and featured menu items in response torapidly changing commodity prices is limited.

 

Since we produce a majorityof our pies for Village Inn and Bakers Square and since our third-party piesales historically have not had, and currently do not have, a material impacton our operating profit, we include the net results of our pie manufacturingoperations as an offset to our food costs. As a result, any profit (or loss)from third-party pie sales has the effect of reducing (or increasing) our totalfood cost. As part of our overall effort to optimize total company food cost,we have been focusing on various measures to improve the net margins within ourpie manufacturing operations, including increasing third-party sales,renegotiating our distribution contracts and rebalancing the production amongour three plants to increase efficiency.

 

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As a result of our efforts,we lowered our consolidated food cost percentage at our restaurants by 2.3% to26.6% of total revenues for fiscal 2004 from 28.9% of total revenues for fiscal2001.  Controlling food costs presentsongoing challenges.

 

Other operating expensesprincipally include occupancy costs, depreciation, supplies, repairs andmaintenance, utility costs, marketing expenses, insurance expenses and workers’compensation costs. Historically, these costs have increased over time and manyare not directly related to the level of sales in our restaurants. We haveexperienced increases in many of these items throughout the last three fiscalyears, particularly utility costs and insurance expenses. In order to maintainour operating performance levels, and to address expected cost increases, wewill be required to increase efficiency in restaurant operations and increasesales, although there is no assurance that we will be able to offset futurecost increases.

 

Our 2004 financial resultsincluded:

 

•                  Growth of revenues by 3.2% to $399.7 millionfrom 2003 to 2004, reflecting the net addition of 14 company-operatedrestaurants over the past two years (including the net addition of fourrestaurants during 2004).  Same storesales modestly increased by 0.4% from 2003 to 2004.

•                  Improvement in operating income to $21.8 millionfrom $12.9 million in 2003.  Our 2004results included a $3.2 million litigation settlement expense and our 2003results included $10.7 million of transaction expenses.

•                  Net income improved to a $0.7 million profitin 2004 from a $1.6 million loss in 2004. We incurred debt extinguishment costs in both years ($6.8 million for2004 and $6.5 million for 2003). Interest expense increased $4.3 million in 2004 as a result of financingassociated with the acquisition of our company in June 2003.

 

**Factorsaffecting comparability**

 

On May 14, 2001, MidwayInvestors Holdings Inc., a newly created holding company, purchased VICORPRestaurants, Inc., which was a publicly owned company prior to the acquisition.On June 14, 2003, VI Acquisition Corp., a newly created holding company,purchased Midway Investors Holdings Inc. Neither of these holding companies hashad any independent operations, and consequently the consolidated statements ofoperations of Midway Investors Holdings Inc. and VI Acquisition Corp. are substantiallyequivalent. As a result of applying the required purchase accounting rules tothese acquisitions, our financial statements for periods following thetransactions were significantly affected. The application of purchaseaccounting rules required us to revalue our assets and liabilities at the tworespective acquisition dates, which resulted in different accounting basesbeing applied in different periods. In particular, occupancy expense increasedas existing rent escalator accruals were eliminated as part of purchaseaccounting and the amount of future rent escalator accruals were recalculatedbased upon the lease escalator provisions applicable over the remaining life ofthe leases at each acquisition date. In addition, depreciation expense increasedas a result of the increase in the valuation of our assets, whichcorrespondingly increased our depreciable base. As a result, the financialinformation for the periods from May 14, 2001 through June 13, 2003, fromOctober 28, 2002 to June 13, 2003, from June 14, 2003 through October 26, 2003and from October 27, 2003 through October 28, 2004 are not comparable to oneanother in certain respects. The term “predecessor” refers to Midway InvestorsHoldings Inc. which was merged into VI Acquisition Corp. in connection with therefinancing.

 

As a result of thesechanges, the historical financial information in this Annual Report on Form10-K and related discussions relate to the entity specified below for thefollowing periods:

 

| Fiscal year ended October  27, 2002 |   | Midway Investors Holdings  Inc. |
|-------------------------------------|--------|---------------------------------|
| October 28, 2002 to June  13, 2003  |   | Midway Investors Holdings  Inc. |
| June 14, 2003 to October  26, 2003  |   | VI Acquisition Corp.            |
| Fiscal year ended October  28, 2004 |   | VI Acquisition Corp.            |

 

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In our analysis, we combinepartial periods into fiscal periods to aid the discussion of financialinformation. The combined periods are not necessarily comparable and should notbe given more emphasis than the individual components.

 

At the time of each of thetwo acquisitions, we also sold certain properties under sale-leasebacktransactions to help finance the acquisitions. Specifically, we sold 48properties in May 2001 for an aggregate of $57.2 million and an additional tenproperties in June 2003 for an aggregate of $13.9 million. As discussed below,the sale-leaseback transactions have resulted in higher rent expense and lowerdepreciation expense subsequent to the transactions.

 

On February 24, 2003, wepurchased one of our franchisees which owned and operated eight Village Innrestaurants in the Albuquerque, New Mexico area for $4.6 million. After theacquisition, revenue associated with these restaurants was included in ourrestaurant revenues, and since the date of the acquisition we have not earnedfranchise revenues from those units. Please refer to the table above forinformation on unit openings during the relevant periods.

 

Our fiscal year, whichhistorically ended on the last Sunday in October, is comprised of 52 or 53 weeksdivided into four fiscal quarters of 12 or 13, 12, 12, and 16 weeks. BeginningJanuary 22, 2004, we changed our fiscal year so that it ends on the Thursdaynearest to October 31st of each year. This increased fiscal 2004 by an extrafour days (368 days in fiscal 2004 versus 364 in fiscal 2003). This change wasmade to facilitate restaurant operations by moving the end of our fiscalperiods and weekly reporting and payroll periods away from weekends when ourrestaurants are busier.

 

**Criticalaccounting policies and estimates**

 

Inthe ordinary course of business, our company makes a number of estimates andassumptions relating to the reporting of results of operations and financialcondition in the preparation of our consolidated financial statements in conformitywith U.S. generally accepted accounting principles. Actual results could differsignificantly from those estimates and assumptions. We believe that thefollowing discussion addresses our most critical accounting policies, which arethose that are most important to the portrayal of our financial condition andresults of operations and require management judgment about the effect ofmatters that are uncertain.

 

Onan ongoing basis, management evaluates its estimates and assumptions, includingthose related to recoverability of long-lived assets, revenue recognition andgoodwill. Management bases its estimates and assumptions on historicalexperience and on various other factors that are believed to be reasonable atthe time the estimates and assumptions are made. Actual results may differ fromthese estimates and assumptions under different circumstances or conditions.

 

Wehave discussed the development and selection of critical accounting policiesand estimates with our audit committee. The following is a summary of our critical accounting policies andestimates:

 

***Inventories***

 

Inventoriesare stated at the lower of cost or market value. Cost is principally determinedby the first-in, first-out method. The valuation of inventory requires us toestimate obsolete or excess inventory as well as inventory that is not ofsaleable quality. Both our manufactured pie inventories and individual storefood inventories are subject to spoilage. We use estimates of future demand aswell as historical trend information to schedule manufacturing and ordering. Ifour demand forecast for specific products is greater than actual demand, wecould be required to record additional inventory reserves or losses which wouldhave a negative impact on our gross margin.

 

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***Property and equipment***

 

Propertyand equipment is recorded at cost and is depreciated on the straight-line basisover the estimated useful lives of such assets. The useful lives of assetsrange from 20 to 40 years for buildings and three to ten years for equipmentand improvements. Changes in circumstances such as the closing of units withinunderproductive markets or changes in our capital structure could result in theactual useful lives of these assets differing from our estimates.

 

Wereview long-lived assets, including land, buildings and building improvements,for impairments on a quarterly basis or whenever events or changes incircumstances indicate that the carrying amount of such assets may not berecoverable. Management evaluates individual restaurants, which are consideredto be the lowest level for which there are identifiable cash flows forimpairment. A specific restaurant is deemed to be impaired if a forecast ofundiscounted future operating cash flows directly relating to that restaurant,including disposal value, if any, is less than the carrying amount of thatrestaurant. If a restaurant is determined to be impaired, the loss is measuredas the amount by which the carrying amount of the restaurant exceeds its fairvalue. Management determines fair value based on quoted market prices in activemarkets, if available. If quoted market prices are not available, managementestimates the fair value of a restaurant based on either the estimates providedby real estate professionals and/or our past experience in disposing ofrestaurant properties. Our estimates of undiscounted cash flows may differ fromactual cash flows due to economic conditions or changes in operatingperformance.  During fiscal 2004, we concludedthat a $552,000 impairment charge was necessary.

 

Followingthe June 2003 acquisition, we analyzed fixed assets and adjusted these assetsto their fair market values as of the date of the transaction. Asset fairmarket values were determined through receipt of third party real estateappraisals as well as the application of management judgment for thoseproperties for which external valuations could not be obtained. Theseprocedures resulted in our increasing the value of property and equipment by $6.2million following the June 2003 acquisition.

 

***Capital and operating leases***

 

Weare the prime lessee under various land, building and equipment leases forcompany-operated and some franchisee-operated locations, pie manufacturingfacilities and other non-company-operated locations, which include warehousespace and parking facilities. Actual cash rents are charged to the operatingunits on a daily basis as incurred.

 

Followingthe June 2003 acquisition, we analyzed all capital and operating leases whichhad not been initiated or renewed in the past 18 months to determine the fairmarket value of these agreements. Lease fair market values were determined byobtaining comparable rents for select locations through third-party advisorsand reviewing sale-leaseback transactions within the past 18 months todetermine an average rent as a percentage of unit sales. This average wasapplied to each location to determine fair value rents. As a result, anadditional rent obligation of $8.0 million was recorded in June 2003. Theseadditional rents are amortized over the remaining life of the underlying leaseagreements.

 

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***Insurance reserves***

 

Weself-insure a significant portion of our employee medical insurance, workers’compensation and general liability insurance plans. As of October 28, 2004, wehad an insurance reserve liability of $8.8 million recorded.  For fiscal 2005, our anticipated claim costsare $10.1 million for employee medical/dental claims, $3.4 million for workers’compensation and $1.0 million for general liability claims. We have obtainedstop-loss insurance policies to protect from individual losses over specifieddollar values ($175,000 for employee health insurance claims, $250,000 workers’compensation and $150,000 for general liability for fiscal 2005). The fullextent of certain claims, especially workers’ compensation and generalliability claims, may not become fully determined for several years. Therefore,we estimate potential obligations for liabilities that have been incurred butnot yet reported based upon historical data and experience. Although managementbelieves that the amounts accrued for these obligations are sufficient, anysignificant increase in the number of claims or costs associated with claimsmade under these plans could have a material adverse effect on our financialresults.

 

***Loss contingencies***

 

Wemaintain accrued liabilities and reserves relating to the resolution of certaincontingent obligations.  Significantcontingencies include those related to litigation.  We account for contingent obligations inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accountingfor Contingencies,” as interpreted by FASB Interpretation No. 14 which requiresthat we assess each contingency to determine estimates of the degree ofprobability and range of possible settlement. Contingencies which are deemed to be probable and where the amount ofsuch settlement is reasonably estimable are accrued in our financial statements.  If only a range of loss can be determined, weaccrue to the best estimate within that range; if none of the estimates withinthat range is better than another, we accrue to the low end of the range.  During the fourth quarter of fiscal 2004, weestablished a reserve of $3.2 million in connection with our agreement inprinciple to settle two class action lawsuits.

 

Theassessment of loss contingencies is a highly subjective process that requiresjudgments about future events. Contingencies are reviewed at least quarterly to determine the adequacyof the accruals and related financial statement disclosure.  The ultimate settlement of loss contingenciesmay differ significantly from amounts we have accrued in our financialstatements.

 

***Income taxes***

 

Deferredincome tax assets and liabilities are recognized for the expected future incometax consequences of carryforwards and temporary differences between the bookand tax basis of assets and liabilities. Valuation allowances are establishedfor deferred tax assets that are deemed unrealizable.  As of October 28, 2004, we had net deferredtax assets of $25.1 million, which included $11.8 million of FICA tip creditcarryforwards, expiring at various dates through 2024.  Approximately $9.6 million of the FICA tipcredit carryforwards were generated prior to the our acquisition in June 2003and are subject to an annual use limitation of $0.7 million.

 

Wemust assess the likelihood that we will be able to recover our deferred taxassets. If recovery is not likely, valuation allowances are established. Thevaluation allowance is based on our estimates of future taxable income by eachjurisdiction in which we operate, tax planning strategies and the period overwhich our deferred tax assets will be recoverable. In the event that actualresults differ from these estimates, we are unable to implement certain taxplanning strategies or we adjust these estimates in future periods, we may needto establish an additional valuation allowance which could have a material negativeimpact on our results of operations or financial position.

 

Significantjudgment is required in determining our effective tax rate and in evaluatingour tax positions. We establish reserves when, despite our belief that our taxreturn positions are supportable, we believe that certain positions are likelyto be successfully challenged. We adjust these reserves in light of changingfacts and circumstances, such as the progress of a tax audit. Our effective taxrate includes the impact of reserve provisions and changes to reserves that weconsider appropriate.

 

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**Results ofoperations**

** **
| ** **                                             | ** ** | **Predecessor**        | ** ** | ** **       | ** ** | ** **      | ** ** | ** **             | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|------------------|------------|-----------------|------------|------------------------|------------|
| ** **                                             | ** ** | **Fiscal year  ended** | ** ** | **Period ended** | ** ** | **Combined**    | ** ** | **Fiscal year  ended** | ** ** |
| ** **                                             | ** ** | **October 27,**        | ** ** | **June 13,**     | ** ** | **October 26,** | ** ** | **2003**               | ** ** | **October 28,** | ** ** |
| **(In thousands)**                                     | ** ** | **2002**               | ** ** | **2003**         | ** ** | **2003**        | ** ** | **Period**             | ** ** | **2004** | ** ** |
| Revenues:                                              |       |                   |       |             |       |            |       |                   |       |   |   |
| Restaurant operations                                  |       | $                      | 377,630    |             | $          | 243,157         |       | $                      | 138,696    |   | $ | 381,853 |   | $ | 394,667 |   |
| Franchise operations                                   |       | 5,796                  |       | 3,448            |       | 1,916           |       | 5,364                  |       | 5,057 |   |
|                                                   |       | 383,426                |       | 246,605          |       | 140,612         |       | 387,217                |       | 399,724 |   |
| Costs and expenses:                                    |       |                   |       |             |       |            |       |                   |       |   |   |
| Restaurant costs:                                      |       |                   |       |             |       |            |       |                   |       |   |   |
| Food                                                   |       | 104,298                |       | 66,186           |       | 37,219          |       | 103,405                |       | 106,294 |   |
| Labor                                                  |       | 122,850                |       | 79,016           |       | 45,500          |       | 124,516                |       | 127,251 |   |
| Other operating expenses                               |       | 100,002                |       | 65,629           |       | 40,531          |       | 106,160                |       | 111,663 |   |
| Franchise operating expenses                           |       | 3,092                  |       | 1,583            |       | 1,032           |       | 2,615                  |       | 2,490 |   |
| General and administrative expenses                    |       | 26,598                 |       | 16,533           |       | 9,447           |       | 25,980                 |       | 25,193 |   |
| Litigation settlement                                  |       | —                 |       | —           |       | —          |       | —                 |       | 3,168 |   |
| Transaction expenses                                   |       | 279                    |       | 9,436            |       | 1,226           |       | 10,662                 |       | 125 |   |
| Management fees                                        |       | 1,000                  |       | 674              |       | 185             |       | 859                    |       | 1,159 |   |
| Asset impairments                                      |       | —                 |       | 96               |       | —          |       | 96                     |       | 552 |   |
|                                                   |       | 358,119                |       | 239,153          |       | 135,140         |       | 374,293                |       | 377,895 |   |
| Operating profit                                       |       | 25,307                 |       | 7,452            |       | 5,472           |       | 12,924                 |       | 21,829 |   |
| Interest expense                                       |       | (9,786                 | )          | (5,550           | )          | (5,330          | )          | (10,880                | )          | (15,161 | ) |
| Debt extinguishment costs                              |       | —                 |       | (6,516           | )          | —          |       | (6,516                 | )          | (6,856 | ) |
| Other income, net                                      |       | 787                    |       | 433              |       | 147             |       | 580                    |       | 522 |   |
| Income (loss) before income taxes                      |       | 16,308                 |       | (4,181           | )          | 289             |       | (3,892                 | )          | 334 |   |
| Provision for income taxes (benefit)                   |       | 5,779                  |       | (1,986           | )          | (280            | )          | (2,266                 | )          | (359 | ) |
| Net income (loss)                                      |       | 10,529                 |       | (2,195           | )          | 569             |       | (1,626                 | )          | 693 |   |
| Preferred stock dividends and accretion                |       | (3,570                 | )          | (2,260           | )          | (2,627          | )          | (4,887                 | )          | (7,560 | ) |
| Net income (loss) attributable to common  stockholders |       | $                      | 6,959      |             | $          | (4,455          | )          | $                      | (2,058     | ) | $ | (6,513 | ) | $ | (6,867 | ) |

 
| ** **                                             | ** ** | **Predecessor**        | ** ** | ** **        | ** ** | ** **       | ** ** | ** **              | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|-------------------|------------|------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **Fiscal year  ended** | ** ** | **Period  ended** | ** ** | **Combined**     | ** ** | **Fiscal  year  ended** | ** ** |
| ** **                                             | ** ** | **October 27,**        | ** ** | **June 13,**      | ** ** | **October  26,** | ** ** | **2003**                | ** ** | **October  28,** | ** ** |
| ** **                                             | ** ** | **2002**               | ** ** | **2003**          | ** ** | **2003**         | ** ** | **Period**              | ** ** | **2004** | ** ** |
| Revenues:                                              |       |                   |       |              |       |             |       |                    |       |   |   |
| Restaurant operations                                  |       | 98.5                   | %          | 98.6              | %          | 98.6             | %          | 98.6                    | %          | 98.7 | % |
| Franchise operations                                   |       | 1.5                    |       | 1.4               |       | 1.4              |       | 1.4                     |       | 1.3 |   |
|                                                   |       | 100.0                  |       | 100.0             |       | 100.0            |       | 100.0                   |       | 100.0 |   |
| Costs and expenses                                     |       |                   |       |              |       |             |       |                    |       |   |   |
| Restaurant costs:                                      |       |                   |       |              |       |             |       |                    |       |   |   |
| Food                                                   |       | 27.2                   |       | 26.8              |       | 26.5             |       | 26.7                    |       | 26.6 |   |
| Labor                                                  |       | 32.0                   |       | 32.0              |       | 32.4             |       | 32.2                    |       | 31.8 |   |
| Other operating expenses                               |       | 26.1                   |       | 26.6              |       | 28.8             |       | 27.4                    |       | 28.0 |   |
| Franchise operating expenses                           |       | 0.8                    |       | 0.7               |       | 0.7              |       | 0.7                     |       | 0.6 |   |
| General and administrative expenses                    |       | 6.9                    |       | 6.7               |       | 6.7              |       | 6.7                     |       | 6.3 |   |
| Litigation settlement                                  |       | —                 |       | —            |       | —           |       | —                  |       | 0.8 |   |
| Transaction expenses                                   |       | 0.1                    |       | 3.8               |       | 0.9              |       | 2.8                     |       | 0.0 |   |
| Management fees                                        |       | 0.3                    |       | 0.3               |       | 0.1              |       | 0.2                     |       | 0.3 |   |
| Asset impairments                                      |       | —                 |       | 0.1               |       | —           |       | 0.0                     |       | 0.1 |   |
|                                                   |       | 93.4                   |       | 97.0              |       | 96.1             |       | 96.7                    |       | 94.5 |   |
| Operating profit                                       |       | 6.6                    |       | 3.0               |       | 3.9              |       | 3.3                     |       | 5.5 |   |
| Interest expense                                       |       | (2.6                   | )          | (2.3              | )          | (3.8             | )          | (2.8                    | )          | (3.8 | ) |
| Debt extinguishment costs                              |       | —                 |       | (2.6              | )          | —           |       | (1.7                    | )          | (1.7 | ) |
| Other income, net                                      |       | 0.2                    |       | 0.2               |       | 0.1              |       | 0.2                     |       | 0.1 |   |
| Income (loss) before income taxes                      |       | 4.2                    |       | (1.7              | )          | 0.2              |       | (1.0                    | )          | 0.1 |   |
| Provision for income taxes (benefit)                   |       | 1.5                    |       | (0.8              | )          | (0.2             | )          | (0.6                    | )          | (0.1 | ) |
| Net income (loss)                                      |       | 2.7                    |       | (0.9              | )          | 0.4              |       | (0.4                    | )          | 0.2 |   |
| Preferred stock dividends and accretion                |       | (0.9                   | )          | (0.9              | )          | (1.9             | )          | (1.3                    | )          | (1.9 | ) |
| Net income (loss) attributable to common  stockholders |       | 1.8                    | %          | (1.8              | )%         | (1.5             | )%         | (1.7                    | )%         | (1.7 | )% |

 

31

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**Fiscal 2004compared to the combined periods beginning October 28, 2002 through June 13,2003 and beginning June 14, 2003 through October 26, 2003 (together, the “Combined2003 Period”)**

 

***Total revenues*** increased by $12.5 million, or 3.2%, to$399.7 million in fiscal 2004, from $387.2 million for the Combined 2003Period.  The increase was largely due tooperating six more locations on average in fiscal 2004 compared to the Combined2003 Period.  We also experienced a 0.4%increase in same unit sales for fiscal 2004 over the Combined 2003 Period, andfiscal 2004 had four extra days compared to the Combined 2003 Period. VillageInn same unit sales for fiscal 2004 increased 2.2% over the Combined 2003Period, and Bakers Square same unit sales decreased 1.0% over the same period.Average guest spending increased 1.6% at Village Inn and 3.7% at Bakers Squarein fiscal 2004 compared to the Combined 2003 Period.

 

***Food costs*** increased by $2.9 million, or 2.8%, to$106.3 million in fiscal 2004, from $103.4 million for the Combined 2003Period.  Food costs as a percentage oftotal revenues slightly decreased to 26.6% for fiscal 2004 from 26.7% in theCombined 2003 Period.  Menu engineeringand menu price increases generally offset unfavorable commodity costsexperienced in fiscal 2004.  Foodcommodity costs were very volatile in fiscal 2004 and generally were very highin the early- to mid-portions of the fiscal year with moderation near the endof the fiscal year.  During the year, weexperienced the highest prices we have seen in the last five years for butter,eggs, poultry, pork and fryer oil all of which are important ingredients in ourproducts.  In addition, beef pricesremained historically high and record high diesel fuel prices increased ourdelivery costs.

 

***Labor costs*** increased by $2.8 million, or 2.2%, to$127.3 million in fiscal 2004, from $124.5 million for the Combined 2003Period, but as a percentage of total revenues declined to 31.8% from 32.2% overthese periods. Labor costs as a percentage of revenues decreased between theperiods as the result of hourly labor efficiencies and reduced overtime due inpart to moving our end of week to a Thursday from a Sunday which allowed for usto manage scheduling and overtime issues during less busy times of theweek.  In addition, management bonusexpense decreased as a result of revisions in the management incentive bonusprograms implemented at the beginning of fiscal 2004, which established moreconservative bonus qualifier thresholds and limited the eligibility toparticipate in the bonus program based upon completion of specified trainingprograms.

 

***Other operating expenses*** increased by $5.5 million, or 5.2%, to$111.7 million in fiscal 2004 from $106.2 million for the Combined 2003 Period.Other operating expenses as a percentage of total revenues increased from 27.4%to 28.0% over these periods. This increase was primarily due to higheroccupancy costs resulting from the sale and leaseback of 13 locations in 2003and the fair market value adjustments to operating and capital leasesassociated with our June 2003 acquisition. Partially offsetting this increasewas a decrease in advertising expenses.

 

***General and administrative expenses*** decreased $0.8 million, or 3.1%, to $25.2million for fiscal 2004 from $26.0 million for the Combined 2003 Period. Thisdecrease resulted from $0.5 million in deferred compensation charges recordedin the Combined 2003 Period compared to no such charges in fiscal 2004, lowerdirect construction oversight and support expenses in fiscal 2004 due toincreased construction capitalization activity and lower manager-in-trainingcosts in fiscal 2004.  Partiallyoffsetting the decrease were $0.6 million of expenses in fiscal 2004 related toa Bakers Square brand revitalization study. As a percentage of revenues, general and administrative expenses were6.3% in fiscal 2004 compared to 6.7% in the Combined 2003 Period, which wasreflective of the reduced costs and economies of scale associated with thehigher revenues.

 

***Litigation settlement expenses*** increased by $3.2 million in fiscal 2004 dueto the proposed settlement of two class action employee practices claims.  No litigation settlement was incurred in theCombined 2003 Period.

 

***Transaction expenses*** of $10.7 million were incurred in the Combined 2003 Period associatedwith the acquisition of our Company. Only $0.1 million of transaction costs were incurred in fiscal 2004.

 

***Impairment expense*** of $0.6 million was incurred in fiscal 2004 compared to $0.1 millionin the Combined 2003 Period.  Theimpairment in fiscal 2004 related to nine restaurant locations for which theestimated future cash flows could not recover the carrying value of theapplicable long-term assets and the fair market value of the assets was lessthan the carrying value.   The impairmentin the Combined 2003 Period related to one such restaurant location.

 

32

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***Operating profit*** increased by $8.9 million, or 69.0%, to $21.8 million in fiscal 2004,from $12.9 million for the Combined 2003 Period. Operating profit as apercentage of total revenues for fiscal 2004 increased from 3.3% to 5.5% overthe Combined 2003 Period. This increase in profit margin was primarily due tothe $10.7 million of transaction costs in the Combined 2003 Period partiallyoffset by $3.2 million of litigation settlement costs in fiscal 2004.

 

***Interest expense*** increased by $4.3 million, or 39.4%, to $15.2 million in fiscal 2004,from $10.9 million for the Combined 2003 Period. Interest expense as apercentage of total revenues increased from 2.8% to 3.8% over these periods.This increase was due primarily to larger outstanding average debt balances duringthe fiscal 2004 compared to the Combined 2003 Period. The increase in interestexpense in fiscal 2004 was the result of the borrowings made in June 2003 tohelp finance the acquisition of our company which were outstanding for theentire fiscal 2004 year.

 

***Debt extinguishment******costs*** of$6.9 million were incurred in fiscal 2004 in connection with the refinancing ofour debt that closed April 14, 2004. These expenses included $2.3 million of prepayment penalties, awrite-off of deferred financing costs of $4.4 million associated with theprevious obligations and settlement of outstanding derivative obligations inthe amount of $0.2 million.  Debtextinguishment costs of $6.5 million were recorded for the Combined 2003 Periodas a result of costs related to terminating financing arrangements prior totheir maturity in connection with the June 2003 acquisition of ourcompany.  Included within the $6.5million in debt extinguishment costs were a write-off of deferred financingcost of $3.3 million, early termination costs of $1.3 million and costsassociated with terminating unfavorable derivative instruments of $1.9 million.

 

***Provision for income taxes (benefit)*** for fiscal 2004 was a benefit of $0.4million.  For the Combined 2003 Period,an income tax benefit of $2.3 million was recorded. The provisions differ fromour statutory rate of 39.9% due to general business credits that we earn fromFICA taxes paid on employee tips, partially offset by nondeductibleamortization related to franchise rights.

 

***Net income (loss)*** increased by $2.3 million to a $0.7 millionprofit in fiscal 2004, from a $1.6 million loss for the Combined 2003Period.  Net income as a percentage oftotal revenues increased to 0.2% from (0.4%) over these periods.

 

***Preferred stock dividends and accretion*** increased by $2.7 million to $7.6 million infiscal 2004 from $4.9 million for the Combined 2003 Period as a result of theredemption of $36.5 million liquidation preference of preferred stock of MidwayInvestors Holdings Inc. that accrued dividends at a rate of 8.94% per annum andthe issuance of $69.7 million liquidation preference of preferred stock of VIAcquisition Corp. that accrue dividends at a rate of 10.0% per annum inconnection with the June 2003 acquisition. Until the June 2003 acquisition,Midway Investors Holdings Inc. had, and following the June 2003 acquisition VIAcquisition Corp. has, outstanding preferred stock. Dividends on VI AcquisitionCorp.’s preferred stock accumulate and compound but are not payable untildividends are declared. Covenants contained in our senior secured creditagreement and the indenture governing our 101⁄2% notes restrict our ability todeclare dividends on our preferred stock.

 

**Combinedperiods beginning October 28, 2002 through June 13, 2003 and beginning June 14,2003 through October 26, 2003 compared to fiscal 2002**

 

***Total revenues***increased by $3.8 million, or 1.0%, to $387.2 million for the Combined2003 Period, from $383.4 million in fiscal 2002. The increase in revenues wasprincipally due to revenues from ten new company-operated restaurants acquiredor opened during the Combined 2003 Period, slightly offset by a decrease in piesales of $0.3 million. We experienced a 1.4% decrease in same unit sales forthe Combined 2003 Period compared to fiscal 2002. Village Inn same unit salesfor the Combined 2003 Period increased 0.1% over fiscal 2002, and Bakers Squaresame unit sales decreased 2.5%. Affecting the change in same unit sales, weexperienced a 3.5% increase in average per-person check size and a 3.5%decrease in entrée count for our Village Inn restaurants in the Combined 2003Period as compared to fiscal 2002. We also experienced a 2.7% increase inaverage per-person check size and a 5.1% decrease in entrée count for ourBakers Square restaurants in the Combined 2003 Period as compared to fiscal2002. We believe that the decrease in pie and Bakers Square revenues wasprimarily the result of a challenging economic environment.

 

***Food costs***decreasedby $0.9 million, or 0.9%, to $103.4 million in the Combined 2003 Period, from$104.3 million in fiscal 2002. Food cost as a percentage of total revenuesdeclined from 27.2% to 26.7% over these periods with improvements of 0.5% atboth Village Inn and Bakers Square. The decrease resulted from increased managementof the cost of food, which reduced the difference between actual food cost andideal food cost. Menu price increases of approximately 3.1% exceeded food costinflation and contributed to the decline as a percentage of revenues.

 

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***Labor costs***increasedby $1.7 million, or 1.4%, to $124.5 million in the Combined 2003 Period, from$122.8 million for fiscal 2002. Labor costs as a percentage of total revenuesincreased from 32.0% to 32.2% during these periods. $1.6 million of theincrease was associated with increased store count resulting from ouracquisition of the eight New Mexico units. Employee benefit costs increased$0.5 million and were offset by lower bonus payouts for the Bakers Squaremanagers due to a change in their incentive program. Village Inn reducedovertime expense by $0.2 million due to our modifying internal processes toprovide our restaurant managers greater control over employee utilization andovertime.

 

***Other operating expenses***increased by $6.2 million, or 6.2%, to $106.2 million in the Combined2003 Period, from $100.0 million in fiscal 2002. Other operating expenses as apercentage of total revenues increased from 26.1% to 27.4% during theseperiods. $2.0 million of this increase was due to increased occupancy expenseresulting from our sale-leaseback transactions. We also increased advertisingprogram expenditures by $1.7 million in an effort to increase customer traffic.In addition, we experienced a $1.2 million increase in utility costs across allof our markets, incurred $0.4 million in repair and maintenance expenses andincurred $0.3 million of incremental pre-opening expense over fiscal 2002 as aresult of new unit openings.

 

***General and administrative expenses***decreased by $0.6 million, or 2.3%, to $26.0million in the Combined 2003 Period, from $26.6 million in fiscal 2002. Generaland administrative expenses expressed as a percentage of total revenuesdeclined from 6.9% to 6.7% during these periods reflective of the higherrevenue and lower costs in the Combined 2003 Period. This decrease wasprimarily the result of a decrease of $1.3 million in bonuses paid inconnection with our corporate management incentive plan, partially offset by a$0.4 million increase in compensation costs associated with options andwarrants and a $0.1 million increase in the cost of providing benefits toemployees.

 

***Operating profit***decreased by $12.4 million, or 49.0%, to $12.9 million for the Combined2003 Period from $25.3 million in fiscal 2002. Operating profit as a percentageof total revenues declined from 6.6% to 3.3% over these periods. The decreasein operating profit and operating margin for the Combined 2003 Period versusfiscal 2002 was primarily attributable to transaction expenses incurred inconnection with the acquisition of our company on June 14, 2003, whichdecreased operating profit by $10.7 million, or 2.7% of total revenues, duringthe Combined 2003 Period. Excluding the impact of the transaction-related costsof $10.7 million and $0.3 million in the Combined 2003 Period and fiscal 2002,respectively, operating profit during the Combined 2003 Period would have been$23.6 million, or 6.2% of total revenues, compared to $25.6 million, or 6.6% oftotal revenues, during fiscal 2002.

 

In addition, thesale-leaseback transaction entered into in June 2003 resulted in additionalcash rent expense of $0.4 million during the period from June 14, 2003 toOctober 26, 2003, and additional noncash rent expenses of $0.3 million whichwere recorded to reflect the estimated fair market value of leases as requiredby purchase accounting, partially offset by a decrease in depreciation expenseof $0.1 million. Additionally, we incurred compensation costs related to theissuance of options to purchase shares of our predecessor’s common stock thatwere $0.4 million greater in the Combined 2003 Period than in fiscal 2002.These increased costs, totaling $1.1 million, decreased operating margin by0.3% during the Combined 2003 Period.

 

***Debt extinguishment costs***of $6.5 million were recorded for the Combined 2003 Period as a resultof costs related to terminating financing arrangements prior to their maturityin connection with the June 2003 acquisition of our company. No such chargeswere incurred for fiscal 2002. Included within the $6.5 million in debtextinguishment costs are a write-off of deferred financing cost of $3.3million, early termination costs of $1.3 million and costs associated withterminating unfavorable derivative instruments of $1.9 million.

 

***Provision for income taxes (benefit)***for the Combined 2003 Period was a benefit of$2.3 million. This benefit reflects the loss before provision for income taxesfor the Combined 2003 Period of $3.9 million and a tax benefit rate of 58.2%.For fiscal 2002, the provision for income taxes of $5.8 million reflects a taxprovision rate of 35.4%. These rates differ from our statutory rate of 39.9%due to tax credits that we earn by paying FICA taxes on employee tips,partially offset by amortization relating to franchise rights that isnondeductible for tax purposes.

 

***Net income (loss)***decreased by $12.1 million to a net loss of $1.6 million for theCombined 2003 Period, from net income of $10.5 million for fiscal 2002. Thisdecrease in profits was primarily the result of $10.7 million in transactionexpenses and $6.5 million in debt elimination costs which were incurred inconnection with the sale of our company.

 

34

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***Preferred stock dividends and accretion***increased by $1.3 million, or 36.1%, to $4.9million for the Combined 2003 Period, from $3.6 million for fiscal 2002, as aresult of the redemption of $36.5 million liquidation preference of MidwayInvestors Holdings Inc. preferred stock that accrued dividends at a rate of8.94% per annum and the issuance of $67.9 million liquidation preference ofpreferred stock of VI Acquisition Corp. that accrue dividends at a rate of10.0% per annum in connection with the June 2003 acquisition.

 

**Liquidityand capital resources**

 

***Cash requirements***

 

Ourprincipal liquidity requirements are to continue to finance our operations,service our debt and fund capital expenditures for maintenance andexpansion.  Cash flow from operations hashistorically been sufficient to finance continuing operations and meet normaldebt service requirements.  However, weare highly leveraged and our ability to repay borrowings at maturity is likelyto depend in part on our ability to refinance the debt when it matures, whichwill be contingent on our continued successful operation of the business aswell as other factors beyond our control, including the debt and capital marketconditions at that time.

 

Our cash balance andworking capital needs are generally low, as sales are made for cash or throughcredit cards that are quickly converted to cash, purchases of food and suppliesand other operating expenses are generally paid within 30 to 60 days afterreceipt of invoices and labor costs are paid bi-weekly.  The timing of our sales collections andvendor and labor payments are consistent with other companies engaged in therestaurant industry.

 

Duringfiscal 2005, we anticipate capital expenditures before build-to-suitconstruction (as discussed below) of approximately $26 million reflecting an accelerationof our unit growth.  Of this amount, $12million is expected to be spent on new store construction, $6 million forremodels and the remainder on capital maintenance and other support relatedprojects.   We may also have capitalexpenditures in fiscal 2005 related to our Bakers Square brand repositioning,although at present such plans have not been finalized.  We currently expect to open an estimated 23to 27 new stores in fiscal 2005.

 

Wemay also be required to make cash payments associated with litigationsettlements.  We expect our maximum netcash outlay for this litigation settlement to be $3.2 million reflectingindemnification of pre-acquisition activities by our predecessor for thebalance of the $6.55 million proposed settlements.

 

Inconnection with our new restaurant development program, we have entered intobuild-to-suit development agreements whereby third parties will purchaseproperty, fund the costs to develop new restaurant properties for us and leasethe properties to us upon completion. Under these agreements, we generally are responsible for theconstruction of the restaurant, and remitting payments to the contractors onthe projects, which are subsequently reimbursed by the property owner.  These amounts advanced and subsequentlyreimbursed are not included in the anticipated capital spending totalsabove.  On October 28, 2004, we hadoutstanding receivables of $4.1 million relating to these types of agreements.  In certain of these agreements, we areobligated to purchase the property in the event that we are unable to completethe construction within a specified time frame, and are also responsible forcost overruns above specified amounts.

 

***Debt and other obligations***

 

InApril 2004, we completed a refinancing of our prior debt including a privateplacement of $126.5 million aggregate principal amount of 101⁄2% senior unsecurednotes maturing in April 2011.   The noteswere issued at a discounted price of 98.791% of face value, resulting inproceeds before transaction costs of $125.0 million.  The senior unsecured notes were issued byVICORP Restaurants, Inc. and are guaranteed by VI Acquisition Corp. and oursubsidiary Village Inn Pancake House of Albuquerque, Inc.

 

35

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Concurrentlywith the issuance of the 101⁄2% senior unsecured notes, we entered into anamended and restated senior secured credit facility consisting of a $15.0million term loan and a $30.0 million revolving credit facility, with a $15.0million sub-limit for letters of credit. As of October 28, 2004, we had issuedletters of credit aggregating $7.3 million and had $1.4 million of borrowingsoutstanding under the senior secured revolving credit facility.  The senior secured revolving credit facilitypermits borrowings equal to the lesser of (a) $30.0 million and (b) 1.2 timestrailing twelve months Adjusted EBITDA (as defined in the senior secured creditagreement) minus the original amount of the senior secured term loan.  Under this formula, as of October 28, 2004, wehad the ability to borrow the full $30 million, less the amount of outstandingletters of credit, under the senior secured revolving credit facility, or $21.3million.   Borrowings under both therevolving credit facility and the term loan bear interest at floating ratestied to either the base rate of the agent bank under the credit agreement orLIBOR rates for a period of one, two or three months, in each case plus amargin that will adjust based on the ratio of our Adjusted EBITDA to totalindebtedness, as defined in the senior secured credit agreement. Bothfacilities are secured by a lien of all of the assets of VICORP Restaurants,Inc., and guaranteed by VI Acquisition Corp. and our subsidiary Village InnPancake House of Albuquerque, Inc. The guarantees also secured by the pledge ofall of the outstanding capital stock of VICORP Restaurants, Inc. by VIAcquisition Corp. The term loan does not require periodic principal payments,but requires mandatory repayments under certain events, including proceeds fromsale of assets, issuance of equity, and issuance of new indebtedness.  Both facilities mature in April 2009.

 

Oursenior secured credit facility and the indenture governing the senior unsecurednotes contain a number of covenants that, among other things, restrict, subjectto certain exceptions, our ability and the ability of our subsidiaries, to sellassets, incur additional indebtedness or issue preferred stock, repay otherindebtedness, pay dividends and distributions or repurchase our capital stock,create liens on assets, make investments, loans or advances, make certainacquisitions, engage in mergers or consolidations, enter into sale-leasebacktransactions, engage in certain transactions with affiliates, amend certainmaterial agreements governing our indebtedness, change the business conductedby us and our subsidiaries and enter into hedging agreements. In addition, oursenior secured credit facility requires us to maintain or comply with a maximumtotal leverage ratio, a minimum interest coverage ratio and a maximum capitalexpenditures limitation.  As of October28, 2004, we were in compliance with these requirements.

 

Weare subject to capital lease obligations related to nine of our leasedproperties. The principal component of our capital lease obligations was $3.7million as of October 28, 2004. These capital leases have expiration datesranging from December 2004 to January 2025. We are also the prime lessee undervarious operating leases for land, building and equipment for company-operatedand franchised restaurants, pie production facilities and locations subleasedto non-affiliated third parties. These leases have initial terms ranging from15 to 35 years and, in most instances, provide for renewal options ranging fromfive to 20 years. These leases expire at various dates through January 2025.

 

Wehave guaranteed certain leases for restaurant properties sold in 1986 andrestaurant leases of certain franchisees. Estimated minimum future rentalpayments remaining under these leases were approximately $2.7 million as ofOctober 28, 2004.

 

OnOctober 28, 2004, our contractual obligations with respect to the above were asfollows:

 
| ** **                       | ** ** | **Payments due by period** | ** ** |
|----------------------------------|------------|----------------------------|------------|
| **(In millions)**                | ** ** | **Total**                  | ** ** | **Less than  one year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **More than  5 years** | ** ** |
| Senior secured credit facility   |       | $                          | 16.4       |   | $ | — |   | $ | — |   | $ | 16.4 |   | $ | — |   |
| 101⁄2% senior unsecured notes |       | 126.5                      |       | — |   | — |   | — |   | 126.5 |   |
| Total long-term debt.            |       | 142.9                      |       | — |   | — |   | 16.4 |   | 126.5 |   |
| Capital lease obligations(1) (2) |       | 7.5                        |       | 0.6 |   | 1.0 |   | 0.9 |   | 5.0 |   |
| Operating lease obligations (2)  |       | 295.0                      |       | 27.3 |   | 49.6 |   | 41.9 |   | 176.2 |   |
| Letters of credit (3)            |       | 7.3                        |       | 7.3 |   | — |   | — |   | — |   |
| Purchase commitments (4)         |       | 5.3                        |       | 5.3 |   | — |   | — |   | — |   |
| Total                            |       | $                          | 458.0      |   | $ | 40.5 |   | $ | 50.6 |   | $ | 59.2 |   | $ | 307.7 |   |

 

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(1)          Amountspayable under capital leases represent gross lease payments, including bothprincipal and interest components.

(2)          Manyof our leases contain provisions that require additional rent paymentscontingent on sales performance and the payment of common area maintenancecharges and real estate taxes.  Amountsin this table do not reflect any of these additional amounts.

 

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(3)          We have letters of credit outstanding primarily to guaranteeperformance under insurance contracts. The letters of credit are irrevocable and have one-year renewable terms.

(4)          We have commitments under contracts for the purchase of property andequipment.  Portions of such contractsnot completed at October 28, 2004 as stated above were not reflected as assets orliabilities in our consolidated financial statements.

 

***Prior indebtedness***

 

Ourprevious credit facilities consisted of a $25.0 million revolving creditfacility, a term A loan, and a term B loan issued pursuant to a creditagreement dated June 13, 2003.  Inaddition, we had outstanding subordinated indebtedness in the originalprincipal amount of $45.0 million issued pursuant to an investment agreementdated June 13, 2003.  The prior termloans and the prior subordinated debt were paid in full from a portion of theproceeds of our senior unsecured notes and our senior secured term loan.  In addition, a portion of these proceeds wereused to pay an early redemption premium of $2.3 million on the subordinateddebt, and to pay $0.2 million to terminate an interest rate swap agreementpursuant to which we agreed to make fixed rate payments in exchange forreceiving quarterly floating rate payments at the three month LIBOR rate thatapplied to the borrowings under our previous senior secured credit facility.  In addition, in connection with therefinancing, we wrote off $4.4 million of unamortized debt financing costs infiscal 2004 related to the prior debt.

 

**Sources and uses of cash**

 

Thefollowing table presents a summary of our cash flows from operating, investingand financing activities for the periods indicated:

** **
| ** **                                            | ** ** | **Predecessor** | ** ** | ** **       | ** ** | ** **      | ** ** | ** **      | ** ** |
|-------------------------------------------------------|------------|-----------------|------------|------------------|------------|-----------------|------------|-----------------|------------|
| ** **                                            | ** ** | **Fiscal year** | ** ** | **Period ended** | ** ** | **Combined**    | ** ** | **Fiscal year** | ** ** |
| ** **                                            | ** ** | **October 27,** | ** ** | **June 13,**     | ** ** | **October 26,** | ** ** | **2003**        | ** ** | **October 28,** | ** ** |
| **(In millions)**                                     | ** ** | **2002**        | ** ** | **2003**         | ** ** | **2003**        | ** ** | **Period**      | ** ** | **2004** | ** ** |
| Net cash provided by operating activities             |       | $               | 29.1       |             | $          | 12.3            |       | $               | 5.6        |   | $ | 17.9 |   | $ | 22.5 |   |
| Net cash used for investing activities                |       | (10.2           | )          | (11.1            | )          | (138.7          | )          | (149.8          | )          | (19.3 | ) |
| Net cash provided by (used for) financing  activities |       | (8.4            | )          | (8.2             | )          | 129.4           |       | 121.2           |       | (7.2 | ) |
| Net increase (decrease) in cash and cash  equivalents |       | $               | 10.5       |             | $          | (7.0            | )          | $               | (3.7       | ) | $ | (10.7 | ) | $ | (4.0 | ) |

 

***Operating activities***

 

Forfiscal 2004, cash flows from operating activities increased $4.6 millioncompared to the Combined 2003 Period. The increase resulted primarily from the use of $11.6 million ofoperating cash in the Combined 2003 Period for transaction and debtextinguishment costs compared to $2.6 million in fiscal 2004.  This was partially offset in part by $4.6 millionof higher interest payments in fiscal 2004 due to the debt incurred as a resultof the June2003 acquisition.

 

For the Combined 2003Period, cash from operations decreased $11.2 million largely from the use of$11.6 million of operating cash for the transaction and debt extinguishmentcosts incurred in connection with the June 2003 acquisition.

 

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***Investing activities***

 

Ourcapital expenditures, excluding amounts related to build-to-suits, for the lastthree fiscal years were comprised of the following:

 
| **(In millions)**                           | ** ** | **Fiscal  2002** | ** ** | **Combined  2003  Period** | ** ** | **Fiscal  2004** | ** ** |
|---------------------------------------------|------------|------------------|------------|----------------------------|------------|------------------|------------|
| New store construction                      |       | $                | 1.0        |                       | $          | 6.1              |       | $ | 3.5 |   |
| Existing store remodel and refurbishment    |       | 2.2              |       | 2.7                        |       | 5.8              |       |
| Point-of-sale computer roll-out             |       | 1.3              |       | 5.9                        |       | —           |       |
| Store capital maintenance                   |       | 3.4              |       | 3.6                        |       | 4.3              |       |
| Pie production facility capital maintenance |       | 0.8              |       | 0.6                        |       | 1.4              |       |
| Corporate related                           |       | 0.5              |       | 0.6                        |       | 0.9              |       |
| Other                                       |       | 1.4              |       | —                     |       | —           |       |
| Purchase of property and equipment          |       | $                | 10.6       |                       | $          | 19.5             |       | $ | 15.9 |   |

 

In addition to the capitalexpenditures noted above, we spent $6.8 million and $1.3 million forbuild-to-suit construction projects in fiscal 2004 and the Combined 2003Period, respectively.  We receivedbuild-to-suit reimbursements from our landlords of $2.7 million and $1.3million in fiscal 2004 and the Combined 2003 Period, respectively.   Also, we used $153.3 million of cash in theCombined 2003 Period for the June 2003 acquisition of our company and $3.8million for our acquisition of Village Inn Pancake House of Albuquerque, Inc.,a former Village Inn franchisee.  Thisspending was partially offset by $17.8 million received from the sale-leasebackof certain restaurant properties and $6.5 million received from other propertydispositions.

 

***Financing activities***

 

Weused cash in financing activities of $7.2 million during fiscal 2004,consisting principally of the net proceeds from our April 2004 debt refinancingand $1.4 million of borrowing under our revolving credit facility, offset bythe periodic principal payments on the previous term debt and the repayment of$9.8 million on our previous revolving line of credit.

 

During the Combined 2003Period, we generated cash from financing activities of $139.5 million fromborrowings under our senior secured credit facility and $72.8 million from theissuance of new capital stock in connection with the June 2003 acquisition, allof which was used to repay existing indebtedness and partially fund theacquisition. We also generated $5.3 million from borrowings under our seniorsecured revolving credit facility. During the Combined 2003 Period we used $2.8million of cash to repay a portion of our senior secured term loans. We alsohad $5.0 million of debt financing costs incurred in the June 2003 acquisition.In addition, we used cash of $1.0 million to redeem the shares of our formerchief executive officer during the Combined 2003 Period.

 

In fiscal 2002, we used cashin financing activities of $8.4 million consisting of scheduled principalpayments on our debt and capital leases.

 

**Cashmanagement**

 

We have historically fundedthe majority of our capital expenditures out of cash from operations. We haveon occasion obtained, and may in the future obtain, capitalized lease financingfor certain expenditures related to equipment. Our investment requirements fornew restaurant development include requirements for acquisition of land,building and equipment.  Historically wehave either acquired all of these assets for cash, or purchased building andequipment assets for cash and acquired a leasehold interest in land. We haveentered into sale-leaseback arrangements for many of the land and buildingassets that we have purchased in the past. Since the initial net cashinvestment required for leased units is significantly lower than for ownedproperties, we intend to focus on leasing sites for future growth so that weonly have to fund the equipment portion of our new restaurant capital costsfrom our cash flows. We believe that this will reduce our upfront cashrequirements associated with new restaurant growth and enable us to increaseour return on these investments, although it will result in significant longterm obligations under either operating or capital leases.

 

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**New accounting pronouncements**

 

InNovember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs,an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies the accounting for abnormal amounts of idle facilityexpense, freight, handling costs and wasted material and requires that suchitems be recognized as current-period charges regardless of whether they meetthe “so abnormal” criterion outlined in ARB No. 43.  SFAS No. 151 also introduces the concept of “normalcapacity” and requires the allocation of fixed production overheads toinventory based on the normal capacity of the production facilities.  Unallocated overheads must be recognized asan expense in the period incurred.  SFASNo. 151 is effective for inventory costs incurred during fiscal years beginningafter June 15, 2005.  While we are stillevaluating the impact of this statement, we do not currently believe it willhave a material impact on our consolidated financial statements.

 

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-basedPayment” which replaces the prior SFAS No. 123, “Accounting for Stock-BasedCompensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issuedto Employees”.  SFAS 123 (revised 2004)requires compensation costs related to share-based payment transactions to berecognized in the financial statements. With limited exceptions, the amount of compensation cost will bemeasured based on the grant-date fair value of the equity or liabilityinstruments issued.  In addition,liability awards will be remeasured each reporting period.  Compensation cost will be recognized over theperiod that an employee provides services in exchange for the award.  This new standard will become effective for usJuly 8, 2005, and we are still evaluating the impact of this statement.

 

**Item 7A.****         Quantitative and Qualitative Disclosures about Market Risk.**

 

Weare exposed to market risk primarily from changes in interest rates and changesin food commodity prices.

 

We are subject to changes ininterest rates on borrowings under our senior secured credit facility that bearinterest at floating rates.  As ofOctober 28, 2004, $16.4 million, or 11.3% of our total debt and capitalizedlease obligations of $145.2****million,bears interest at a floating rate.  Ahypothetical one hundred basis increase in interest rates for our variable rateborrowings, as of October 28, 2004, would increase our future interest expenseby approximately $0.2 million per year.  This sensitivity analysis does not factor in potential changes in thelevel of our variable interest rate borrowings, or any actions that we mighttake to mitigate our exposure to changes in interest rates.

 

Manyof the ingredients purchased for use in the products sold to our guests aresubject to unpredictable price volatility outside of our control.  We try to manage this risk by entering intoselective short-term agreements for the products we use most extensively.  Also, we believe that our commodity cost riskis diversified as many of our food ingredients are available from severalsources and we have the ability to modify recipes or vary our menu itemsoffered.  Historically, we have also beenable to increase certain menu prices in response to food commodity price increasesand believe the opportunity may exist in the future.  To compensate for a hypothetical priceincrease of 10% for food ingredients, we would need to increase prices chargedto our guests by an average of approximately 2.7%.  We have not historically used financialinstruments to hedge our commodity ingredient prices.

 

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**Item 8.****            Financial Statements and Supplementary Data.**

 

Theinformation required under this Item 8 is set forth on pages F-1 through F-32of this Report.

 

**Item 9.****            Changes in and Disagreements with Accountants onAccounting and Financial Disclosure.**

 

Notapplicable.

 

**Item 9A****.         Controls and Procedures.**

 

**Evaluationof disclosure controls and procedures**

 

Within the 90-dayperiod prior to the filing date of this report, our management, under thesupervision of our Chief Executive Officer and Chief Financial Officer, carriedout an evaluation of the effectiveness of the design and operation of ourdisclosure controls and procedures pursuant to Rules 13a-14 and 15d-14 underthe Securities Exchange Act of 1934 (the “Exchange Act”), as amended.  Based upon their evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures are effective in alerting them timely to materialinformation required to be included in our Exchange Act filings.  There have not been any significant changesin our internal controls or in other factors that could significantly affectthese controls subsequent to the date of the evaluation.

 

**Limitationson the effectiveness of controls**

 

A control system,no matter how well designed and operated, can provide only reasonable, notabsolute, assurance that the control system’s objectives will be met.  Further, the design of a control system mustreflect the fact that there are resource constraints, and the benefits ofcontrols must be considered relative to their costs.  Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, with the company have beendetected.  These inherent limitationsinclude the realities that judgments in decision-making can be faulty, thatbreakdowns can occur because of simple errors or mistakes, and that controlscan be circumvented by the acts of individuals or groups.  Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

 

**Item 9B.****         Other Information.**

 

Not applicable.

 

**PART III**

 

**Item 10.****         Directors and Executive Officers of the Registrant.**

 

The following table setsforth certain information regarding our Board of Directors and executiveofficers as of October 28, 2004.

 
| **Name**              | ** ** | **Age** | ** ** | **Position**                          |
|-----------------------|------------|---------|------------|---------------------------------------|
| Debra Koenig          |       | 52      |       | Chief  Executive Officer and Director |
| Robert Kaltenbach     |       | 59      |       | Chief  Operating Officer              |
| Anthony Carroll       |       | 53      |       | Chief  Financial Officer              |
| Walter Van Benthuysen |       | 65      |       | Chairman of  the Board and Director   |
| Robert Cummings       |       | 57      |       | Director                              |
| Wayne Kocourek        |       | 67      |       | Director                              |
| Michael Solot         |       | 40      |       | Director                              |

 

*Debra Koenig*has been our Chief Executive Officer and one of our directors sinceJune 2003. She joined us after a 25 year career with McDonald’s Corporation.Ms. Koenig’s most recent position was President of the Southeast Division from1997 to 2001. In this role she was responsible for McDonald’s largest U.S.division, with $4 billion in sales, consisting of approximately 2,675franchised restaurants and 290 company-operated restaurants in 14 states.

 

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*Robert Kaltenbach*has been our Chief Operating Officer since November 2000, after servingas President of our Village Inn division since December 1994. Mr. Kaltenbachbegan his career with us in 1988 as Vice President of Franchise Operations ofVillage Inn. Mr. Kaltenbach’s professional career includes over 33 years ofmanagement experience in several aspects of the foodservice industry, includingextensive experience with new concept development and positioning.

 

*Anthony Carroll*has been our Chief Financial Officer since February 2004. From June2000 until December 2002 Mr. Carroll was Chief Financial Officer ofProcureZone.com, LLC, which provided an Internet-based procurement tool for theutility industry. Mr. Carroll was Chief Financial Officer for Au Bon Pain Co.,Inc. and its successor, ABP Corporation, from October 1988 until June 2000. Mr.Carroll began his career with PriceWaterhouseCoopers and is a Certified PublicAccountant.

 

*Walter Van Benthuysen*has been one of our directors and Chairman ofthe Board since June 2003. Mr. Van Benthuysen served as a member of the Boardof Directors of Value Added Bakery Holding Company and as its Chairman of theBoard from December 1998 until December 2003. He also served as Chairman of theBoard of Hazelwood Farms, a subsidiary of Supervalu, Inc., from September 1995to December 1998. Previously, Mr. Van Benthuysen was the Executive VicePresident of Quaker Oats Company until he retired in October 1995.  Mr. Van Benthuysen is also a director of ColoradoBaking Company and Nonni’s Food Company, Inc.

 

*Robert Cummings*has been one of our directors since June 2003. Mr. Cummings has been aManaging Director of Wind Point Advisors LLC, a private equity investment firm,since 1987. Investment funds affiliated with Wind Point Advisors LLC controlour company. He is also a director of Procyon Technologies, Inc., Nonni’s FoodCompany, Inc. and United Subcontractors, Inc.

 

*Wayne Kocourek*has been one of our directors since June 2003. He is Chairman, ChiefExecutive Officer and Managing Member of Mid Oaks Investments LLC, a privateequity investment company that he founded in 1997. He is also currently adirector of Little Rapids Corporation, Liquid Container Inc., Profile ProductsLLC, Environmental Materials LLC and Wilkinson Industries Inc.

 

*Michael Solot*has been one of our directors since June 2003. He has been employed byWind Point Advisors LLC, a private equity investment firm, since 1999, mostrecently as a Principal. Investment funds affiliated with Wind Point AdvisorsLLC control our company. Prior to joining Wind Point, Mr. Solot spent six yearsin various operating and strategy positions with Werner Ladder Co. Mr. Solothas also held positions as an Associate with Goldman, Sachs and Co. and as aConsultant with Bain & Co.

 

Ms.Koenig, Mr. Van Benthuysen, Mr. Cummings, Mr. Solot and Mr. Kocourek wereelected as directors in June 2003 pursuant to the stockholders agreementdescribed in “Item 13. Certain Relationships and Related Party Transactions.”Our directors serve until their successors have been elected and qualified oruntil their earlier resignation or removal. Our executive officers are electedby and serve at the discretion of our Board of Directors.

 

OurBoard of Directors has an Audit Committee that is responsible, among otherthings, for overseeing our accounting and financial reporting processes andaudits of our financial statements. The Audit Committee is comprised solely ofMessrs. Kocourek and Van Benthuysen. Our Board of Directors has determined thatMr. Kocourek qualifies as an “audit committee financial expert” and that Mr.Van Benthuysen is “independent” as defined in federal securities laws.

 

VICORPRestaurants, Inc., VI Acquisition Corp. and Village Inn Pancake House ofAlbuquerque, Inc. have entered into separate indemnification agreements withtheir directors under which each company has agreed to indemnify, and toadvance expenses to, each of that company’s directors to the fullest extentpermitted by applicable law with respect to liabilities they may incur in theircapacities as that company’s directors and officers.

 

Wehave adopted a Business Conduct Policy effective as of January 24, 2005 that isapplicable to all of our Board members, employees and executive officers,including our Chief Executive Officer (Principal Executive Officer) and ChiefFinancial Officer (Principal Financial Officer and Accounting Officer).

 

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**Item 11.****                 ExecutiveCompensation.**

 

The following table discloses the compensation awarded by us forservices rendered during our last two fiscal years to the chief executiveofficer and to the other named executive officers.

 

**Summary compensation table**

 
| ** **                     | ** ** | ** **              | ** ** | **Long-term  Compensation** | ** ** | ** **     | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------------|------------|----------------|------------|
| ** **                     | ** ** | ** **              | ** ** | **Awards**                  | ** ** | ** **     | ** ** |
| ** **                     | ** ** | ** **              | ** ** | ** **                  | ** ** | ** **     | ** ** | **Restricted** | ** ** | **Securities** | ** ** | ** ** | ** ** |
| **Name and principal**         | ** ** | **Annual compensation** | ** ** | **stock**                   | ** ** | **underlying** | ** ** | **All other** | ** ** |
| **position**                   | ** ** | **Year**                | ** ** | **Salary**                  | ** ** | **Bonus**      | ** ** | **awards(1)** | ** ** | **options(2)** | ** ** | **compensation** | ** ** |
| Debra Koenig(3)                |       | 2004                    |       | $                           | 420,757    |           | $          | 90,000 |   | — |   | — |   | $ | 61,381 | (4) |
| Chief Executive Officer        |       | 2003                    |       | 251,505                     |       | —         |       | — |   | — |   | 63,557 | (5) |
| Joseph Trungale                |       | 2004                    |       | —                      |       | —         |       | — |   | — |   | — |   |
| Former Chief Executive Officer |       | 2003                    |       | 339,066                     |       | —         |       | — |   | — |   | 1,046,246 | (6) |
| Robert Kaltenbach              |       | 2004                    |       | 434,872                     |       | 76,003         |       | — |   | — |   | 6,312 | (7) |
| Chief Operating Officer        |       | 2003                    |       | 430,560                     |       | 71,782         |       | — |   | — |   | 506,308 | (8) |
| Anthony Carroll(9)             |       | 2004                    |       | 165,796                     |       | 23,381         |       | — |   | — |   | 70,940 | (10) |
| Chief Financial Officer        |       | 2003                    |       | —                      |       | —         |       | — |   | — |   | — |   |
| William Hoppe                  |       | 2004                    |       | —                      |       | —         |       | — |   | — |   | — |   |
| Former Chief Financial Officer |       | 2003                    |       | 107,689                     |       | —         |       | — |   | — |   | 116,633 | (11) |
|                                |            |                         |            |                             |            |                |            |  |  |  |  |  |  |  |  |  |

 

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(1)           The shares represented by the restricted stockawards were purchased by the executives at a price equal to $1.00 per share,the fair market value on the date of each purchase, and are subject to certainrepurchase rights upon termination of employment.   The number of restricted shares held by Ms.Koenig at the end of 2003 was 86,250 and the dollar value of such shares at theend of last year was $86,250, which is equal to the total amount paid for theshares by Ms. Koenig. The number of restricted shares held by Ms. Koenigat the end of 2004 was 89,825 and the dollar value of such shares at the end oflast year was $89,825, which is equal to the total amount paid for the sharesby Ms. Koenig.   The number ofrestricted shares held by Mr. Kaltenbach at the end of 2003 and 2004 was 45,000and the dollar value of such shares at the end of each such year was $45,000,which is equal to the total amount paid for the shares byMr. Kaltenbach.  The number ofrestricted shares held for Mr. Carroll at the end of 2004 was 14,295 and thedollar value of such shares at the end of such year was $14,295, which is equalto the total amount paid for the shares by Mr. Carroll.  Dividends are paid on shares represented bythe restricted stock awards.    All ofthese shares vest over a five year period at the rate of 20% per year,beginning on the respective date of purchase, and will become fully vested upona change in control.

 

(2)           Prior to 2003, Mr. Kaltenbach and Mr. Trungalewere granted options to purchase shares of Midway Investors Holdings Inc.  Upon the acquisition of Midway by VIAcquisition Corp., Mr. Kaltenbach and Mr. Trungale exchanged theiroptions to purchase shares of Midway for options to purchase preferred stock ofVI Acquisition Corp.  As a result of suchexchange, Mr. Kaltenbach has an option to purchase 458.57 shares of thepreferred stock of VI Acquisition Corp. at an exercise price of $24.80 pershare.  The option is fully vested and exercisable.  Mr. Trungale received an option topurchase 947.39 shares of the preferred stock of VI Acquisition Corp.  Mr. Trungale’s option is no longeroutstanding.

 

(3)           Ms. Koenig was named our Chief ExecutiveOfficer on June 13, 2003.

 

(4)           Consists in 2004 of payments toMs. Koenig totaling $60,407 for relocation expenses and our payment of$975 in term life insurance premiums on Ms. Koenig’s behalf.

 

(5)           Consists in 2003 of payments toMs. Koenig totaling $62,938 for relocation expenses and our payment of$619 in term life insurance premiums on Ms. Koenig’s behalf.

 

(6)           Mr. Trungale’s employment terminated onSeptember 2, 2003.  Consists in 2003 ofseverance payments totaling $14,531, a change in control payment of $1,000,000,payment of accrued vacation totaling $27,945, payment of COBRA premiums of$1,172, and our payment of $2,600 term life insurance premiums on Mr. Trungale’sbehalf.

 

(7)           Consists in 2004 of our contribution of $4,000to Mr. Kaltenbach’s 401(k) plan maintained by us and our payment of $2,312 interm life insurance premiums on Mr. Kaltenbach’s behalf.

 

(8)           Consists in 2003 of our contribution of $4,000to Mr. Kaltenbach’s 401(k) plan maintained by us, a change in control paymentof $500,000, and our payment of $2,308 in term life insurance premiums on Mr.Kaltenbach’s behalf.

 

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(9)           Mr. Carroll was named our Chief FinancialOfficer on February 12, 2004.

 

(10)         Consists in 2004 of payments toMr. Carroll totaling $70,582 for relocation expenses and our payment of$358 in term life insurance premiums on Mr. Carroll’s behalf.

 

(11)         Mr. Hoppe’s employment terminated on July 31,2003.  Consists in 2003 of severancepayments totaling $112,500, payment of accrued vacation totaling $3,654, and ourpayment of $479 in term life insurance provisions on Mr. Hoppe’s behalf.

 

**CompensationCommittee Interlocks and Insider Participation**

 

Our compensation committee iscurrently comprised of Messrs. Robert Cummings and Walter Van Benthuysen. Noneof these individuals has been at any time an officer or employee of ourcompany. No member of our compensation committee serves as a member of theboard of directors or compensation committee of any entity that has one or moreexecutive officers serving as a member of our board of directors orcompensation committee.

 

**Employment and severance agreements**

 

***Employment contracts***

 

We have entered into employment agreements with Ms. Koenig, Mr.Kaltenbach and Mr. Carroll.  UnderMs. Koenig’s employment agreement, she is entitled to receive a minimum basesalary of $400,000, less applicable tax withholding, as well as an annualperformance bonus targeted at 50% of base salary.  The annual performance bonus is based uponachievement of our annual budget that is determined by our Board in its solediscretion.

 

If Ms. Koenig’s employment is terminated by us without “cause”, she isentitled to a severance payment equal to 12 months of her base salary, whichseverance is payable over the 12 month period immediately following thetermination of her employment.  Inaddition, during the 12 month severance period, we will pay the cost of Ms.Koenig’s health care continuation coverage under COBRA at the same rate that wepay for health insurance for our active employees, if Ms. Koenig elects COBRAcontinuation coverage.  Ms. Koenig willalso be entitled to the foregoing severance payments if she terminates heremployment for “good reason,” which is generally defined as a diminution in herduties or position that is not remedied after notice or a breach of heremployment contract by us (which includes any decrease in Ms. Koenig’s basesalary without her consent or a required relocation outside of the Denver area)that is not remedied after notice.

 

Mr. Kaltenbach’s employment agreement is substantially the same as Ms.Koenig’s, except that he is entitled to receive a minimum base salary of$430,560, less applicable tax withholding. In addition, if Mr. Kaltenbach’s employment is terminated by us without “cause”(or by him for “good reason”), his severance payment will be an amount equal to$500,000, payable in equal installments over a period of 12 months.  In addition, Mr. Kaltenbach received anoption to purchase 458.57 shares of our preferred stock at an exercise price of$24.80 per share.  The option is fullyvested and will expire on June 12, 2013, subject to earlier termination in theevent Mr. Kaltenbach’s employment is terminated.

 

Mr. Carroll’s employment agreement is substantially the same as Ms.Koenig’s, except that he is entitled to receive a minimum annual base salary of$225,000, less applicable tax withholding, and his annual performance bonus istargeted at 40% of base salary.  Inaddition, if Mr. Carroll’s employment is terminated by us without “cause” (orby him for “good reason”), he is entitled to receive as severance thecontinuation of his base salary then in effect for a period of one month foreach month in which he was employed by us, up to a maximum of 12 months,payable in accordance with our payroll policy.

 

Ms. Koenig, Mr. Kaltenbach and Mr. Carroll are also each subjectto noncompetition restrictions for a period of at least twelve months followingtermination of their employment and nonsolicitation restrictions for a periodof two years following employment termination. We may, in our discretion, extend the noncompetition period up to amaximum period of twelve additional months by similarly extending the periodfor which they are entitled to receive severance.

 

***Managementagreements***

 

Ms. Koenig, Mr. Kaltenbach****andMr. Carroll have entered into certain Management Agreements with us pursuant towhich they purchased restricted shares of our common stock at a price equal to$1.00 per share.  The shares vest over aperiod of five years at the rate of 20% per year and are subject to certainrepurchase rights upon termination of employment.  Upon termination of employment, all vestingceases and the unvested shares may be repurchased by us at their original costand the vested shares may be repurchased at fair market value (unlesstermination is for “cause” or voluntarily by the employee without “good reason”,in which event all of the shares may be repurchased by us at the lesser oforiginal cost or fair market value).  Inaddition, pursuant to the Management Agreements, following the termination ofMs. Koenig’s, Mr. Kaltenbach’s or Mr. Carroll’s employment, we may elect, or,in the event of their deaths, their respective estates may compel us, torepurchase certain shares of our preferred stock and common stock previouslyacquired by Ms. Koenig, Mr. Kaltenbach and Mr. Carroll.  The purchase price for such shares will beequal to fair market value with respect to the common stock and original costwith respect to the preferred stock, unless the purchase is pursuant to Ms. Koenig’s,Mr. Kaltenbach’s or Mr. Carroll’s put right following death, in which casethe purchase price will be the lesser of the foregoing amounts or the originalcost of the shares.

 

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*** ***

***Severance agreements***

 

We entered into severance agreements with Mr. William Hoppe, our formerChief Financial Officer, and with Mr. Joseph Trungale, our former President andChief Executive Officer.  Mr. Hoppe’semployment terminated on June 27, 2003. Pursuant to the terms of his agreement, we continued to pay Mr. Hoppehis base salary until December 26, 2003. In addition, we paid a portion of the cost of Mr. Hoppe’s health carecontinuation coverage under COBRA until October 31, 2003.  In exchange for these severance payments, Mr.Hoppe executed a release of all claims against us.  Mr. Hoppe also is subject to an agreementthat prohibits him from competing against us for a period of 12 monthsfollowing the termination of his employment.

 

Mr. Trungale’s employment terminated on September 2, 2003.  Pursuant to the terms of his severanceagreement, we continued to pay Mr. Trungale his base salary and a portion ofthe cost of his health care continuation coverage under COBRA until March 2,2004.  In addition, we exercised our rightto repurchase certain shares of our common stock and preferred stock that hadbeen previously acquired by Mr. Trungale. The aggregate purchase price paid to Mr. Trungale in connection withsuch repurchase was approximately $1,000,000. In exchange for his severance payments, Mr. Trungale executed a releaseof all claims against us.   Mr. Trungaleis subject to an agreement that prohibits him from soliciting our employees orcustomers for a period of two years following the termination of his employment.

 

**Item 12.****                 SecurityOwnership of Certain Beneficial Owners and Management.**

 

All of theoutstanding capital stock of VICORP Restaurants, Inc. is held by VI AcquisitionCorp. The following table sets forth information with respect to the beneficialownership of all of the common stock of VI Acquisition Corp. as of October 28,2004 by:

 

•      eachperson (or group of affiliated persons) who is known by us to beneficially own5% or more of VI Acquisition Corp.’s common stock;

•      eachof the named executive officers;

•      eachof our directors; and

•      allof our directors and executive officers as a group.

 

To ourknowledge, each of the holders of shares listed below has sole voting andinvestment power as to the shares owned unless otherwise noted. Our equitysecurities are privately held and no class of our voting securities isregistered pursuant to Section 12 of the Exchange Act.  The information set forth herein does notdescribe the ownership of our preferred stock, which is nonvoting.

 
| **Name and address(1)**                                                | ** ** | **Amount and nature of  beneficial ownership** | ** ** | **Percentage of outstanding  voting securities (2)** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------|------------|
| Wind Point Partners V, L.P.(3)                                         |       | 682,403                                        |       | 48.0                                                 | %          |
| Wind Point Partners IV, L.P.(4)                                        |       | 258,289                                        |       | 18.2                                                 | %          |
| Mid Oaks Investments LLC(5)                                            |       | 171,939                                        |       | 12.1                                                 | %          |
| Debra Koenig                                                           |       | 108,905                                        |       | 7.7                                                  | %          |
| Robert Kaltenbach                                                      |       | 52,795                                         |       | 3.7                                                  | %          |
| Anthony Carroll                                                        |       | 14,295                                         |       | 1.0                                                  | %          |
| Walter Van Benthuysen                                                  |       | 29,695                                         |       | 2.1                                                  | %          |
| Robert Cummings(3)(4)(6)                                               |       | 947,690                                        |       | 66.7                                                 | %          |
| Wayne Kocourek(7)                                                      |       | 171,939                                        |       | 12.1                                                 | %          |
| Michael Solot                                                          |       | —                                         |       | —                                               |       |
| All executive officers and directors as a  group (seven persons)(6)(7) |       | 1,325,319                                      |       | 93.2                                                 | %          |

 

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(1)     The addresses for the beneficial owners andcertain directors and executive officers are as follows: for Wind PointPartners V, L.P., Wind Point Partners IV, L.P., and Mr. Cummings, One Towne Square,Suite 780, Southfield, Michigan 48076; for Mr. Solot, 676 North MichiganAvenue, Suite 3700, Chicago, Illinois 60611; for Mid Oaks Investments LLC andMr. Kocourek, 750 Lake Cook Road, Suite 440, Buffalo Grove, Illinois 60089; forMr. Van Benthuysen, 17 Tartan Lakes Drive, Westmont, Illinois 60559; and foreach other director or executive officer, c/o VICORP Restaurants, Inc., 400West 48th Avenue, Denver, Colorado 80216.

 

(2)     As of October 28, 2004, VI Acquisition Corp.had 1,421,800 issued and outstanding shares of common stock.

 

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(3)     Wind Point Investors V, L.P. is the generalpartner of Wind Point Partners V, L.P. (“WPP V”). Wind Point Advisors LLC isthe general partner of Wind Point Investors V, L.P., and therefore possessessole voting and investment power with respect to all of the common shares heldby WPP V. Mr. Cummings, as a managing member of Wind Point Advisors LLC, may bedeemed to beneficially own the common shares held by WPP V. Mr. Cummingsdisclaims beneficial ownership of any such shares in which he does not have apecuniary interest.

 

(4)     Wind Point Investors IV, L.P. is the generalpartner of Wind Point Partners IV, L.P. (“WPP IV”). Wind Point Advisors LLC isthe general partner of Wind Point Investors IV, L.P., and therefore possessessole voting and investment power with respect to all of the common shares heldby WPP IV. Mr. Cummings, as a managing member of Wind Point Advisors LLC, maybe deemed to beneficially own the common shares held by WPP IV. Mr. Cummingsdisclaims beneficial ownership of any such shares in which he does not have apecuniary interest.

 

(5)     Includes 4,298 shares held by Donald Piazzaand 1,289 shares held by Matthew Lynn for which Mid Oaks Investments LLC (“MidOaks”) holds sole voting power. Mr. Kocourek, as the Chairman, Chief ExecutiveOfficer and managing member of Mid Oaks may be deemed to beneficially own thecommon shares held by Mid Oaks. Mr. Kocourek disclaims beneficial ownership ofany such shares in which he does not have a pecuniary interest.

 

(6)     Wind Point Investors IV, L.P. is the generalpartner of Wind Point IV Executive Advisor Partners, L.P. (“WPP IV EAP”). WindPoint Advisors LLC is the general partner of Wind Point Investors IV, L.P., andtherefore possesses sole voting and investment power with respect to all of thecommon shares held by WPP IV EAP. Wind Point Investors IV, L.P. is the generalpartner of Wind Point Associates IV, L.P. (“WPP Associates IV”). Wind PointAdvisors LLC is the general partner of Wind Point Investors IV, L.P., andtherefore possesses sole voting and investment power with respect to all of thecommon shares held by WPP Associates IV. Wind Point Investors V, L.P. is thegeneral partner of Wind Point V Executive Advisor Partners, L.P. (“WPP V EAP”).Wind Point Advisors LLC is the general partner of Wind Point Investors V, L.P.,and therefore possesses sole voting and investment power with respect to all ofthe common shares held by WPP V EAP. Includes 947,690 shares held by WPP V, WPPIV, WPP IV EAP, WPP Associates IV, WPP V EAP and Wind Point Advisors LLC thatMr. Cummings may be deemed to beneficially own. Mr. Cummings disclaimsbeneficial ownership of any such shares in which he does not have a pecuniaryinterest.

 

(7)     Includes 171,939 shares held by Mid Oaks thatMr. Kocourek may be deemed to beneficially own. Mr. Kocourek disclaimsbeneficial ownership of any such shares in which he does not have a pecuniaryinterest.

 

**Item 13.****                 CertainRelationships and Related Party Transactions.**

 

**Professionalservices agreement**

 

In June 2003,VI Acquisition Corp. entered into a professional services agreement with WindPoint Investors IV, L.P. and Wind Point Investors V, L.P. pursuant to whichthey provide services relating to corporate strategy, acquisition anddivestiture strategy and advice regarding debt and equity financings. Inexchange for such services, Wind Point Investors IV, L.P. is entitled to anannual management fee of $231,668 plus its reasonable out-of-pocket expenses,and Wind Point Investors V, L.P. is entitled to an annual management fee of$618,332 plus its reasonable out-of-pocket expenses. In addition, uponrepayment in full of all amounts owing under VI Acquisition Corp.’s priorsenior secured credit agreement and its prior subdebt credit agreement, WindPoint Investors IV, L.P. and Wind Point Investors V, L.P. was paid a fee equalto the sum of $250,000 plus the product of $70,000 multiplied by the result ofa fraction, the numerator of which is the number of days from June 13, 2003until such repayment and the denominator of which is 365. We paid Wind PointInvestors IV, L.P. and Wind Point Investors V, L.P. approximately $309,000pursuant to this provision upon repayment of our prior senior credit facility inconnection with the April 2004 refinancing.

 

Theprofessional services agreement will continue until the occurrence of a changeof control of VI Acquisition Corp.; provided that if at such time VIAcquisition Corp. pays in full all amounts owing under its existing seniorsecured credit facility and mezzanine credit agreement, the professionalservices agreement shall remain in effect as long as VI Acquisition Corp.’scurrent stockholders own at least 10% of the common stock or preferred stock ofVI Acquisition Corp. The professional services agreement, however, may beterminated by VI Acquisition Corp. if either Wind Point Investors IV, L.P. orWind Point Investors V, L.P. is in material breach and has not cured suchbreach within 60 days of notice thereof. In June 2003, VI Acquisition Corp.paid Wind Point Investors IV, L.P. professional service fees of $89,122 andpaid Wind Point Investors V, L.P. professional service fees of $234,248. VIAcquisition Corp. also paid Wind Point Investors IV, L.P. and Wind PointInvestors V, L.P. expense reimbursement of $22,208 in 2003. The professionalservices agreement contains customary indemnification provisions in favor ofWind Point Investors IV, L.P., Wind Point Investors V, L.P. and theiraffiliates. Mr. Cummings is a managing director and Mr. Solot is a principal ofWind Point Advisors LLC, an affiliate of Wind Point Investors IV, L.P. and WindPoint Investors V, L.P.

 

45

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**Additionalequity issuances**

 

In November2003, Wind Point Partners IV, L.P. purchased 1,324 shares of our common stockfor $1,324 and 61.075 shares of our series A preferred stock for $61,075, WindPoint Partners V, L.P. purchased 3,520 shares of our common stock for $3,520and 162.331 shares of our series A preferred stock for $162,331, Wind Point IVExecutive Advisor Partners, L.P. purchased ten shares of our common stock for$10 and 0.459 shares of our series A preferred stock for $459, Wind PointAssociates IV, LLC purchased five shares of our common stock for $5 and 0.226shares of our series A preferred stock for $226, Mid Oaks Investments LLCpurchased 629 shares of our common stock for $629 and 29.028 shares of ourseries A preferred stock for $29,028 and Walter Van Benthuysen purchased 72 sharesof our common stock for $72 and 3.325 shares of our series A preferred stockfor $3,325.

 

In Februaryand March 2004, Walter Van Benthuysen purchased 10,000 shares of our commonstock for $10,000, Debra Koenig purchased 3,575 shares of our common stock for$3,575 and Anthony Carroll purchased 14,295 shares of our common stock for$14,295.

 

**Transactionfees in connection with the June 2003 acquisition**

 

In June 2003,VI Acquisition Corp. entered into a stock purchase agreement with Wind PointPartners IV, L.P., Wind Point Partners V, L.P., Wind Point IV Executive AdvisorPartners, L.P., Wind Point Associates IV, LLC and certain other parties,including Robert Kaltenbach, pursuant to which VI Acquisition Corp. issuedcommon stock and series A preferred stock. In exchange for certain services inconnection with the capitalization of VI Acquisition Corp. and VI AcquisitionCorp.’s purchase of all of the capital stock of Midway Investors Holdings Inc.,VI Acquisition Corp. paid Wind Point Partners IV, L.P. and Wind Point PartnersV, L.P. a transaction fee of $749,994 and fees and expense reimbursement in theamount of $60,000. Mid Oaks Investments LLC also received reimbursement of$120,000 of its fees and expenses associated with the June 2003 transaction.Wayne Kocourek, one of our directors, is the Chairman and Chief ExecutiveOfficer of Mid Oaks Investments LLC.

 

**Item 14****.****PrincipalAccounting Fees and Services.**

 

The following table sets forth the aggregate fees and related expensesfor professional services provided by our independent registered publicaccounting firm, Ernst & Young LLP, for the fiscal year ended October 28,2004 and the combined periods from October 28, 2002 through June 13, 2003 andfrom June 14, 2003 through October 26, 2003 (together, “Combined 2003”).

 
| ** **         | ** ** | **Fiscal** | ** ** | **Combined** | ** ** |
|--------------------|------------|------------|------------|--------------|------------|
| ** **         | ** ** | **2004**   |       | **2003**     |       |
| Audit fees         |       | $          | 453,032    |  (1)    | $          | 237,011 |  (4) |
| Audit-related fees |       | 17,050     |  (2)  | 18,500       |  (5)  |
| Tax fees           |       | 3,500      |  (3)  | 58,825       |  (6)  |
| All other fees     |       | —     |       | —       |       |
| Total              |       | $          | 473,582    |         | $          | 314,336 |   |

 

----

(1)   For fiscal 2004, audit fees related to professionalservices rendered for the audit of our consolidated financial statements($161,835), the review of our quarterly report on Form 10-Q for the periodended July 8, 2004 ($20,200) and assistance with our private placement debtoffering memorandum and subsequent Registration Statements on Form S-4(including all amendments thereto) filed with the Securities and ExchangeCommission ($270,997).

 

(2)   For fiscal 2004, audit-related fees related to auditsof our 401(k) Plan ($11,000) and Vacation Plan ($6,050).  The fee for the audit of the 401(k) Plan waspaid directly from assets of the 401(k) Plan.

 

46

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(3)   For fiscal 2004, tax fees were related to taxcompliance.

 

(4)   For Combined 2003, audit fees related to professionalservices rendered for audits of our and our predecessor’s consolidatedfinancial statements ($199,711) and accounting consultations on mattersaddressed during the audit or interim reviews ($37,300).

 

(5)   For Combined 2003, audit-related fees related to auditsof our 401(k) Plan ($10,500) and Vacation Plan ($5,500), and an annualsubscription to Ernst & Young’s online accounting and auditing researchtool ($2,500).  The fee for the 401(k)Plan audit was paid directly from assets of the 401(k) Plan.

 

(6)   For Combined 2003, tax fees related to tax complianceand tax advice / tax planning, primarily associated with the purchase of afranchisee.

 

**Audit Committee pre-approval of fees.**

 

Our Audit Committee meets with the independent auditors prior to theaudit to discuss the planning and staffing of the audit and to approve theproposed fee for the audit and any required special services.  The Audit Committee is notified in advance ofany proposed engagement of the independent auditor to provide non-auditservices to the Company.  The AuditCommittee adopted a pre-approval policy for services by its independentaccountant to comply with Securities and Exchange Commission Release No.33-8183 pursuant to which all services provided by the principal accountant arepre-approved by the Audit Committee.  TheAudit Committee pre-approved all services performed by the principalaccountants for fiscal year 2004 in accordance with the pre-approval policy.

 

**Item 15.****                 Exhibits, FinancialStatement Schedules, and Reports on Form 8-K**

 

**(a)**           The following are beingfiled as part of this Annual Report on Form 10-K.

 

**1.****             Financial Statements**

 

See the Index to Financial Statements which appears on Page F-1 hereof.

 

**2.****             Financial StatementSchedules**

 

None.

 

**3.****             Exhibits**

 

2.1           Stock Purchase Agreement, dated as of April 15, 2003, by and among VIAcquisition Corp., Midway Investors Holdings Inc., the Sellers listed onSchedule 1 thereto and the Preferred Holders listed on Schedule 1 thereto.  Schedules to this exhibit have been omittedpursuant to Item 601(b)(2) of Regulation S-K promulgated under the SecuritiesAct.  The registrant agrees to furnishsupplementally a copy of any omitted schedule to the Securities and ExchangeCommission upon request. *

 

2.2           AmendmentNo. 1 to Stock Purchase Agreement, dated as of June 9, 2003, by and among VIAcquisition Corp., Midway Investors Holdings Inc. and BancBoston Ventures, Inc.and Marathon Fund Limited Partnership IV as the Seller Representatives *

 

2.3           Amendment No. 2 toStock Purchase Agreement, dated as of June 12, 2003, by and among VIAcquisition Corp., Midway Investors Holdings Inc. and BancBoston Ventures, Inc.and Marathon Fund Limited Partnership IV as the Seller Representatives *

 

47

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2.4           Stock PurchaseAgreement, dated as of June 13, 2003, by and among VI Acquisition Corp., WindPoint Partners IV, L.P., Wind Point Partners V, L.P., Wind Point IV ExecutiveAdvisor Partners, L.P., Wind Point Associates IV, LLC, Mid Oaks InvestmentsLLC, A.G. Edwards Private Equity Partners QP II, L.P., A.G. Edwards PrivateEquity Partners II, L.P., Debra Koenig, Walter Van Benthuysen, RobertKaltenbach, Joseph Trungale and the other Executives as defined therein.  Schedules to this exhibit have been omittedpursuant to Item 601(b)(2) of Regulation S-K promulgated under the SecuritiesAct.  The registrant agrees to furnishsupplementally a copy of any omitted schedule to the Securities and ExchangeCommission upon request. *

 

3.1           Amendedand Restated Articles of Incorporation of VICORP Restaurants, Inc. *

 

3.2           Bylawsof VICORP Restaurants, Inc. *

 

3.3           Certificate ofIncorporation of VI Acquisition Corp. *

 

3.4           Bylaws of VIAcquisition Corp. *

 

3.5           Certificate ofIncorporation of Village Inn Pancake House of Albuquerque, Inc. *

 

3.6           Bylaws of Village InnPancake House of Albuquerque, Inc. *

 

4.1           Indenture,dated as of April 14, 2004, by and among VICORP Restaurants, Inc., as issuer,the Securities Guarantors, as defined therein, and Wells Fargo Bank, NationalAssociation, as Trustee *

 

4.2           PurchaseAgreement, dated as of April 6, 2004, by and among VICORP Restaurants, Inc., asissuer, J.P. Morgan Securities Inc. and CIBC World Markets Corp., as initialpurchasers *

 

4.3           Amendment No. 1 toPurchase Agreement, dated as of April 14, 2004, by and among VICORPRestaurants, Inc., as issuer, J.P. Morgan Securities Inc. and CIBC WorldMarkets Corp., as initial purchasers *

 

4.4           RegistrationRights Agreement, dated as of April 14, 2004, by and among VICORP Restaurants,Inc., as issuer, VI Acquisition Corp. and Village Inn Pancake House ofAlbuquerque, Inc., as guarantors, and J.P. Morgan Securities Inc. and CIBCWorld Markets Corp., as initial purchasers *

 

4.5           Formof Note (included as Exhibit B to Exhibit 4.1) *

 

10.1           StockholdersAgreement, dated as of June 13, 2003, by and among VI Acquisition Corp., WindPoint Partners IV, L.P., Wind Point Partners V, L.P., Wind Point IV ExecutiveAdvisor Stockholders Agreement, dated as of June 13, 2003, by and among VIAcquisition Corp., Wind Point Partners IV, L.P., Wind Point Partners V, L.P.,Wind Point IV Executive Advisor *

 

10.2           RegistrationRights Agreement, dated as of June 13, 2003, by and among VI Acquisition Corp.,Wind Point Partners IV, L.P., Wind Point Partners V, L.P., Wind Point IVExecutive Advisor Partners, L.P., Wind Point Associates IV, LLC, Mid OaksInvestments LLC, A.G. Edwards Private Equity Partners QP II, L.P., A.G. EdwardsPrivate Equity Partners II, L.P., Debra Koenig, Walter Van Benthuysen, RobertKaltenbach, Joseph Trungale and the other Executives, and each of the InitialWarrantholders *

 

10.3           JoinderAgreement, dated as of February 27, 2004, by and among VI Acquisition Corp. andAnthony Carroll *

 

10.4           Joinder Agreement,dated as of December 1, 2003, by and among VI Acquisition Corp. and Wind PointV Executive Advisor Partners, L.P. *

 

48

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10.5           Amended and RestatedLoan and Security Agreement, dated as of April 14, 2004, by and among VIAcquisition Corp., VICORP Restaurants, Inc., the Lenders (as defined therein)and Wells Fargo Foothill, Inc., as the arranger and administrative agent forthe Lenders *

 

10.6           Management Agreement,dated as of June 13, 2003, by and among VI Acquisition Corp. and Debra Koenig*+

 

10.7           Management Agreement,dated as of June 13, 2003, by and among VI Acquisition Corp. and RobertKaltenbach *+

 

10.8           Management Agreement,dated as of June 13, 2003, by and among VI Acquisition Corp. and Walter Van Benthuysen*+

 

10.9           Nonstatutory StockOption Agreement, dated as of June 13, 2003, by and among VI Acquisition Corp.and Robert Kaltenbach *+

 

10.10         Subscription Agreement,dated as of November 19, 2003, by and among VI Acquisition Corp. and Mid OaksInvestments, LLC *

 

10.11         Subscription Agreement,dated as of November 19, 2003, by and among VI Acquisition Corp. and Walter VanBenthuysen *

 

10.12         Amended and RestatedSubscription Agreement, dated as of November 19, 2003, by and among VIAcquisition Corp., Wind Point Partners IV, L.P., Wind Point Partners V, L.P.,Wind Point IV Executive Advisor Partners, L.P. and Wind Point Associates IV,LLC *

 

10.13         Management Agreement,dated as of February 12, 2004, by and among VI Acquisition Corp. and AnthonyCarroll *+

 

10.14         Management Agreement,dated as of March 3, 2004, by and among VI Acquisition Corp. and Debra Koenig*+

 

10.15         Management Agreement,dated as of March 11, 2004, by and among VI Acquisition Corp. and Walter VanBenthuysen *+

 

10.16         Employment Agreement,dated as of June 13, 2003, by and among VI Acquisition Corp. and Debra Koenig*+

 

10.17         Amendment to EmploymentAgreement, dated as of March 15, 2004, by and among VICORP Restaurants, Inc.and Debra Koenig *+

 

10.18         Employment Agreement,dated as of June 13, 2003, by and among VI Acquisition Corp. and RobertKaltenbach *+

 

10.19         Employment Agreement,dated as of February 12, 2004, by and among VI Acquisition Corp. and AnthonyCarroll *+

 

10.20         Form of IndemnificationAgreement for directors of VICORP Restaurants, Inc. *

 

10.21         Form of IndemnificationAgreement for directors of VI Acquisition Corp. *

 

10.22         Form of IndemnificationAgreement for directors of Village Inn Pancake House of Albuquerque, Inc.*

 

10.23         Professional ServicesAgreement, dated as of June 13, 2003, by and among VI Acquisition Corp., WindPoint Investors IV, L.P. and Wind Point Investors V, L.P.*

 

49

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12.1           StatementRegarding Computation of Ratios of Earnings and Fixed Charges

 

14.1           Business Conduct Policy

 

21.1           Subsidiariesof the Company

 

31.1           Certificationby our Chief Executive Officer with respect to our Form 10-K for the year endedOctober 28, 2004, pursuant to Rule 13a-14 or 15d-14 of the Securities ExchangeAct of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

31.2           Certificationby our Chief Financial Officer with respect to our Form 10-K for the year endedOctober 28, 2004, pursuant to Rule 13a-14 or 15d-14 of the Securities ExchangeAct of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

32.1           Certificationsby our Chief Executive Officer and Chief Financial Officer with respect to ourForm 10-K for the year ended October 28, 2004, pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

----

*     Incorporatedby reference to the Company’s Registration Statement on Form S-4 as filed withthe SEC on July 9, 2004 (Registration No. 333-117263).

+     Identifieseach management contract or compensatory plan or arrangement.

 

**(b)****           Reports on Form 8-K**

 

No Reports on Form 8-K were filed during the quarter ended October 28,2004.

 

50

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
| VICORP RESTAURANTS, INC.                     |   |
|----------------------------------------------|--------|
| (Registrant)                                 |   |
|                                         |   |
| By: /s/ Debra Koenig                         |   | Date: January 24, 2005 |
| Debra Koenig                                 |   |
| Chief Executive Officer                      |   |
| (Principal Executive Officer)                |   |
|                                         |   |
|                                         |   |
| By: /s/ Anthony Carroll                      |   | Date: January 24, 2005 |
| Anthony Carroll                              |   |
| Chief Financial Officer                      |   |
| (Principal Financial and Accounting Officer) |   |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theRegistrant, and in the capacities and on the date indicated.

 
| **Signature  / Title**                       | ** ** | ** **             |
|----------------------------------------------|------------|------------------------|
| ** **                                   | ** ** |
| /s/ Robert Cummings                          |       | Date: January 24, 2005 |
| Robert Cummings, Director                    |       |
|                                         |       |
| /s/ Wayne Kocourek                           |       | Date: January 24, 2005 |
| Wayne Kocourek, Director                     |       |
|                                         |       |
| /s/ Michael Solot                            |       | Date: January 24, 2005 |
| Michael Solot, Director                      |       |
|                                         |       |
| /s/ Walter Van Benthuysen                    |       | Date: January 24, 2005 |
| Walter Van Benthuysen, Chairman of the Board |       |
|                                              |            |                        |  |

 

51

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**VI ACQUISITION CORP.**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Reports of Independent Registered Public  Accounting Firm                                                                                                                             | F-2    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                  |   |
| Consolidated Balance Sheets – As of October 28, 2004 and October 26,  2003                                                                                                       | F-4    |
|                                                                                                                                                                                  |   |
| Consolidated Statements of Operations –  Fiscal year ended October 28, 2004, periods ended October 26, 2003 and June  13, 2003 and fiscal year ended October 27, 2002            | F-5    |
|                                                                                                                                                                                  |   |
| Consolidated Statements of Cash Flows -  Fiscal year ended October 28, 2004, periods ended October 26, 2003 and June  13, 2003 and fiscal year ended October 27, 2002.                | F-6    |
|                                                                                                                                                                                  |   |
| Consolidated Statements of Stockholders’  Equity - Fiscal year ended October 28, 2004, periods ended October 26, 2003  and June 13, 2003 and fiscal year ended October 27, 2002. | F-7    |
|                                                                                                                                                                                  |   |
| Notes to Consolidated Financial Statements.                                                                                                                                           | F-9    |

 

F-1

----

 

**Report of Ernst & Young, LLP,**

**Independent Registered Public Accounting Firm**

 

To the Boardof Directors

VI AcquisitionCorp.

 

We haveaudited the accompanying consolidated balance sheets of VI Acquisition Corp. asof October 28, 2004 and October 26, 2003, and the related consolidatedstatements of operations, stockholders’ equity and cash flows for the yearended October 28, 2004 and the period from June 14, 2003 through October 26,2003. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of VI Acquisition Corp.at October 28, 2004 and October 26, 2003, and the consolidated results of itsoperations and its cash flows for the year ended October 28, 2004 and theperiod from June 14, 2003 through October 26, 2003 in conformity with U.S.generally accepted accounting principles.

 
|               | /s/ ERNST  & YOUNG LLP |   |
|--------------------|----------------------------|--------|
|               |
| Denver,  Colorado  |
| December 10,  2004 |

 

F-2

----

 

**Report of Ernst & Young, LLP,**

**Independent Registered Public Accounting Firm**

 

To the Boardof Directors

MidwayInvestors Holdings Inc.

 

We haveaudited the accompanying consolidated statements of operations, stockholders’equity and cash flows of Midway Investors Holdings Inc. (the predecessorcompany to VI Acquisition Corp.) for the period from October 28, 2002 throughJune 13, 2003 and the year ended October 27, 2002. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated results of operations and cash flows ofMidway Investors Holdings Inc. for the period from October 28, 2002 throughJune 13, 2003 and the year ended October 27, 2002, in conformity with U.S.generally accepted accounting principles.

 
|               | /s/ ERNST  & YOUNG LLP |   |
|--------------------|----------------------------|--------|
|               |
| Denver,  Colorado  |
| December 22,  2003 |

 

F-3

----

 

**VI Acquisition Corp.**

**Consolidatedbalance sheets**

 
| **(In thousands, except share data)**                                                                                                                                                                                                 | ** ** | **October 28, 2004** | ** ** | **October 26, 2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| **Assets**                                                                                                                                                                                                                            |       |                 |       |                 |       |
| Current assets:                                                                                                                                                                                                                       |       |                 |       |                 |       |
| Cash and cash equivalents                                                                                                                                                                                                             |       | $                    | 1,332      |                 | $          | 5,326 |   |
| Receivables, net (Note 3)                                                                                                                                                                                                             |       | 13,676               |       | 5,224                |       |
| Inventories                                                                                                                                                                                                                           |       | 12,245               |       | 11,767               |       |
| Deferred income taxes, short-term (Note 15)                                                                                                                                                                                           |       | 2,463                |       | 2,164                |       |
| Prepaid expenses and other current assets                                                                                                                                                                                             |       | 3,432                |       | 3,524                |       |
| Income tax receivable                                                                                                                                                                                                                 |       | 270                  |       | 961                  |       |
| Total current assets                                                                                                                                                                                                                  |       | 33,418               |       | 28,966               |       |
| Property and equipment, net (Note 4)                                                                                                                                                                                                  |       | 84,785               |       | 84,207               |       |
| Build-to-suit construction-in-progress                                                                                                                                                                                                |       | 6,258                |       | 1,272                |       |
| Deferred income taxes, long-term (Note 15)                                                                                                                                                                                            |       | 22,636               |       | 20,329               |       |
| Long-term receivables, net (Note 3)                                                                                                                                                                                                   |       | —               |       | 122                  |       |
| Goodwill                                                                                                                                                                                                                              |       | 82,843               |       | 82,835               |       |
| Trademarks and tradenames                                                                                                                                                                                                             |       | 42,600               |       | 42,600               |       |
| Franchise rights, net of accumulated  amortization of $841 and $249                                                                                                                                                                   |       | 11,358               |       | 11,949               |       |
| Other assets, net (Note 5)                                                                                                                                                                                                            |       | 6,482                |       | 6,022                |       |
| Total assets                                                                                                                                                                                                                          |       | $                    | 290,380    |                 | $          | 278,302 |   |
| **Liabilities and stockholders’ equity**                                                                                                                                                                                         |       |                 |       |                 |       |
| Current liabilities:                                                                                                                                                                                                                  |       |                 |       |                 |       |
| Current maturities of long-term debt and  capitalized lease obligations (Notes 7 and 8)                                                                                                                                               |       | $                    | 258        |                 | $          | 9,326 |   |
| Cash overdraft                                                                                                                                                                                                                        |       | 3,190                |       | 4,866                |       |
| Accounts payable                                                                                                                                                                                                                      |       | 12,865               |       | 12,705               |       |
| Accrued compensation                                                                                                                                                                                                                  |       | 7,138                |       | 7,246                |       |
| Accrued taxes                                                                                                                                                                                                                         |       | 7,992                |       | 7,846                |       |
| Other accrued expenses (Note 6)                                                                                                                                                                                                       |       | 18,520               |       | 12,696               |       |
| Total current liabilities                                                                                                                                                                                                             |       | 49,963               |       | 54,685               |       |
| Long-term debt (Note 7)                                                                                                                                                                                                               |       | 141,469              |       | 133,441              |       |
| Capitalized lease obligations (Note 8)                                                                                                                                                                                                |       | 3,490                |       | 3,749                |       |
| Build-to-suit liability                                                                                                                                                                                                               |       | 6,258                |       | 1,230                |       |
| Other noncurrent liabilities (Note 9)                                                                                                                                                                                                 |       | 15,871               |       | 13,455               |       |
| Total liabilities                                                                                                                                                                                                                     |       | 217,051              |       | 206,560              |       |
|                                                                                                                                                                                                                                  |       |                 |       |                 |       |
| Commitments and contingencies (Notes 8 and  18)                                                                                                                                                                                       |       | —               |       | —               |       |
|                                                                                                                                                                                                                                  |       |                 |       |                 |       |
| Stock subject to repurchase (Note 10)                                                                                                                                                                                                 |       | 1,063                |       | 1,063                |       |
|                                                                                                                                                                                                                                  |       |                 |       |                 |       |
| Stockholders’ equity (Notes 10 and 12):                                                                                                                                                                                          |       |                 |       |                 |       |
| Preferred stock, $0.0001 par value:                                                                                                                                                                                                   |       |                 |       |                 |       |
| Series A, 100,000 shares authorized, 68,659  shares issued and outstanding at October 28, 2004 and 67,854 shares issued  and outstanding at October 26, 2003 (aggregate liquidation preference of  $78,846 and $70,481, respectively) |       | 79,769               |       | 71,405               |       |
| Unclassified preferred stock, 100,000  shares authorized, no shares issued or outstanding                                                                                                                                             |       | —               |       | —               |       |
| Common stock $0.0001 par value:                                                                                                                                                                                                       |       |                 |       |                 |       |
| Class A, 2,800,000 shares authorized,  1,386,552 shares issued and outstanding at October 28, 2004 and 1,298,649  shares issued and outstanding at October 26, 2003                                                                   |       | —               |       | —               |       |
| Paid-in capital                                                                                                                                                                                                                       |       | 2,426                |       | 2,332                |       |
| Treasury stock, at cost, 923.87 shares of  preferred stock and 80,603 shares of common stock at October 28, 2004 and 923.87  shares of preferred stock and 76,103 shares of common stock at October 26,  2003                         |       | (1,004               | )          | (1,000               | )          |
| Accumulated deficit                                                                                                                                                                                                                   |       | (8,925               | )          | (2,058               | )          |
| Total stockholders’ equity                                                                                                                                                                                                       |       | 72,266               |       | 70,679               |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                       |       | $                    | 290,380    |                 | $          | 278,302 |   |

 

*See accompanying notes to consolidated financial statements.*

 

F-4

----

 

**VI Acquisition Corp.**

**Consolidated statements of operations**

 
| ** **                                                 | ** ** | **VI Acquisition**                | ** ** | **Midway**                          | ** ** |
|------------------------------------------------------------|------------|-----------------------------------|------------|-------------------------------------|------------|
| **(In thousands)**                                         | ** ** | **Year ended  October 28,  2004** | ** ** | **Period ended  October 26,  2003** | ** ** | **Period ended  June 13,  2003** | ** ** | **Year ended  October 27,  2002** | ** ** |
| Revenues:                                                  |       |                              |       |                                |       |   |   |   |   |
| Restaurant operations                                      |       | $                                 | 394,667    |                                | $          | 138,696 |   | $ | 243,157 |   | $ | 377,630 |   |
| Franchise operations                                       |       | 5,057                             |       | 1,916                               |       | 3,448 |   | 5,796 |   |
|                                                       |       | 399,724                           |       | 140,612                             |       | 246,605 |   | 383,426 |   |
| Cost and expenses:                                         |       |                              |       |                                |       |   |   |   |   |
| Restaurant costs:                                          |       |                              |       |                                |       |   |   |   |   |
| Food                                                       |       | 106,294                           |       | 37,219                              |       | 66,186 |   | 104,298 |   |
| Labor                                                      |       | 127,251                           |       | 45,500                              |       | 79,016 |   | 122,850 |   |
| Other operating expenses                                   |       | 111,663                           |       | 40,531                              |       | 65,629 |   | 100,002 |   |
| Franchise operating expenses                               |       | 2,490                             |       | 1,032                               |       | 1,583 |   | 3,092 |   |
| General and administrative expenses                        |       | 25,193                            |       | 9,447                               |       | 16,533 |   | 26,598 |   |
| Litigation settlement                                      |       | 3,168                             |       | —                              |       | — |   | — |   |
| Transaction expenses (Note 17)                             |       | 125                               |       | 1,226                               |       | 9,436 |   | 279 |   |
| Management fees (Note 19)                                  |       | 1,159                             |       | 185                                 |       | 674 |   | 1,000 |   |
| Asset impairments (Note 14)                                |       | 552                               |       | —                              |       | 96 |   | — |   |
|                                                       |       | 377,895                           |       | 135,140                             |       | 239,153 |   | 358,119 |   |
| Operating profit                                           |       | 21,829                            |       | 5,472                               |       | 7,452 |   | 25,307 |   |
| Interest expense                                           |       | (15,161                           | )          | (5,330                              | )          | (5,550 | ) | (9,786 | ) |
| Debt extinguishment costs (Note 17)                        |       | (6,856                            | )          | —                              |       | (6,516 | ) | — |   |
| Other income, net                                          |       | 522                               |       | 147                                 |       | 433 |   | 787 |   |
| Income (loss) before income taxes                          |       | 334                               |       | 289                                 |       | (4,181 | ) | 16,308 |   |
| Provision for income taxes (benefit) (Note  15)            |       | (359                              | )          | (280                                | )          | (1,986 | ) | 5,779 |   |
| Net income (loss)                                          |       | 693                               |       | 569                                 |       | (2,195 | ) | 10,529 |   |
| Preferred stock dividends and accretion  (Notes 10 and 11) |       | (7,560                            | )          | (2,627                              | )          | (2,260 | ) | (3,570 | ) |
| Net income (loss) attributable to common  stockholders     |       | $                                 | (6,867     | )                                   | $          | (2,058 | ) | $ | (4,455 | ) | $ | 6,959 |   |

 

*See accompanying notes to consolidated financial statements.*

 

F-5

----

 

**VI Acquisition Corp.**

**Consolidated statements of cash flows**

 
| ** **                                                                | ** ** | **VI Acquisition**                | ** ** | **Midway**                          | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------------------------|------------|
| **(In thousands)**                                                        | ** ** | **Year ended  October 28,  2004** | ** ** | **Period ended  October 26,  2003** | ** ** | **Period ended  June 13,  2003** | ** ** | **Year ended  October 27,  2002** | ** ** |
| Cash flows from operating activities:                                     |       |                              |       |                                |       |   |   |   |   |
| Net income (loss)                                                         |       | $                                 | 693        |                                | $          | 569 |   | $ | (2,195 | ) | $ | 10,529 |   |
| Reconciliation to cash provided by  operations:                           |       |                              |       |                                |       |   |   |   |   |
| Depreciation and amortization                                             |       | 14,670                            |       | 5,306                               |       | 8,948 |   | 15,330 |   |
| Asset impairments                                                         |       | 552                               |       | —                              |       | 96 |   | — |   |
| Amortization of financing costs and  original issue discounts             |       | 973                               |       | 329                                 |       | 1,544 |   | 1,064 |   |
| Stock-based compensation expense                                          |       | —                            |       | —                              |       | 2,299 |   | 293 |   |
| Warrants issued for anti-dilution                                         |       | —                            |       | —                              |       | 129 |   | — |   |
| Loss on disposition of assets                                             |       | 438                               |       | 141                                 |       | 237 |   | 88 |   |
| Deferred finance charge write-off                                         |       | 4,344                             |       | —                              |       | 3,322 |   | — |   |
| Deferred income tax expense (benefit)                                     |       | (2,606                            | )          | (691                                | )          | (663 | ) | 2,148 |   |
| Changes in assets and liabilities:                                        |       |                              |       |                                |       |   |   |   |   |
| Receivables, net                                                          |       | (4,240                            | )          | (979                                | )          | (467 | ) | 228 |   |
| Inventories                                                               |       | (478                              | )          | (2,655                              | )          | 1,078 |   | (1 | ) |
| Cash overdraft                                                            |       | (1,676                            | )          | 4,866                               |       | — |   | — |   |
| Accounts payable, trade                                                   |       | 160                               |       | (1,047                              | )          | 992 |   | 62 |   |
| Accrued compensation                                                      |       | (108                              | )          | 1,997                               |       | (3,319 | ) | 976 |   |
| Other current assets and liabilities                                      |       | 6,080                             |       | (1,555                              | )          | (742 | ) | (4,479 | ) |
| Other noncurrent assets and liabilities                                   |       | 3,718                             |       | (702                                | )          | 1,040 |   | 2,881 |   |
| Cash provided by operations                                               |       | 22,520                            |       | 5,579                               |       | 12,299 |   | 29,119 |   |
| Cash flows from investing activities:                                     |       |                              |       |                                |       |   |   |   |   |
| Acquisitions, net of cash acquired                                        |       | (8                                | )          | (153,322                            | )          | (3,834 | ) | — |   |
| Purchase of property and equipment                                        |       | (15,868                           | )          | (9,573                              | )          | (9,904 | ) | (10,599 | ) |
| Build-to-suit construction                                                |       | (6,825                            | )          | (1,272                              | )          | — |   | — |   |
| Proceeds from disposition of property                                     |       | 627                               |       | 24,291                              |       | 2,572 |   | 200 |   |
| Proceeds from build-to-suit reimbursements                                |       | 2,747                             |       | 1,230                               |       |   |   |   |   |
| Collection of notes receivable                                            |       | 30                                |       | 6                                   |       | 29 |   | 121 |   |
| Cash used in investing activities                                         |       | (19,297                           | )          | (138,640                            | )          | (11,137 | ) | (10,278 | ) |
| Cash flows from financing activities:                                     |       |                              |       |                                |       |   |   |   |   |
| Payments of debt and capital lease  obligations                           |       | (165,068                          | )          | (105,974                            | )          | (8,303 | ) | (8,355 | ) |
| Proceeds from issuance of debt                                            |       | 163,651                           |       | 168,580                             |       | — |   | — |   |
| Net proceeds from issuance of preferred and  common stock                 |       | 298                               |       | 72,774                              |       | 228 |   | — |   |
| Debt issuance costs                                                       |       | (6,094                            | )          | (5,029                              | )          | (72 | ) | (33 | ) |
| Repurchase of shares                                                      |       | (4                                | )          | (1,000                              | )          | — |   | — |   |
| Cash provided by (used in) financing  activities                          |       | (7,217                            | )          | 129,351                             |       | (8,147 | ) | (8,388 | ) |
|                                                                      |       |                              |       |                                |       |   |   |   |   |
| Increase (decrease) in cash and cash  equivalents                         |       | (3,994                            | )          | (3,710                              | )          | (6,985 | ) | 10,453 |   |
| Cash and cash equivalents at beginning of  period                         |       | 5,326                             |       | 9,036                               |       | 16,021 |   | 5,568 |   |
| Cash and cash equivalents at end of period                                |       | $                                 | 1,332      |                                | $          | 5,326 |   | $ | 9,036 |   | $ | 16,021 |   |
|                                                                      |       |                              |       |                                |       |   |   |   |   |
| Supplemental disclosures of cash flow  information:                       |       |                              |       |                                |       |   |   |   |   |
| Cash paid during the period for:                                          |       |                              |       |                                |       |   |   |   |   |
| Interest (net of amount capitalized)                                      |       | $                                 | 14,162     |                                | $          | 3,540 |   | $ | 6,024 |   | $ | 9,672 |   |
| Income taxes                                                              |       | 1,867                             |       | 2,188                               |       | 1,878 |   | 1,908 |   |
|                                                                      |       |                              |       |                                |       |   |   |   |   |
| Supplemental disclosures of non-cash  investing and financing activities: |       |                              |       |                                |       |   |   |   |   |
| Build-to-suit reimbursements not yet  received                            |       | $                                 | 4,120      |                                | $          | — |   | $ | — |   | $ | — |   |
| Fixed assets purchased with debt                                          |       | —                            |       | —                              |       | — |   | 3,359 |   |

 

*See accompanying notes to consolidated financial statements.*

 

F-6

----

 

**Midway Investors Holdings Inc.**

**(Predecessor to VI Acquisition Corp.)**

 

**Consolidated statements of stockholders’ equity**

 
| ** **                                         | ** ** | **Preferred  stock** | ** ** |
|----------------------------------------------------|------------|----------------------|------------|
| ** **                                         | ** ** | **(Note  11)**       | ** ** |
| ** **                                         | ** ** | **Class A**          | ** ** | **Class B** | ** ** | **Class C** | ** ** |
| **(In  thousands, except shares)**                 | ** ** | **Shares**           | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Balances at  October 28, 2001                      |       | 18,299               |       | 17,603 |   | 18,266 |   | 17,572 |   | — |   | — |   |
| Dividends on  preferred stock Class A & B      |       | —               |       | 1,618 |   | — |   | 1,615 |   | — |   | — |   |
| Preferred stock  Class C issued, net               |       | —               |       | — |   | — |   | (2,380 | ) | 2,380 |   | 2,380 |   |
| Accretion of  redeemable preferred stock           |       | —               |       | — |   | — |   | — |   | — |   | — |   |
| Issuance of  incentive stock options               |       | —               |       | — |   | — |   | — |   | — |   | — |   |
| Amortization of  deferred compensation             |       | —               |       | — |   | — |   | — |   | — |   | — |   |
| Comprehensive  income:                             |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized loss  on hedge transactions, net of tax |       | —               |       | — |   | — |   | — |   | — |   | — |   |
| Net income                                         |       | —               |       | — |   | — |   | — |   | — |   | — |   |
| Total  comprehensive income                        |       | —               |       | — |   | — |   | — |   | — |   | — |   |
| Balances at  October 27, 2002                      |       | 18,299               |       | 19,221 |   | 18,266 |   | 16,807 |   | 2,380 |   | 2,380 |   |
| Dividends on  Class A and B preferred stock        |       | —               |       | 1,027 |   | — |   | 1,025 |   | — |   | — |   |
| Class C preferred  stock issued, net               |       | —               |       | — |   | — |   | (1,025 | ) | 1,025 |   | 1,025 |   |
| Accretion of  redeemable preferred stock           |       | —               |       | — |   | — |   | — |   | — |   | — |   |
| Issuance of  incentive stock options               |       | —               |       | — |   | — |   | — |   | — |   | — |   |
| Amortization of  deferred compensation             |       | —               |       | — |   | — |   | — |   | — |   | — |   |
| Issuance of  warrants                              |       | —               |       | — |   | — |   | — |   | — |   | — |   |
| Realization of  hedge transaction loss             |       | —               |       | — |   | — |   | — |   | — |   | — |   |
| Amortization of  deferred compensation             |       | —               |       | — |   | — |   | — |   | — |   | — |   |
| Exercise of  options                               |       | 1,543                |       | 1,544 |   | — |   | — |   | 287 |   | 287 |   |
| Exercise of  warrants                              |       | —               |       | — |   | — |   | — |   | — |   | — |   |
| Repurchase of  Midway preferred stock              |       | (19,842              | )          | (21,792 | ) | (18,266 | ) | (16,807 | ) | (3,692 | ) | (3,692 | ) |
| Comprehensive  loss:                               |       | —               |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized loss  on hedge transactions, net of tax |       | —               |       | — |   | — |   | — |   | — |   | — |   |
| Net loss                                           |       | —               |       | — |   | — |   | — |   | — |   | — |   |
| Total  comprehensive loss                          |       | —               |       | — |   | — |   | — |   | — |   | — |   |
| Balances at June  13, 2003                         |       | —               |       | — |   | — |   | — |   | — |   | — |   |
| Elimination of  Midway equity                      |       | —               |       | — |   | — |   | — |   | — |   | — |   |
| Balance at June  13, 2003, post-transaction        |       | —               |       | $ | — |   | — |   | $ | — |   | — |   | $ | — |   |
|                                                    |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                         | ** ** | **Common  stock** | ** ** | ** **  | ** ** | ** **   | ** ** | **Accumulated** | ** ** | ** **    | ** ** | ** **        | ** ** |
|----------------------------------------------------|------------|-------------------|------------|-------------|------------|--------------|------------|-----------------|------------|---------------|------------|-------------------|------------|
| ** **                                         | ** ** | **(Note  11)**    | ** ** | ** **  | ** ** | **Retained** | ** ** | **other**       | ** ** | ** **    | ** ** | **Total**         | ** ** |
| ** **                                         | ** ** | **Class A**       | ** ** | **Class B** | ** ** | ** **   | ** ** | **Paid-in**     | ** ** | **Earnings**  | ** ** | **comprehensive** | ** ** | **Deferred** | ** ** | **stockholders’** | ** ** |
| **(In  thousands, except shares)**                 | ** ** | **Shares**        | ** ** | **Shares**  | ** ** | **Amount**   | ** ** | **capital**     | ** ** | **(deficit)** | ** ** | **loss**          | ** ** | **compensation** | ** ** | **equity** | ** ** |
| Balances at  October 28, 2001                      |       | 19,397            |       | 627         |       | —       |       | 1,854           |       | 1,192         |       | —            |       | — |   | 38,221 |   |
| Dividends on  preferred stock Class A & B      |       | —            |       | —      |       | —       |       | —          |       | (3,233        | )          | —            |       | — |   | — |   |
| Preferred stock  Class C issued, net               |       | —            |       | —      |       | —       |       | —          |       | —        |       | —            |       | — |   | — |   |
| Accretion of  redeemable preferred stock           |       | —            |       | —      |       | —       |       | —          |       | (337          | )          | —            |       | — |   | (337 | ) |
| Issuance of  incentive stock options               |       | —            |       | —      |       | —       |       | 2,135           |       | —        |       | —            |       | (439 | ) | 1,696 |   |
| Amortization of  deferred compensation             |       | —            |       | —      |       | —       |       | —          |       | —        |       | —            |       | 17 |   | 17 |   |
| Comprehensive income:                              |       |              |       |        |       |         |       |            |       |          |       |              |       |   |   |   |   |
| Unrealized loss  on hedge transactions, net of tax |       | —            |       | —      |       | —       |       | —          |       | —        |       | (1,290            | )          | — |   | (1,290 | ) |
| Net income                                         |       | —            |       | —      |       | —       |       | —          |       | 10,529        |       | —            |       | — |   | 10,529 |   |
| Total  comprehensive income                        |       | —            |       | —      |       | —       |       | —          |       | 10,529        |       | (1,290            | )          | — |   | 9,239 |   |
| Balances at  October 27, 2002                      |       | 19,397            |       | 627         |       | —       |       | 3,989           |       | 8,151         |       | (1,290            | )          | (422 | ) | 48,836 |   |
| Dividends on  Class A and B preferred stock        |       | —            |       | —      |       | —       |       | —          |       | (2,052        | )          | —            |       | — |   | — |   |
| Class C preferred  stock issued, net               |       | —            |       | —      |       | —       |       | —          |       | —        |       | —            |       | — |   | — |   |
| Accretion of  redeemable preferred stock           |       | —            |       | —      |       | —       |       | —          |       | (212          | )          | —            |       | — |   | (212 | ) |
| Issuance of  incentive stock options               |       | —            |       | —      |       | —       |       | 1,790           |       | —        |       | —            |       | (1,790 | ) | — |   |
| Amortization of  deferred compensation             |       | —            |       | —      |       | —       |       | 87              |       | —        |       | —            |       | 436 |   | 523 |   |
| Issuance of  warrants                              |       | —            |       | —      |       | —       |       | 129             |       | —        |       | —            |       | — |   | 129 |   |
| Realization of  hedge transaction loss             |       | —            |       | —      |       | —       |       | —          |       | —        |       | 1,263             |       | — |   | 1,263 |   |
| Amortization of  deferred compensation             |       | —            |       | —      |       | —       |       | —          |       | —        |       | —            |       | 1,776 |   | 1,776 |   |
| Exercise of  options                               |       | —            |       | 2,431       |       | —       |       | 228             |       | —        |       | —            |       | — |   | 2,059 |   |
| Exercise of  warrants                              |       | —            |       | 1,182       |       | —       |       | —          |       | —        |       | —            |       | — |   | — |   |
| Repurchase of  Midway preferred stock              |       | —            |       | —      |       | —       |       | —          |       | —        |       | —            |       | — |   | (42,291 | ) |
| Comprehensive  loss:                               |       |              |       |        |       |         |       |            |       |          |       |              |       |   |   |   |   |
| Unrealized loss  on hedge transactions, net of tax |       | —            |       | —      |       | —       |       | —          |       | —        |       | 27                |       | — |   | 27 |   |
| Net loss                                           |       | —            |       | —      |       | —       |       | —          |       | (2,195        | )          | —            |       | — |   | (2,195 | ) |
| Total  comprehensive loss                          |       | —            |       | —      |       | —       |       | —          |       | (2,195        | )          | 27                |       | — |   | (2,168 | ) |
| Balances at June  13, 2003                         |       | 19,397            |       | 4,240       |       | —       |       | 6,223           |       | 3,692         |       | —            |       | — |   | 9,915 |   |
| Elimination of  Midway equity                      |       | (19,397           | )          | (4,240      | )          | —       |       | (6,223          | )          | (3,692        | )          | —            |       | — |   | (9,915 | ) |
| Balance at June  13, 2003, post-transaction        |       | —            |       | —      |       | $            | —     |            | $          | —        |       | $                 | —     |   | $ | — |   | $ | — |   | $ | — |   |
|                                                    |            |                   |            |             |            |              |            |                 |            |               |            |                   |            |  |  |  |  |  |  |  |  |  |  |

 

*See accompanying notes to consolidated financial statements.*

 

F-7

----

 

**VI Acquisition Corp.**

**Consolidated statements of stockholders’ equity**

 

 
| ** **                                    | ** ** | **Preferred  stock** | ** ** | **Common stock** | ** ** | **Treasury** | ** ** | **Treasury**   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **  | ** ** |
|-----------------------------------------------|------------|----------------------|------------|------------------|------------|--------------|------------|----------------|------------|----------------|------------|----------------|------------|-------------|------------|
| ** **                                    | ** ** | **Series A**         | ** ** | **Class A**      | ** ** | **stock**    | ** ** | **stock**      | ** ** | ** **     | ** ** | ** **     | ** ** | **Total**   | ** ** |
| ** **                                    | ** ** | ** **           | ** ** | **(Note  10)**   | ** ** | ** **   | ** ** | **(Note  10)** | ** ** | **(Note  10)** | ** ** | **(Note  10)** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **stockholders’** | ** ** |
| **(In  thousands, except shares)**            | ** ** | **Shares**           | ** ** | **Amount**       | ** ** | **Shares**   | ** ** | **Amount**     | ** ** | **preferred**  | ** ** | **common**     | ** ** | **capital** | ** ** | **deficit** | ** ** | **equity** | ** ** |
| Balances at June  14, 2003                    |       | —               |       | $                | —     |         | —     |           | $          | —         |       | $              | —     |        | $          | — |   | $ | — |   | $ | — |   | $ | — |   |
| Issuance of  preferred stock and common stock |       | 67,854               |       | 67,854           |       | 1,358,649    |       | —         |       | —         |       | —         |       | 1,358       |       | — |   | 69,212 |   |
| Issuance of  preferred stock options          |       | —               |       | —           |       | —       |       | —         |       | —         |       | —         |       | 896         |       | — |   | 896 |   |
| Warrants issued                               |       | —               |       | —           |       | —       |       | —         |       | —         |       | —         |       | 62          |       | — |   | 62 |   |
| Exercise of  options                          |       | 924                  |       | 924              |       | —       |       | —         |       | —         |       | —         |       | —      |       | — |   | 924 |   |
| Repurchase of  preferred and common shares    |       | (924                 | )          | —           |       | (60,000      | )          | —         |       | (924           | )          | (76            | )          | 16          |       | — |   | (984 | ) |
| Dividends on  Series A preferred stock        |       | —               |       | 2,627            |       | —       |       | —         |       | —         |       | —         |       | —      |       | (2,627 | ) | — |   |
| Net income                                    |       | —               |       | —           |       | —       |       | —         |       | —         |       | —         |       | —      |       | 569 |   | 569 |   |
| Balances at  October 26, 2003                 |       | 67,854               |       | 71,405           |       | 1,298,649    |       | —         |       | (924           | )          | (76            | )          | 2,332       |       | (2,058 | ) | 70,679 |   |
| Issuance of  preferred stock and common stock |       | 258                  |       | 257              |       | 39,603       |       | —         |       | —         |       | —         |       | 41          |       | — |   | 298 |   |
| Release of  collateralized stock              |       | 547                  |       | 547              |       | 52,800       |       | —         |       | —         |       | —         |       | 53          |       | — |   | 600 |   |
| Repurchase of  common shares                  |       | —               |       | —           |       | (4,500       | )          | —         |       | —         |       | (4             | )          | —      |       | — |   | (4 | ) |
| Dividends on  Series A preferred stock        |       | —               |       | 7,560            |       | —       |       | —         |       | —         |       | —         |       | —      |       | (7,560 | ) | — |   |
| Net income                                    |       | —               |       | —           |       | —       |       | —         |       | —         |       | —         |       | —      |       | 693 |   | 693 |   |
| Balances at  October 28, 2004                 |       | 68,659               |       | $                | 79,769     |         | 1,386,552  |           | $          | —         |       | $              | (924       | )           | $          | (80 | ) | $ | 2,426 |   | $ | (8,925 | ) | $ | 72,266 |   |

 

*See accompanying notes to consolidated financial statements.*

 

F-8

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**VI Acquisition Corp.**

**Notes to consolidated financial statements**

 

**1.Description of the business and basis of presentation**

 

VI AcquisitionCorp. (the “Company” or “VI Acquisition”), a Delaware corporation, wasorganized by Wind Point Partners and other individual co-investors.

 

On June 14,2003, the Company acquired Midway Investors Holdings Inc. (“Midway”), and itswholly owned subsidiaries VICORP Restaurants, Inc. (“VICORP”) and Village InnPancake House of Albuquerque, Inc. (collectively “Midway” or “Predecessor”) ina stock purchase transaction accounted for under the purchase method ofaccounting pursuant to Financial Accounting Standards Board (“FASB”) Statementof Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.”  The Midway legal entity was merged into theCompany on April 14, 2004 and no longer exists.

 

Midway was aDelaware corporation originally organized by BancBoston Ventures, Inc., GoldnerHawn Johnson & Morrison, Incorporated (“Goldner Hawn”), Fairmont Capital,Inc. and other affiliates. Midway acquired VICORP in May 2001 in a “goingprivate” stock purchase transaction accounted for under the purchase method ofaccounting pursuant to SFAS No. 141. Prior to the acquisition of VICORP byMidway, VICORP operated as a publicly-traded company.

 

The Companyoperates family-style restaurants under the brand names “Bakers Square” and “VillageInn,” and franchises restaurants under the Village Inn brand name. At October28, 2004, the Company operated 271 Company-owned restaurants in 15 states. Ofthe Company-owned restaurants, 150 are Bakers Squares and 121 are Village Inns,with an additional 103 franchised Village Inn restaurants in 19 states. TheCompany-owned and franchised restaurants are concentrated in Arizona,California, Florida, the Rocky Mountain region, and the upper Midwest. Inaddition, the Company operates three pie manufacturing facilities located inSanta Fe Springs, California; Oak Forest, Illinois; and Chaska, Minnesota.

 

**VIAcquisition’s purchase of Midway**

 

In connectionwith the June 14, 2003 purchase of Midway, the assets (including specificallyidentifiable intangible assets) and liabilities of the acquired company wererecorded at their estimated fair value of $143.2 million with the excess of thepurchase price over these amounts being recorded as goodwill of $82.8 million.Capitalization of the acquired company was funded by new senior andsubordinated debt under the terms of newly executed credit and investmentagreements dated as of June 13, 2003 (Note 7). In connection with the closingof the purchase and subject to the terms of the stock purchase agreement, thefollowing transactions occurred:

 

•      Fixedassets were adjusted to their estimated fair market value, resulting in anincrease to the assets’ value of $6.2 million;

 

•      Trademarksand tradenames were recorded at an estimated fair value of $42.6 million;

 

•      Repaymentof all indebtedness, including the prior Senior Term A and B loans,subordinated debt, mortgage loan obligations and letters of credit. Prepaymentpenalties of $1.3 million were also paid in association with the earlyrepayment of this indebtedness and recorded as an expense in the period endedJune 13, 2003;

 

•      Outstandingderivatives were settled for $1.9 million and recorded as an expense in theperiod ended June 13, 2003;

 

•      Costsassociated with the acquisition of new debt instruments totaling $5.1 millionwere capitalized;

 

•      TheCompany entered into a sale-leaseback transaction involving ten propertieswhich resulted in a decrease in fixed assets of $9.7 million;

 

F-9

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•      Rentspayable under leases were revalued to their estimated fair market valueresulting in an additional obligation of $8.0 million;

 

•      Midwayredeemed all of its outstanding preferred stock for a total of $42.4 million;

 

•      Franchiserights were recorded at their estimated fair value resulting in a decrease of$3.7 million; and

 

•      Compensationcosts of $6.2 million were recorded in the period ended June 13, 2003 as aresult of the repurchase of common stock issued from the exercise of stockoptions, settlement of employment contracts and severance payments.

 

Theconsolidated financial statements for Midway for the period from October 28,2002 through June 13, 2003 and the year ended October 27, 2002 represent theoperations of the Company prior to the purchase by VI Acquisition and reflectthe values established at the time of Midway’s purchase of the Company on May14, 2001. Therefore, they do not reflect the effects of the purchase accountingadjustments of the June 14, 2003 transaction discussed above. The consolidatedfinancial statements and related notes as of October 28, 2004 and October 26,2003 and for the period from June 14, 2003 through October 26, 2003 reflect allpurchase accounting adjustments resulting from the June 14, 2003 transaction.

 

**VICORP’spurchase of Village Inn Pancake House of Albuquerque, Inc.**

 

On February24, 2003, VICORP purchased all of the outstanding shares of Village Inn PancakeHouse of Albuquerque, Inc. This transaction was accounted for as a purchase inaccordance with SFAS No. 141. The purchase price was originally allocated tothe acquired assets (including specifically identifiable intangible assets) andassumed liabilities. Cash of $4.6 million was used to purchase net assets withthe fair value of approximately $894,000, including $948,000 of property, plantand equipment resulting in goodwill of $3.7 million.  The amounts allocated for this transactionwere revalued in connection with the June 14, 2003 transaction mentioned above.

 

**2.Summary of significant accounting policies**

 

**Principlesof consolidation**

 

Theaccompanying consolidated financial statements of VI Acquisition Corp. as ofOctober 28, 2004 and October 26, 2003 and for the year ended October 28, 2004and period from June 14, 2003 through October 26, 2003 include the accounts ofthe Company, Midway, VICORP and its wholly-owned subsidiaries.

 

Theaccompanying predecessor financial statements for the period from October 28,2002 through June 13, 2003 and the year ended October 27, 2002 include theaccounts of Midway, VICORP and its wholly-owned subsidiaries.

 

Allintercompany accounts and balances have been eliminated.

 

**Fiscalyear**

 

The Company’sfiscal year, which historically ended on the last Sunday in October, iscomprised of 52 or 53 weeks divided into four fiscal quarters of 12 or 13, 12,12, and 16 weeks.  Beginning January 22,2004, the Company changed its fiscal year so that it ends on the Thursdaynearest to October 31st of each year. This increased the fiscal year endedOctober 28, 2004 by four days (368 days in fiscal 2004 versus 364 days infiscal 2003). This change was made to facilitate restaurant operations bymoving the end of the Company’s fiscal periods and weekly reporting and payrollperiods away from weekends when the Company’s restaurants are busier.

 

F-10

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**Estimates**

 

The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions. These estimates and assumptions affect the reported amounts ofassets and liabilities, the disclosure of contingent assets and liabilities,and the reported amounts of revenues and expenses.  Actual results could differ materially fromthose estimates. Estimates and assumptions are reviewed periodically, and theeffects of revisions are reflected in the consolidated financial statements inthe period that they are determined to be necessary. The Company’s criticalaccounting estimates include (i) inventory valuation (Note 2),(ii) useful life assignments and impairment evaluations associated withproperty and equipment and intangible assets (Notes 2, 4 and 14),(iii) anticipated outcomes of legal proceedings and other contingencies(Notes 2 and 18) (iv) self-insurance reserves (Notes 2 and 18) and(v) valuation allowances associated with deferred tax assets (Notes 2 and15).

 

**Cashand cash equivalents**

 

Cash and cashequivalents consist of cash on hand and highly liquid instruments with originalmaturities of three months or less when purchased.  Amounts in-transit from credit cardprocessors are also considered cash equivalents because they are bothshort-term and highly liquid in nature and are typically converted to cashwithin three days of the sales transaction.

 

**Receivables**

 

Receivablesgenerally represent billings to third-party customers of our pie productionfacilities, billings to franchisees for royalties, initial and renewal fees andequipment sales, and rent receivable from franchisees and other sublessees.  Trade receivables are generally unsecured,while notes receivable are typically secured by the property that gave rise tothem.  Other receivables consist of various amounts due from landlords,insurance providers and others in the ordinary course of business.

 

The allowance for doubtful accounts is the Company’s best estimate ofthe amount of probable credit losses related to existing receivables.  The Company determines the allowance based onhistorical write-off experience and management’s judgment regarding thecollectibility of certain accounts. Account balances are charged off against the allowance after managementdetermines that the potential for recovery is considered remote.

 

**Concentrationsof credit risk**

 

Financialinstruments that potentially subject the Company to a concentration of creditrisk are cash and cash equivalents and receivables.  The Company maintains deposits in excess ofFDIC limits at two banks. The maximum loss that would have resulted from this riskamounted to approximately $1.3 million at October 28, 2004, which representsthe excess of the deposit liabilities reported by the bank over the amountsthat would have been covered by federal deposit insurance.  The Company considers the concentration ofcredit risk within its receivables to be minimal as a result of paymenthistories and the general financial condition of its third party-customers andfranchisees.

 

**Inventories**

 

Inventoriesare stated at the lower of cost (which is determined on a first-in, first-outbasis) or market and consist of food, paper products and supplies. Inventoriesconsisted of the following:

 
| **(In thousands)**               | ** ** | **October 28,  2004** | ** ** | **October 26,  2003** | ** ** |
|----------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Production facility inventories: |       |                  |       |                  |       |
| Raw materials                    |       | $                     | 4,353      |                  | $          | 3,851 |   |
| Finished goods                   |       | 4,717                 |       | 5,108                 |       |
|                             |       | 9,070                 |       | 8,959                 |       |
| Restaurant inventories           |       | 3,175                 |       | 2,808                 |       |
|                             |       | $                     | 12,245     |                  | $          | 11,767 |   |

 

F-11

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The Company obtains most of its food products and supplies from threedistributors.  Management believes thatit could obtain its food products and supplies from alternative sources underterms that are similar to those currently received

 

**Renovations,improvements and repairs and maintenance**

 

The Company renovates, remodels or improves its restaurants andproduction facilities (all or a portion depending on need), replaces agedequipment and periodically upgrades equipment to more current technology.  These expenditures are typical in therestaurant industry and each provides a future economic benefit.  Therefore, the related costs are capitalizedand depreciated over the estimated useful lives discussed further below underthe caption “Property and equipment”. While the Company believes the estimated useful lives used fordepreciation purposes are representative of the assets’ actual useful lives,the Company has an asset retirement policy, and any assets that are replacedare retired.  The Company currently has acapitalization threshold of $600, and any costs for singular items below thisthreshold are expensed.

 

The Company routinely incurs costs to repair and maintain itsfacilities and equipment, which are expensed as incurred. Suchrepairs and maintenance costs generally relate to repairs to existingequipment, fixtures or facilities, including, but not limited to, electrical,plumbing, refrigeration, air conditioning, heating, painting, tile work, roofrepairs and wood repairs. The Companyrecorded repair and maintenance expense of $9.2 million, $3.4 million,$5.6  million and $8.6 million for thefiscal year ended October 28, 2004, the periods ended October 26, 2003 and June13, 2003, and the fiscal year ended October 27, 2002, respectively.

 

**Propertyand equipment**

 

At the date ofthe June 14, 2003 purchase of Midway, all property and equipment were adjustedto their estimated fair market values. This resulted in the Company recordingan increase in its net property and equipment of $6.2 million and allsubsequent acquisitions of property and equipment are stated at cost, lessaccumulated depreciation and amortization.

 

Depreciationand amortization expense is calculated using the straight-line method. Theuseful lives of assets range from 20 to 40 years for buildings and three to tenyears for equipment and improvements. In general, assets acquired under capitalleases and leasehold improvements are amortized over the lesser of the usefullife or the lease term. Property and equipment additions include acquisitionsof building and equipment and costs incurred in the development andconstruction of new stores.

 

**Long-livedassets**

 

The Companyadopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” in theperiod beginning October 28, 2002. Under SFAS No. 143, the fair value of aliability for an asset retirement obligation covered under the scope of thisstatement would be recognized in the period in which the liability is incurred,along with an offsetting increase in the carrying amount of the relatedlong-lived asset. Upon settlement of the liability, an entity would eithersettle the obligation for its recorded amount or incur a gain or loss uponsettlement

 

The Companyadopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets,” in the period beginning October 28, 2002. SFAS No. 144 retains thefundamental provisions of existing generally accepted accounting principleswith respect to the recognition and measurement of long-lived asset impairmentcontained in SFAS No. 121, “Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to be Disposed Of.” However, SFAS No. 144 providesnew guidance intended to address certain significant implementation issuesassociated with SFAS No. 121, including expanded guidance with respect toappropriate cash flows to be used to determine whether recognition of anylong-lived asset impairment is required, and if required, how to measure theamount of the impairment. SFAS No. 144 also requires that any net assets to bedisposed of by sale be reported at the lower of carrying value or fair valueless cost to sell, and expands the reporting of discontinued operations toinclude any component of any entity with operations and cash flows that can beclearly distinguished from the rest of the entity.

 

F-12

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Prior to October 28, 2002and pursuant to SFAS No. 121, carrying values of long-lived assets werereviewed for impairment when events or changes in circumstances indicated thatthe assets’ carrying values may not be recoverable from the estimated future cashflows expected to result from the properties’ use and eventual disposition.When undiscounted expected future cash flows were less than carrying values, animpairment loss is recognized equal to the amount by which the carrying valuesexceed the net realizable values of the assets. The net realizable value wouldtypically be calculated using discounted expected future cash flows, ordetermined by estimates provided by real estate professionals and/or theCompany’s past experience in disposing of restaurant properties.

 

**Build-to-suit construction-in-progress**

 

Emerging Issues TaskForce (“EITF”) Issue No. 97-10, “The Effect of Lessee Involvement in Asset Construction,*”* is applied to entities involvedwith certain structural elements of the construction of an asset that will beleased when construction of the asset is completed. EITF Issue No. 97-10requires that the Company be considered the owner (for accounting purposesonly) of these types of projects during the construction period. This is thecase even though the Company is not obligated to guarantee the non-recoursemortgage obligation, nor are we involved in the management of the owner-lessor.Therefore, the Company has recorded such building costs related to certain new restaurantsunder construction, which the Company will ultimately lease, as construction inprogress with a corresponding non-cash obligation for construction in progress.

 

**Intangibleassets**

 

Goodwill represents theexcess of cost over the fair value of individual net assets acquired inbusiness combinations accounted for under the purchase method of accounting. Inaccordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwillis not amortized on a periodic basis, but instead is subject to an impairmenttest to be performed at least on an annual basis, or more frequently if eventsor changes in circumstances indicate that the asset might be impaired. SFAS No.142 requires a two-step process for testing impairment. First, the fair valueof each reporting unit is compared to its carrying value to determine whetheran indication of impairment exists. If an impairment is indicated, the fairvalue of the reporting unit’s goodwill is determined by allocating the unit’sfair value to its assets and liabilities (including any unrecognized intangibleassets) as if the reporting unit had been acquired in a business combination.The amount of impairment, if any, for goodwill and other intangible assets ismeasured as the excess of its carrying value over its fair value. The Company hasdetermined that no impairments have existed related to its related goodwill inany of the periods presented. Intangible assets with lives restricted bycontractual, legal, or other means continue to be amortized over their usefullives.

 

In connection with theJune 14, 2003 purchase transaction and in accordance with SFAS No. 142, theCompany had its trademarks and tradenames evaluated by an external third party.As a result of this evaluation, it was determined that the Company possesses$42.6 million in trademarks and tradenames which have indefinite lives. Thetrademarks and tradenames are not amortized and are evaluated for impairment atleast annually.

 

Prior to the June 14,2003 purchase transaction, franchise rights with a value of $14.2 million wereamortized using the straight-line method over the period expected to bebenefited, or 20 years. Amortization expense of $500,000 and $794,000 wasrecorded for the period ended June 13, 2003 and the year ended October 27, 2002,respectively. At the date of the June 14, 2003 purchase transaction, theremaining franchise rights were adjusted to their then current fair marketvalue of $12.2 million. This value is being amortized over the remaining periodexpected to be benefited, or 18 years. Amortization expense of $592,000 and $250,000was recorded for the fiscal year ended October 28, 2004 and period ended October26, 2003, respectively. The Company expects to record annual amortizationexpense of $592,000 over the 18-year life of the franchise rights.

 

Deferred debt financingcosts are amortized to interest expense over the life of the related loan.

 

F-13

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Upon completion of VICORP’s“going-private” transaction on May 14, 2001, the former chairman of VICORP’sBoard of Directors entered into a non-competition and escrow agreement pursuantto which he will be paid a total of $2 million not to compete with the Companyfor a period of five years after the purchase. The agreement requires theescrow agent to pay the former chairman, on January 2 of each year starting in2002 through 2005, an amount equal to the lesser of (a) $500,000 plus allinterest and other earnings in the escrow account, less any fees then due theescrow agent or (b) the entire amount then remaining in the escrow account. Thenon-competition agreement is reflected in other assets and amortized using thestraight-line method over a five-year period.

 

**Loss contingencies and self-insurancereserves**

 

The Company maintainsaccrued liabilities and reserves relating to the resolution of certaincontingent obligations including reserves for self-insurance.  Contingent obligations are accounted for inaccordance with SFAS No. 5, “Accounting for Contingencies,” which requires thatthe Company assess each contingency to determine estimates of the degree ofprobability and the range of possible settlement.  Those contingencies that are deemed to beprobable and where the amount of such settlement is reasonably estimable areaccrued in the Company’s consolidated financial statements.  If only a range of loss can be determined,the best estimate within that range is accrued; if none of the estimates withinthat range is better than another, the low end of the range is accrued.  Reserves for self-insurance are determinedbased on the insurance companies undiscounted incurred loss estimates, lossdevelopment factors and management’s judgment.

 

The assessment ofcontingencies is a highly subjective process that requires judgments aboutfuture events.  Contingencies arereviewed at least quarterly to determine the adequacy of the accruals andrelated financial statement disclosure. The ultimate settlement of contingencies may differ materially fromamounts accrued in the financial statements.

 

**Leases and deferred straight-linerent payable**

 

The Company leases mostof its restaurant properties.  Leases areaccounted for under the provisions of SFAS No. 13, “Accounting for Leases,” asamended, which requires that leases be evaluated and classified as operating orcapital leases for financial reporting purposes.

 

The Company periodicallyenters into sale/leaseback transactions with unrelated third parties inconnection with the construction of new restaurants.  Such transactions qualify as sales under SFASNo. 66, “Sales of Real Estate,” because they include a normal leaseback,adequate initial and continuing investment by the buyer/lessor and the transferof all risks and rewards of ownership to the buyer/lessor.

 

For leases that containrent escalations, the Company records the total rent payable during the leaseterm on a straight-line basis over the term of the lease and records thedifference between the rent paid and the straight-line rent as a deferredstraight-line rent payable.

 

**Revenuerecognition**

 

Revenue fromCompany-operated stores is recognized in the period during which food andbeverage products are sold.  Gift cardssold but not yet redeemed are included in other accrued expenses (Note 6).  Revenues are recognized upon redemption ofthe gift cards.

 

Royalties are calculatedas a percentage of the franchisee gross sales and recognized in the period thesales are generated. Initial franchise fees are recognized as income uponcommencement of the franchise operation and completion of all material servicesand conditions by the Company. Rental income on properties subleased tofranchisees is recognized on a straight-line basis over the life of the lease.Interest income on franchisee notes receivable is recognized when earned.

 

F-14

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Franchise operationsgross revenues and expenses consisted of the following:

 
| ** **                         | ** ** | **VI Acquisition**                | ** ** | **Midway**                           | ** ** |
|------------------------------------|------------|-----------------------------------|------------|--------------------------------------|------------|
| **(In thousands)**                 | ** ** | **Year ended  October 28,  2004** | ** ** | **Period  ended  October 26,  2003** | ** ** | **Period  ended  June 13,  2003** | ** ** | **Year ended  October 27,  2002** | ** ** |
| Royalties                          |       | $                                 | 3,917      |                                 | $          | 1,451 |   | $ | 2,612 |   | $ | 4,217 |   |
| Initial and renewal fees           |       | —                            |       | —                               |       | 67 |   | 155 |   |
| Property rental                    |       | 1,120                             |       | 457                                  |       | 754 |   | 1,402 |   |
| Interest income on franchise notes |       | 20                                |       | 8                                    |       | 15 |   | 22 |   |
| Franchise revenues                 |       | 5,057                             |       | 1,916                                |       | 3,448 |   | 5,796 |   |
| Franchise operating expenses       |       | (2,490                            | )          | (1,032                               | )          | (1,583 | ) | (3,092 | ) |
| Franchise operations, net          |       | $                                 | 2,567      |                                 | $          | 884 |   | $ | 1,865 |   | $ | 2,704 |   |

 

Since the Companyproduces a majority of its pies and since its third-party pie saleshistorically have not had, and currently do not have, a material impact on ouroperating profit, the net results of pie manufacturing operations is includedas an offset to food costs.

 

**Advertisingcosts**

 

Advertising costs fortelevision, radio, newspapers, direct mail and point-of-purchase materials areexpensed in the period incurred. Advertising expense for the fiscal year endedOctober 28, 2004, the periods ended October 26, 2003 and June 13, 2003, and thefiscal year ended October 27, 2002 was approximately $12.3 million, $4.7million, $8.6 million, and $11.6 million, respectively.  Prepaid advertising costs totaled $0.3million at October 28, 2004 and $0.1 million at October 26, 2003 representingbillings paid for media events not occurring until after the respective dates.

 

**Newstore pre-opening costs**

 

New store pre-openingcosts consist of salaries and other direct expenses incurred in connection withthe setup and stocking of stores, employee training, and general storemanagement costs incurred prior to the opening of new restaurants.  New store pre-opening costs are expensed asincurred in accordance with SOP 98-5, “Reporting on the Costs of Start-upActivities.”  New store pre-opening costsfor the fiscal year ended October 28, 2004, the periods ended October 26, 2003and June 13, 2003, and the fiscal year ended October 27, 2002 were $532,000, $249,000,$150,000, and $60,000, respectively.

 

**Comprehensiveincome**

 

Under SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities,” the Company’s interest rateswap agreements on its variable rate debt (Note 16) are recorded at fair value withchanges in the value of such contracts, net of income taxes, reported incomprehensive income. For purposes of calculating income taxes related tocomprehensive income, the Company uses the combined statutory rate for federaland state income taxes.

 

**Fairvalue of financial instruments**

 

At October 28, 2004 andOctober 26, 2003, the fair value of cash and cash equivalents, accountsreceivable, accounts payable and accrued liabilities approximated theircarrying value based on the short-term nature of these instruments.  See Note 7 for information concerning thefair value of the Company’s long-term debt.

 

 

F-15

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**Derivativesand hedging activities**

 

SFAS No. 133 establishedaccounting standards for derivative instruments and hedging activities. UnderSFAS No. 133, all derivatives are recognized as either assets or liabilitiesand measured at fair value. The accounting for changes in fair value ofderivatives is dependent upon the intended use of the derivative. The Companydoes not use derivative instruments for trading purposes and the Company hasprocedures in place to monitor and control their use.

 

The Company has usedinterest rate swaps to manage its interest rate mix on the total debt portfolioand related overall cost of borrowing whereby it agreed to exchange thevariable rate on a portion of its term borrowings for a fixed rate. Under SFASNo. 133, the Company’s interest rate swap agreements are typically designatedas cash flow hedges and recorded at fair value, with changes in the value ofsuch contracts, net of income taxes, reported in comprehensive income. The netsettlements made under the interest rate swap agreements are reflected in theconsolidated statements of operations as an adjustment to interest expense overthe term of the related swap. See Note 16 for further discussion.

 

**Incometaxes**

 

Income taxes areaccounted for under the asset and liability method.  The Company recognizes deferred tax assetsand liabilities for the future tax consequences attributable to differencesbetween the carrying value for financial reporting purposes and the tax basisof assets and liabilities.  Deferred taxassets and liabilities are recorded using the enacted tax rates expected toapply to taxable income in the years in which such differences are expected tobe recovered or settled.  The effect ondeferred tax assets and liabilities resulting from a change in tax rates isrecognized as a component of income tax expense (benefit) in the period suchchange occurs.  Net operating loss andother credit carryforwards, including FICA tip credit, are recorded as deferredtax assets.  A valuation allowance isrecorded for the tax benefit of the deferred tax assets not expected to beutilized.

 

**Accounting for stock basedcompensation**

 

SFAS No. 123, “Accounting for Stock-Based Compensation,”defines a fair value method of accounting for employee stock compensation andencourages, but does not require, all entities to adopt that method ofaccounting. Entities electing not to adopt the fair value method of accountingmust make pro forma disclosures of net income as if the fair value method ofaccounting defined in SFAS No. 123 had been applied. The Company has electednot to adopt the fair value method and instead has elected to follow AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations. Under APB Opinion No. 25, compensationexpense related to stock options is calculated as the difference between theexercise price of the option and the fair market value of the underlying stockat the date of grant. This expense is recognized over the vesting period of theoption or at the time of grant if the options immediately vest. As a result ofthe minimal number of options outstanding during all periods presented in theaccompanying consolidated financial statements, the pro forma effects ofapplying the fair value method to outstanding options over their respectivevesting periods had an immaterial effect on net income (loss).

 

**New accounting pronouncements**

 

In January 2003,the FASB issued Interpretation No. 46, “Consolidation of Variable InterestEntities” (“FIN 46”). FIN 46 requires an investor with a majority of thevariable interests in a variable interest entity to consolidate the entity andalso requires majority and significant variable interest investors to providecertain disclosures. A variable interest entity is an entity in which the equityinvestors do not have a controlling interest or the equity investment at riskis insufficient to finance the entity’s activities without receiving additionalsubordinated financial support from the other parties. The provisions of FIN 46were effective for the Company no later than April 15, 2004. The adoptionof FIN 46 had no effect on the Company’s consolidated financial statements.

 

F-16

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In May 2003, theFASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity.” SFAS No. 150 improves the accounting for certain financialinstruments that, under previous guidance, issuers could account for as equityand requires that those instruments be classified as liabilities (or assets incertain circumstances) in statements of financial position. SFAS No. 150also requires disclosures about alternative ways of settling the instrumentsand the capital structure of entities whose shares are mandatorily redeemable.SFAS No. 150 was generally effective for all financial instruments enteredinto or modified after May 31, 2003. The adoption of SFAS No. 150requires that certain financial instruments the Company would have otherwiseclassified as equity be reflected in the liability section of the consolidatedbalance sheets. Therefore, the Company classified obligations related tocertain of its securities outside of stockholders’ equity in the accompanyingconsolidated balance sheets as a result of applying the provisions of SFASNo. 150. See Note 10 for further discussion.

 

On December 17, 2003, theStaff of the Securities and Exchange Commission (“SEC” or the “Staff”) issuedStaff Accounting Bulletin (“SAB”) No. 104 “Revenue Recognition,” which supersedesSAB No. 101, “Revenue Recognition in Financial Statements.” SAB No. 104’sprimary purpose is to rescind accounting guidance contained in SAB No. 101related to multiple element revenue arrangements, superseded as a result of theissuance of EITF Issue No. 00-21, “Accounting for Revenue Arrangements withMultiple Deliverables.” SAB No. 104 did not have a significant impact on theCompany’s consolidated financial statements.

 

In November 2004,the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43,Chapter 4.”  SFAS No. 151 clarifies theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material, and requires that such items be recognized ascurrent-period charges regardless of whether they meet the “so abnormal”criterion outlined in ARB No. 43.  SFASNo. 151 also introduces the concept of “normal capacity” and requires theallocation of fixed production overheads to inventory based on the normalcapacity of the production facilities. Unallocated overheads must be recognized as an expense in the periodincurred.  SFAS No. 151 is effective forinventory costs incurred during fiscal years beginning after June 15,2005.  While the Company is stillevaluating the impact of this statement, it does not currently believe it willhave a material impact on its consolidated financial statements.

 

In December 2004,the FASB issued SFAS No. 123 (revised 2004), “Share-based Payment,” whichreplaces the prior SFAS No. 123, “Accounting for Stock-Based Compensation,” andsupersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”  SFAS 123 (revised 2004) requires compensationcosts related to share-based payment transactions to be recognized in thefinancial statements.  With limitedexceptions, the amount of compensation cost will be measured based on thegrant-date fair value of the equity or liability instruments issued.  In addition, liability awards will beremeasured each reporting period. Compensation cost will be recognized over the period that an employeeprovides services in exchange for the award. This new standard will become effective for the Company on July 8, 2005,and the Company is still evaluating its impact.

 

**Reclassifications**

 

Certain reclassificationshave been made to prior year information to conform to the current yearpresentation.

 

F-17

----

 

**3. Receivables**

 

Receivables consisted ofthe following:

 
| **(In thousands)**                          | ** ** | **October 28,  2004** | ** ** | **October 26,  2003** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Trade receivables                           |       | $                     | 5,373      |                  | $          | 4,726 |   |
| Construction receivables (Note 4)           |       | 4,120                 |       | —                |       |
| Indemnification receivable (Notes 6 and 18) |       | 3,382                 |       | —                |       |
| Other receivables                           |       | 975                   |       | 878                   |       |
| Notes receivable                            |       | 204                   |       | 234                   |       |
| Allowance for doubtful accounts             |       | (378                  | )          | (492                  | )          |
| Receivables, net                            |       | 13,676                |       | 5,346                 |       |
| Less: long-term portion                     |       | —                |       | 122                   |       |
| Current portion                             |       | $                     | 13,676     |                  | $          | 5,224 |   |

 

Construction receivablesrepresent amounts due from landlords for build-to-suit construction projects(Note 4).

 

Activity in the allowancefor doubtful accounts was as follows:

 
| ** **          | ** ** | **VI Acquisition** | ** ** | **Midway**       | ** ** |
|---------------------|------------|--------------------|------------|------------------|------------|
| ** **          | ** ** | **Year ended**     | ** ** | **Period ended** | ** ** | **Period ended** | ** ** | **Year ended** | ** ** |
| ** **          | ** ** | **October 28,**    | ** ** | **October 26,**  | ** ** | **June 13,** | ** ** | **October 27,** | ** ** |
| **(In thousands)**  | ** ** | **2004**           | ** ** | **2003**         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Beginning of period |       | $                  | 492        |             | $          | 742 |   | $ | 552 |   | $ | 632 |   |
| Bad debt expense    |       | 11                 |       | 70               |       | 190 |   | 85 |   |
| Write-offs          |       | (125               | )          | (320             | )          | — |   | (165 | ) |
| End of period       |       | $                  | 378        |             | $          | 492 |   | $ | 742 |   | $ | 552 |   |

 

**4. Property and equipment and build-to-suit construction-in-progress**

 

Property and equipmentconsisted of the following:

 
| **(In thousands)**             | ** ** | **October 28,  2004** | ** ** | **October 26,  2003** | ** ** |
|--------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Land                           |       | $                     | 5,634      |                  | $          | 5,634 |   |
| Buildings and improvements     |       | 41,368                |       | 35,429                |       |
| Equipment                      |       | 45,917                |       | 39,687                |       |
| Construction in progress       |       | 6,087                 |       | 3,650                 |       |
| Capitalized lease buildings    |       | 4,373                 |       | 4,373                 |       |
| Impairment reserve             |       | (552                  | )          | —                |       |
|                           |       | 102,827               |       | 88,773                |       |
| Less: accumulated depreciation |       | (18,042               | )          | (4,566                | )          |
| Property and equipment, net    |       | $                     | 84,785     |                  | $          | 84,207 |   |

 

Depreciation expense was $13.7million, $4.9 million, $8.2 million, and $14.1 million for the year endedOctober 28, 2004, the periods ended October 26, 2003 and June 13, 2003, and theyear ended October 27, 2002, respectively.

 

Under EITF Issue No. 97-10,“The Effect of Lessee Involvement inAsset Construction,” the Company is considered the owner (for accountingpurposes only) of certain buildings during the construction period that it willultimately lease. The application of the provisions of EITF Issue No. 97-10resulted in the inclusion of $6.3 million and $1.3 million asconstruction-in-progress with a corresponding non-cash obligation forconstruction-in-progress of $6.3 million and $1.2 million as ofOctober 28, 2004 and October 26, 2003, respectively. 

 

F-18

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**5. Other assets**

 

Other assets consisted ofthe following:

 
| **(In thousands)**                         | ** ** | **October 28,  2004** | ** ** | **October 26,  2003** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Non-competition agreements                 |       | $                     | 2,030      |                  | $          | 2,030 |   |
| Deferred debt financing costs              |       | 6,092                 |       | 5,029                 |       |
| Deposits and miscellaneous financing costs |       | 258                   |       | 285                   |       |
|                                       |       | 8,380                 |       | 7,344                 |       |
| Less: accumulated amortization             |       | (1,898                | )          | (1,322                | )          |
| Other assets, net                          |       | $                     | 6,482      |                  | $          | 6,022 |   |

 

During fiscal 2004, deferreddebt financing costs with a book value of $4.3 million were written off as aresult of early extinguishment of debt associated with the April 2004refinancing transactions (Notes 7 and 17). Also during fiscal 2004, deferred financing costs totaling $6.1 millionwere added associated with the debt incurred as a result with the April 2004refinancing transactions (Note 7).

 

**6. Other accrued expenses**

 

Other accrued expensesconsisted of the following:

 
| **(In thousands)**                               | ** ** | **October 28,  2004** | ** ** | **October 26,  2003** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Legal settlements (Notes 3 and 18)               |       | $                     | 6,775      |                  | $          | 355 |   |
| Insurance                                        |       | 4,372                 |       | 3,659                 |       |
| Rent                                             |       | 1,611                 |       | 1,656                 |       |
| Interest                                         |       | 729                   |       | 1,322                 |       |
| Gift certificates and cards                      |       | 891                   |       | 490                   |       |
| Advertising                                      |       | 869                   |       | 1,016                 |       |
| Reserve for closed/subleased locations (Note 14) |       | 556                   |       | 519                   |       |
| Miscellaneous                                    |       | 2,717                 |       | 3,679                 |       |
|                                             |       | $                     | 18,520     |                  | $          | 12,696 |   |

 

Accrued miscellaneousexpenses consisted primarily of accrued expenses for 401(k) employercontributions, credit card fees, royalty prepayments and legal, management andaudit fees.

 

F-19

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**7. Debt**

 

Long-term debt consistedof the following:

 
| **(In thousands)**                                             | ** **         | **October 28,  2004** | ** ** | **October 26,  2003** | ** ** |
|----------------------------------------------------------------|--------------------|-----------------------|------------|-----------------------|------------|
| 101⁄2% Senior Unsecured Notes (1):                          |               | $                     | 126,530    |                  | $          | — |   |
| Amended and Restated Senior Secured Credit Facility  (1):      |               |                  |       |                  |       |
| Term loan                                                      |               | 15,000                |       | —                |       |
| Revolving credit facility                                      |               | 1,350                 |       | —                |       |
| Original Senior Secured Credit Facility (2):                   |               |                  |       |                  |       |
| Term A Loan                                                    |               | —                |       | 45,333                |       |
| Term B Loan                                                    |               | —                |       | 41,860                |       |
| Revolving credit facility                                      |               | —                |       | 9,815                 |       |
| Subordinated debt (2)                                          |               | —                |       | 45,413                |       |
| Gross amount payable                                           |               | 142,880               |       | 142,421               |       |
| Unamortized original issue discount on senior  unsecured notes |               | (1,411                | )          | —                |       |
| Unamortized original issue discount on subordinated  debt      |               | —                |       | (60                   | )          |
|                                                           |               | 141,469               |       | 142,361               |       |
| Less:                                                          | current maturities |                  | —     |                  | (8,920     | ) |
|                                                           | Long-term debt     |                  | $          | 141,469               |       | $ | 133,441 |   |

 

----

(1)       The proceeds from theseborrowings were used to repay the Company’s existing debt and pay transactionrelated costs of approximately $8.0 million.

(2)       Midway’s previousindebtedness was repaid on June 14, 2003, and VI Acquisition Corp.’s prior seniorsecured credit facility agreements were executed following the Juneacquisition.

 

On April 14, 2004,the Company completed a private placement of $126.5 million aggregate principalamount of 101⁄2% senior unsecured notes maturing on April 15, 2011.  The notes were issued at a discounted priceof 98.791% of face value, resulting in net proceeds before transaction expensesof $125.0 million.  The senior unsecurednotes were issued by VICORP Restaurants, Inc. and are guaranteed by VIAcquisition Corp. and Village Inn Pancake House of Albuquerque, Inc.  In August 2004, the Company’s registrationstatement with the Securities and Exchange Commission on Form S-4 was declaredeffective and the senior unsecured notes and guarantees were exchanged forregistered notes and guarantees having substantially the same terms andevidencing the same indebtedness.  Interestis payable semi-annually on each April 15 and October 15 until maturity.

 

Concurrently withthe issuance of the 101⁄2% senior unsecured notes, the Company entered into an Amendedand Restated Senior Secured Credit Facility consisting of a $15.0 million termloan and a $30.0 million revolving credit facility, with a $15.0 million sub-limitfor letters of credit.  As of October 28,2004, the Company had issued letters of credit aggregating $7.3 million and had$1.4 million of borrowings outstanding under the senior secured revolvingcredit facility.  The senior securedrevolving credit facility permits borrowings equal to the lesser of (a) $30.0million and (b) 1.2 times trailing twelve months Adjusted EBITDA (as defined inthe senior secured credit agreement) minus the original amount of the newsenior secured term loan.  Under thisformula, as of October 28, 2004, the Company had the ability to borrow the full$30.0 million, less the amount of outstanding letters of credit and borrowingsunder the senior secured revolving credit facility, or $21.3 million.

 

Borrowings underboth the revolving credit facility and the term loan of the Amended and RestatedSenior Credit Facility bear interest at floating rates tied to either the baserate of the agent bank under the credit agreement or LIBOR rates for a periodof one, two or three months, in each case plus a margin that will adjust basedon the ratio of our Adjusted EBITDA to total indebtedness, as defined in theagreement.  At October 28, 2004, theinterest rates on borrowings outstanding were 4.72% for term loan borrowingsand 5.75% for loans under the revolving credit facility.  Both facilities are secured by a lien of allof the assets of VICORP Restaurants, Inc., and guaranteed by VI AcquisitionCorp. and Village Inn Pancake House of Albuquerque, Inc. In addition, theguarantees also are secured by the pledge of all of the outstanding capitalstock of VICORP Restaurants, Inc. by VI Acquisition Corp. The term loan doesnot require periodic principal payments, but requires mandatory repaymentsunder certain events, including proceeds from sale of assets, issuance ofequity, and issuance of new indebtedness. Both facilities mature on April 14, 2009.

 

F-20

----

 

The Amended and RestatedSenior Secured Credit Facility and the indenture governing the 101⁄2% Senior UnsecuredNotes contain a number of covenants that, among other things, restrict, subjectto certain exceptions,  the Company’s abilityand the ability of its subsidiaries, to sell assets, incur additional indebtednessor issue preferred stock, repay other ndebtedness, pay dividends anddistributions or repurchase our capital stock, create liens on assets, makeinvestments, loans or advances, make certain acquisitions, engage in mergers orconsolidations, enter into sale-leaseback transactions, engage in certaintransactions with affiliates, amend certain material agreements governing ourindebtedness, change the business conducted by us and our subsidiaries andenter into hedging agreements. In addition, the Company’s Amended and Restated SeniorSecured Credit Facility requires us to maintain or comply with a maximum totalleverage ratio, a minimum interest coverage ratio and a maximum capitalexpenditures limitation.  On October 28,2004, the Company was in compliance with these requirements.

 

On June 14, 2003, theCompany, along with various lending institutions, entered into a $90 millioncredit agreement (the “Original Senior Secured Credit Facility”), and a $45million investment agreement for subordinated debt (“Subordinated Debt”). The OriginalSenior Secured Credit Facility consisted of Term A and B loans.

 

Proceeds from the OriginalSenior Secured Credit Facility were used to finance the purchase of Midway onJune 14, 2003. The Original Senior Secured Credit Facility also provided for a$25 million revolving credit facility, which could have been borrowed andrepaid from time to time through the maturity date of June 12, 2008.

 

Interest on the OriginalSenior Secured Credit Facility accrued at variable rates per annum equal to thebase (higher of lender prime rate or Federal Funds Effective rate plus 0.50%)or Eurodollar rate plus the applicable margin with respect to Eurodollar rate (“LIBOR”)loans as in effect from time to time.  Inaddition, the Company was required to pay a commitment fee calculated bymultiplying (a) the applicable commitment fee percentage (0.50% or 0.375%,depending on the leverage ratio) times (b) the average daily amount during eachcalendar quarter (or portion thereof).

 

The interest rate onborrowings outstanding under the Original Senior Secured Credit Facility was4.657% for the Term A Loan and 5.157% for the Term B Loan at October 26, 2003.Borrowings were collateralized by substantially all of the Company’s property,rights and interests of the consolidated entities and the pledge by theCompany, Midway and VICORP of all of the capital stock of their respectivesubsidiaries. This loan facility contained customary representations,warranties, and covenants, including financial covenants related to themaintenance of certain financial ratios and limitations on capitalexpenditures.

 

The Original SeniorSecured Credit Facility also provided for the issuance of letters of credit ofup to $12.5 million under a sub-facility. The Company was also required to pay fees on the issuance, extension, orrenewal of any letters of credit equal to the applicable margin plus an amountequal to 0.125 of 1% per annum, as a fronting fee, plus other reasonableadministrative fees in effect from time to time.

 

On June 14, 2003, theCompany also issued Subordinated Debt with a principal amount of $45 million,which was subordinated to the senior indebtedness and was accompanied bywarrants for an aggregate of 95,745 shares of common stock and 0.06 shares ofpreferred stock. See Note 10 (“Stockholders’ equity—VI AcquisitionCorp.—Warrants”) for further discussion. The discount was amortized to interestexpense over the term of the Subordinated Debt. The proceeds from the issuanceof the notes were used to finance, in part, the June 2003 purchase, and to payrelated transaction fees and expenses. The principal amount of the notes wasdue in full on December 13, 2009, and accrued interest at a fixed annual rateof 16%. Subject to the terms of the Subordinated Debt, interest was to be paidin cash on a quarterly basis on each interest payment date (October 1, January1, April 1 and July 1) at a fixed rate of 13% annually. On each interestpayment date, the Company, at its option, could (a) make an additional cashpayment to the holders of the Subordinated Debt in an amount equal to 3%annually of the principal outstanding under the note, (b) the then outstandingprincipal of the note could be increased by a payment-in-kind amount, or (c)pay a portion of the additional cash payment to the holders and accrue to theholders a portion of the payment-in-kind amount equal to 3% annually of theprincipal outstanding under the notes. This facility also contained covenantscustomary in lending transactions of this type.

 

The Company incurred $15.2million, $5.3 million, $5.5 million and $9.8 million of interest charges in thefiscal year ended October 28, 2004, periods ended October 26, 2003 and June 13,2003 and the fiscal year ended October 27, 2002, respectively.  Of these amounts, $55,000, $23,000, $92,000and $0 was capitalized in the fiscal year ended October 28, 2004, periods endedOctober 26, 2003 and June 13, 2003, and the fiscal year ended October 27, 2002,respectively.

 

F-21

----

 

Excluding capital leaseobligations (Note 8), the aggregate maturities of long-term debt obligationsfor the five years following October 28, 2004 are:

 
| **(In  thousands)** | ** ** | ** ** | ** ** |
|---------------------|------------|------------|------------|
| 2005                |       | $          | —     |   |
| 2006                |       | —     |       |
| 2007                |       | —     |       |
| 2008                |       | —     |       |
| 2009                |       | 16,350     |       |
| 2010 and thereafter |       | 126,530    |       |
|                |       | $          | 142,880    |   |

 

Theestimated fair value of the Company’s long-term debt (excluding capital leaseobligations) was approximately $142.2 million at October 28, 2004.  The Company believes that the carrying valueof debt balances under its Senior Secured Credit Facility approximates fairvalue because of its variable interest feature and the difference between theestimated fair value of long-term debt compared to its historical cost reportedin the consolidated balance sheets at October 28, 2004 relates primarily tomarket quotations for the 10 1⁄2% Senior Unsecured Notes.

 

**8. Leases**

 

The Company is the primelessee under various land, building, and equipment leases for Company-operatedand franchised restaurants, pie production facilities and other locations. Theleases have initial terms ranging from 15 to 35 years and, in most instances,provide for renewal options ranging from five to 20 years.  Many leases contain purchase options at theend of the lease term and escalation clauses, either predetermined or basedupon inflation. When predetermined escalation clauses are present, the Companyrecognizes rental expense on the straight-line basis. Certain leases containprovisions that require additional rental payments based upon restaurant salesvolume (“contingent rentals”).  Contingent rentals are accrued each accountingperiod as the liabilities are incurred utilizing prorated periodic salestargets.  Under most leases, the Companyis responsible for occupancy costs including taxes, insurance and maintenance.  Subleases to franchisees and others generallyprovide for similar terms as the prime lease and an obligation for occupancycosts.

 

The following summarizesfuture minimum lease payments under capital and operating leases having an initialor remaining non-cancelable term of one year or more as of October 28, 2004:

 
| **(In  thousands)**                                        | ** ** | **Capital  leases** | ** ** | **Operating  leases** | ** **    | **Lease and  sublease  income** | ** ** |
|------------------------------------------------------------|------------|---------------------|------------|-----------------------|---------------|---------------------------------|------------|
| 2005                                                       |       | $                   | 630        |                  | $             | 27,316                          |       | $ | 820 |   |
| 2006                                                       |       | 472                 |       | 25,918                |          | 567                             |       |
| 2007                                                       |       | 471                 |       | 23,690                |          | 479                             |       |
| 2008                                                       |       | 467                 |       | 21,524                |          | 330                             |       |
| 2009                                                       |       | 442                 |       | 20,386                |          | 139                             |       |
| 2010 and thereafter                                        |       | 5,059               |       | 176,158               |          | 488                             |       |
| Total minimum lease payments                               |       | 7,541               |       | $                     |  294,992 |                            | $          |  2,823 |   |
| Less: amount representing interest                         |       | (3,793              | )          |                  |          |                            |       |
| Present value of minimum lease payments                    |       | 3,748               |       |                  |          |                            |       |
| Less: current maturities of capitalized lease  obligations |       | (258                | )          |                  |          |                            |       |
| Capitalized lease obligations                              |       | $                   | 3,490      |                  |          |                            |       |   |

 

Nine of our leasedproperties are subject to capital lease obligations. These capital leases haveexpiration dates ranging from December 2004 to January 2025.  Implicit interest rates range from 9.7% to 14.0%on capital leases.

 

F-22

----

 

Net rental expenseconsisted of the following:

 

| ** **                             | ** ** | **VI Acquisition**                | ** ** | **Midway**                          | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|-------------------------------------|------------|
| **(In  thousands)**                    | ** ** | **Year ended  October 28,  2004** | ** ** | **Period ended  October 26,  2003** | ** ** | **Period ended  June 13,  2003** | ** ** | **Year ended  October 27,  2002** | ** ** |
| Restaurant land and buildings:         |       |                              |       |                                |       |   |   |   |   |
| Minimum rentals                        |       | $                                 | 28,640     |                                | $          | 10,162 |   | $ | 14,938 |   | $ | 23,063 |   |
| Contingent rentals                     |       | 2,061                             |       | 704                                 |       | 1,368 |   | 2,286 |   |
| Equipment                              |       | 437                               |       | 202                                 |       | 314 |   | 266 |   |
| Gross rental expense                   |       | 31,138                            |       | 11,068                              |       | 16,620 |   | 25,615 |   |
| Less: lease and sublease rental income |       | (1,458                            | )          | (596                                | )          | (1,054 | ) | (1,994 | ) |
| Net rental expense                     |       | $                                 | 29,680     |                                | $          | 10,472 |   | $ | 15,566 |   | $ | 23,621 |   |

 

During the period endedJune 13, 2003, the Company completed two sale-leaseback transactions of realestate related to restaurant properties. The Company received $2.6 million inproceeds with a resulting loss on these properties of $37,000.

 

In connection with thepurchase transaction on June 14, 2003, the Company completed a sale-leasebacktransaction of real estate related to ten restaurant properties. The Companyreceived $13.9 million in proceeds. No deferred gain or loss was recorded inconnection with the transaction.

 

In October 2003, theCompany completed an additional sale-leaseback transaction of real estaterelated to a restaurant property. The Company received $1.3 million in proceedswith a resultant gain on this property of $17,000. The deferred gain on thesale-leaseback transaction will be amortized as a decrease to future rentexpense over the term of the underlying lease agreement.

 

For all of the aboveidentified sale-leaseback transactions, the risks and rewards of ownership havebeen transferred to the buyer-lessor and the Company has no continuinginvolvement with the properties other than that of an independent third-partylessee.

 

**9. Other non-current liabilities**

 

Other non-currentliabilities and credits consisted of the following:

 
| **(In thousands)**                                | ** ** | **October 28,  2004** | ** ** | **October 26,  2003** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Reserve for closed/subleased properties (Note 14) |       | $                     | 714        |                  | $          | 1,243 |   |
| Deferred straight-line rent payable               |       | 1,762                 |       | 406                   |       |
| Deferred lease payments                           |       | 8,854                 |       | 8,016                 |       |
| Insurance                                         |       | 4,477                 |       | 3,648                 |       |
| Other                                             |       | 64                    |       | 142                   |       |
|                                              |       | $                     | 15,871     |                  | $          | 13,455 |   |

 

The deferred leasepayments liability was established at the date of the Company’s purchase ofMidway and represents the present value of the excess of the Company’s leasepayments, on individual properties, compared to the market rates in effect asof that date.

 

F-23

----

 

**10. Stockholders’ equity—VI Acquisition Corp.**

 

**Preferredstock**

 

The VI Acquisition Corp.Series A preferred stock has a par value of $0.0001 per share with a liquidationpreference of $1,000 per share, plus accrued and unpaid dividends. Dividends onthe Series A preferred stock accrue cumulatively on a daily basis at a fixedrate of 10% and are payable upon liquidation or redemption. Accrued dividendswere approximately $7.6 million and $2.6 million at October 28, 2004 and October26, 2003, respectively.  Holders of theSeries A preferred stock have no voting rights in relation to matters of theCompany.

 

**Commonstock**

 

VI Acquisition Corp.common stock has a par value of $0.0001 per share and each holder of commonstock is entitled to one vote for each share of common stock.

 

**Mezzanineand collateralized securities**

 

On June 13, 2003, theCompany issued shares of both common stock and Series A preferred stock to amember of management.  Indebtednessincurred by the shareholder totaling $590,000 to purchase these shares wasguaranteed by a letter of credit totaling $600,000 obtained by the Company.  As the Company had a potential obligationunder this arrangement, the potential obligation was reflected outside the stockholders’equity section in the October 26, 2003 consolidated balance sheet.  52,800 common shares, or $52,800, and 547.2 preferredshares, or $547,200, were classified in this manner.  The amounts were reclassified to stockholders’equity in fiscal 2004 as a result of the repayment of the loan by the member ofmanagement.

 

Certain members ofmanagement have purchased shares of the Company’s common and preferred stock,and those shares are subject to a put by the holder upon the death of the holder.Since the put feature is at the option of the holders’ estate but is notmandatory, these shares have been classified as mezzanine equities. Theseshares have resulted in common mezzanine equity of 35,248 shares, or $35,248,and preferred mezzanine equity of 1,027.85 shares, or $1,028,000.

 

**Treasurystock**

 

Following the separationof a member of management from the Company during the period ended October 26,2003, the Company repurchased 76,103 shares of common stock and 923.90 sharesof preferred stock at a cost of $1.00 and $1,000 per share, respectively.  During the year ended October 28, 2004, theCompany repurchased 4,500 shares of common stock at a cost of $1.00 per share followingthe separation of another member of management.

 

**Warrants**

 

In connection with theissuance of senior debt on June 13, 2003, VI Acquisition issued common andpreferred stock purchase warrants which entitled the holders to purchase at anytime through June 13, 2013 an aggregate of 95,745 shares of common stock and anaggregate of 0.06 shares of Series A preferred stock at $0.01 per share. Thepreferred stock warrant holders are subject to an anti-dilution provision,which allows their ownership to remain at approximately 6% of the value of theaccrued dividends on the Series A preferred stock. As of October 28, 2004, thepreferred warrants were exercisable for an aggregate of 647.49 shares ofpreferred stock.

 

F-24

----

 

**11. Stockholders’ equity—Midway Investors Holdings Inc.**

 

**Preferredstock**

 

The Midway Class Apreferred stock had a par value of $0.01 per share with a liquidationpreference of $1,000 per share, plus accrued and unpaid dividends. Dividends onthe Class A preferred stock accrued cumulatively on a daily basis at a fixedannual rate of 8.94% through April 30, 2004, and 11.34% thereafter, and werepayable upon liquidation or redemption. Accrued dividends were approximately$3.4 million at June 13, 2003. The Class A preferred stock was redeemable incash, at Midway’s option, to all holders on a pro-rata basis. Holders of theClass A preferred stock had no voting rights in relation to matters of theCompany.

 

In connection with theissuance of the Subordinated Debt on May 14, 2001, Midway issued 2,005.7additional shares of Class A preferred stock, which were subject to certain putand call provisions (the “Redeemable Preferred Stock”). Under the terms of theRedeemable Preferred Stock, holders could require Midway to redeem their shareson the earliest of (i) May 14, 2006, (ii) a change in control, (iii)acceleration of the Subordinated Debt, (iv) noncompliance of covenants in theSubordinated Debt agreement, or (v) the undertaking of Midway in a fundamentalasset transaction. Midway was also entitled to purchase all of the RedeemablePreferred Stock at any time between May 14, 2007 and the date of an initialpublic offering. The shares were to be redeemed at the accumulated liquidationvalue.

 

The Midway Class Bpreferred stock had a par value of $0.01 per share with a liquidationpreference of $1,000 per share, plus accrued and unpaid dividends, and wasconvertible into an equal number of shares of Class A preferred stock.Dividends on the Class B Preferred Stock accrued cumulatively on a daily basisat a fixed annual rate of 8.94% through April 30, 2004, and 11.34% thereafter,and were payable exclusively by issuance of a payment-in-kind dividend of ClassC preferred stock on the last day of each fiscal quarter. Fractional shares ofClass C preferred stock could be issued in connection with any payment-in-kinddividend. The Class B preferred stock was redeemable in cash, at Midway’soption, to all holders of the preferred shares on a pro-rata basis. Holders ofthe Class B preferred stock had no voting rights in relation to matters of theCompany.

 

The Class C preferredstock had a par value of $0.01 per share with a liquidation preference of$1,000 per share. The Class C preferred stock was redeemable in cash, at Midway’soption, to all holders of the preferred shares on a pro-rata basis. Holders ofthe Class C preferred stock had no voting rights in relation to matters of theCompany.

 

**Commonstock**

 

The Midway Class A commonstock had a par value of $0.01 per share and was convertible into the samenumber of shares of Class B common stock. Each holder of Class A common stock wasentitled to one vote for each share of Class A common stock.

 

The Midway Class B commonstock had a par value of $0.01 per share and was automatically convertible intothe same number of shares of Class A common stock upon the closing of aqualified public offering. Holders of the Class B common stock had no votingrights in relation to matters of the Company.

 

On June 14, 2003, allpreviously outstanding shares of Class A preferred stock, Class B preferredstock, Class C preferred stock, Class A common stock, and Class B common stockwere redeemed by the previous holders and sold to VI Acquisition Corp. At thattime, all outstanding shares of common stock were sold to VI Acquisition Corp.

 

**Warrants**

 

In connection with theissuance of the Midway Subordinated Debt, Midway issued common stock purchasewarrants entitling the holders to purchase from Midway at any time prior to May14, 2011, an aggregate of 1,063.7 shares of Class B common stock for anexercise price of $0.01 per share. See also Note 7 related to the accretion ofthis amount as a discount to the Subordinated Debt.

 

F-25

----

 

During the period ofOctober 27, 2002 through June 13, 2003, the Company issued an additional 118.18warrants with a value of $129,000. The warrants were issued in accordance withthe antidilution provision in the warrant agreement following the grant ofadditional employee stock options on October 28, 2002. All warrants of Midwaywere exercised on June 13, 2003.

 

**12. Stock option and incentive program**

 

On October 28, 2002,Midway’s Board of Directors authorized the issuance of options to certain keymanagement personnel to purchase 550.5 shares of Class B common stock for anexercise price of $100 per share. It was determined that the market price ofthe Class B common stock at the date of grant was in excess of $100 per shareand thus deferred compensation expense of $1.8 million was accrued based uponthe difference in the market price, as determined by the Board of Directors,and the exercise price. This charge was amortized into expense over the vestingperiod of the options and, during the period ended June 13, 2003, the Companyrecorded compensation expense of $523,000. At June 13, 2003, all outstandingoptions became fully vested as a result of the change in control and wereexercised as a component of the acquisition of Midway by VI Acquisition Corp.

 

Information regardingactivity for stock options exercisable for shares of Class B common stockoutstanding under Midway’s stock option plan is as follows:

 
| ** **                              | ** ** | **Shares** | ** ** | **Weighted-  average  exercise  price** | ** ** |
|-----------------------------------------|------------|------------|------------|-----------------------------------------|------------|
| Options outstanding at October 28, 2001 |       | 1,767.2    |       | $                                       | 90.36      |   |
| Granted                                 |       | 135.0      |       | 100.00                                  |       |
| Exercised                               |       | —     |       | —                                  |       |
| Forfeited                               |       | 22.0       |       | 100.00                                  |       |
| Options outstanding at October 27, 2002 |       | 1,880.2    |       | 90.94                                   |       |
| Granted                                 |       | 550.5      |       | 100.00                                  |       |
| Exercised                               |       | 2,430.7    |       | 92.99                                   |       |
| Forfeited                               |       | —     |       | —                                  |       |
| Options outstanding at June 13, 2003    |       | —     |       | $                                       | 0.00       |   |

 

In connection with the acquisitionof Midway by VI Acquisition, those members of management who chose to roll overoptions to purchase shares of Midway stock were granted options to purchaseshares of Series A preferred stock of VI Acquisition Corp. for $24.80 pershare. These options were fully vested as of the grant date and no expense wasrecorded.

 

F-26

----

 

Information regardingactivity for stock options exercisable for shares of Series A preferred stockoutstanding under VI Acquisition Corp. Stock Option Plan is as follows:

 
| ** **                              | ** ** | **Shares** | ** ** | **Weighted-  average  exercise  price** | ** ** |
|-----------------------------------------|------------|------------|------------|-----------------------------------------|------------|
| Options outstanding at June 13, 2003    |       | —     |       | $                                       | —     |   |
| Granted rollover options                |       | 1,571      |       | 24.80                                   |       |
| Exercised                               |       | 924        |       | 24.80                                   |       |
| Forfeited                               |       | —     |       | —                                  |       |
| Options outstanding at October 26, 2003 |       | 647        |       | 24.80                                   |       |
| Granted                                 |       | —     |       | —                                  |       |
| Exercised                               |       | —     |       | —                                  |       |
| Forfeited                               |       | —     |       | —                                  |       |
| Options outstanding at October 28, 2004 |       | 647        |       | $                                       | 24.80      |   |
| Options exercisable at October 28, 2004 |       | 647        |       | $                                       | 24.80      |   |

 

Theoptions outstanding at October 28, 2004 had a weighted average remainingcontractual life of 8.7 years.

 

**13. Employee benefit plans**

 

The Company maintains theVICORP Restaurants, Inc. Employees’ 401(k) Plan under Section 401(k) of theInternal Revenue Code of 1986, which provides for annual contributions by theCompany in the amount of 2% of the aggregate compensation of participants.Full-time and part-time employees meeting a 1,000 hour service requirement areeligible to participate. During the year ended October 28, 2004, the periodsended October 26, 2003 and June 13, 2003, and the year ended October 27, 2002,the Company recorded expense of $587,000, $232,000, $406,000 and $593,000,respectively, for its 401(k) contributions.

 

**14. Asset impairments, asset disposals and related costs**

 

During the fiscal yearended October 28, 2004, the Company recorded a $552,000 pretax impairment chargerelated to the write-down of assets for nine restaurant locations, eight ofwhich will continue to be operated and one which is closed..  Management assessed various factors relevantto the assets, including projected negative cash flows, and concluded thehistorical performance trends at the operating locations were unlikely toimprove materially. Therefore an impairment charge was recognized to reduce thecarrying value of the assets to fair market value, which was estimated basedupon management’s historical experience associated with such assets.

 

As of October 28,2004 and October 26, 2003, the Company had recorded a reserve forclosed/subleased restaurant locations (Notes 6 and 9) of approximately $1.3million and $1.8 million, respectively, primarily representing estimated futureminimum lease payments related to the restaurant facilities, net of expectedsublease income. Of the eight restaurant locations to which this reserverelates, four of the leases will terminate during the Company’s fiscal yearending October 27, 2005. Six of such locations were subleased as of October 28,2004.

 

The following summarizesthe activities that occurred in the Company’s reserve for closed/subleasedrestaurant locations during the year ended October 28, 2004, the periods endedOctober 26, 2003 and June 13, 2003 and the year ended October 27, 2002,respectively (in thousands):

 
| ** **          | ** ** | **VI Acquisition** | ** ** | **Midway**       | ** ** |
|---------------------|------------|--------------------|------------|------------------|------------|
| ** **          | ** ** | **Year ended**     | ** ** | **Period ended** | ** ** | **Period ended** | ** ** | **Year ended** | ** ** |
| ** **          | ** ** | **October 28,**    | ** ** | **October 26,**  | ** ** | **June 13,** | ** ** | **October 27,** | ** ** |
| **(In  thousands)** | ** ** | **2004**           | ** ** | **2003**         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Beginning of period |       | $                  | 1,762      |             | $          | 2,005 |   | $ | 2,042 |   | $ | 2,334 |   |
| Additions           |       | 65                 |       | —           |       | — |   | — |   |
| Payments            |       | (557               | )          | (243             | )          | (37 | ) | (292 | ) |
| End of period       |       | $                  | 1,270      |             | $          | 1,762 |   | $ | 2,005 |   | $ | 2,042 |   |

 

F-27

----

 

**15. Income taxes**

 

The total provisions forincome tax expense (benefit) consisted of the following:

 

| ** **                           | ** ** | **VI Acquisition**                | ** ** | **Midway**                          | ** ** |
|--------------------------------------|------------|-----------------------------------|------------|-------------------------------------|------------|
| **(In  thousands)**                  | ** ** | **Year ended  October 28,  2004** | ** ** | **Period ended  October 26,  2003** | ** ** | **Period ended   June 13,  2003** | ** ** | **Year ended  October 27,  2002** | ** ** |
| Current:                             |       |                              |       |                                |       |   |   |   |   |
| Federal                              |       | $                                 | 1,394      |                                | $          | 458 |   | $ | (996 | ) | $ | 2,641 |   |
| State                                |       | 853                               |       | (47                                 | )          | (327 | ) | 990 |   |
|                                 |       | 2,247                             |       | 411                                 |       | (1,323 | ) | 3,631 |   |
| Deferred:                            |       |                              |       |                                |       |   |   |   |   |
| Federal                              |       | (2,303                            | )          | (761                                | )          | (326 | ) | 1,717 |   |
| State                                |       | (303                              | )          | 70                                  |       | (337 | ) | 431 |   |
|                                 |       | (2,606                            | )          | (691                                | )          | (663 | ) | 2,148 |   |
| Provision for income taxes (benefit) |       | $                                 | (359       | )                                   | $          | (280 | ) | $ | (1,986 | ) | $ | 5,779 |   |

 

The following is areconciliation of income taxes at the federal statutory rate to the Company’sincome tax expense (benefit):

 
| ** **                                                           | ** ** | **VI Acquisition** | ** ** | **Midway** | ** ** |
|----------------------------------------------------------------------|------------|--------------------|------------|------------|------------|
| ** **                                                           | ** ** | **Year  ended**    | ** ** | ** ** | ** ** | **Period  ended** | ** ** | ** ** | ** ** | **Period  ended** | ** ** | ** ** | ** ** | **Year  ended** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **October  28,**   | ** ** | ** ** | ** ** | **October  26,** | ** ** | ** ** | ** ** | **June  13,** | ** ** | ** ** | ** ** | **October  27,** | ** ** | ** ** | ** ** |
| **(In  thousands)**                                                  | ** ** | **2004**           | ** ** | ** ** | ** ** | **2003** | ** ** | ** ** | ** ** | **2003** | ** ** | ** ** | ** ** | **2002** | ** ** | ** ** | ** ** |
| Income tax provision computed at statutory federal  income tax rates |       | 117                |       | 35         | %          | 101 |   | 35 | % | (1,463 | ) | 35 | % | 5,708 |   | 35 | % |
| FICA tip tax credit                                                  |       | (1,049             | )          | -314       | %          | (395 | ) | -137 | % | (634 | ) | 15 | % | (973 | ) | -6 | % |
| Non-deductible costs                                                 |       | 225                |       | 67         | %          | 58 |   | 20 | % | 798 |   | -19 | % | 278 |   | 2 | % |
| State income tax provision, net of federal benefit                   |       | 358                |       | 107        | %          | 15 |   | 5 | % | (432 | ) | 10 | % | 924 |   | 6 | % |
| Other, net.                                                          |       | (10                | )          | -3         | %          | (59 | ) | -20 | % | (255 | ) | 6 | % | (158 | ) | -1 | % |
| Income tax expense (benefit)                                         |       | (359               | )          | -107       | %          | (280 | ) | -97 | % | (1,986 | ) | 48 | % | 5,779 |   | 35 | % |

 

The components of the netdeferred tax assets were as follows:

** **

| **(In  thousands)**                             | ** ** | **October 28,  2004** | ** ** | **October 26,  2003** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| FICA tax credit carryforwards                   |       | $                     | 11,820     |                  | $          | 10,510 |   |
| Alternative minimum tax credit carryforwards    |       | 3,366                 |       | 3,366                 |       |
| Accrued insurance claims not yet deductible     |       | 3,347                 |       | 2,719                 |       |
| Property and equipment                          |       | 4,171                 |       | 5,390                 |       |
| Investment                                      |       | 2,760                 |       | 2,760                 |       |
| Other                                           |       | 4,190                 |       | 2,376                 |       |
|                                            |       | 29,654                |       | 27,121                |       |
| Valuation allowance                             |       | (2,760                | )          | (2,760                | )          |
| Deferred tax assets, net of valuation allowance |       | 26,894                |       | 24,361                |       |
| Deferred tax liabilities                        |       | (1,795                | )          | (1,868                | )          |
| Net deferred tax assets                         |       | 25,099                |       | 22,493                |       |
| Less: current portion                           |       | (2,463                | )          | (2,164                | )          |
| Long-term portion                               |       | $                     | 22,636     |                  | $          | 20,329 |   |

 

F-28

----

 

The FICA tip credit is ageneral business income tax credit claimed by the Company for employer socialsecurity taxes paid on employee tips exceeding the amount treated as wages forminimum wage purposes. To the extent that the FICA tip credit is claimed, abusiness deduction for the FICA tax is not received for the FICA tax which issubject to the federal income tax credit. Any unused FICA tip credit may be carried back one year and forward 20years (three-year carryback and 15-year carryforward for credits generated intax years beginning before 1998).  Thealternative minimum tax credit carryforwards never expire.

 

Approximately $9.6million of the FICA tip credit carryforwards were generated prior to theCompany’s acquisition in June 2003 and are subject to an annual use limitationof approximately $0.7 million.  Of thesecredit carryforwards, $5.5 million may be carried forward up to 15 years with expirationsin 2009 through 2013 and $4.1 million may be carried forward up to 20 yearswith expirations in 2019 through 2023.  Theremaining $2.2 million of FICA tip credit carryforwards were generatedpost-acquisition, are not subject to annual limitations and will expire in 2023and 2024.  Management believes that,based upon past historical and forecasted future taxable income, it is morelikely than not that these carryforwards will be fully utilized beforeexpiration.  Annual taxable income ofapproximately $6.0 million would be necessary to fully utilize the creditcarryforwards.  Estimated taxable incomefor the fiscal year ended October 28, 2004 was $5.0 million and includedapproximately $6.9 million of taxable expense related to debt extinguishmentcosts (Note 17).

 

The Company hasestablished a valuation allowance of $2.8 million for the portion of itsdeferred tax asset related to an investment for which it is more likely thannot that a tax benefit will not be realized. This investment arose from the sale of a subsidiary and in 1991 had beenwritten-off for financial reporting purposes. While the Company believes that this investment will ultimately bewritten-off for tax purposes, it does not believe that it will generatesufficient capital gains to offset the capital loss.

 

**16. Hedging activities**

 

Effective October27, 2003, the Company entered into an interest rate swap agreement to manageits cash flows associated with the interest payable under the variablecomponent of its prior senior secured credit agreement.  The swap agreement had an original notionalamount of $35 million. The contract was scheduled to expire October 27, 2006and the interest rate was fixed at 2.686%. In connection with the debt refinancing transaction on April 14, 2004(Note 7), the outstanding derivative obligations were settled for $0.2million.  The Company held no derivativeinstruments as of October 28, 2004 and October 26, 2003.

 

F-29

----

 

**17. Transaction and debt extinguishment expenses**

 

The Company incurredvarious expenses directly related to the acquisitions of the predecessorcompanies (Note 1). The components of the transaction expenses and debtextinguishment costs were as follows:

 

| ** **                                              | ** ** | **VI Acquisition**                | ** ** | **Midway**                          | ** ** |
|---------------------------------------------------------|------------|-----------------------------------|------------|-------------------------------------|------------|
| **(In  thousands)**                                     | ** ** | **Year ended  October 28,  2004** | ** ** | **Period ended  October 26,  2003** | ** ** | **Period ended  June 13,  2003** | ** ** | **Year ended  October 27,  2002** | ** ** |
| Transaction expenses:                                   |       |                              |       |                                |       |   |   |   |   |
| Employment contract termination and stock  compensation |       | $                                 | —     |                                | $          | — |   | $ | 5,574 |   | $ | — |   |
| Legal, accounting and other professional fees           |       | 75                                |       | 49                                  |       | 3,862 |   | 279 |   |
| Severance costs                                         |       | —                            |       | 1,177                               |       | — |   | — |   |
| Legal settlements                                       |       | 50                                |       | —                              |       | — |   | — |   |
| Total transaction expenses                              |       | $                                 | 125        |                                | $          | 1,226 |   | $ | 9,436 |   | $ | 279 |   |
| Debt extinguishment costs:                              |       |                              |       |                                |       |   |   |   |   |
| Debt prepayment penalties                               |       | $                                 | 2,305      |                                | $          | — |   | $ | 1,298 |   | $ | — |   |
| Write-off of deferred financing costs                   |       | 4,344                             |       | —                              |       | 3,322 |   | — |   |
| Derivative termination                                  |       | 207                               |       | —                              |       | 1,896 |   | — |   |
| Total debt extinguishment costs                         |       | $                                 | 6,856      |                                | $          | — |   | $ | 6,516 |   | $ | — |   |

 

**18. Commitments and contingencies**

 

***Insurancereserves***

 

The Company retains asignificant portion of certain insurable risks primarily in the medical,dental, workers’ compensation, general liability and property areas.Traditional insurance coverage is obtained for catastrophic losses.  Provisions for losses expected under theseprograms are recorded based upon the Company’s estimates of liabilities forclaims incurred, including those not yet reported.  Such estimates utilize prior Company historyand actuarial assumptions followed in the insurance industry.  As of October 28, 2004, the Company hadplaced letters of credit totaling approximately $7.3 million, primarilyassociated with its insurance programs.

 

***Litigationand tax contingencies***

 

From time-to-time, theCompany has been involved in various lawsuits and claims arising from theconduct of its business. Such lawsuits typically involve claims from customersand others related to operational issues and complaints and allegations fromformer and current employees. These matters are believed to be common forrestaurant businesses. Additionally, the Company has been party to variousassessments of taxes, penalties and interest from federal and stateagencies.  Management believes theultimate disposition of these matters will not have a material adverse effecton the Company’s consolidated financial position or results of operations.

 

TheCompany is currently a defendant in two purported class action claims inCalifornia. The first class action claim was brought in October 2003 by twoformer employees and one current employee, and the second class action claimwas brought in May 2004 by two former employees. The complaints allege that theCompany violated California law with regard to rest and meal periods, bonuspayment calculations (in the October 2003 complaint), overtime payments (in theMay 2004 complaint) and California law regarding unfair business practices. Theclasses and subclasses alleged in the actions have not been certified by therespective courts at the current stages of the litigation, but generally areclaimed in the 2003 complaint to include persons who have been employed by theCompany in California since October 17, 1999 in the positions of foodserver, restaurant general manager and assistant restaurant manager, andgenerally are claimed in the 2004 complaint to include persons who have beenemployed by the Company in California since May 21, 2000 in the positionsof restaurant general manager and restaurant associate manager. No dollaramount in damages is requested in either complaint, and the complaints seekstatutory damages, compensatory damages, interest and attorneys’ fees inunspecified amounts.

 

During the fourthquarter of fiscal 2004, the Company established a reserve of $3.2 million inconnection with its agreement in principle to settle these class actionlawsuits.  The parties in both lawsuitsare in the process of finalizing the settlement, which is subject to approvalof the court. Under the terms of the proposed settlements, the Company hasagreed to pay up to an aggregate of $6.55 million for the alleged claims andassociated legal fees.

 

The Company fileda lawsuit on December 3, 2004 against the former shareholders of Midway (theformer parent of VICORP), including certain members of current management, inthe Circuit Court of Cook County, Illinois seeking indemnification for all ofthe damages related to such litigation under the purchase agreement dated June14, 2003 pursuant to which VICORP was acquired, in addition to the assertion ofother claims.  The former shareholders ofMidway filed a lawsuit on December 22, 2004 in Suffolk County Superior Court inMassachusetts.  The former shareholdersof Midway claim, among other allegations, that the Company has improperlysought indemnification and are denying liability for the portion of the damagesin the previously mentioned class action lawsuits that arose following theclosing of the June 2003 acquisition, and for certain settlements for whichthey claim they did not receive appropriate notice or approval rights.

 

While the Company believes that its claims against the formershareholders of Midway Investors Holdings Inc. are meritorious and that it willprevail, in the event the Company does not fully prevail on its indemnificationclaims, management estimates that the Company’s maximum exposure under thesettlement agreements is the $3.2 million amount reserved.

 

F-30

----

 

A receivable of$3.4 million (Note 3) was recorded at October 28, 2004 for the differencebetween the aggregate amount of the settlement and the Company’s estimatedexposure.

 

***Guaranteesand commitments***

 

VICORP guaranteed certainleases for restaurant properties sold in 1986 and restaurant leases of certainfranchisees. Minimum future rental payments remaining under these leases wereapproximately $2.7 million as of October 28, 2004.  Management believes the ultimate dispositionof these matters will not have a material adverse effect on the Company’sconsolidated financial position or results of operations.

 

Contractual obligationsfor restaurant construction amounted to approximately $5.3 million as of October28, 2004.

 

**19. Related party transactions**

 

On June 14, 2003, theCompany entered into a professional services agreement with Wind PointInvestors, IV, L.P. and Wind Point Investors V, L.P., whereby certainmanagement, financial and other consulting services would be provided to theCompany.  Under terms of the agreement,the Company pays a total annual fee of $850,000 to the partnerships. Inconnection with the April 14, 2004 debt refinancing (Note 7), the Company alsopaid an additional $309,000 in fees to Wind Point Investors IV, L.P. and WindPoint Investors V, L.P., which represented a deferral of a portion of thetransaction fee payable to Wind Point Investors IV, L.P. and Wind PointInvestors V, L.P. in connection with the June 2003 acquisition (Note 1).  Total management fees paid to Wind PointInvestors, IV, L.P. and Wind Point Investors V, L.P. totaled $1,088,000 and $315,000for the fiscal year ended October 28, 2004 and the period from June 14, 2003through October 26, 2003, respectively.  Totalmanagement fee expense for the fiscal year ended October 28, 2004 and theperiod from June 14, 2003 through October 26, 2003 was $1,159,000 and $315,000,respectively. As of October 28, 2004 and October 26, 2003, $275,000 and$204,000 of such management fees were accrued but unpaid (Note 6).

 

The Company previouslyhad obtained a letter of credit which was required to secure the personal loanof a member of management. The proceeds under this arrangement were used by theindividual to participate in the acquisition of the Company’s stock (Note 10).  The Company assumed fees associated with thisletter of credit in the amount of approximately $8,000.  The loan was paid in full in February 2004.

 

On May 14, 2001, theCompany entered into management fee agreements with Goldner, Hawn, Johnson& Morrison, a Minnesota corporation, and Second Capital Corporation ofBoston (“Second Capital”), a Massachusetts corporation, whereby certainmanagement, financial and other consulting services would be provided to theCompany’s predecessor.   Under the termsof the agreement, the Company paid a total annual fee of $1.0 million toGoldner Hawn and Second Capital. Management fees totaled approximately $575,000, and $1.0 million for theperiod from October 28, 2002 through June 13, 2003 and for the fiscal yearended October 27, 2002, respectively. This agreement terminated on June 13,2003.

 

F-31

----

 

### ***20. Quarterly financial data(unaudited)***

### * *

The Company’squarterly results of operations for fiscal years 2004 and 2003 are summarizedas follows:

 

| ** **                       | ** ** | **Quarter ended**     | ** ** |
|----------------------------------|------------|-----------------------|------------|
| **(In  thousands)  Fiscal 2004** | ** ** | **January 22,  2004** | ** ** | **April 15,  2004** | ** ** | **July 8,  2004** | ** ** | **October 28,  2004** | ** ** |
|                             |       |                  |       |   |   |   |   |   |   |
| Revenues                         |       | $                     | 100,594    |   | $ | 93,125 |   | $ | 90,123 |   | $ | 115,882 |   |
| Litigation settlement            |       | —                |       | — |   | — |   | 3,168 |   |
| Transaction costs                |       | 22                    |       | 23 |   | — |   | 80 |   |
| Impairment expense               |       | —                |       | 22 |   | — |   | 530 |   |
| Operating profit                 |       | 7,368                 |       | 5,549 |   | 6,031 |   | 2,881 |   |
| Debt extinguishment costs        |       | —                |       | 6,856 |   | — |   | — |   |
| Net income (loss)                |       | 2,790                 |       | (3,097 | ) | 1,698 |   | (698 | ) |
|                                  |            |                       |            |  |  |  |  |  |  |  |  |  |  |

 

| ** **                | ** ** | **Quarter  ended**         | ** ** |
|---------------------------|------------|----------------------------|------------|
| **Fiscal 2003**           | ** ** | **January  19,  2003 (a)** | ** ** | **April  13,  2003 (a)** | ** ** | **July 6,  2003 (b)** | ** ** | **October  26,  2003** | ** ** |
|                      |       |                       |       |   |   |   |   |   |   |
| Revenues                  |       | $                          | 93,585     |   | $ | 87,296 |   | $ | 90,589 |   | $ | 115,747 |   |
| Transaction costs         |       | 100                        |       | 372 |   | 9,046 |   | 1,144 |   |
| Impairment expense        |       | —                     |       | — |   | 96 |   | — |   |
| Operating profit          |       | 7,983                      |       | 3,038 |   | (1,884 | ) | 3,787 |   |
| Debt extinguishment costs |       | —                     |       | — |   | 6,516 |   | — |   |
| Net income (loss)         |       | 3,949                      |       | 771 |   | (5,992 | ) | (354 | ) |
|                           |            |                            |            |  |  |  |  |  |  |  |  |  |  |

 

----

(a) The quartersended January 19, 2003 and April 13, 2003 represent financial results of ourpredecessor company, Midway (Note 1).

 

(b) The quarterended July 6, 2003 is combined with financial results of our predecessorcompany, Midway (Note 1), as follows:

 

| ** **                | ** ** | **Midway**         | ** ** | **VI  Acquisition** | ** ** | **Combined**      | ** ** |
|---------------------------|------------|--------------------|------------|---------------------|------------|-------------------|------------|
| **(In  thousands)**       | ** ** | **June 13,  2003** | ** ** | **July 6,  2003**   | ** ** | **July 6,  2003** | ** ** |
|                      |       |               |       |                |       |              |       |
| Revenues                  |       | $                  | 65,724     |                | $          | 24,865            |       | $ | 90,589 |   |
| Transaction costs         |       | 8,964              |       | 82                  |       | 9,046             |       |
| Impairment expense        |       | 96                 |       | —              |       | 96                |       |
| Operating profit          |       | (3,569             | )          | 1,685               |       | (1,884            | )          |
| Debt extinguishment costs |       | 6,516              |       | —              |       | 6,516             |       |
| Net income (loss)         |       | (6,915             | )          | 923                 |       | (5,992            | )          |
|                           |            |                    |            |                     |            |                   |            |  |  |  |

 

The Company’sfirst, second and third quarters generally consist of twelve weeks each and thefourth quarter consists of sixteen weeks. However, the first quarter of fiscal 2004 included an additional fourdays due to a change made to end fiscal quarters on a Thursday rather than aSunday (Note 1).

 

F-32

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