**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549-1004**

**FORM 10-K**

**(Mark One)**

 

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

 

**For the Fiscal Year EndedNovember 2, 2006**

** **

**o**                                 TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

 

**For the transition periodfrom         to      **

 

**Commission FileNumber:  333-117263**

 

**VICORP RESTAURANTS, INC.******(Exactname of registrant as specified in its charter)

| **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’stelephone number, including area code)

 

Securitiesregistered pursuant to Section 12(b) of the Act:

**None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

**None**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.  YES   o   NO   x

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Exchange Act.  YES   x   NO   o

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months and (2) has been subject to such filing requirements for the past90 days.  YES   x   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 anyamendment to this form 10-K:   x

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated  filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o  Accelerated filer o  Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  YES   o   NO   x.

The aggregate market value of voting stock held by non-affiliates of theregistrant is not determinable as such shares were privately placed and thereis no public market for such shares.

Number of shares of CommonStock, $.0001 par value, outstanding at December 31, 2006: 1,361,753,excluding treasury shares.

 

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Our annual reports on Form 10-K, quarterlyreports 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 48th Avenue, Denver, Colorado 80216.  Additionally, our consolidated financialstatements are available at our website, www.vicorpinc.com, under the “OurCompany — Investor Relations” headings.

**FORM 10-KINDEX**
|            |   | **PART I**                                                                             |   |   |
|------------|--------|---------------------------------------------------------------------------------------------|--------|--------|
|       |   |                                                                                        |   |   |
| Item 1     |   | Business                                                                                    |   | 4      |
|       |   |                                                                                        |   |   |
| Item 1a    |   | Risk Factors                                                                                |   | 10     |
|       |   |                                                                                        |   |   |
| Item 1b    |   | Unresolved Staff Comments                                                                   |   | 16     |
|       |   |                                                                                        |   |   |
| Item 2     |   | Properties                                                                                  |   | 16     |
|       |   |                                                                                        |   |   |
| Item  3    |   | Legal  Proceedings                                                                          |   | 18     |
|       |   |                                                                                        |   |   |
| Item 4     |   | Submission of Matters to a Vote of Security Holders                                         |   | 18     |
|       |   |                                                                                        |   |   |
|       |   | **PART II**                                                                            |   |   |
|       |   | ** **                                                                                  |   |   |
| Item 5     |   | Market for the Registrant’s Common Equity and Related  Stockholder Matters             |   | 18     |
|       |   |                                                                                        |   |   |
| Item 6     |   | Selected Financial Data                                                                     |   | 18     |
|       |   |                                                                                        |   |   |
| Item 7     |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |   | 22     |
|       |   |                                                                                        |   |   |
| Item 7a    |   | Quantitative and Qualitative Disclosures About Market  Risk                                 |   | 37     |
|       |   |                                                                                        |   |   |
| Item 8     |   | Financial Statements and Supplementary Data                                                 |   | 37     |
|       |   |                                                                                        |   |   |
| Item 9     |   | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure       |   | 37     |
|       |   |                                                                                        |   |   |
| Item 9A    |   | Controls and Procedures                                                                     |   | 37     |
|       |   |                                                                                        |   |   |
| Item  9B   |   | Other  Information                                                                          |   | 37     |
|       |   |                                                                                        |   |   |
|       |   | **PART III**                                                                           |   |   |
|       |   | ** **                                                                                  |   |   |
| Item 10    |   | Directors and Executive Officers of the Registrant                                          |   | 38     |
|       |   |                                                                                        |   |   |
| Item 11    |   | Executive Compensation                                                                      |   | 40     |
|       |   |                                                                                        |   |   |
| Item 12    |   | Security Ownership of Certain Beneficial Owners and  Management                             |   | 43     |
|       |   |                                                                                        |   |   |
| Item 13    |   | Certain Relationships and Related Transactions                                              |   | 44     |
|       |   |                                                                                        |   |   |
| Item 14    |   | Principal Accounting Fees and Services                                                      |   | 45     |
|       |   |                                                                                        |   |   |
| ** ** |   | **PART IV**                                                                            |   |   |
|       |   |                                                                                        |   |   |
| Item 15    |   | Exhibits, Financial Statement Schedules, and Reports  on Form 8-K                      |   | 46     |

 

 

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**FORWARD-LOOKINGSTATEMENTS**

*This Annual Report on Form 10-K and the documentsincorporated by reference into the Annual Report on Form 10-K includeforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934.  These forward-looking statementscan be identified by the use of forward-looking terminology, including thewords “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 ofoperations, 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 ordevelopments may not be indicative of results or developments in subsequentperiods.*

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

·                  Our level of indebtedness;

·                  Our development and expansion plans;

·                  Our ability to profitably implement our growth strategy;

·                  Competitive pressures and trends in the restaurant industry;

·                  Our exposure to commodity prices;

·                  Our dependence upon frequent deliveries of food and other supplies;

·                  Food-borne illness incidents;

·                  Adverse publicity and litigation;

·                  Seasonality of our business and weather conditions;

·                  Government regulations;

·                  Our vulnerability to changes in consumer preferences and economicconditions;

·                  Integration of future acquisitions into our business;

·                  Our reliance in part on our franchisees;

·                  Our ability to attract and retain employees;

·                  Our liquidity and capital resources;

·                  Theloss of key employees;

·                  Theimpact of having a controlling shareholder; and

·                  Loss development factors used in determining our insurance reserves.

*These forward-looking statements are subject to numerousrisks, uncertainties and assumptions about us, including the factors describedunder “Item 1. Business - Risk factors related to our business.”  The forward-looking events we discuss in thisAnnual Report on Form 10-K speak only as of the date of such statement andmight not occur in light of these risks, uncertainties and assumptions. Weundertake no obligation and disclaim any obligation to publicly update orrevise any forward-looking statements, whether as a result of new information,future events or otherwise.*

*Unless otherwise provided in this Annual Report onForm 10-K, references to “the Company,” “VICORP,” “we,” “us” and “our”refer to VI Acquisition Corp. and our consolidated subsidiaries includingVICORP Restaurants, Inc.*

 

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**PART I**

**Item1.****                    Business.**

**Ourcompany**

We operate family-diningrestaurants under two proven and well-recognized brands, Village Inn and BakersSquare. As of November 2, 2006, our company, which was founded in 1958, had 404restaurants in 25 states, consisting of 309 company-operated restaurants and 95franchised 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 $404.2 million in 2002 to $466.3 million in 2006. Both of ourrestaurant concepts operate in the stable family-dining segment of therestaurant industry. Over our 48-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 manage our prime margin, which is ourprofitability expressed as a percentage of restaurant sales after deducting ourtwo most significant costs, food and labor. Prime margin was 40.7% in 2002 compared to 41.0% in 2006.  In addition, we provide our managers withextensive training and the tools necessary to effectively operate our business,such as on-line ordering and bill processing and real-time information on keybusiness metrics. We continually engage in selective menu engineering and thedevelopment of updated menu items for our restaurants such as our signatureoven-roasted focaccia sandwiches in our Village Inn restaurants, seasonalofferings such as artisan-style bread bowls filled with hearty soups and stewsand new flavors of pie offerings in our Bakers Square restaurants. Our otherefforts to drive sales growth include creative marketing programs, andexpansion of our third-party customer base for our pies.

***Village Inn***

We opened our firstVillage Inn restaurant in 1958, and as of November 2, 2006 we had 256locations, 161 of which were operated by our company and 95 of which wefranchised. Our company-operated Village Inn restaurants are located in elevenstates, primarily in the Rocky Mountain region (91 units), the Midwest (39units), and Florida (16 units).  VillageInn is focused on family dining and appeals to a large segment of thepopulation, and we believe it has a strong reputation for fast and friendlyservice, fresh food and reasonable prices. We are known for serving freshbreakfast items throughout the day, including our Ultimate Skillet meals, PecanRoll French Toast, made-from-scratch buttermilk pancakes and fluffy three-eggomelets. Breakfast items accounted for 58.7% of Village Inn sales in 2006. Wehave also successfully leveraged our strong breakfast heritage to establish awell-developed brand platform encompassing a broad selection of traditionalAmerican fare for lunch and dinner, at price points that position us in themid-range of the family-dining segment. Signature items on our lunch and dinnermenus include our Portabella Chicken Skillet and our All-World DoubleCheeseburger®. We frequently review and update our menus with the assistance ofour team of in-house research and development chefs to enhance theattractiveness of our menu offerings to our customers. Customer loyalty is oneof Village Inn’s strongest characteristics, with a significant number ofcustomers who patronize our restaurants three or more times a month.

Our Village Innrestaurants are predominantly free-standing units which average approximately5,000 square feet in size and can seat between 120 and 180 people. We aretypically open from 6 a.m. to 12 a.m. allowing us to effectivelygenerate revenue in all three day parts. Our typical entrée prices range from$4.29 to $11.35 for breakfast items and from $4.99 to $13.25 for lunch anddinner items, with an average per-person check of $8.09 overall in 2006. Inorder to improve our efficiency and purchasing power, our menus arestandardized throughout the United States, with some variations driven byregional preferences. In 2006, Village Inn’s average unit sales were $1.48million, and corresponding average restaurant operating cash flow was $281,000,representing a 19.0% margin.

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***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 148company-operated restaurants as of November 2, 2006. Our Bakers Squarerestaurants are located in eight states, including California (47 units),Illinois (47 units) and Minnesota (25 units). The foundation of the BakersSquare concept is our signature freshly baked pies, which accounted for 22.7%of Bakers Square’s sales in 2006. Building upon our reputation for qualitypies, we have extended our offerings to include popular traditional Americanfare for breakfast, lunch and dinner. Bakers Square offers dozens of varietiesof multi-layer specialty pies made from premium ingredients, whichdifferentiates the concept from our family-dining competitors. Many of ourcustomers complement their lunch or dinner with a serving of pie, while otherspurchase whole pies for at-home consumption throughout the year, andparticularly around the holidays. As with Village Inn, we use our team ofin-house research and development chefs to regularly update the Bakers Squaremenu offerings to attract a wider demographic range of diners and increaserepeat business from existing customers. For example, we have successfullypromoted our artisan-style bread bowls filled with hearty soups and stews,along with popular menu favorites like our Stir-Fry Chicken Pita, Honey MustardChicken 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 trafficgenerated at lunch and dinner. Our typical entrée prices range from $4.99 to$9.99 for breakfast items and from $6.79 to $12.99 for lunch and dinner items,with an average per-person check of $9.39 overall in 2006. As with Village Inn,our menus are standardized across the United States, with some variationsdriven by regional preferences.  In 2006,Bakers Square’s average unit sales were $1.40 million, and corresponding averagerestaurant operating cash flow was $114,000, representing an 8.1% margin.

In fiscal 2005 and 2006we opened four remodeled test units.  Weare currently in the process of evaluating performance data to determine theappropriate model for the future Bakers Square units.

***Pie production operations***

Complementing ourrestaurant operations, we produce premium pies for the Bakers Square andVillage Inn restaurants and for sale to select third-party customers. In 2006,we produced 19.4 million premium pies compared to 15.4 million pies in 2005. Byproducing pies at our three strategically located facilities, we are able tocontrol the quality, consistency and freshness of our pies and enhance ourdistribution capabilities. We differentiate ourselves from other piemanufacturers by producing multi-layer pies, using premium ingredients such asfresh cream, whole fruits and high quality pie crusts, and maintaining a strictshelf life policy of no more than three days for the fresh pies in ourrestaurants. At the 2006 National Pie Championships, we won 21 first placeawards, which was more than any other competitor.

We continue to focus onthe efficiency of our pie production operations and increased sales of our piesto third parties, including the addition of several new accounts. We have usedour enterprise resource planning system to manage inventory and costs,concentrated our frozen pie production in our high volume Chaska, Minnesotafacility to achieve economies of scale and restructured our delivery arrangementsto obtain substantial savings.

Although our primary focus is to produce pies forVillage Inn and Bakers Square, our third-party pie sales have increased overtime. The overall results of operations of our pie manufacturing historicallyhave not had, and currently do not have, a material impact on our operatingprofit. We show the results of operations associated with our third party piesales separately on our income statement. In order to determine the operatingprofit for our third party sales, we allocate both variable and fixed costs. Asexternal sales increase as a percentage of total pie production, the allocationmethod may cause a decrease in the operating profit due to the higherallocation of fixed costs to the external sales. The net costs associated withinternal “sales” to our restaurants are included in restaurant food cost. Aspart of our overall effort to optimize total company food cost, we have beenfocusing on various measures to improve the net margins within our piemanufacturing operations, including increasing third-party sales, investing inequipment to improve automation, renegotiating our distribution contracts andrebalancing the production among our three plants to increase efficiency.

**Industryoverview**

The restaurant industryis a significant contributor to the U.S. economy, with estimated total 2006sales of $511 billion, the fifteenth consecutive year of real growth. Webelieve this growth can be attributed to several key lifestyle and demographictrends, including the continued increase in spending on food consumed away fromhome and restaurant dining, and the 

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continued growth indisposable incomes and key age groups of the population. The restaurantindustry can be divided into two primary operating segments: full service restaurants(“FSR”) and limited service restaurants (“LSR”). Restaurants operating in theFSR segment present broad menu choices that are served to patrons by await-staff, while restaurants operating in the LSR segment serve customers at acounter or through a drive-thru window.

Our Village Inn andBakers Square concepts operate in the “family-dining” category of the FSRsegment. The family-dining category is estimated to be near 6% of the totalsales of the top 100 restaurants per the National Restaurant Association.  While not exhibiting the higher growth ofcertain other segments, we believe the family-dining category has a loyalcustomer base and stable characteristics. We believe that family-diningrestaurants offer consumers a consistent dining experience with quality food ata lower cost per check than 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 WestCoast, 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 PancakeHouse, Inc. to VICORP Restaurants, Inc. Following our initial publicoffering, we were publicly traded until we were acquired in a going-privatetransaction led by the private equity firms Goldner Hawn Johnson &Morrison and BancBoston Capital in May 2001. In June 2003, we wereacquired in a transaction led by the private equity firm Wind PointPartners.  In April 2004, wecompleted a private placement of senior unsecured notes.  The registration statement relating to thesenotes was declared effective and the unregistered notes were exchanged forregistered notes in August 2004.

**Oursponsor**

Wind Point Partners is aprivate equity investment firm that manages over $2 billion in commitments andhas invested in more than 80 companies since its founding in 1984. 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 $100 million and $400 million.

**Operationsand controls**

To maintain aconsistently high level of food quality and service in our restaurants, we haveestablished uniform operational standards relating to the quality ofingredients, preparation of food, menu selection, maintenance of premises andemployee conduct. We require each of our restaurants to operate in accordancewith these rigorous standards, and our managers are responsible forimplementing these standards.

We use updatedinformation systems, including our ReMACS back-office system, our POS systemand our enterprise resource planning system. Our ReMACS information systemprovides our restaurant managers with improved electronic food ordering,inventory, ideal and actual food cost reporting, cash control and labormanagement tools. By using our recently upgraded POS system in our restaurants,we are able to track sales, product mix, labor dollars and hours, and creditcard and cash deposit information for each of our restaurants on a daily basis.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 

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$450,000 for leasedunits, 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 andequipment. In addition, we anticipate that we will enter into sale-leasebacktransactions and other leasing arrangements with respect to our newly constructedrestaurant properties. The standardized decor and interior design of each ofour restaurant concepts can be readily adapted to accommodate different typesof building configurations.

We use our in-housedevelopment team, including real estate, design and legal professionals, tofind, evaluate and negotiate new sites for our restaurants. We evaluatepotential sites based on a number of criteria, including surrounding populationdensity, demographic information, median household income and size, location,area restaurant competition, traffic, access, visibility, potential restaurantsize, parking and signage capability. We also selectively use outsideconsultants who specialize in site evaluation to provide independent validationof our sales potential estimates for new sites. In fiscal 2006, we opened 22new restaurants and acquired 5 franchise locations.

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.

We also seek to 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.  Additionally, we completed a transactionin 2006 with a franchisee in Oklahoma in which we purchased five VillageInn restaurants.

**Restaurantstaffing and training**

Attraction and retentionof quality 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 success inretaining our management and employees to our extensive training programs,attractive cash incentive compensation program and competitive benefitprograms.

Each of our restaurantsis typically managed by one general manager, one associate manager and one assistantmanager. On average, general managers possess over eight years of experiencewith us. Each of our general managers has primary responsibility for day-to-dayoperations in one of our restaurants, including hiring, scheduling, cleanlinessof the restaurant and restaurant cash flows. The restaurant managers aresupported by Regional Managers, Regional Vice Presidents (Village Inn) orDistrict Managers (Bakers Square) and our corporate office. As ofNovember 2, 2006, we had 39 Regional Managers, each of whom is responsiblefor managing approximately eight restaurants in a designated geographic regionin a manner consistent with our strategies, policies and standards of quality.The Regional Managers report to one of the Regional Vice Presidents of Operations(in Village Inn) or the District Managers (in Bakers Square). Our Regional VicePresidents of Operations and District Managers participate in every aspect ofour restaurant operations, from organizing quality management teams for therestaurants to routine visits to each location.

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 segmentin which our restaurant concepts operate attracts customers seeking quality,consistency, variety and value, with an average per-person check typicallybetween $8 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 

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where we have sufficientmarket penetration), newspaper, direct mail and point-of-purchase materials topromote our restaurant concepts and gain market share.

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. New items may beoffered on a promotional or seasonal basis, serve as special items to providevariety to our regular menus, or become a permanent part of our 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. Webelieve that we have good relationships with our suppliers and that alternativesupply sources are readily available if necessary.

We deliver our pies fromour three pie manufacturing facilities to all of our restaurants and to ourthird-party customers using external distributors and transportation companies.

**Franchiseprogram**

We established our firstVillage Inn franchise in 1961. As of November 2, 2006 we had a total of 95franchised 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.  We completed atransaction in 2006 with a franchisee in Oklahoma in which we purchased fiveVillage Inn restaurants.

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.  Our currentfranchisees pay royalty fees up to 4% of gross sales.  Additionally, our current franchisees paymarketing fees up to 2% of gross sales. Our franchise consultants work toward visiting each of our Village Innfranchisees approximately four times a year to monitor their business and toensure that their stores meet with our quality standards.

A franchisee is requiredto pay an initial franchise fee for a 15 year franchise term. Until the end oftheir first year of operation, our franchisees also pay us a royalty fee of$1,154 a week and a marketing fee of $577 a week. A franchisee is alsotypically obligated to pay a fee for renewal of a franchise agreement beyondthe initial term. After the first year of operation, our franchisees arerequired to pay royalty and marketing fees based on 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.

**Competition**

The restaurant industryis highly 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 of 

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their meal offerings inthe 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 PieÒ,” “The Skillet ExpertsÒ,”“Good Food ... Good FeelingsÒ,” “The BreakfastExpertsÒ“ and “J. Horner’sÒ.”We believe that our service marks, trademarks and logos are valuable to theoperation of our restaurants and are important to our marketing strategy. Ourpolicy is to actively pursue and maintain registration of our service marks,trademarks and logos where our business strategy requires us to do so and tooppose vigorously any infringement or dilution of our service marks, trademarksor logos. However, we cannot predict whether steps taken by us to protect ourproprietary rights will be adequate to prevent misappropriation of these rightsor the use by others of restaurant features based upon, or otherwise similarto, our concepts. It may be difficult for us to prevent others from copyingelements of our concepts, and any litigation to enforce our rights will likelyinvolve significant costs.

**Environmentalmatters**

Our operations aresubject to federal, state and local laws and regulations relating toenvironmental protection, including regulation of discharges into the air andwater. Under various federal, state and local laws, an owner or operator ofreal estate may be liable for the costs of removal or remediation of hazardousor toxic substances on or in such property. Such liability may be imposedwithout regard to whether the owner or operator knew of, or was responsiblefor, the presence of such hazardous or toxic substances.

Some of our propertiesare located on or adjacent to sites that we know or suspect to have been usedby prior owners or operators as retail gas stations or industrial facilities.Such properties previously contained underground storage tanks, and some ofthese properties may currently contain abandoned underground storage tanks. Wedo not believe that we have contributed to the contamination at any of ourproperties. It is possible that petroleum products and other contaminants mayhave been released at or migrated beneath our properties into or through thesoil or groundwater. Under applicable federal and state environmental laws, we,as the current owner or operator of these sites, may be jointly and severallyliable for the costs of investigation and remediation of any contamination.While we seek to obtain certain assurances relating to environmental issues atthe properties 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 restaurants orrestaurant 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 variousstate laws regulating the offer and sale of franchises. In addition, all of ourrestaurants located in California and some of our restaurants in the Midwestsell beer and wine. As a result, we are required to comply with applicablealcohol licensing requirements and alcoholic beverage control regulations.

We also are subject tothe Fair Labor Standards Act, the Immigration Reform and Control Act of 1986and various 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 Americanswith Disability Act prohibit discrimination on the basis of disability inpublic accommodations and employment. We are required to comply with theAmericans with Disabilities Act and regulations relating to accommodating theneeds of the disabled in connection with the construction of new facilities andwith significant renovations of existing facilities.

**Employees**

As of November 2,2006, we had 12,789 employees, consisting of 7,423 part-time employees and5,366 full-time employees. We employ 173 employees at our corporateheadquarters. Our employees are not covered by any collective bargaining 

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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, ouremployees could engage in future unionization efforts that may succeed.

**Item1a.                  Risk Factors.**

**Risk factors related to ourbusiness**

**Ourlevel of indebtedness could adversely affect our ability to raise additionalcapital to fund our operations, limit our ability to react to changes in theeconomy or our industry and prevent us from meeting our obligations under ourindebtedness.**

We are significantlyleveraged. The following chart shows our level of indebtedness and certainother information as of November 2, 2006:

| (In millions)                  | ** ** | **As of  November 2,  2006** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| Senior secured  credit facility     |       |                                   |       |
| Revolving credit facility(1)        |       | $                                      | 12.6       |   |
| Term loan                           |       | 15.0                                   |       |
| 10 1⁄2% senior  unsecured notes  |       | 126.5                                  |       |
| Unamortized original issue discount |       | (1.0                                   | )          |
| Capitalized  leases                 |       | 0.2                                    |       |
| Other debt                          |       | 0.8                                    |       |
| Total indebtedness (2)              |       | $                                      | 154.1      |   |
| Stockholders’ equity           |       | $                                      | 63.3       |   |

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(1)             Doesnot include $7.4 million of outstanding letters of credit that were issuedunder the senior secured revolving credit facility as of November 2, 2006.We are able to borrow under the senior secured revolving credit facility thelesser of (a) $30.0 million and (b) 1.2 times trailing twelve monthsAdjusted EBITDA (as defined in the senior secured credit facility) minus theoriginal principal amount of our senior secured term loan.  As of November 2, 2006, we had theability to borrow the full $30 million, less the amount of outstanding lettersof credit under the senior secured revolving credit facility, or $10.0 million.

(2)             Does notinclude deemed landlord financing liability.

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

·                  itmay limit our ability to obtain additional debt or equity financing for workingcapital, capital expenditures, new restaurant development, debt servicerequirements, acquisitions and general corporate or other purposes;

·                  asubstantial portion of our cash flows from operations must be dedicated to thepayment of principal and interest on our indebtedness and is not available forother purposes, including our operations, capital expenditures and futurebusiness opportunities;

·                  thedebt service requirements of our other indebtedness could make it moredifficult for us to make payments on our indebtedness;

·                  certainof our borrowings, including borrowings under our senior secured creditfacility, are at variable rates of interest, exposing us to the risk ofincreased interest rates;

·                  itmay limit our ability to adjust to changing market conditions and place us at acompetitive disadvantage compared to our competitors that have less debt; and

·                  wemay be vulnerable in a downturn in general economic conditions or in ourbusiness, or we may be unable to carry out capital spending that is importantto our growth.

 

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**We mayhave difficulty 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:

·                  findsuitable locations;

·                  reachacceptable agreements regarding the lease or purchase of prospective locationsfor our restaurants;

·                  complywith applicable zoning, land use and environmental regulations;

·                  raiseor have available an adequate amount of money for construction and openingcosts;

·                  hire,train and retain the skilled management and other employees necessary to meetstaffing needs in a timely and cost-effective manner;

·                  obtainrequired permits and approvals; and

·                  efficientlymanage the amount of time and money used to build and open each new restaurant.

Historically, there is a “ramp-up”period of time before a new restaurant location achieves its targeted level ofperformance. This phenomenon is due to higher operating costs caused bystart-up and other temporary inefficiencies associated with opening newrestaurants, such as lack of market familiarity and acceptance when we enternew markets and lack of experienced staff. We may not be able to attract enoughcustomers to new restaurants because potential customers may be unfamiliar withour restaurants or our restaurants’ atmosphere or menus might not appeal tothem.

**We maynot be able to open new restaurants profitably, which could negatively affectour growth strategy.**

We have historicallyadded, and plan to continue to add, new restaurants through new construction,acquisitions and conversions. We have traditionally used cash flow fromoperations and sale-leaseback transactions as the primary funding sources foradditional restaurants. We cannot guarantee that our cash flows will besufficient to achieve the desired development levels if our revenues,profitability or cash flow from operations decline. Opening a new restaurant inan existing market also could reduce the revenue of our existing restaurants inthat 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 reputation forvalue 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 restaurantindustry has few non-economic barriers to entry, and therefore new competitorsmay emerge at any time. We may not be able to compete successfully against ourcompetitors in the future, and competition may have a material adverse effect onour operations.

**Thesuccess of 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.

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

The cost, availabilityand quality of the ingredients we use to prepare our food are subject to arange of factors, many of which are beyond our control. We depend on frequentdeliveries of fresh ingredients, thereby subjecting us to the risk of shortagesor interruptions 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 contractswith respect to potential price fluctuations in the cost of food and othersupplies, which we purchase at prevailing market or contracted prices. Althoughwe at times enter into arrangements locking in the price of certain ingredientsfor a specified 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.

**Wedepend heavily on our suppliers and distributors.**

We currently purchase ourraw materials from various suppliers. Most of our suppliers drop-ship directlyto our pie production facilities. Our reliance on our suppliers subjects us toa number of risks, including possible delays or interruptions in delivery ofsupplies, diminished control over quality and a potential lack of adequate rawmaterial capacity. If any of these suppliers do not perform adequately orotherwise fail to distribute products or supplies to our restaurants or pieproduction facilities, we may be unable to replace the suppliers in a shortperiod of time on acceptable terms. For example, labor disputes at any of oursuppliers could result in those suppliers being unable to provide us with rawmaterials or supplies that we depend upon to run our business. Our inability toreplace the suppliers in a short period of time on acceptable terms couldincrease our costs and could cause shortages at our restaurants or pieproduction 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 orinjury relating 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, ordiseases 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 impactof adverse 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.

**We facethe risk of litigation in connection with our operations.**

We are from time to timethe subject of complaints or litigation from our consumers alleging illness,injury or 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.

We settled two classaction claims in California related to overtime and wage payments in June 2005for an aggregate 

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payment of up to $6.5million, subject to the following partial indemnification.  We filed a suit in December 2004 in Cook County,Illinois, seeking indemnification for damages related to this litigation underthe Purchase Agreement dated June 14, 2003, pursuant to which VICORPRestaurants, Inc., was acquired, in addition to assertion of other claims.  The former shareholders of Midway InvestorsHoldings Inc. filed a similar action in December 2004 in Superior Court inMassachusetts.  Through our parentcompany, VI Acquisition Corp., an agreement to settle claims brought in both ofthese actions was finalized and VI Acquisition Corp. received a settlementpayment in December 2005 of $2.65 million. The ultimate cost to settle the two class actions was reduced to $5.3million.

We are currentlydefendants in two class action claims in California.  The first class action was brought in March2006 by two former managers and alleges that we violated California law withregard to unpaid overtime, compensation for missed meals and rest periods,civil penalties for failure to provide itemized wage statements, failure toprovide notice on paychecks where paychecks may be cashed without any fees, andunfair business practices.  The classesand subclasses alleged in the action have not been certified by the court atthe current stage of the litigation but generally are claimed to be persons whohave been employed since February 1, 2005, in the position of restaurantmanagers, persons who have been employed in California since March 15, 2002, inany capacity who received a payroll check in California, and all restaurantmanagers who  have ended their employmentwith VICORP prior to the effective date of any settlement, judgment, or otherresolution of the action.  No dollaramount in damages is requested in the Complaint and the Complaint seeksstatutory damages, and attorneys’ fees in an unspecified amount.

The second class actionwas brought in April 2006 by a former employee and alleges that VICORP violatedCalifornia laws with regard to failure to pay vested vacation pay and unfairbusiness practices.  The class alleged isany person who has been employed by us in California at any time from fouryears prior to the filing of the class action to date of trial.  No dollar amount in damages is requested inthe Complaint and the Complaint seeks attorneys’ fees in an unspecifiedamount.  In the fourth quarter of fiscal2006, The Company established a liability of $600,000 relating to this action.

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

Our business is subjectto seasonal 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 andDecember of each year, and decrease significantly following holidayperiods. Accordingly, results for any one quarter are not necessarilyindicative of results to be expected for any other quarter or for any year.Adverse weather conditions can also negatively impact our financial results.For example, unusually cold temperatures or above-average rainfall tends toadversely affect sales in affected markets. These fluctuations can make it moredifficult for us to predict accurately and address in a timely manner factorsthat may have a negative impact on our business.

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

Our business is subjectto extensive federal, state and local government regulation, includingregulations related to the preparation and sale of food, the sale of alcoholicbeverages, the use of tobacco, zoning and building codes, land use andemployee, health, sanitation and safety matters. One or more of our restaurantscould be subject to litigation and governmental fine, censure or closure inconnection with issues relating to our food and/or our facilities. Ourfranchise operations are also subject to regulation by the Federal TradeCommission. We and our franchisees must also comply with state franchising lawsand a wide range of other state and local rules and regulations applicableto our business. The failure to comply with federal, state and localrules and regulations could impair our ability to continue operating ourbusiness.

All of our restaurantslocated in California and some of our restaurants in the Midwest sell beer andwine. Typically, each restaurant’s license to sell alcoholic beverages must berenewed annually and may be suspended or revoked at any time for cause.Alcoholic beverage control regulations relate to various aspects of dailyoperations of our restaurants, including the minimum age of patrons andemployees, hours of operation, advertising, wholesale purchasing and inventorycontrol, 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 

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may also increase ifthere are changes in laws and regulations such as those governing access forthe disabled, including the Americans with Disabilities Act. If any of thesecosts increased and we were unable to offset the increase by increasing ourmenu prices or by other means, we would generate lower profits, which couldhave a material adverse effect on our business and results of operations. See “Business—Governmentalregulation.”

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

Many of our currentleases are non-cancelable and typically have terms ranging from 15 to 20 yearsand renewal options for terms ranging from five to 20 years. It is likely thatleases we enter into in the future will also be long-term and non-cancelableand have similar renewal options. If we close a restaurant, we may remaincommitted to perform our obligations under the applicable lease, which would include,among other things, payment of the base rent for the balance of the lease term.As of November 2, 2006, we were responsible for lease payments at 4 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 endof the 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 to constructionand other costs and risks, and could have a material adverse effect on ourbusiness and results of operations.

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

Food service businessesare often 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.

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

Our future growth may bea function, in part, of acquisitions of other restaurants. To the extent thatwe grow 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 risksassociated with the incurrence of this indebtedness, such as reductions in ourliquidity, 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. Any prolonged disruption in the operations ofany of these plants, whether as a result of technical or labor difficulties,destruction or damage to the facilities or other reasons, could result inincreased costs and reduced revenues, and 

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our relationships withthird-party customers could be harmed.

**We relyin part 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 2006 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 inpart upon our ability to attract, motivate and retain qualified employees,including restaurant managers, kitchen staff and servers, in quantitiessufficient to keep pace with our expansion schedule and meet the needs ofour existing restaurants. A sufficient number of qualified individuals of therequisite caliber 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.

**Changesin employment 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:

·                  minimumwages;

·                  mandatedhealth benefits;

·                  paidleaves of absence;

·                  taxreporting; or

·                  revisionsin the tax payment requirements for employees who receive gratuities.

**We maynot be able to protect our trademarks, service marks, logos and otherproprietary rights.**

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, our intellectualproperty rights may not have the value that we believe they have. If we areunsuccessful in protecting our intellectual property rights, or if anotherparty 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 tofederal, state and local laws, regulations and ordinances that:

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·                  governactivities or operations that may have adverse environmental effects, such asdischarges to air and water, as well as handling and disposal practices forsolid and hazardous wastes; and

·                  imposeliability for the costs of cleaning up, and certain damages resulting from,sites of past spills, 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 restaurants orrestaurant sites could have a material adverse effect on our business andresults of operations.

**Wedepend on the services of key executives, the loss of whom could materiallyharm our business.**

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.”

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

As a result of theircontrol of VI Acquisition Corp., which is our parent, investment fundsaffiliated with Wind Point have the power to elect a majority of our directors,to appoint members of management, to approve all actions requiring the approvalof the holders of our common stock, including adopting amendments to ourcertificate of incorporation and approving mergers, acquisitions or sales ofall or substantially all of our assets, and to direct our operations.

The interests of WindPoint may not in all cases be aligned with the interests of our other equityholders and the holders of our indebtedness. For example, if we encounterfinancial difficulties or are unable to pay our debts as they mature, theinterests of Wind Point as a holder of equity might conflict with the interestsof our other equity holders and the holders of our indebtedness. Wind Pointalso may have an interest in pursuing acquisitions, divestitures, financings orother transactions that, in its judgment, could enhance its equity investment,even though such transactions might involve risks to other equity holders andthe holders of our indebtedness.

We have two independentdirectors (as defined under the federal securities laws) on our Board ofDirectors and, as a result, our Board of Directors and Audit Committee have notmet, and do not meet, the standard “independence” requirements that would beapplicable if our equity securities were traded on the NASDAQ National Marketor the New York Stock Exchange.

**Item1b.                  Unresolved StaffComments.**

None.

**Item2.****                    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 

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rest of ourcompany-operated restaurants are leased, in whole or in part.

We also lease 10restaurants that we sublease to franchisees and lease four restaurants that wesublease to others. All of our other franchise restaurants are leased or owneddirectly by the respective franchisees.  As of November 2, 2006, we owned no idle property.

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

**Locations*.***  As of November 2, 2006, we and ourfranchisees operated 404 restaurants as follows:

**VillageInn restaurants:**
| **State of operation** | ** ** | **Number of  company-  operated  restaurants** | ** ** | **Number of  franchised  restaurants** | ** ** | **Total  number of  restaurants** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------|------------|
| Alaska                           |       | —                                              |       | 3                                           |       | 3                                      |       |
| Arizona                          |       | 29                                                  |       | —                                      |       | 29                                     |       |
| Arkansas                         |       | —                                              |       | 4                                           |       | 4                                      |       |
| Colorado                         |       | 38                                                  |       | 16                                          |       | 54                                     |       |
| Florida                          |       | 16                                                  |       | 15                                          |       | 31                                     |       |
| Illinois                         |       | 2                                                   |       | 1                                           |       | 3                                      |       |
| Iowa                             |       | 18                                                  |       | 4                                           |       | 22                                     |       |
| Kansas                           |       | —                                              |       | 10                                          |       | 10                                     |       |
| Minnesota                        |       | —                                              |       | 3                                           |       | 3                                      |       |
| Missouri                         |       | —                                              |       | 3                                           |       | 3                                      |       |
| Nebraska                         |       | 19                                                  |       | 3                                           |       | 22                                     |       |
| New Mexico                       |       | 10                                                  |       | 5                                           |       | 15                                     |       |
| North Dakota                     |       | —                                              |       | 2                                           |       | 2                                      |       |
| Oklahoma                         |       | 5                                                   |       | —                                      |       | 5                                      |       |
| Oregon                           |       | 1                                                   |       | 3                                           |       | 4                                      |       |
| Texas                            |       | 9                                                   |       | 8                                           |       | 17                                     |       |
| Utah                             |       | 14                                                  |       | 2                                           |       | 16                                     |       |
| Virginia                         |       | —                                              |       | 1                                           |       | 1                                      |       |
| Washington                       |       | —                                              |       | 3                                           |       | 3                                      |       |
| Wyoming                          |       | —                                              |       | 9                                           |       | 9                                      |       |
| Total                            |       | 161                                                 |       | 95                                          |       | 256                                    |       |

 

**BakersSquare restaurants:**
| **State of operation** | ** ** | **Number of  company-  operated  restaurants** | ** ** | **Number of  franchised  restaurants** | ** ** | **Total  number of  restaurants** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------|------------|
| California                       |       | 47                                                  |       | —                                      |       | 47                                     |       |
| Illinois                         |       | 47                                                  |       | —                                      |       | 47                                     |       |
| Indiana                          |       | 4                                                   |       | —                                      |       | 4                                      |       |
| Iowa                             |       | 3                                                   |       | —                                      |       | 3                                      |       |
| Michigan                         |       | 7                                                   |       | —                                      |       | 7                                      |       |
| Minnesota                        |       | 25                                                  |       | —                                      |       | 25                                     |       |
| Ohio                             |       | 7                                                   |       | —                                      |       | 7                                      |       |
| Wisconsin                        |       | 8                                                   |       | —                                      |       | 8                                      |       |
| Total                            |       | 148                                                 |       | —                                      |       | 148                                    |       |

 

**Lease expirations**

In fiscal 2007, leasesfor 22 of our properties are scheduled to expire.  Of these expiring leases, we plan to exerciseoptions to extend the lease term on 19 properties.  Of the three leases we expect to let expire,these are associated with currently operating restaurants which will close.

 

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**Item3.****                    Legal proceedings.**

We are parties tolawsuits, revenue agent reviews by taxing authorities and legal proceedings, ofwhich the majority involve workers’ compensation, employment practicesliability and general liability claims arising in the ordinary course ofbusiness.

We settled two classaction claims in California related to overtime and wage payments in June 2005for an aggregate payment of up to $6.5 million, subject to the followingpartial indemnification.  We filed a suitin December 2004 in Cook County, Illinois, seeking indemnification for damagesrelated to this litigation under the Purchase Agreement dated June 14, 2003,pursuant to which VICORP Restaurants, Inc., was acquired, in addition toassertion of other claims.  The formershareholders of Midway Investors Holdings Inc. filed a similar action inDecember 2004 in Superior Court in Massachusetts.  Through our parent company, VI AcquisitionCorp., an agreement to settle claims brought in both of these actions wasfinalized and VI Acquisition Corp. received a settlement payment in December2005 of $2.65 million.  The ultimate costto settle the two class actions was reduced to $5.3 million.

We are currentlydefendants in two class action claims in California.  The first class action was brought in March2006 by two former managers and alleges that we violated California law withregard to unpaid overtime, compensation for missed meals and rest periods,civil penalties for failure to provide itemized wage statements, failure toprovide notice on paychecks where paychecks may be cashed without any fees, andunfair business practices.  The classesand subclasses alleged in the action have not been certified by the court atthe current stage of the litigation but generally are claimed to be persons whohave been employed since February 1, 2005, in the position of restaurantmanagers, persons who have been employed in California since March 15, 2002, inany capacity who received a payroll check in California, and all restaurantmanagers who  have ended their employmentwith the Company prior to the effective date of any settlement, judgment, orother resolution of the action.  Nodollar amount in damages is requested in the Complaint and the Complaint seeksstatutory damages, and attorneys’ fees in an unspecified amount.

The second class actionwas brought in April 2006 by a former employee and alleges that the Companyviolated California laws with regard to failure to pay vested vacation pay andunfair business practices.  The classalleged is any person who has been employed by us in California at any timefrom four years prior to the filing of the class action to date of trial.  No dollar amount in damages is requested inthe Complaint and the Complaint seeks attorneys’ fees in an unspecified amount.  In the fourth quarter of fiscal 2006, theCompany established a liability of $600,000 relating to this action.

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.

**PART II**

**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.”

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

The table below presentsselected historical consolidated financial data. The selected historical consolidatedfinancial data for the fiscal year ended October 28, 2004, the fiscal yearended November 3, 2005 and the fiscal year ended November 2, 2006have been derived from our audited consolidated financial statements includedelsewhere herein. The selected historical consolidated financial data for thefiscal year ended October 27, 2002 and the period from October 28,2002 to June 13, 2003, and the period from June 14, 2003 toOctober 26, 2003 has been derived from our audited consolidated financial statementsfor those periods not included elsewhere herein.

On May 14, 2001,Midway Investors Holdings Inc. purchased VICORP Restaurants, Inc., whichwas a publicly owned company prior to the acquisition. On June 14, 2003,VI Acquisition 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 VICORP 

18

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Restaurants, Inc.However, 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 purchase accountingrules required us to revalue our assets and liabilities at the tworespective acquisition dates which resulted in different accounting bases beingapplied in different periods. As a result of these changes, the summaryfinancial information presented below relate to the entity specified below forthe following 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.           |
| Fiscal year  ended November 3, 2005     |   | VI Acquisition Corp.           |
| Fiscal year  ended November 2, 2006     |   | VI Acquisition Corp.           |

 

The following data shouldbe read in conjunction with “Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and our consolidated financialstatements and notes thereto included elsewhere in this Annual Report onForm 10-K.

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| ** **                                                                            | ** ** | **VI Acquisition Corp.**                  | ** ** | **Midway Investors  Holdings Inc.**       | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                                                               | ** ** | **Fiscal year  ended  November 2,  2006** | ** ** | **Fiscal year  ended  November 3,  2005** | ** ** | **Fiscal year  ended  October 28,  2004** | ** ** | **Period from  June 14,  2003 to  October 26,  2003** | ** ** | **Period from  October 28,  2002 to  June 13,  2003** | ** ** | **Fiscal year  ended  October 27,  2002** | ** ** |
| ** **                                                                            | ** ** | ** **                                          | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income  statement data:**                                                           | ** ** | ** **                                          | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                             |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Restaurant operations                                                                 |       | $                                                   | 425,185    |                                                | $          | 407,424 |   | $ | 394,667 |   | $ | 138,696 |   | $ | 243,157 |   | $ | 377,630 |   |
| Franchise operations                                                                  |       | 5,058                                               |       | 5,280                                               |       | 5,057 |   | 1,916 |   | 3,448 |   | 5,796 |   |
| Manufacturing operations                                                              |       | 36,065                                              |       | 26,641                                              |       | 31,796 |   | 12,378 |   | 18,726 |   | 20,754 |   |
| Total revenues                                                                        |       | 466,308                                             |       | 439,345                                             |       | 431,520 |   | 152,990 |   | 265,331 |   | 404,180 |   |
| **Cost and  expenses:**                                                               |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Restaurant costs:                                                                     |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Food                                                                                  |       | 108,774                                             |       | 105,575                                             |       | 103,604 |   | 35,800 |   | 64,108 |   | 101,218 |   |
| Labor                                                                                 |       | 141,876                                             |       | 132,000                                             |       | 127,251 |   | 45,500 |   | 79,016 |   | 122,850 |   |
| Other operating expenses(1)                                                           |       | 126,415                                             |       | 112,204                                             |       | 105,043 |   | 38,161 |   | 62,067 |   | 94,336 |   |
| Franchise operating expenses                                                          |       | 2,148                                               |       | 2,181                                               |       | 2,311 |   | 978 |   | 1,583 |   | 3,092 |   |
| Manufacturing operating expenses                                                      |       | 35,350                                              |       | 24,809                                              |       | 32,322 |   | 12,899 |   | 19,432 |   | 21,518 |   |
| General and administrative expenses                                                   |       | 29,417                                              |       | 29,602                                              |       | 27,028 |   | 10,048 |   | 17,802 |   | 28,914 |   |
| Litigation settlement expenses                                                        |       | 600                                                 |       | (408                                                | )          | 3,168 |   | — |   | — |   | — |   |
| Employee severance                                                                    |       | 40                                                  |       | 600                                                 |       | 286 |   | 297 |   | — |   | — |   |
| Transaction expenses(2)                                                               |       | —                                              |       | 15                                                  |       | 125 |   | 1,226 |   | 9,436 |   | 279 |   |
| Management fees                                                                       |       | 850                                                 |       | 850                                                 |       | 1,159 |   | 185 |   | 674 |   | 1,000 |   |
| Loss on disposition of assets                                                         |       | 1,395                                               |       | 110                                                 |       | 438 |   | 141 |   | 237 |   | 88 |   |
| Asset impairments                                                                     |       | 1,381                                               |       | —                                              |       | 1,101 |   | — |   | 96 |   | — |   |
| Operating profit                                                                      |       | 18,062                                              |       | 31,807                                              |       | 27,684 |   | 7,755 |   | 10,880 |   | 30,885 |   |
| Interest expense                                                                      |       | (29,976                                             | )          | (28,951                                             | )          | (26,787 | ) | (9,719 | ) | (11,353 | ) | (19,312 | ) |
| Debt  extinguishment costs(2)                                                         |       | —                                              |       | —                                              |       | (6,856 | ) | — |   | (6,516 | ) | — |   |
| Other income, net                                                                     |       | 586                                                 |       | 745                                                 |       | 522 |   | 147 |   | 433 |   | 787 |   |
| Income (loss)  before income taxes                                                    |       | (11,328                                             | )          | 3,601                                               |       | (5,437 | ) | (1,817 | ) | (6,556 | ) | 12,360 |   |
| Provision for  income taxes (benefit)                                                 |       | (3,457                                              | )          | 138                                                 |       | (2,912 | ) | (1,235 | ) | (3,139 | ) | 3,882 |   |
| Net income (loss)                                                                     |       | $                                                   | (7,871     | )                                                   | $          | 3,463 |   | $ | (2,525 | ) | $ | (582 | ) | $ | (3,417 | ) | $ | 8,478 |   |
|                                                                                  |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| **Balance  sheet data (at end of period):**                                           | ** ** | ** **                                          | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                                             |       | $                                                   | 1,938      |                                                | $          | 2,099 |   | $ | 1,332 |   | $ | 5,326 |   | $ | 9,036 |   | $ | 16,021 |   |
| Working deficit(3)                                                                    |       | (12,688                                             | )          | (10,708                                             | )          | (16,348 | ) | (25,679 | ) | (61,111 | ) | (14,758 | ) |
| Total assets                                                                          |       | 395,242                                             |       | 412,265                                             |       | 384,127 |   | 376,939 |   | 270,553 |   | 276,248 |   |
| Total debt(4)                                                                         |       | 154,168                                             |       | 147,261                                             |       | 141,918 |   | 143,169 |   | 80,611 |   | 91,700 |   |
| Deemed landlord financing liability                                                   |       | 108,033                                             |       | 132,038                                             |       | 114,670 |   | 108,140 |   | 92,209 |   | 89,305 |   |
| Total stockholders’ equity                                                       |       | 63,347                                              |       | 71,871                                              |       | 68,045 |   | 69,588 |   | 5,592 |   | 45,735 |   |
| **Cash  flow and other financial data:**                                              | ** ** | ** **                                          | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net rent expense:(5)                                                                  |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Net rent expense, less amortization of rent- related  purchase accounting adjustments |       | 23,277                                              |       | 18,343                                              |       | 17,387 |   | 6,012 |   | 10,093 |   | 14,615 |   |
| Amortization of rent-related purchase accounting  adjustments                         |       | 1,140                                               |       | 1,582                                               |       | 1,597 |   | 614 |   | (222 | ) | (301 | ) |
| Capital expenditures(6)                                                               |       | 24,699                                              |       | 21,081                                              |       | 16,006 |   | 9,573 |   | 9,904 |   | 10,599 |   |
| Depreciation and amortization                                                         |       | 22,184                                              |       | 20,482                                              |       | 18,962 |   | 6,869 |   | 11,215 |   | 19,059 |   |
| Cash flow from operating activities                                                   |       | 17,890                                              |       | 24,490                                              |       | 25,121 |   | 5,820 |   | 12,243 |   | 28,657 |   |
| Cash flow from investing activities                                                   |       | (36,375                                             | )          | (38,871                                             | )          | (23,766 | ) | (154,261 | ) | (13,743 | ) | (10,278 | ) |
| Cash flow from financing activities                                                   |       | 18,324                                              |       | 15,148                                              |       | (5,349 | ) | 144,731 |   | (5,485 | ) | (7,926 | ) |
|                                                                                  |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| **Ratio  data:**                                                                      | ** ** | ** **                                          | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Ratio of earnings to fixed charges(7)                                                 |       | 0.7 x                                               |       | 1.1 x                                               |       | 0.8 x |   | 0.9 x |   | 0.7 x |   | 1.4 x |   |
| **Operating  data:**                                                                  | ** ** | ** **                                          | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Village Inn company-operated locations (at end of  period)                            |       | 161                                                 |       | 135                                                 |       | 121 |   | 118 |   | 117 |   | 109 |   |
| Bakers Square company-operated locations (at end of  period)                          |       | 148                                                 |       | 152                                                 |       | 150 |   | 149 |   | 148 |   | 148 |   |
| Village Inn franchised locations (at end of period)                                   |       | 95                                                  |       | 100                                                 |       | 103 |   | 105 |   | 106 |   | 115 |   |
| Change in same unit sales—Village Inn                                            |       | (1.9                                                | )%         | 0.9                                                 | %          | 2.2 | % | 0.4 | % | (0.2 | )% | 0.2 | % |
| Change in same unit sales—Bakers Square                                          |       | (2.3                                                | )%         | (3.1                                                | )%         | (1.0 | )% | (4.7 | )% | (1.3 | )% | 1.8 | % |
| Change in total  same unit sales                                                      |       | (2.1                                                | )%         | (1.3                                                | )%         | 0.4 | % | (2.6 | )% | (0.8 | )% | 1.1 | % |

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(1)             Otheroperating expense consists primarily of rent, utilities, depreciation,marketing expenses, supplies, repairs and maintenance, insurance expenses andworkers’ compensation costs.

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(2)             Weincurred various expenses directly related to the June 2003 acquisitionsof the predecessor companies. The components of the transaction expenses are asfollows (there were no transaction or debt related costs incurred in fiscal2006):
| ** **                                                 | ** ** | **VI Acquisition Corp.**                  | ** ** | **Midway Investors Holdings Inc.**   | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                                    | ** ** | **Fiscal year  ended  November 3,  2005** | ** ** | **Fiscal year  ended  October 28,  2004** | ** ** | **Period from  June 14,  2003 to  October 26,  2003** | ** ** | **Period from  October 28,  2002 to  June 13,  2003** | ** ** | **Fiscal year  ended  October 27,  2002** | ** ** |
| Transaction  expenses:                                     |       |                                                |       |                                                |       |   |   |   |   |   |   |
| Employment contract termination and stock  compensation(a) |       | $                                                   | —     |                                                | $          | — |   | $ | — |   | $ | 5,574 |   | $ | — |   |
| Legal, accounting and other professional fees              |       | 15                                                  |       | 75                                                  |       | 49 |   | 3,862 |   | 279 |   |
| Severance costs(b)                                         |       | —                                              |       | —                                              |       | 1,177 |   | — |   | — |   |
| Legal settlements                                          |       | —                                              |       | 50                                                  |       | — |   | — |   | — |   |
| Total transaction expenses                                 |       | $                                                   | 15         |                                                | $          | 125 |   | $ | 1,226 |   | $ | 9,436 |   | $ | 279 |   |
| Debt  extinguishment costs:(c)(d)                          |       |                                                |       |                                                |       |   |   |   |   |   |   |
| Debt prepayment penalties                                  |       | $                                                   | —     |                                                | $          | 2,305 |   | $ | — |   | $ | 1,298 |   | $ | — |   |
| Write-off of deferred debt financing costs                 |       | —                                              |       | 4,344                                               |       | — |   | 3,322 |   | — |   |
| Derivative termination                                     |       | —                                              |       | 207                                                 |       | — |   | 1,896 |   | — |   |
| Total debt  extinguishment costs                           |       | $                                                   | —     |                                                | $          | 6,856 |   | $ | — |   | $ | 6,516 |   | $ | — |   |

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(a)            Inconnection with the June 2003 acquisition we paid senior employees a totalof $2.1 million to terminate their existing employment contracts and recognized$3.5 million of compensation expense associated with the exercise of stockoptions.

(b)           Wemade severance payments totaling $1.2 million, primarily related to our formerchief executive officer, pursuant to contractual provisions triggered by theJune 2003 acquisition.

(c)            Inconnection with the June 2003 acquisition, we incurred $6.5 million ofdebt 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.

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

(3)             Workingdeficit is defined as current assets less current liabilities.

(4)             Totaldebt at the end of each of the periods presented represents the following:

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

VI Acquisition Corp.(October 26, 2003) —Term loan and revolving borrowings under our priorsenior secured credit facility, subordinated debt (net of original issuediscounts), capitalized lease obligations and a letter of credit secured by ourcapital stock; and

VI Acquisition Corp.(October 28, 2004, November 3, 2005 and November 2, 2006) —Seniorunsecured notes payable, term loan and revolving borrowings under our seniorsecured credit facility, subordinated debt (net of original issue 

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discounts) and capitalizedlease obligations.  Amounts excludedeemed landlord financing liability.

(5)             Netrent expense includes the effects of recording the known escalations in ourrent expense on a straight-line basis over the committed term of the lease.Additionally, net rent expense includes amortization of the fair market rentadjustments which we were required to recognize under purchase accounting atthe time of June 2003 acquisitions.

(6)             Capitalexpenditures include capital spent for new stores, remodeling projects,restaurant maintenance and corporate capital projects.

(7)             Forpurposes of calculating the ratio of earnings to fixed charges, earningsrepresent 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.

**Item7.****                                                           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 onForm 10-K under “Forward-looking statements” and under “Risk factors.” Youshould read the following discussion in conjunction with “Item 6. Selectedfinancial data” and our audited consolidated financial statements and notesappearing elsewhere in this Annual Report on Form 10-K.*

**Companyprofile**

We operate family-diningrestaurants under two well-recognized brands, Village Inn and Bakers Square. Asof November 2, 2006, our company, which was founded in 1958, had 404restaurants in 25 states, consisting of 309 company-operated restaurants and 95franchised restaurants.  We also producepremium pies at three strategically located facilities that we serve in ourrestaurants or sell to third parties.

Our Village Innrestaurants are known for serving fresh breakfast items throughout the day, andwe have leveraged our breakfast heritage to include traditional American fareat lunch and dinner. Our Bakers Square restaurants have built upon the reputationof our signature pies to offer quality meals at breakfast, lunch and dinner.Our broad offering of affordable menu items is designed to appeal to ademographically diverse customer base, including families, senior citizens andother value-oriented diners.

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

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| **(Units)**                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Village Inn  company-operated restaurants:   |       |     |       |     |       |     |       |
| Beginning of period                          |       | 135      |       | 121      |       | 118      |       |
| Acquired from franchisee                     |       | 5        |       | —   |       | 1        |       |
| Openings                                     |       | 22       |       | 14       |       | 5        |       |
| Conversion to a Bakers Square                |       | —   |       | —   |       | (1       | )          |
| Closings                                     |       | (1       | )          | —   |       | (2       | )          |
| End of period                                |       | 161      |       | 135      |       | 121      |       |
| Bakers Square  company-operated restaurants: |       |     |       |     |       |     |       |
| Beginning of period                          |       | 152      |       | 150      |       | 149      |       |
| Openings                                     |       | —   |       | 4        |       | 3        |       |
| Conversion from a Village Inn                |       | —   |       | —   |       | 1        |       |
| Closings                                     |       | (4       | )          | (2       | )          | (3       | )          |
| End of period                                |       | 148      |       | 152      |       | 150      |       |
|                                         |       |     |       |     |       |     |       |
| Total company-operated restaurants           |       | 309      |       | 287      |       | 271      |       |
| Village Inn  franchised restaurants:         |       |     |       |     |       |     |       |
| Beginning of period                          |       | 100      |       | 103      |       | 105      |       |
| Openings                                     |       | —   |       | —   |       | —   |       |
| Acquired by our company                      |       | (5       | )          | —   |       | (1       | )          |
| Closings                                     |       | —   |       | (3       | )          | (1       | )          |
| End of period                                |       | 95       |       | 100      |       | 103      |       |
| Total  restaurants                           |       | 404      |       | 387      |       | 374      |       |

 

Our Village Inn andBakers Square concepts operate in the “family-dining” segment of the fullservice restaurant category. Full service restaurants offer broad menu choicesthat are served to patrons by a wait-staff, 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 Crest/NPD, the growth in the third quarter of2006 was 2.6% which is the lowest since the third quarter 2003 and is expectedto be modest in 2007. In the family-dining category, the average per-personcheck generally ranges from $8 to $9, and diners in this category are sensitiveto changes in price. In 2006, the average per-person check at Village Inn was$8.09 and the average per person check at Bakers Square was $9.39. One of theimportant elements of our business strategy is to provide our customers with anattractive value by offering quality food at reasonable prices. As a result, wecontinually strive to maintain and improve the efficiency of our operations.

**Managementoverview**

Our restaurant revenuesare affected by restaurant openings and closings and same unit salesperformance. Same unit sales is a measure of the percentage increase ordecrease of the sales of units open at least 18 months relative to the sameperiod in the prior year. Restaurants opened for less than 18 months areexcluded in order to allow a new restaurant’s operations and sales time tostabilize and provide more meaningful results. Same unit sales is an important indicator within the restaurant industrybecause small changes in same unit sales can have a proportionally higherimpact on operating margins because of the high degree of fixed costsassociated with operating restaurants.

The Village Innrestaurant count has increased over 36% in the last three years.  We plan to continue to increase the number ofCompany-operated Village Inn restaurants over the next several years. WithinBakers Square, the restaurant count has decreased one unit over the last threeyears.   In fiscal 2005 and 2006 we openedfour remodeled test units.  We arecurrently in the process of evaluating performance data to determine theappropriate model for the future Bakers Square units.

Like much of therestaurant industry, we view same unit sales as a key performance metric, atthe individual 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 

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constrained by the pricesensitivity of customers in our market segment and our desire to maintain anattractive price-to-value relationship that is a fundamental characteristic ofour concepts. For example, we raised prices in our Bakers Square units infiscal 2002 and fiscal 2003, and while some unit sales increased in fiscal2003, guest traffic declined. As a result, we generally have increased pricesin line with increases in the consumer price index, and expect to continue todo so in the future. Same unit sales performance is also affected by otherfactors, such as food quality, the level and consistency of service within ourrestaurants, the attractiveness and physical condition of our restaurants, aswell as local and national economic factors. From fiscal 2002 through fiscal2006, Village Inn recorded average annual same unit sales growth of 1.5% andBakers Square recorded an annual same unit sales decline of 8.1%.

As of November 2,2006, we had 95 franchised Village Inn restaurants in 18 states, operated by 25franchisees which operate one to eleven restaurants each.  Our revenue attributable to franchiseoperations, consisting primarily of royalty income has averaged approximately1% of our total revenues over the last three years. On February 24, 2003,we acquired 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.  During fiscal 2006 we acquired fiverestaurants in Oklahoma from a franchisee for $650,000.

In addition to unit sales, the other major factoraffecting the performance of our restaurants is the cost associated withoperating our restaurants. We monitor and assess these costs principally as apercentage of a restaurant’s revenues, or on a margin basis. The operatingmargin of a restaurant is the profitability, expressed as a percentage ofsales, of the restaurant after accounting for all direct expenses of operatingthe restaurant. Another key performance metric is the prime margin, which isthe profitability, expressed as a percentage of sales, of the restaurants afterdeducting the two most significant costs, labor and food. Due to the importanceof both labor cost and food cost, we closely monitor prime margin from thechain level down to the individual restaurant. We have systems in place at eachrestaurant to assist the restaurant managers in effectively managing thesecosts 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. InMay 2005 and again on January 1, 2006, the minimum wage rate for thestate of Florida increased.  The state ofOregon’s minimum wage increased in both 2005 and 2006 and the states ofMichigan and Wisconsin also increased their minimum wage in 2006.  Arizona, California, Colorado, Florida, Ohio,Oregon, and Albuquerque, New Mexico will all raise their minimum wage rate in2007.  The federal legislation regardingthe minimum wage rate currently is under discussion in both the U.S. House ofRepresentatives and U.S. Senate which would also increase our labor costs.

While the wage rates are largely externallydetermined, labor utilization within our restaurants is more subject to ourcontrol and is closely monitored. We seek to staff each restaurant to provide ahigh level of service to our customers, without incurring more labor cost thanis needed. We have included labor scheduling tools in each of ourcompany-operated restaurants’ back office systems to assist our managers inimproving labor utilization. We monitor labor hours actually incurred inrelation to sales and customer count on a restaurant- by-restaurant basis throughouteach week. We have been able to contain increases to our labor cost as apercentage of restaurant revenues, with those amounts increasing from 32.5% infiscal 2002 to 33.4% in fiscal 2006 as a result of modifying our internalprocesses to provide our restaurant managers greater control over employeeutilization and overtime.

In managing prime margin, we also focus on percentagefood cost, which is food cost expressed as a percentage of total revenues. Ourfood cost is affected by several factors, including market prices for the foodingredients, our effectiveness at controlling waste and proper portioning, andshifts in our customers’ buying habits between low-food-cost and high-food-costmenu items. Our ReMACS food cost management system within each restaurantmeasures actual ingredient costs and actual customer product purchases againstan “ideal” food cost standard. Ideal food cost is calculated within eachrestaurant based on the cost of ingredients used, assuming proper portion size,adherence to recipes, limited waste and similar factors. We track variancesfrom ideal food cost within each restaurant and seek to address the causes ofsuch variances; to the extent they are within our control, in order to improveour percentage food cost. In addition, our centralized purchasing departmentbuys a majority of the products used in both Village Inn and Bakers Square (aswell as our pie production operations), leveraging the purchasing volumes ofour restaurants and our franchisees to obtain favorable prices. We attempt tostabilize potentially volatile prices for certain high-cost ingredients such aschicken, beef, coffee and dairy products for three to twelve month periods byentering into purchase contracts when we believe that this will improve our foodcost. We also use “menu 

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engineering” to promote menu items which have a lowerpercentage food cost. However, we are vulnerable to fluctuations in food costs.Given our customers’ sensitivity to price increases and since we only reprintour full menus every six months, our ability to adjust prices and featured menuitems in response to rapidly changing commodity prices is limited.

As a result of our efforts, we lowered ourconsolidated food cost percentage at our restaurants to 25.6% of totalrestaurant revenues for fiscal 2006 from 26.8% of total restaurant revenues forfiscal 2002.  Controlling food costspresents ongoing challenges.

Other operating expenses principally include occupancycosts, depreciation, supplies, repairs and maintenance, utility costs,marketing expenses, insurance expenses and workers’ compensation costs.Historically, these costs have increased over time and many are not directlyrelated to the level of sales in our restaurants. We have experienced increasesin many of these items throughout the last three fiscal years, particularlyutility costs. In order to maintain our operating performance levels, and toaddress expected cost increases, we will be required to increase efficiency inrestaurant operations and increase sales, although there is no assurance thatwe will be able to offset future cost increases.

Our 2006 financial results included:

·                  Growth ofrevenues by 6.1% to $466.3 million from 2005 to 2006, reflecting the netaddition of 38 company-operated restaurants over the past two years (includingthe net addition of 22 restaurants during 2006).  Same store sales decreased by 2.1% from 2005to 2006.

·                  Operating profitdecreased to $18.1 million in 2006 from $31.8 million in 2005.  Our 2006 results included increased occupancy,utility and labor charges.

·                  Net incomedecreased to a net loss of $7.9 million in 2006 from net income of $3.5 millionin 2005 as a result of increased other restaurant operating costs and thedecline in same store sales.

**Factors affecting comparability**

On May 14, 2001, Midway Investors Holdings Inc.,a newly created holding company, purchased VICORP Restaurants, Inc., whichwas a publicly owned company prior to the acquisition. On June 14, 2003,VI Acquisition Corp., a newly created holding company, purchased MidwayInvestors Holdings Inc. Neither of these holding companies has had anyindependent operations, and consequently the consolidated statements ofoperations of Midway Investors Holdings Inc. and VI Acquisition Corp. aresubstantially equivalent. As a result of applying the required purchaseaccounting rules to these acquisitions, our financial statements forperiods following the transactions were significantly affected. The applicationof purchase accounting rules required us to revalue our assets andliabilities at the two respective acquisition dates, which resulted indifferent accounting bases being applied in different periods. In particular,occupancy expense increased as existing rent escalator accruals were eliminatedas part of purchase accounting and the amount of future rent escalator accrualswere recalculated based upon the lease escalator provisions applicable over theremaining life of the leases at each acquisition date. In addition,depreciation expense increased as a result of the increase in the valuation ofour assets, which correspondingly increased our depreciable base.  Fiscal years 2004, 2005 and 2006 relate to VIAcquisition Corp.

At the time of each of the two acquisitions, we alsosold certain properties under sale-leaseback transactions to help finance theacquisitions. Specifically, we sold 48 properties in May 2001 for anaggregate of $57.2 million and an additional ten properties in June 2003for an aggregate of $13.9 million. The sale-leaseback transactions have resultedin higher interest expense as a result of recording these transactions underthe financing method.

On February 24,2003, we purchased one of our franchisees which owned and operated eightVillage Inn restaurants in the Albuquerque, New Mexico area for $4.6 million.After the acquisition, revenue associated with these restaurants was includedin our restaurant revenues, and since the date of the acquisition we have notearned franchise revenues from those units. Please refer to the table above forinformation on unit openings during the relevant periods. Additionally, wecompleted a transaction in 2006 with a franchisee in Oklahoma in which wepurchased five Village Inn restaurants for $650,000.

Our fiscal year, which historically ended on the lastSunday in October, is comprised of 52 or 53 weeks divided into four fiscalquarters of 12 or 13, 12, 12, and 16 weeks. Fiscal 2005 was comprised of 53weeks, or 371 days and fiscal 2006 was comprised of 52 weeks, or 364 days.  Beginning January 22, 2004, we changedour fiscal year so that it ends on the Thursday nearest to October 31st ofeach year. This increased fiscal 2004 by an extra four days. 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.

 

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**Critical accounting policies andestimates**

In the ordinary course ofbusiness, our company makes a number of estimates and assumptions relating tothe reporting of results of operations and financial condition in thepreparation of our consolidated financial statements in conformity with 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.

On an ongoing basis,management evaluates its estimates and assumptions, including those related torecoverability of long-lived assets, revenue recognition, goodwill and otherintangibles. 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.

We have discussed thedevelopment and selection of critical accounting policies and estimates withour audit committee.  The following is asummary of our critical accounting policies and estimates:

**Goodwilland other intangibles**

To assist in the processof determining goodwill and tradenames impairment for fiscal 2006, the Companyengaged an outside firm to perform a valuation analysis. Estimates of fairvalue are primarily determined using discounted cash flows and marketcomparisons and recent transactions. These approaches use significant estimates and assumptions includingprojected future cash flows (including timing), discount rate reflecting therisk inherent in future cash flows, perpetual growth rate, determination ofappropriate market comparables and the determination of whether a premium ordiscount should be applied to comparables.

**Change inaccounting estimate**

It is the Company’spolicy to periodically review the estimated useful lives of its fixed assets.This review during 2006 indicated that actual lives for our building assetswere longer than the useful lives used for depreciation purposes in the Company’sfinancial statements. As a result, the Company revised the estimated usefullives of buildings from 30 years to 45 years. The Company reviewed its ownrestaurants, as well as using construction industry data and comparablerestaurant company estimated lives of building assets. The change was madeeffective during the third quarter. The Company believes the change moreappropriately reflects the remaining useful lives of the assets based upon thenature of the asset. This change has been accounted for prospectively inaccordance with the provisions of Accounting Principle Board Opinion No. 20:Accounting Changes. The effect of this change was a reduction of approximately$0.5 million to depreciation during fiscal 2006.

***Property and equipment, build-to-suit projects and assetsunder deemed landlord financing liability***

Property and equipment isrecorded at cost and is depreciated on the straight-line basis over theestimated useful lives of such assets or through the applicable lease expiration,if shorter.  Leasehold improvements addedsubsequent to the inception of a lease are amortized over the shorter of theuseful life of the assets or a term that includes lease renewals, if suchrenewals are considered reasonably assured. The useful lives of assets range from 20 to 45 years for buildings andthree to ten years for equipment and improvements. Changes in circumstancessuch as the closing of units within underproductive markets or changes in ourcapital structure could result in the actual useful lives of these assetsdiffering from our estimates.

For many of ourbuild-to-suit projects, we are considered the owner of the project during theconstruction period in accordance with Emerging Issues Task Force (“EITF”)Issue No. 97-10, “The Effect of Lessee Involvement in Asset Construction,”because we are deemed to have substantially all of the construction periodrisk.  At the end of these constructionprojects, a sale-leaseback could be deemed to occur in certain situations andthe seller-lessee would record the sale, remove all property and relatedliabilities from its balance sheet and recognize gain or loss from the sale,which is generally deferred and amortized as an adjustment to rent expense overthe term of the lease.  However, many ofour historical real estate transactions and build-to-suit projects have notqualified for sale-leaseback accounting because of our deemed continuinginvolvement with the buyer-lessor, which results in the transaction beingrecorded under the financing method. Under the financing method, the assets remain on the consolidatedbalance sheet and are depreciated over their useful life, and the proceeds fromthe transaction are recorded as a financing liability.  A portion of lease payments are applied aspayments of deemed principal and imputed interest.

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We review long-livedassets, including land, buildings and building improvements, for impairments ona quarterly basis or whenever events or changes in circumstances indicate thatthe carrying amount of such assets may not be recoverable. Management evaluatesindividual restaurants, which are considered to be the lowest level for whichthere are identifiable cash flows for impairment. A specific restaurant isdeemed to be impaired if a forecast of undiscounted future operating cash flowsdirectly relating to that restaurant, including disposal value, if any, is lessthan the carrying amount of that restaurant. If a restaurant is determined tobe impaired, the loss is measured as the amount by which the carrying amount ofthe restaurant exceeds its fair value. Management determines fair value basedon quoted market prices in active markets, if available. If quoted marketprices are not available, management estimates the fair value of a restaurantbased on either the estimates provided by real estate professionals and/or ourpast experience in disposing of restaurant properties. Our estimates ofundiscounted cash flows may differ from actual cash flows due to economicconditions or changes in operating performance. During fiscal 2004, we concluded that a $1.1 million impairment chargewas necessary.  No impairment wasrecorded in fiscal 2005.  During fiscal2006, we concluded that a $1.4 million impairment charge was necessary.

During the third quarterof fiscal 2006, the Company changed the estimated useful lives of its buildings(Note 2). This change removed the Company’s ability to control the propertythrough at least 90% of its economic life for 26 of our 126 restaurantsaccounted for using the financing method. As a result, the Company recognizedthe “sale” of these 26 units by removing both the assets and financingobligations associated with the restaurants and recording any gain or loss inaccordance with Financial Accounting Standards Board (“FASB”) Statement ofFinancial Accounting Standards (“SFAS”) No. 98, “Accounting for Leases”. Theleases were then tested under the provisions of SFAS No. 13 “Accounting forLeases” for treatment as capital or operating leases. All 26 leases qualifiedas operating and deferred rent was recorded in accordance with SFAS No. 98 andSFAS No.13. The effect of this change was a reduction in the Company’sfinancing obligation of $30.5 million, a reduction of financing assets of $29.3million, an increase in deferred rent of $1.2 million, and a net loss on thetransactions of $50,000. The net loss has been deferred and will be amortizedto rent expense over the remaining reasonably assured lease term in accordancewith SFAS No. 13.

***Leases***

We lease a substantialamount of our restaurant properties and one of our pie production plants.  We account for our leases under theprovisions of Statement of Financial Accounting Standards No. 13, “Accountingfor Leases,” and subsequent amendments, which require leases to be evaluatedand classified as operating or capitalized leases for financial reportingpurposes.  In addition, we record thetotal rent payable during the operating lease term on a straight-line basisover the term of the lease and record the difference between the rent paid andthe straight-line rent as a deferred straight-line rent payable. Incentivepayments received from landlords are recorded as deferred rent liabilities andare amortized on a straight-line basis over the lease term as a reduction ofrent.  Certain of our leases areaccounted for under the financing method as discussed above.  Future authoritative changes to the methodsof accounting for leases could have a material impact on our reported resultsof operations and financial position.

In October 2005, the FASB issued FSP No. FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period.” FSP No. FAS 13-1 requires rental costs associated with operating leases that are incurred during a construction period to be recognized as rental expense. FSP No. FAS 13-1 is effective for reporting periods beginning after December 15, 2005. The transition provisions of FSP No. FAS 13-1 permit early adoption and retrospective application of the guidance. The Company historically capitalized rental costs incurred during a construction period.  We implemented FSP No. FAS 13-1 during the first quarter of fiscal 2006.  We capitalized $0.7 million and $0.2 million in 2005 and 2004, respectively.

***Insurance reserves***

We self-insure asignificant portion of our employee medical insurance, workers’ compensationand general liability insurance plans. We had an insurance reserve liability of $8.9 million and $9.3 millionrecorded as of November 2, 2006 and November 3, 2005, respectively.  We have obtained stop-loss insurance policiesto protect from individual losses over specified dollar values ($175,000 foremployee health insurance claims, $250,000 workers’ compensation and $150,000for general liability for fiscal 2005 and 2006). The full extent of certainclaims, especially workers’ compensation and general liability claims may notbecome fully determined for several years. Therefore, we estimate potentialobligations for liabilities that have been incurred but not yet reported basedupon historical data, experience, and use of outside consultants. Althoughmanagement believes that the amounts accrued for these obligations arereasonably estimated, any significant increase in the number of claims or costsassociated with claims made under these plans could have a material adverseeffect on our financial results. Favorable workers compensation claims experience related to recent yearshas permitted a reduction in workers compensation expense accruals in fiscal2005 and 2006.

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***Losscontingencies***

We maintain accruedliabilities and reserves relating to the resolution of certain contingentobligations.  Significant contingenciesinclude those related to litigation.  Weaccount for contingent obligations in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 5, “Accounting for Contingencies,” asinterpreted by FASB Interpretation No. 14 which requires that we assesseach contingency to determine estimates of the degree of probability and rangeof possible settlement.  Contingencieswhich are deemed to be probable and where the amount of such settlement isreasonably 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.

The assessment of losscontingencies 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 loss contingencies may differ significantlyfrom amounts we have accrued in our financial statements.

***Income taxes***

Deferred income taxassets and liabilities are recognized for the expected future income taxconsequences of carry forwards and temporary differences between the book andtax basis of assets and liabilities. Valuation allowances are established fordeferred tax assets that are deemed unrealizable.  As of November 2, 2006, we had grossdeferred tax assets of $32.2 million, which included $16.1 million of FICA tipcredit carry forwards, expiring at various dates through 2026.  Approximately $10.2 million of the FICA tipcredit carry forwards were generated prior to our acquisition in June 2003and are subject to an annual use limitation of $0.7 million.

We must assess thelikelihood that we will be able to recover our deferred tax assets. If recoveryis not likely, valuation allowances are established. The valuation allowance isbased on the reversals of our existing deferred tax items and our estimates offuture taxable income by each jurisdiction in which we operate as a result ofavailable tax planning strategies.  Inthe event that actual results differ from these estimates, we are unable toimplement certain tax planning strategies or we adjust these estimates infuture periods, we may need to establish an additional valuation allowancewhich could have a material negative impact on our results of operations orfinancial position.  As of November 2,2006, the Company recorded a valuation allowance of $2.5 million for FICA tipcredits for which it is more likely than not that a tax benefit will not berealized due to the impending expiration of such credits.

Significant judgment isrequired in determining our effective tax rate and in evaluating our taxpositions. We establish reserves when, despite our belief that our tax returnpositions are supportable, we believe that certain positions are likely to besuccessfully challenged. We adjust these reserves in light of changing factsand circumstances, such as the progress of a tax audit. Our effective tax rateincludes the impact of reserve provisions and changes to reserves that weconsider appropriate.

 

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**Results of operations**

| (In thousands)                          | ** ** | **Fiscal year  ended  November 2,  2006** | ** ** | **Fiscal year  ended  November 3,  2005** | ** ** | **Fiscal year  ended  October 28,  2004** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
|                                         |       |                                                |       |                                                |       |                                                |       |
| Revenues:                                    |       |                                                |       |                                                |       |                                                |       |
| Restaurant  operations                       |       | $                                                   | 425,185    |                                                | $          | 407,424                                             |       | $ | 394,667 |   |
| Franchise  operations                        |       | 5,058                                               |       | 5,280                                               |       | 5,057                                               |       |
| Manufacturing  operations                    |       | 36,065                                              |       | 26,641                                              |       | 31,796                                              |       |
|                                         |       | 466,308                                             |       | 439,345                                             |       | 431,520                                             |       |
| Costs and expenses:                          |       |                                                |       |                                                |       |                                                |       |
| Restaurant  costs:                           |       |                                                |       |                                                |       |                                                |       |
| Food                                         |       | 108,774                                             |       | 105,575                                             |       | 103,604                                             |       |
| Labor                                        |       | 141,876                                             |       | 132,000                                             |       | 127,251                                             |       |
| Other operating  expenses                    |       | 126,415                                             |       | 112,204                                             |       | 105,043                                             |       |
| Franchise  operating expenses                |       | 2,148                                               |       | 2,181                                               |       | 2,311                                               |       |
| Manufacturing  operating expenses            |       | 35,350                                              |       | 24,809                                              |       | 32,322                                              |       |
| General and  administrative expenses         |       | 29,417                                              |       | 29,602                                              |       | 27,028                                              |       |
| Litigation  settlement expense               |       | 600                                                 |       | (408                                                | )          | 3,168                                               |       |
| Employee  severance                          |       | 40                                                  |       | 600                                                 |       | 286                                                 |       |
| Transaction  expenses                        |       | —                                              |       | 15                                                  |       | 125                                                 |       |
| Management fees                              |       | 850                                                 |       | 850                                                 |       | 1,159                                               |       |
| Loss on  disposition of assets               |       | 1,395                                               |       | 110                                                 |       | 438                                                 |       |
| Asset  impairments                           |       | 1,381                                               |       | —                                              |       | 1,101                                               |       |
|                                         |       | 448,246                                             |       | 407,538                                             |       | 403,836                                             |       |
| Operating profit                             |       | 18,062                                              |       | 31,807                                              |       | 27,684                                              |       |
| Interest expense                             |       | (29,976                                             | )          | (28,951                                             | )          | (26,787                                             | )          |
| Debt extinguishment  costs                   |       | —                                              |       | —                                              |       | (6,856                                              | )          |
| Other income, net                            |       | 586                                                 |       | 745                                                 |       | 522                                                 |       |
| Income (loss) before  income taxes           |       | (11,328                                             | )          | 3,601                                               |       | (5,437                                              | )          |
| Provision for income  taxes (benefit)        |       | (3,457                                              | )          | 138                                                 |       | (2,912                                              | )          |
| Net income (loss)                            |       | (7,871                                              | )          | 3,463                                               |       | (2,525                                              | )          |
| Preferred stock  dividends and accretion     |       | (9,795                                              | )          | (8,941                                              | )          | (7,665                                              | )          |
| Net loss attributable to common stockholders |       | $                                                   | (17,666    | )                                                   | $          | (5,478                                              | )          | $ | (10,190 | ) |

 

|                                              | ** ** | **Fiscal year  ended  November 2,  2006** | ** ** | **Fiscal year  ended  November 3,  2005** | ** ** | **Fiscal year  ended  October 28,  2004** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
|                                         |       |                                                |       |                                                |       |                                                |       |
| Revenues:                                    |       |                                                |       |                                                |       |                                                |       |
| Restaurant  operations                       |       | 91.2                                                | %          | 92.7                                                | %          | 91.4                                                | %          |
| Manufacturing  operations                    |       | 1.1                                                 |       | 1.2                                                 |       | 1.2                                                 |       |
| Franchise  operations                        |       | 7.7                                                 |       | 6.1                                                 |       | 7.4                                                 |       |
|                                         |       | 100.0                                               |       | 100.0                                               |       | 100.0                                               |       |
| Costs and expenses                           |       |                                                |       |                                                |       |                                                |       |
| Restaurant  costs:                           |       |                                                |       |                                                |       |                                                |       |
| Food (1)                                     |       | 25.6                                                |       | 25.9                                                |       | 26.3                                                |       |
| Labor (1)                                    |       | 33.4                                                |       | 32.4                                                |       | 32.2                                                |       |
| Other operating  expenses (1)                |       | 29.7                                                |       | 27.5                                                |       | 26.6                                                |       |
| Franchise  operating expenses (2)            |       | 42.5                                                |       | 41.3                                                |       | 45.7                                                |       |
| Manufacturing  operating expenses (3)        |       | 98.0                                                |       | 93.1                                                |       | 101.7                                               |       |
| General and  administrative expenses         |       | 6.3                                                 |       | 6.7                                                 |       | 6.3                                                 |       |
| Litigation  settlement expense               |       | 0.1                                                 |       | (0.1                                                | )          | 0.7                                                 |       |
| Employee  severance                          |       | —                                              |       | 0.1                                                 |       | 0.1                                                 |       |
| Transaction  expenses                        |       | —                                              |       | —                                              |       | —                                              |       |
| Management fees                              |       | 0.2                                                 |       | 0.2                                                 |       | 0.3                                                 |       |
| Loss on  disposition of assets               |       | 0.3                                                 |       | —                                              |       | 0.1                                                 |       |
| Asset  impairments                           |       | 0.3                                                 |       | —                                              |       | 0.3                                                 |       |
|                                         |       | 96.1                                                |       | 92.8                                                |       | 93.6                                                |       |
| Operating profit                             |       | 3.9                                                 |       | 7.2                                                 |       | 6.4                                                 |       |
| Interest expense                             |       | (6.4                                                | )          | (6.6                                                | )          | (6.2                                                | )          |
| Debt extinguishment  costs                   |       | —                                              |       | —                                              |       | (1.6                                                | )          |
| Other income, net                            |       | 0.1                                                 |       | 0.2                                                 |       | 0.1                                                 |       |
| Income (loss) before  income taxes           |       | (2.4                                                | )          | 0.8                                                 |       | (1.3                                                | )          |
| Provision for income  taxes (benefit)        |       | (0.7                                                | )          | —                                              |       | (0.7                                                | )          |
| Net income (loss)                            |       | (1.7                                                | )          | 0.8                                                 |       | (0.6                                                | )          |
| Preferred stock  dividends and accretion     |       | (2.1                                                | )          | (2.0                                                | )          | (1.8                                                | )          |
| Net loss attributable to common stockholders |       | (3.8                                                | )%         | (1.2                                                | )%         | (2.4                                                | )%         |

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(1)             Restaurantcosts percentages are based on Restaurant operations revenues.

(2)             Franchiseoperating expense percentage is based on Franchise operations revenues.

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(3)             Manufacturingoperating expense percentage is based on Manufacturing operations revenues.

All other cost percentages are based on total revenues.

**Fiscal 2006 compared to fiscal 2005**

***Total revenues*** increased by $27.0million, or 6.1%, to $466.3 million in fiscal 2006, from $439.3 million forfiscal 2005.  The increase was largelydue to operating 22 more locations in fiscal 2006 compared to fiscal 2005offset by seven extra days in fiscal 2005 compared to fiscal 2006.  However, we experienced a 2.1% decrease insame unit sales for fiscal 2006 over fiscal 2005.  Village Inn same unit sales for fiscal 2006decreased 1.9% over fiscal 2005, and Bakers Square same unit sales decreased2.3% over the same period. Average guest spending decreased 2.7% at Village Innand 4.3% at Bakers Square in fiscal 2006 compared to fiscal 2005. We believethat our decrease in comparable store is closely related to trends within therestaurant industry. The majority of our direct competitors have beenexperiencing similar declining sales and restaurant analysts believe this is aresult of increasing utility and gas prices being absorbed by consumers. Thirdparty pie sales increased $9.5 million, or 35.4%, to $36.1 million in fiscal2006 due to the addition of a large customer at the end of the first quarter of2006.

***Food costs*** increased by $3.2 million,or 3.0%, to $108.8 million in fiscal 2006, from $105.6 million for fiscal2005.  Food costs as a percentage ofrestaurant revenuesdecreased to 25.6% for fiscal 2006 from 25.9% in fiscal 2005.  The decrease was driven primarily by menuprice increases exceeding commodity price increases.

***Labor costs*** increased by $9.9 million,or 7.5%, to $141.9 million in fiscal 2006, from $132.0 million for fiscal 2005,while labor costs as a percentage of restaurant revenues increased slightly to33.4% from 32.4% over these periods.  Therelative increase in labor costs was due to lower operating efficiency,increased average wage due to minimum wage increases, negative leverageassociated with the same store sales declines and labor inefficiencies at thenew restaurants in start up mode.

***Other operating expenses*** increased by$14.2 million, or 12.7%, to $126.4 million in fiscal 2006 from $112.2 millionfor fiscal 2005. Other operating expenses as a percentage of restaurantrevenues increased from 27.5% to 29.7% over these periods.  This increase was primarily due to higheroccupancy costs ($8.4 million), increased utility costs ($2.1 million) andincreased costs associated with new store growth.

***Manufacturing operating expenses***increased by $10.6 million, or 42.5%, to $35.4 million in fiscal 2006 from$24.8 million for fiscal 2005. This increase was primarily due to higher thirdparty pie sales.  Manufacturing operatingexpenses as a percentage of manufacturing revenues increased from 93.1% to98.0% over these periods.

***General and administrative expenses***decreased $0.2 million, or 0.6%, to $29.4 million for fiscal 2006 from $29.6million for fiscal 2005.   As apercentage of total revenues, general and administrative expenses decreased to6.3% in fiscal 2006 from 6.7% in fiscal 2005.

***Employeeseverance*** in fiscal 2005 related to a severance chargedue to the departure of one of our officers.

***Litigationsettlement expense*** for fiscal 2006 included a $0.6 chargerelated to the anticipated settlement of the class action suit brought in April2006 as discussed in Item 3 Legal Proceedings. Fiscal 2005 was a credit of $0.4 million due to the net effects ofreversing $1.2 million in accrued litigation reserve as a result of theultimate costs being finalized by the trustee for the prior class actionlawsuits and the reversal of $0.8 million of the indemnification receivablefrom our former shareholders.  Theoriginal charge was previously recorded in fiscal 2004 at $3.2 million.

***Losson disposition of assets*** increased $1.3 million to $1.4million for fiscal 2006 from $0.1 million for fiscal 2005.   The increase resulted primarily fromservices related to site investigation, architectural and environmentalresearch associated with properties that we have decided not to develop.

***Impairmentexpense*** of $1.4 million was incurred in fiscal 2006related to 12 restaurant locations for which the estimated future cash flowscould not recover the carrying value of the applicable long-term assets and forwhich the fair market value of the assets was less than the carrying value.

***Operating profit***decreased by $13.7 million, or 43.1%, to $18.1 million in fiscal 2006, from$31.8 million for fiscal 2005. Operating profit as a percentage of totalrevenues for fiscal 2006 decreased from 7.2% to 3.9% for fiscal 2006.  The decrease was due largely to the declinein our same unit sales, its effect on labor, as well as increases in otheroperating expenses.

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***Interest expense***increased by $1.0 million, or 3.5%, to $30.0 million in fiscal 2006, from $29.0million for fiscal 2005.  This increasewas due primarily to the higher average debt balances and interest rates duringfiscal 2006.

***Provision for income taxes (benefit)***for fiscal 2006 was a benefit of $3.5 million, compared to a provision of $0.1million for fiscal 2005. The provisions differ from our statutory rate ofapproximately 40.0% due to general business credits that we earn from FICAtaxes paid on employee tips, partially offset by nondeductible amortizationrelated to franchise rights. During fiscal 2006 the Company recorded avaluation allowance of $2.5 million for FICA tip credits for which it is morelikely than not that a tax benefit will not be realized due to the impendingexpiration of such credits.

**Valuation**

***Net income (loss)*** decreased by $11.4million to a loss of $7.9 million in fiscal 2006, from income of $3.5 millionfor fiscal 2005.  Net income (loss) as apercentage of total revenues decreased from 0.8% to (1.7)% over these periods.

***Preferred stock dividends and accretion***increased by $0.9 million to $9.8 million in fiscal 2006 from $8.9 million forfiscal 2005 as a result of the compounding effect of unpaid preferred stockdividends and issuance of additional shares. Dividends on VI Acquisition Corp.’s preferred stock accumulate andcompound but are not payable until dividends are declared. Covenants containedin our senior secured credit agreement and the indenture governing our 101⁄2%notes restrict our ability to declare dividends on our preferred stock.

**Fiscal 2005 compared to fiscal 2004**

***Total revenues*** increased by $7.8million, or 1.8%, to $439.3 million in fiscal 2005, from $431.5 million forfiscal 2004.  The increase was largelydue to operating 7.3 more locations on average in fiscal 2005 compared tofiscal 2004 and three extra days in fiscal 2005 compared to fiscal 2004.  However, we experienced a 1.3% decrease insame unit sales for fiscal 2005 over fiscal 2004.  Village Inn same unit sales for fiscal 2005increased 0.9% over fiscal 2004, and Bakers Square same unit sales decreased3.1% over the same period. Average guest spending increased 3.0% at Village Innand 3.3% at Bakers Square in fiscal 2005 compared to fiscal 2004.  Third party pie sales decreased $5.2 million,or 16.4%, to $26.6 million in fiscal 2005.

***Food costs*** increased by $2.0 million,or 1.9%, to $105.6 million in fiscal 2005, from $103.6 million for fiscal2004.  Food costs as a percentage ofrestaurant revenuesdecreased slightly from 26.3% in fiscal 2004 to 25.9% in 2005.  Food commodity costs were very volatile infiscal 2004 and were moderate in fiscal 2005. Menu engineering and menu price increases generally offset unfavorablecommodity cost increases experienced in fiscal 2004.

***Labor costs*** increased by $4.7 million,or 3.7%, to $132.0 million in fiscal 2005, from $127.3 million for fiscal 2004,but labor costs as a percentage of restaurant revenues increased to 32.4% from32.2% over these periods.  A factor inthe labor increase is the fact that we continue to be impacted by the increasesin minimum wage in the states in which we operate.

***Other operating expenses*** increased by$7.2 million, or 6.8%, to $112.2 million in fiscal 2005 from $105.0 million forfiscal 2004. Other operating expenses as a percentage of restaurant revenuesincreased from 26.6% to 27.5% over these periods.  The increase in other operating expenses isprimarily due to higher credit card fees, preopening expenses related to newstore openings, and higher utility and occupancy costs which were partiallyoffset by favorable claim expenses in our insurance programs.

***Manufacturing operating expenses***decreased by $7.5 million, or 23.2%, to $24.8 million in fiscal 2005 from $32.3million for fiscal 2004. This decrease was primarily due to lower third partysales in fiscal 2005.  Manufacturingoperating expenses as a percentage of manufacturing revenues decreased from101.7% to 93.1% over these periods.

***General and administrative expenses***increased $2.6 million, or 9.6%, to $29.6 million for fiscal 2005 from $27.0million for fiscal 2004. This increase resulted from increased support expensesrelated to new store openings, increased audit fees due to the previouslyreported restatement of our financing obligations and increased legal feesrelated to our employment litigation.

***Employeeseverance*** in fiscal 2005 related to a severance chargedue to the departure of one of our officers and in fiscal 2004 to the departureof two of our officers.

***Litigationsettlement expense*** was a credit of $0.4 million in fiscal2005 due to the net effects of the $1.2 million reduction in the accruedlitigation reserve as a result of the ultimate costs being finalized by thetrustee for the class action lawsuits and the corresponding $0.8 millionreduction in our indemnification receivable from former shareholders.  The original charge was previously recordedin fiscal 2004 at $3.2 million.

 

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***Impairmentexpense*** of $1.1 million was incurred in fiscal 2004.  The impairment in fiscal 2004 related to 10restaurant locations for which the estimated future cash flows could notrecover the carrying value of the applicable long-term assets and for which thefair market value of the assets was less than the carrying value.

***Operating profit***increased by $4.1 million, or 14.8%, to $31.8 million in fiscal 2005, from$27.7 million for fiscal 2004. Operating profit as a percentage of totalrevenues for fiscal 2005 increased from 6.4% to 7.2% over fiscal 2004. Thisincrease in profit margin was primarily due to the $3.2 million of litigationsettlement costs in fiscal 2004.

***Interest expense***increased by $2.2 million, or 8.1%, to $29.0 million in fiscal 2005, from $26.8million for fiscal 2004.  This increasewas due primarily to the higher average debt balances and interest ratesresulting from our debt refinancing in April 2004.

***Debt extinguishment******costs*** of $6.9 million were incurredin fiscal 2004 in connection with the refinancing of our debt that closed inApril 2004.  These expenses included$2.3 million of prepayment penalties, a write-off of deferred financing costsof $4.4 million associated with the previous obligations and settlement ofoutstanding derivative obligations in the amount of $0.2 million.  There were no debt extinguishment costs infiscal 2005.

***Provision for income taxes (benefit)***for fiscal 2005 was $0.1 million.  Forfiscal 2004, an income tax benefit of $2.9 million was recorded. The provisionsdiffer from our statutory rate of approximately 40.0% due to general businesscredits that we earn from FICA taxes paid on employee tips, partially offset bynondeductible amortization related to franchise rights.

***Net income (loss)*** increased by $6.0million to $3.5 million in fiscal 2005, from a $2.5 million loss for fiscal2004.  Net income (loss) as a percentageof total revenues improved to 0.8% from (0.6%) over these periods.

***Preferred stock dividends and accretion***increased by $1.2 million to $8.9 million in fiscal 2005 from $7.7 million forfiscal 2004 as a result of the compounding effect of unpaid preferred stockdividends and issuance of additional shares. Dividends on VI Acquisition Corp.’s preferred stock accumulate and compoundbut are not payable until dividends are declared. Covenants contained in oursenior secured credit agreement and the indenture governing our 101⁄2% notesrestrict our ability to declare dividends on our preferred stock.

**Liquidity and capital resources**

***Cash requirements***

Our principal liquidityrequirements are to continue to finance our operations, service our debt andfund capital expenditures for maintenance and expansion.  Cash flow from operations has historicallybeen sufficient to finance continuing operations and meet normal debt servicerequirements.  However, we are highlyleveraged and our ability to repay borrowings at maturity is likely to dependin part on our ability to refinance the debt when it matures, which will becontingent on our continued successful operation of the business as well asother factors beyond our control, including the debt and capital marketconditions at that time.

Our cash balance and working capital needs are generally low, as salesare made for cash or through credit cards that are quickly converted to cash,purchases of food and supplies and other operating expenses are generally paidwithin 30 to 60 days after receipt of invoices and labor costs are paidbi-weekly.  The timing of our salescollections and vendor and labor payments are consistent with other companiesengaged in the restaurant industry.

During fiscal 2007, weanticipate capital expenditures before build-to-suit construction (as discussedbelow) of approximately $16 million.  Ofthis amount, $4 million is expected to be spent on new store construction, $5million for remodels and the remainder on capital maintenance and other supportrelated projects.  We currently expect toopen an estimated 9 new stores in fiscal 2007.

In connection with ournew restaurant development program, we have entered into build-to-suitdevelopment agreements whereby third parties will purchase property, fund thecosts to develop new restaurant properties for us and lease the properties tous upon completion.  Under these agreements,we generally are responsible for the construction of the restaurant, andremitting payments to the contractors on the projects, which are subsequentlyreimbursed by the property owner.  Theseamounts advanced and subsequently reimbursed are not included in theanticipated capital spending totals above. On November 2, 2006, we had outstanding receivables of $3.8 millionrelating to these types of agreements. In 

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certain of theseagreements, we are obligated to purchase the property in the event that we areunable to complete the construction within a specified time frame, and are alsoresponsible for cost overruns above specified amounts.

***Debt and other obligations***

In April 2004, wecompleted a refinancing of our prior debt including a private placement of$126.5 million aggregate principal amount of 101⁄2% senior unsecured notesmaturing 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.

Concurrently with theissuance of the 101⁄2% senior unsecured notes, we entered into an amended andrestated senior secured credit facility consisting of a $15.0 million term loanand a $30.0 million revolving credit facility, with a $15.0 million sub-limitfor letters of credit.  As ofNovember 2, 2006, we had issued letters of credit aggregating $7.4 millionand had $12.6 million of borrowings outstanding under the senior securedrevolving credit facility.  As ofNovember 2, 2006, the senior secured revolving credit facility permittedborrowings 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 November 2,2006, we had the ability to borrow the full $30 million, less the amount ofoutstanding letters of credit, under the senior secured revolving creditfacility, or $10.0 million.  Borrowingsunder both the revolving credit facility and the term loan bear interest atfloating rates tied to either the base rate of the agent bank under the creditagreement or LIBOR rates for a period of one, two or three months, in each caseplus a margin that will adjust based on the ratio of our Adjusted EBITDA tototal indebtedness, as defined in the senior secured credit agreement. Bothfacilities are secured by a lien of all of the assets of VICORPRestaurants, Inc., and guaranteed by VI Acquisition Corp. The guaranteesare also secured by the pledge of all of the outstanding capital stock ofVICORP Restaurants, Inc. by VI Acquisition Corp. The term loan does notrequire periodic principal payments, but requires mandatory repayments undercertain events, including proceeds from sale of assets, issuance of equity, andissuance of new indebtedness.  Bothfacilities mature in April 2009.

Our senior secured creditfacility and the indenture governing the senior unsecured notes contain anumber of covenants that, among other things, restrict, subject to certainexceptions, our ability and the ability of our subsidiaries, to sell assets,incur additional indebtedness, as defined in the agreements, or issue preferredstock, repay other indebtedness, pay dividends and distributions or repurchaseour capital stock, create liens on assets, make investments, loans or advances,make certain acquisitions, engage in mergers or consolidations, enter intosale-leaseback transactions, engage in certain transactions with affiliates,amend certain material agreements governing our indebtedness, change thebusiness conducted by us and our subsidiaries and enter into hedgingagreements. In addition, our senior secured credit facility requires us tomaintain or comply with a minimum Adjusted EBITDA, a minimum Fixed ChargeCoverage ratio, and a maximum Growth Capital Expenditures limitation.  As of November 2, 2006, we were in compliancewith these requirements.

We are subject to capitallease obligations related to two of our leased properties. The principalcomponent of our capital lease obligations was $0.2 million as ofNovember 2, 2006. These capital leases have expiration dates of October2008 and November 2011. We are also the prime lessee under various operatingleases or agreements under deemed landlord financing transactions for land,building and equipment for company-operated and franchised restaurants, pieproduction facilities and locations subleased to non-affiliated third parties.These leases and agreements have initial terms ranging from 15 to 20 years and,in most instances, provide for renewal options ranging from five to 20 years.These leases and agreements expire at various dates through June 2028.

We have guaranteedcertain leases for restaurant properties sold in 1986 and restaurant leases ofcertain franchisees. Estimated minimum future rental payments remaining underthese leases were approximately $2.0 million as of November 2, 2006.

On November 2, 2006,our contractual obligations with respect to the above were as follows:

|                                                   | ** ** | **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                   |       | $                                         | 27.6       |   | $ | — |   | $ | 27.6 |   | $ | — |   | $ | — |   |
| 101⁄2% senior  unsecured notes                 |       | 126.5                                     |       | — |   | — |   | 126.5 |   | — |   |
| Total long-term debt                              |       | 154.1                                     |       | — |   | 27.6 |   | 126.5 |   | — |   |
| Capital lease  obligations(1) (2)            |       | 0.2                                       |       | 0.1 |   | 0.1 |   | — |   | — |   |
| Operating lease  obligations (2)                  |       | 189.6                                     |       | 24.9 |   | 45.6 |   | 38.7 |   | 80.4 |   |
| Deemed landlord  financing liability (1) (2) |       | 261.9                                     |       | 11.5 |   | 23.3 |   | 24.3 |   | 202.8 |   |
| Other debt (3)                                    |       | 0.8                                       |       | 0.8 |   | — |   | — |   | — |   |
| Letters of  credit (4)                            |       | 7.4                                       |       | 7.4 |   | — |   | — |   | — |   |
| Purchase  commitments (5)                         |       | 5.1                                       |       | 5.1 |   | — |   | — |   | — |   |
| Total                                             |       | $                                         | 619.1      |   | $ | 49.8 |   | $ | 96.6 |   | $ | 189.5 |   | $ | 283.2 |   |

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(1)             Amountspayable under capital leases and the deemed landlord financing liabilityrepresent gross rent payments, including both deemed principal and imputedinterest components.

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(2)             Manyof our leases and deemed landlord financing liabilities contain provisions thatrequire additional rent payments contingent on sales performance and thepayment of common area maintenance charges and real estate taxes.  Amounts in this table do not reflect any ofthese additional amounts.

(3)             Propertyinsurance financing for one year.

(4)             Wehave letters of credit outstanding primarily to guarantee performance underinsurance contracts.  The letters ofcredit are irrevocable and have one-year renewable terms.

(5)             Wehave commitments under contracts for the purchase of property and equipment.  Portions of such contracts not completed atNovember 2, 2006 as stated above were not reflected as assets orliabilities in our consolidated financial statements.

***Prior indebtedness***

Our previous creditfacilities consisted of a $25.0 million revolving credit facility, a term Aloan, and a term B loan issued pursuant to a credit agreement datedJune 13, 2003.  In addition, we hadoutstanding subordinated indebtedness in the original principal amount of $45.0million issued pursuant to an investment agreement dated June 13,2003.  The prior term loans and the priorsubordinated debt were paid in full from a portion of the proceeds of oursenior 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 creditfacility.  In addition, in connectionwith the refinancing, we wrote off $4.4 million of unamortized debt financing costsin fiscal 2004 related to the prior debt.

**Sourcesand uses of cash**

The following tablepresents a summary of our cash flows from operating, investing and financingactivities for the periods indicated:

| **(In millions)**                                | ** ** | **Fiscal year  November 2,  2006** | ** ** | **Fiscal year  November 3,  2005** | ** ** | **Fiscal year  October 28,  2004** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Net cash  provided by operating activities            |       | $                                            | 17.9       |                                         | $          | 24.5                                         |       | $ | 25.1 |   |
| Net cash used  for investing activities               |       | (36.4                                        | )          | (38.9                                        | )          | (23.8                                        | )          |
| Net cash  provided by (used for) financing activities |       | 18.3                                         |       | 15.2                                         |       | (5.3                                         | )          |
| Net increase (decrease)  in cash and cash equivalents |       | (0.2                                         | )          | 0.8                                          |       | (4.0                                         | )          |
|                                                       |            |                                              |            |                                              |            |                                              |            |  |  |  |

 

***Operatingactivities***

Operating cash flows forfiscal 2006 decreased $6.6 million due to the increase in labor costs,utilities, and occupancy costs experienced during the year combined withincreased purchases of inventory items necessary to meet the increasedproduction related to manufacturing operations in fiscal 2006.

For fiscal 2005, cashflows from operating activities decreased $0.6 million compared to fiscal 2004which resulted primarily from the payment of the settlement amounts related tothe class action lawsuits, offset by a favorable change in the funding of theunpresented checks which relate to outstanding checks issued by us.

***Investingactivities***

Our capital expenditures,excluding amounts related to build-to-suits, for the last three fiscal yearswere comprised of the following:

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| (In millions)                           | ** ** | **Fiscal  2006** | ** ** | **Fiscal  2005** | ** ** | **Fiscal  2004** | ** ** |
|----------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| New store  construction                      |       | $                | 10.3       |             | $          | 7.9              |       | $ | 3.6 |   |
| Existing store  remodel and refurbishment    |       | 6.3              |       | 5.8              |       | 5.8              |       |
| Store capital  maintenance                   |       | 5.3              |       | 4.8              |       | 4.3              |       |
| Pie production  facility capital maintenance |       | 1.9              |       | 2.0              |       | 1.4              |       |
| Corporate  related                           |       | 0.9              |       | 0.6              |       | 0.9              |       |
| Purchase of property  and equipment          |       | $                | 24.7       |             | $          | 21.1             |       | $ | 16.0 |   |

 

In addition to the capital expenditures noted above,we spent $7.5 million, $18.0 million and $8.4 million for the purchase ofassets under deemed landlord financing liability in fiscal 2006, 2005 and 2004,respectively, and net spending on build-to-suit construction of $3.8 millionassociated with our new unit growth during fiscal 2006.  We opened 22 new restaurants in fiscal 2006and acquired 5 restaurants from a franchisee for $0.7 million. Also, we had anadditional 11 locations under construction at the end of fiscal 2006.

***Financingactivities***

During fiscal 2006, we generated cash from financingactivities of $18.3 million, consisting principally of the net proceeds fromdeemed landlord financing transactions associated with our new unit growthduring the year of $12.5 million and additional borrowings under our creditfacility of $5.9 million.

Our financing activitiesprovided cash of $15.2 million during fiscal 2005, consisting principally of$9.9 million of proceeds from deemed landlord financing transactions associatedwith our new restaurant construction, and an increase in borrowings under ourcredit facility of $5.3 million.

We used cash in financingactivities of $5.3 million during fiscal 2004, consisting principally of thenet proceeds from our April 2004 debt refinancing, $1.4 million ofborrowing under our revolving credit facility and $1.8 million of proceeds fromdeemed landlord financing, offset by the periodic principal payments on theprevious term debt and the repayment of $9.8 million on our previous revolvingline of credit.

**Cash management**

We have historically funded the majority of ourcapital expenditures out of cash from operations. We have on occasion obtained,and may in the future obtain, capitalized lease financing for certain expendituresrelated to equipment. Our investment requirements for new restaurantdevelopment include requirements for acquisition of land, building andequipment.  Historically we have eitheracquired all of these assets for cash, or purchased building and equipmentassets for cash and acquired a leasehold interest in land. We have entered intosale-leaseback arrangements for many of the land and building assets that wehave purchased in the past, many of which have been accounted for as financingtransactions. Since the initial net cash investment required for leased unitsis significantly lower than for owned properties, we intend to focus on leasingsites for future growth so that we only have to fund the equipment portion ofour new restaurant capital costs from our cash flows. We believe that this willreduce our upfront cash requirements associated with new restaurant growth andenable us to increase our return on these investments, although it will resultin significant long term obligations under operating leases, capital leases orfinancing liabilities.

**Newaccounting pronouncements**

In November 2004,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 151, “Inventory Costs, an amendment of ARBNo. 43, Chapter 4.”  SFASNo. 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 meet the“so abnormal” criterion outlined in ARB No. 43.  SFAS No. 151also introduces the concept of “normal capacity” and requires the allocation offixed production overheads to inventory based on the normal capacity of theproduction facilities.  Unallocated overheads must be recognized as anexpense in the period incurred.  SFAS No. 151 is effective forinventory costs incurred during fiscal years beginning after June 15,2005.  The Company implemented SFAS No. 151 effective November 4,2005 and because we did not have abnormal costs, the implementation did nothave a material impact on our financial position, results of operations or cashflows during the year ended November 2, 2006.

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On December 16,2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment,which is a revision of SFAS No. 123. SFAS 123(R) supersedes APBOpinion No. 25, Accounting for Stock Issued to Employees, and amends SFASNo. 95, Statement of Cash Flows. Generally, the approach inSFAS 123(R) is similar to the approach described in SFAS 123.However, SFAS 123(R) requires all share-based payments to employees,including grants of employee stock options, to be recognized in the incomestatement based on their fair values. Pro forma disclosure is no longer analternative.

SFAS 123(R) permitspublic companies to adopt its requirements using one of two methods:

1. A “modifiedprospective” method in which compensation cost is recognized beginning with theeffective date (a) based on the requirements of SFAS 123(R) for allshare-based payments granted after the effective date and (b) based on therequirements of SFAS 123 for all awards granted to employees prior to theeffective date of SFAS 123(R) that remain unvested on the effective date,after estimating forfeitures.

2. A “modifiedretrospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restate basedon the amounts previously recognized under SFAS 123 for purposes of proforma disclosures for either (a) all prior periods presented or(b) prior interim periods of the year of adoption.

The Company will use themodified prospective method when it adopts SFAS 123(R).  SFAS 123(R)is effective for non-public filers, with the first annual reporting period thatbegins after December 15, 2005. For purposes of this Statement, theCompany is considered a non-public filer because it is an entity that has onlydebt securities trading in a public market. As permitted by SFAS 123, theCompany had accounted for share-based payments to employees using APB Opinion25’s intrinsic value method and, as such, generally recognizes no compensationcost for employee stock options. Simultaneously with the closing of the Company’ssale transaction in June 2003, all options became immediately vested, thusthe Company did not recognize any compensation expense. Consequently, theadoption of SFAS 123(R) will only impact the Company’s results ofoperations if the Company grants share-based payments subsequent toNovember 2, 2006, the beginning of the Company’s 2007 fiscal year.

In May 2005, theFASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS154)”. SFAS 154 replaces APB No. 20, Accounting Changes, and SFASNo. 3, Reporting Accounting changes in Interim Financial Statements, andchanges the requirements for the accounting for and reporting of a change inaccounting principle. SFAS 154 requires retrospective application of changes inaccounting principle, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. SFAS 154defines retrospective application as the application of a different accountingprinciple to prior accounting periods as if that principle had always been usedor as the adjustment of previously issued financial statements to reflect achange in the reporting entity. SFAS 154 also redefines restatement as therevising of previously issued financial statements to reflect the correction ofan error.  SFAS 154 is effective for accounting changes and correction oferrors made in fiscal years beginning after December 15, 2005.

In October 2005, theFASB issued FSP No. FAS 13-1, “Accounting for Rental Costs Incurred duringa Construction Period.” FSP No. FAS 13-1 requires rental costs associatedwith operating leases that are incurred during a construction period to berecognized as rental expense. FSP No. FAS 13-1 is effective for reportingperiods beginning after December 15, 2005. The transition provisions ofFSP No. FAS 13-1 permit early adoption and retrospective application ofthe guidance. The Company historically capitalized rental costs incurred duringa construction period.  The Company implemented FSP No. FAS 13-1during the first quarter of fiscal 2006 and it did not have a material impactupon the Company’s financial position, results of operations or cash flows. TheCompany capitalized $0.7 million and $0.2 million in fiscal 2005 and 2004,respectively.

In July 2006, theFinancial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,*“Accounting for Uncertainty in IncomeTaxes — an Interpretation of FASB Statement No. 109”*(FIN 48), which clarifies the accounting for uncertainty in tax positions.This interpretation requires that we recognize in our financial statements theimpact of a tax position if that position is more likely than not of beingsustained on audit, based on the technical merits of the position. Theprovisions of FIN 48 are effective for fiscal years beginning afterDecember 15, 2006.  We are currentlyevaluating the impact of adopting FIN 48 on our condensed consolidatedfinancial statements.

On September 18, 2006,the FASB issued SFAS No. 157, *Fair ValueMeasurements*(“SFAS No. 157”), which defines fair value, establishesa framework for measuring fair value in accordance with GAAP and expandsdisclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15,2007.  We do not believe such adoptionwill have a material impact on our consolidated financial statements.

In September 2006, thestaff of the Securities and Exchange Commission (“SEC”) issued Staff AccountingBulletin No. 108, *Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements. *This bulletinprovides guidance on the consideration of the effects of prior yearmisstatements in quantifying current year misstatements for the purpose of amateriality assessment.  The Companyassesses the materiality of unrecorded 

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misstatements under theroll over method.  The guidance in thisbulletin must be applied to financial reports covering the first fiscal yearending after November 15, 2006, therefore the Company will adopt in fiscal2007.  The Company is currently assessingthe financial impact upon adoption.

**Item7A.****                                                  Quantitativeand Qualitative Disclosures about Market Risk.**

We are exposed to marketrisk primarily from changes in interest rates and changes in food commodityprices.

We are subject to changes in interest rates onborrowings under our senior secured credit facility that bear interest atfloating rates.  As of November 2,2006, $27.6 million, or 17.9% of our total debt and capitalized leaseobligations of $154.2 million, bears interest at a floating rate.  A hypothetical one hundred basis increase ininterest rates for our variable rate borrowings, as of November 2, 2006,would increase our future interest expense by approximately $0.3 million peryear.  This sensitivity analysis does notfactor in potential changes in the level of our variable interest rateborrowings, or any actions that we might take to mitigate our exposure tochanges in interest rates.

Many of the ingredientspurchased for use in the products sold to our guests are subject tounpredictable 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 several sourcesand we have the ability to modify recipes or vary our menu items offered.  Historically, we have also been able toincrease certain menu prices in response to food commodity price increases andbelieve 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 2.6%.  We have not historically used financialinstruments to hedge our commodity ingredient prices.

**Item8.****                                                           FinancialStatements and Supplementary Data.**

The information requiredunder this Item 8 is set forth on pages F-1 through F-27 of this Report.

**Item9.****                                                           Changesin and Disagreements with Accountants on Accounting and Financial Disclosure.**

OnJune 14, 2005, the Company filed a current report on Form 8-K,pursuant to Item 4 thereof, reporting that the Company had dismissedErnst & Young LLP as its independent registered public accounting firmand had determined to engage Grant Thornton LLP as its independent registeredpublic accounting firm for the fiscal year 2005.

TheCompany does not have any disagreements with its accountants on accounting andfinancial disclosure matters.

**Item9A.****                                                  Controlsand Procedures.**

**Evaluation of disclosure controls and procedures**

Within the 90-day period prior to the filing date of this report, ourmanagement, under the supervision of our Chief Executive Officer and ChiefFinancial Officer, carried out an evaluation of the effectiveness of the designand operation of our disclosure controls and procedures pursuant toRules 13a-14 and 15d-14 under the Securities Exchange Act of 1934 (the “ExchangeAct”), as amended.  Based upon theirevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective in alerting themtimely to material information required to be included in our Exchange Actfilings.

**Limitations on the effectiveness of controls**

A control system, no matter how well designed and operated, can provideonly reasonable, not absolute, assurance that the control system’s objectiveswill be met.  Further, the design of acontrol system must reflect the fact that there are resource constraints, andthe benefits of controls 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.

**Item9B.****                                                  OtherInformation.**

Not applicable.

 

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**PART III**

**Item10.****                                                    Directorsand Executive Officers of the Registrant.**

The following table sets forth certain informationregarding our Board of Directors and executive officers as of November 2,2006.

| Name                  | ** ** | **Age** | ** ** | **Position** |
|-----------------------|------------|---------|------------|--------------|
| Walter Van Benthuysen |       |    | 67         |         |   | Chairman of the Board and Director |
| Robert Cummings       |       |    | 59         |         |   | Director |
| Wayne Kocourek        |       |    | 69         |         |   | Director |
| Michael Solot         |       |    | 42         |         |   | Director |
| Kenneth Keymer        |       |    | 58         |         |   | Director |
| Debra Koenig          |       |    | 54         |         |   | Chief Executive Officer and Director |
| Anthony Carroll       |       |    | 55         |         |   | Chief Financial Officer and Chief Administrative  Officer |
| Jeffry Guido          |       |    | 47         |         |   | President, Village Inn |
| Timothy Casey         |       |    | 46         |         |   | President, Bakers Square |

 

*DebraKoenig*has been our Chief Executive Officer and one of ourdirectors since June 2003. She joined us after a 25 year career withMcDonald’s Corporation. Ms. Koenig’s most recent position was President ofthe Southeast Division from 1997 to 2001. In this role she was responsible forMcDonald’s largest U.S. division, with $4 billion in sales, consisting ofapproximately 2,675 franchised restaurants and 290 company-operated restaurantsin 14 states.

*AnthonyCarroll*has been our Chief Financial Officer sinceFebruary 2004 and our Chief Administrative Officer sinceDecember 2005. From June 2000 until December 2002Mr. Carroll was Chief Financial Officer of ProcureZone.com, LLC, whichprovided an Internet-based procurement tool for the utility industry.Mr. Carroll was Chief Financial Officer for Au Bon Pain Co., Inc. andits successor, ABP Corporation, from October 1988 until June 2000.Mr. Carroll began his career with PriceWaterhouseCoopers and is aCertified Public Accountant.

*JeffryGuido*has been our President for Village Inn since November2005.  Mr. Guido has been with VillageInn for nearly 30 years.  During thistime, he has worked in a variety of capacities, including Associate Manager,General Manager, Franchise Field Consultant and Corporate Area Manager.  For the past 10 years, Mr. Guido has been theRegional Vice President for the Village Inn West division.

*TimothyCasey*has been our President for Bakers Square since April2006.  Mr. Casey is a former StarbucksExecutive.  He spent 15 years withSouthland Corporation, eventually leading a multi-million dollar businesscomprised of over 100 units  in theOrlando area.  He joined Circle KCorporation and successfully led the organization in a two yearturnaround.  In 1996, Mr. Casey joinedStarbucks and over the next 8 years participated in the growth of the businessfrom 20 to 725 stores.  Most recently,Mr. Casey partnered with the founders of Cereality to develop a comprehensivestrategy to grow this emerging brand.

*WalterVan Benthuysen*has been one of our directors and Chairman ofthe Board since June 2003. Mr. Van Benthuysen served as a member ofthe Board of Directors of Value Added Bakery Holding Company and as itsChairman of the Board from December 1998 until December 2003. He alsoserved as Chairman of the Board of Hazelwood Farms, a subsidiary ofSupervalu, Inc., from September 1995 to December 1998.Previously, Mr. Van Benthuysen was the Executive Vice President of QuakerOats Company until he retired in October 1995.  Mr. Van Benthuysen is also a director ofNonni’s Food Company, Inc.

*RobertCummings*has been one of our directors since June 2003.Mr. Cummings has been a Managing Director of Wind Point Advisors LLC, aprivate equity investment firm, since 1987. Investment funds affiliated withWind Point Advisors LLC control our company. He is also a director of Procyon Technologies, Inc.,Nonni’s Food Company, Inc., Knape and Vogt, Summit Business Media, YorkLabel and United Subcontractors, Inc.

*WayneKocourek*has been one of our directors since June 2003.He is Chairman, Chief Executive Officer and Managing Member of Mid Oaks InvestmentsLLC, a private equity investment company that he founded in 1997. He is alsocurrently a director of Little Rapids Corporation, Liquid Container Inc.,Profile Products LLC, Environmental Materials LLC and WilkinsonIndustries, Inc.

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*MichaelSolot*has been one of our directors since June 2003. Hehas been employed by Wind Point Advisors LLC, a private equity investment firm,since 1999, most recently as a Managing Director. Investment funds affiliatedwith Wind Point Advisors LLC control our company. Prior to joining Wind Point,Mr. Solot spent six years in various operating and strategy positions withWerner Ladder Co. Mr. Solot has also held positions as an Associate withGoldman, Sachs and Co. and as a Consultant with Bain & Co.

*KennethKeymer*has been one of our directors since August 2005.Mr. Keymer has been Chief Executive Officer of AFC Enterprises Inc., thefranchisor and operator of Popeyes Chicken & Biscuits and President ofPopeyes Chicken & Biscuits. From January 2002 toNovember 2003, he was President and Co-Chief Executive Officer ofNoodles & Company.  He alsoserved as President and Chief Operating Officer of Sonic Corporation fromJuly 1996 to January 2002. Mr. Keymer has also served in board and/or senior executive officerpositions with several other restaurant companies, including Taco Bell, BostonChicken and Perkins Family Restaurants.

Ms. Koenig,Mr. Van Benthuysen, Mr. Cummings, Mr. Solot andMr. Kocourek were elected as directors in June 2003 pursuant to thestockholders agreement described in “Item 13. Certain Relationships and RelatedParty Transactions.” Mr. Keymer was appointed as a director inSeptember 2005 pursuant to the stockholders agreement.  Our directors serve until their successorshave been elected and qualified or until their earlier resignation or removal.Our executive officers are elected by and serve at the discretion of our Boardof Directors.

Our Board of Directorshas an Audit Committee that is responsible, among other things, for overseeingour accounting and financial reporting processes and audits of our financialstatements. The Audit Committee is comprised solely of Messrs. Kocourekand Van Benthuysen. Our Board of Directors has determined thatMr. Kocourek qualifies as an “audit committee financial expert” and thatMr. 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 agreementswith their 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.

We have adopted aBusiness 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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**Item11.****                                                    ExecutiveCompensation.**

The following tablediscloses the compensation awarded by us for services rendered during our lastthree fiscal years to the chief executive officer and to the other namedexecutive officers.

**Summarycompensation table**
|                              | ** ** | ** **                   | ** ** | ** **            | ** ** | ** **                 | ** ** | **Long-term  Compensation** | ** ** | ** **         | ** ** |
|------------------------------|------------|------------------------------|------------|-----------------------|------------|----------------------------|------------|-----------------------------|------------|--------------------|------------|
| ** **                   | ** ** | ** **                   | ** ** | **Awards**            | ** ** | **Payouts**                | ** ** | ** **                  | ** ** |
| **Name and**            | ** ** | **Annual compensation** | ** ** | **Restricted  stock** | ** ** | **Securities  underlying** | ** ** | **LTIP**                    | ** ** | **All other** | ** ** |
| **principal position**  | ** ** | **Year**                     | ** ** | **Salary**            | ** ** | **Bonus(16)**              | ** ** | **awards(1)**               | ** ** | **options**        | ** ** | **Payouts** | ** ** | **compensation** | ** ** |
| Debra Koenig(2)              |       | 2006                         |       | $                     | 412,000    |                       | $          | —                      |       | —             |       |   |   | — |   | $ | 4,464 | (3) |
| Chief Executive Officer      |       | 2005                         |       | 417,800               |       | 113,319                    |       | —                      |       |               |       | — |   | 4,552 | (4) |
|                              |       | 2004                         |       | 420,757               |       | 90,000                     |       | —                      |       |               |       | — |   | 64,866 | (5) |
|                         |       |                         |       |                  |       |                       |       |                        |       |               |       |   |   |   |   |
| Anthony Carroll(6)           |       | 2006                         |       | $                     | 236,753    |                       | $          | —                      |       | —             |       |   |   | — |   | $ | 4,263 | (7) |
| Chief Financial Officer and  |       | 2005                         |       | 234,311               |       | 50,810                     |       | —                      |       |               |       | — |   | 17,136 | (8) |
| Chief Administrative Officer |       | 2004                         |       | 165,796               |       | 23,381                     |       | —                      |       |               |       | — |   | 70,940 | (9) |
|                         |       |                         |       |                  |       |                       |       |                        |       |               |       |   |   |   |   |
| Jeffry Guido(10)             |       | 2006                         |       | $                     | 214,000    |                       | $          | —                      |       | —             |       |   |   | — |   | $ | 10,552 | (11) |
| President, Village Inn       |       | 2005                         |       | 162,943               |       | 112,553                    |       | —                      |       |               |       | — |   | 12,997 | (12) |
|                              |       | 2004                         |       | 156,794               |       | 75,030                     |       | —                      |       |               |       | — |   | 4,233 | (13) |
|                         |       |                         |       |                  |       |                       |       |                        |       |               |       |   |   |   |   |
| Timothy Casey(14)            |       | 2006                         |       | $                     | 130,769    |                       | $          | —                      |       | —             |       |   |   | — |   | $ | 59,298 | (15) |
| President, Bakers Square     |       | 2005                         |       | —                |       | —                     |       | —                      |       |               |       | — |   | — |   |
|                              |       | 2004                         |       | —                |       | —                     |       | —                      |       |               |       | — |   | — |   |

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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 byMs. Koenig at the end of 2004, 2005 and 2006 was 89,825 with an aggregatefair value on the grant date of $89,825 which equaled the amount paid for therestricted shares by Ms. Koenig. The value of Ms. Koenig’s restricted shares based on the last stockpurchase made in 2006 is $406,907 (89,825 x $4.53).  The number of restricted shares held byMr. Carroll at the end of 2004, 2005 and 2006 was 14,295, 20,097 and24,340, respectively, which carried an aggregate fair value on the grant dateof $14,295, $20,097 and $24,340, respectively, which equaled the total amountpaid for the shares by Mr. Carroll. Based on the last stock purchase in2006 the value of Mr. Carroll’s shares is $110,260 (24,340 x $4.53).  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)                                  Ms. Koenig was named our Chief ExecutiveOfficer on June 13, 2003.

(3)                                  Consists in 2006 of our payment of $464 interm life insurance premiums on Ms. Koenig’s behalf and our contributionof $4,000 to Ms. Koenig’s 401(k) plan maintained by us.

(4)                                  Consists in 2005 of our payment of $552 interm life insurance premiums on Ms. Koenig’s behalf and our contributionof $4,000 to Ms. Koenig’s 401(k) plan maintained by us.

(5)                                  Consists in 2004 of payments toMs. Koenig totaling $60,407 for relocation expenses, our payment of $975in term life insurance premiums on Ms. Koenig’s behalf and ourcontribution of $3,484 to Ms. Koenig’s 401(k) plan maintained by us.

(6)                                  Mr. Carroll was named our Chief FinancialOfficer on February 12, 2004, and our Chief Administrative Officer onDecember 1, 2005.

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(7)                                  Consists in 2006 of our payment of $263 interm life insurance premiums on Mr. Carroll’s behalf and our contributionof $4,000 to Mr. Carroll’s 401(k) plan maintained by us.

(8)                                  Consists in 2005 of payments toMr. Carroll totaling $16,000 for relocation expenses, our payment of $320in term life insurance premiums on Mr. Carroll’s behalf and ourcontribution of $816 to Mr. Carroll’s 401(k) plan maintained by us.

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

(10)                            Mr. Guido was named our President forVillage Inn on November 4, 2005.

(11)                            Consists in 2006 of our payment of $6,316 intuition reimbursement to Mr. Guido, our payment of $236 in term lifeinsurance premiums on Mr. Guido’s behalf and our contribution of $4,000 toMr. Guido’s 401(k) plan maintained by us.

(12)                            Consists in 2005 of our payment of $9,289 intuition reimbursement to Mr. Guido, our payment of $236 in term lifeinsurance premiums on Mr. Guido’s behalf and our contribution of $3,472 toMr. Guido’s 401(k) plan maintained by us.

(13)                            Consists in 2004 of our payment of $233 interm life insurance premiums on Mr. Guido’s behalf and our contribution of$4,000 to Mr. Guido’s 401(k) plan maintained by us.

(14)                            Mr. Casey was named our president forBakers Square on April 27, 2006.

(15)                            Consists in 2006 of payments to Mr. Caseytotaling $59,091 for relocation expenses and our payment of $207 in term lifeinsurance premiums on Mr. Casey’s behalf.

(16)                            Consists of actual bonuses paid for fiscal2005 and 2006.

**Compensationcommittee interlocks and insider participation**

Our compensationcommittee is currently comprised of Messrs. Robert Cummings andWalter Van Benthuysen.  Neither of these individuals has been at any timean officer or employee of our company. Neither member of our compensationcommittee serves as a member of the board of directors or compensationcommittee of any entity that has one or more executive officers serving as amember of our board of directors or compensation committee.

**Directorcompensation**

Mr. Keymer receivesa fee of $20,000 per annum in exchange for his service on our Board ofDirectors, payable in substantially equal quarterly installments.

**Employmentand severance agreements**

***Employment contracts***

We have entered intoemployment agreements with Ms. Koenig, Mr. Carroll, Mr. Guido and Mr.Casey.

Under Ms. Koenig’semployment agreement, she is entitled to receive a minimum base salary of$400,000, less applicable tax withholding, as well as an annual performancebonus targeted at 50% of base salary. The annual performance bonus is based upon achievement of our annualbudget that is determined by our Board in its sole discretion.  If Ms. Koenig’s employment is terminatedby us without “cause”, she is entitled to a severance payment equal to 12months of her base salary, which severance is payable over the 12 month periodimmediately following the termination of her employment.  In addition, during the 12 month severanceperiod, we will pay the cost of Ms. Koenig’s health care continuationcoverage under COBRA at the same rate that we pay for health insurance for ouractive employees, if Ms. Koenig elects COBRA continuation coverage.  Ms. Koenig will also be entitled to theforegoing severance payments if she terminates her employment for “good reason,”which is generally defined as a diminution in her duties or position that isnot remedied after notice or a breach of her employment contract by us (whichincludes any decrease in Ms. Koenig’s base salary without her consent or arequired relocation outside of the Denver area) that is not remedied afternotice.

 

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Mr. Carroll’semployment agreement is substantially the same as Ms. Koenig’s, exceptthat he is entitled to receive a minimum annual base salary of $225,000, lessapplicable tax withholding, and his annual performance bonus is targeted at 40%of base salary.  In addition, ifMr. Carroll’s employment is terminated by us without “cause” (or by himfor “good reason”), he is entitled to receive as severance the continuation ofhis base salary then in effect for a period of one month for each month inwhich he was employed by us, up to a maximum of 12 months, payable inaccordance with our payroll policy.

Ms. Koenig andMr. Carroll are also each subject to noncompetition restrictions for aperiod of at least twelve months following termination of their employment andnonsolicitation restrictions for a period of two years following employmenttermination.  We may, in our discretion,extend the noncompetition period up to a maximum period of twelve additionalmonths by similarly extending the period for which they are entitled to receiveseverance.

Under Mr. Guido’semployment agreement he is entitled to receive a minimum annual base salary of$214,000, less applicable tax withholding, and his annual performance bonus istargeted at 40% of base salary.  Inaddition, if Mr. Guido’s employment is terminated by us without “cause”(or by him for “good reason”), he is entitled to receive as severance thecontinuation of his base salary then in effect for a period of twelve monthspayable in accordance with our payroll policy.

Under Mr. Casey’semployment agreement he is entitled to receive a minimum annual base salary of$250,000, less applicable tax withholding, and his annual performance bonus istargeted at 40% of base salary.  Mr.Casey is also entitled to a $50,000 supplemental bonus covering the periodthrough the end of fiscal 2007.  Inaddition, if Mr. Casey’s employment is terminated by us without “cause”(or by him for “good reason”), he is entitled to receive as severance thecontinuation of his base salary then in effect for a period of twelve monthspayable in accordance with our payroll policy.

***Management agreements***

Ms. Koenig andMr. Carroll have entered into certain Management Agreements with uspursuant to which they purchased restricted shares of our common stock at aprice equal to $1.00 per share.  Theshares vest over a period of five years at the rate of 20% per year and aresubject to certain repurchase 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 ofemployment, we may elect, or, in the event of their deaths, their respectiveestates may compel us, to repurchase certain shares of our preferred stock andcommon stock previously acquired by Ms. Koenig 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 toMs. Koenig’s and Mr. Carroll’s put right following death, in whichcase the purchase price will be the lesser of the foregoing amounts or theoriginal cost of the shares.

Mr. Keymer enteredinto a Management Agreement with us pursuant to which he purchased restrictedshares of our common stock at a price equal to $4.53 per share.  The shares vest over a period of four yearsat the rate of 25% per year and are subject to certain repurchase rights upontermination of Mr. Keymer’s service as a member of our Board ofDirectors.  Upon termination ofMr. Keymer’s services as a member of our Board of Directors, 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.

Messrs. Guido and Caseyhave entered into a Management Agreements with us to commit to purchaserestricted shares of our common stock at a price equal to $4.53 per share.  The shares vest over a period of five yearsat the rate of 20% per year and are subject to certain repurchase rights upontermination of employment.  Upontermination of employment, all vesting ceases and the unvested shares may berepurchased by us at their original cost and the vested shares may berepurchased at fair market value (unless termination is for “cause” orvoluntarily by the employee without “good reason”, in which event all of theshares may be repurchased by us at the lesser of original cost or fair marketvalue).   As of November 2, 2006, Mr.Guido had purchased the restricted shares.

***Severance agreements***

We entered into aseverance agreement with Mr. Robert Kaltenbach, our former Chief OperatingOfficer.  Mr. Kaltenbach’semployment terminated on December 3, 2005. Pursuant to the terms of hisagreement, we paid Mr. Kaltenbach $500,000 and a portion of the cost ofMr. Kaltenbach’s health care continuation coverage under COBRA on ourscheduled salary payment dates until December 3, 2006.  In exchange for these severance payments,Mr. Kaltenbach executed a release of all claims against us.  Mr. Kaltenbach also is subject to anagreement that prohibits him from competing against us for a period 

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of 12 months followingthe termination of his employment.  InJanuary 2006, we repurchased certain shares of our common stock andpreferred stock that had been previously acquired by Mr. Kaltenbach.  The aggregate purchase price paid toMr. Kaltenbach in connection with such repurchase was approximately$723,000.

**Item12.****                                                    SecurityOwnership of Certain Beneficial Owners and Management.**

All of the outstanding capital stock of VICORPRestaurants, Inc. is held by VI Acquisition Corp. The following table setsforth information with respect to the beneficial ownership of all of the commonstock of VI Acquisition Corp. as of November 2, 2006 by:

·                  each person (or group of affiliatedpersons) who is known by us to beneficially own 5% or more of VI AcquisitionCorp.’s common stock;

·                  each of the named executive officers;

·                  each of our directors; and

·                  all of our directors and executiveofficers as a group.

To our knowledge, each of the holders of shares listedbelow has sole voting and investment power as to the shares owned unlessotherwise noted. Our equity securities are privately held and no class of ourvoting securities is registered pursuant to Section 12 of the ExchangeAct.  The information set forth hereindoes not describe 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)                                        |       | 686,503                                                            |       | 49.4                                                                 | %          |
| Wind Point  Partners IV, L.P.(4)                                       |       | 258,289                                                            |       | 18.6                                                                 | %          |
| Mid Oaks  Investments LLC(5)                                           |       | 171,939                                                            |       | 12.4                                                                 | %          |
| Debra Koenig                                                           |       | 108,905                                                            |       | 7.8                                                                  | %          |
| Anthony Carroll                                                        |       | 24,340                                                             |       | 1.8                                                                  | %          |
| Walter Van  Benthuysen                                                 |       | 29,695                                                             |       | 2.1                                                                  | %          |
| Robert  Cummings(3)(4)(6)                                              |       | 947,690                                                            |       | 68.2                                                                 | %          |
| Wayne  Kocourek(7)                                                     |       | 171,939                                                            |       | 12.4                                                                 | %          |
| Michael Solot                                                          |       | —                                                             |       | —                                                               |       |
| Jeffry Guido                                                           |       | 15,448                                                             |       | 1.1                                                                  | %          |
| Kenneth Keymer                                                         |       | 2,901                                                              |       | 0.2                                                                  | %          |
| All executive officers  and directors as a group (seven persons)(6)(7) |       | 1,300,918                                                          |       | 93.6                                                                 | %          |

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(1)             Theaddresses for the beneficial owners and certain directors and executiveofficers are as follows: for Wind Point Partners V, L.P., Wind Point PartnersIV, L.P., and Mr. Cummings, One Towne Square, Suite 780, Southfield,Michigan 48076; for Mr. Solot, 676 North Michigan Avenue, Suite 3700,Chicago, Illinois 60611; for Mid Oaks Investments LLC and Mr. Kocourek,750 Lake Cook Road, Suite 440, Buffalo Grove, Illinois 60089; for Mr. VanBenthuysen, 17 Tartan Lakes Drive, Westmont, Illinois 60559; and for each otherdirector or executive officer, c/o VICORP Restaurants, Inc., 400 West 48thAvenue, Denver, Colorado 80216.

(2)             Asof November 2, 2006, VI Acquisition Corp. had 1,361,753 issued andoutstanding shares of common stock.

(3)             WindPoint Investors V, L.P. is the general partner of Wind Point Partners V, L.P. (“WPPV”). 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 toall of the common shares held by WPP V. Mr. Cummings, as a managing memberof Wind Point Advisors LLC, may be deemed to beneficially own the common sharesheld by WPP V. Mr. Cummings disclaims beneficial ownership of any suchshares in which he does not have a pecuniary interest.

(4)             WindPoint Investors IV, L.P. is the general partner of Wind Point Partners IV, L.P.(“WPP IV”). Wind Point Advisors LLC is the general partner of Wind PointInvestors IV, L.P., and therefore possesses sole voting and investment powerwith respect to all of the common shares held by WPP IV. Mr. Cummings, asa managing member of Wind Point 

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Advisors LLC, may bedeemed 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)             Includes4,298 shares held by Donald Piazza and 4,298 shares held by Michael Kocourekfor which Mid Oaks Investments LLC (“Mid Oaks”) holds sole voting power.Mr. Kocourek, as the Chairman, Chief Executive Officer and managing memberof Mid Oaks may be deemed to beneficially own the common shares held by MidOaks. Mr. Kocourek disclaims beneficial ownership of any such shares inwhich he does not have a pecuniary interest.

(6)             WindPoint Investors IV, L.P. is the general partner of Wind Point IV ExecutiveAdvisor Partners, L.P. (“WPP IV EAP”). Wind Point Advisors LLC is the generalpartner of Wind Point Investors IV, L.P., and therefore possesses sole votingand investment power with respect to all of the common shares held by WPP IVEAP. Wind Point Investors IV, L.P. is the general partner of Wind PointAssociates IV, L.P. (“WPP Associates IV”). Wind Point Advisors LLC is thegeneral partner of Wind Point Investors IV, L.P., and therefore possesses solevoting and investment power with respect to all of the common shares held byWPP Associates IV. Wind Point Investors V, L.P. is the general partner of WindPoint V Executive Advisor Partners, L.P. (“WPP V EAP”). Wind Point Advisors LLCis the 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 EAP. Includes 947,690 shares held by WPP V, WPP IV, WPP IV EAP, WPPAssociates IV, WPP V EAP and Wind Point Advisors LLC that Mr. Cummings maybe deemed to beneficially own. Mr. Cummings disclaims beneficial ownershipof any such shares in which he does not have a pecuniary interest.

(7)             Includes171,939 shares held by Mid Oaks that Mr. Kocourek may be deemed tobeneficially own. Mr. Kocourek disclaims beneficial ownership of any suchshares in which he does not have a pecuniary interest.

**Item13.****                                                    CertainRelationships and Related Party Transactions.**

**Professional services agreement**

In June 2003, VI Acquisition Corp. entered into aprofessional services agreement with Wind Point Investors IV, L.P. and WindPoint Investors V, L.P. pursuant to which they provide services relating tocorporate strategy, acquisition and divestiture strategy and advice regardingdebt and equity financings. In exchange for such services, Wind Point InvestorsIV, L.P. is entitled to an annual management fee of $231,668 plus itsreasonable out-of-pocket expenses, and Wind Point Investors V, L.P. is entitledto an annual management fee of $618,332 plus its reasonable out-of-pocketexpenses. In addition, upon repayment in full of all amounts owing under VIAcquisition Corp.’s prior senior secured credit agreement and its prior subdebtcredit agreement, Wind Point Investors IV, L.P. and Wind Point Investors V,L.P. was paid a fee equal to the sum of $250,000 plus the product of $70,000multiplied by the result of a fraction, the numerator of which is the number ofdays from June 13, 2003 until such repayment and the denominator of whichis 365. We paid Wind Point Investors IV, L.P. and Wind Point Investors V, L.P.approximately $309,000 pursuant to this provision upon repayment of our priorsenior credit facility in connection with the April 2004 refinancing.

The professional services agreement will continueuntil the occurrence of a change of control of VI Acquisition Corp.; providedthat if at such time VI Acquisition Corp. pays in full all amounts owing underits existing senior secured credit facility and mezzanine credit agreement, theprofessional services agreement shall remain in effect as long as VIAcquisition Corp.’s current stockholders own at least 10% of the common stockor preferred stock of VI Acquisition Corp. The professional services agreement,however, may be terminated by VI Acquisition Corp. if either Wind PointInvestors IV, L.P. or Wind Point Investors V, L.P. is in material breach andhas not cured such breach within 60 days of notice thereof.  The professional services agreement containscustomary indemnification provisions in favor of Wind Point Investors IV, L.P.,Wind Point Investors V, L.P. and their affiliates. Mr. Cummings is amanaging director and Mr. Solot is a principal of Wind Point Advisors LLC,an affiliate of Wind Point Investors IV, L.P. and Wind Point Investors V, L.P.

Total management feespaid to Wind Point Investors, IV, L.P. and Wind Point Investors V, L.P. totaled$850,000, $1,063,000, and $1,088,000 for the fiscal years endedNovember 2, 2006, November 3, 2005 and October 28, 2004,respectively.  Total management feeexpense for the fiscal years ended November 2, 2006, November 3, 2005, andOctober 28, 2004 was $850,000, $850,000, and $1,159,000, respectively. Asof November 2, 2006 and November 3, 2005, $63,000 and $63,000 of suchmanagement fees were accrued but unpaid.

**Additional equity issuances**

In November 2003, Wind Point Partners IV, L.P.purchased 1,324 shares of our common stock for $1,324 and 61.075 shares of ourseries A preferred stock for $61,075, Wind Point Partners V, L.P. purchased3,520 shares of our common stock for 

44

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$3,520 and 162.331 shares of our series A preferredstock for $162,331, Wind Point IV Executive Advisor Partners, L.P. purchasedten shares of our common stock for $10 and 0.459 shares of our series A preferredstock for $459, Wind Point Associates IV, LLC purchased five shares of ourcommon stock for $5 and 0.226 shares of our series A preferred stock for $226,Mid Oaks Investments LLC purchased 629 shares of our common stock for $629 and29.028 shares of our series A preferred stock for $29,028 and Walter VanBenthuysen purchased 72 shares of our common stock for $72 and 3.325 shares ofour series A preferred stock for $3,325.

In March 2004, Walter Van Benthuysen purchased10,000 shares of our common stock for $10,000, Debra Koenig purchased 3,575shares of our common stock for $3,575 and Anthony Carroll purchased 14,295shares of our common stock for $14,295.

In April 2005, Anthony Carroll purchased 5,802shares of common stock for $26,282 and 284.087 shares of our series A preferredstock for $322,200.  In May 2005, aformer employee purchased .913 shares of our series A preferred stock for$1,036.

In September 2005, Kenneth Keymer purchased 2,901shares of common stock for $13,142.

In June 2006, Anthony Carroll purchased 4,243 sharesof common stock for $19,200, Jeffry Guido purchased 10,948 shares of commonstock for $49,594 and another member of management purchased 3,399 shares ofcommon stock for $15,397.

**Transaction fees in connection withthe June 2003 acquisition**

In June 2003, VI Acquisition Corp. entered into astock purchase agreement with Wind Point Partners IV, L.P., Wind Point PartnersV, L.P., Wind Point IV Executive Advisor Partners, L.P., Wind Point AssociatesIV, LLC and certain other parties, including our former Chief OperatingOfficer, 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 2003transaction. Wayne Kocourek, one of our directors, is the Chairman and ChiefExecutive Officer of Mid Oaks Investments LLC.

**Item14.****                                                    PrincipalAccounting Fees and Services.**

The following table setsforth the aggregate fees and related expenses for professional servicesprovided by Ernst & Young LLP (“E&Y”) and Grant Thornton LLP (“GT”),for the fiscal years ended November 2, 2006 and November 3, 2005:
| ** **          | ** ** | **Fiscal 2006** | ** ** | **Fiscal 2005** | ** ** |
|---------------------|------------|----------------------|------------|----------------------|------------|
| ** **          | ** ** | **GT**               | ** ** | **GT**               | ** ** | **E&Y** | ** ** |
| Audit fees          |       | $                    | 287,500    | (1)                  | $          | 171,813 | (1) | $ | 245,734 | (3) |
| Audit-related  fees |       | 41,470               | (4)        | —               |       | — |   |
| Tax fees            |       | 1,395                | (2)        | 7,250                | (2)        | — |   |
| Total               |       | $                    | 330,365    |                 | $          | 179,063 |   | $ | 245,734 |   |

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(1)             Forfiscal 2005 and 2006, fees for GT audit services pertained to professionalservices rendered for the audit of our consolidated financial statements andthe review of our quarterly Form 10-Q and 10-K.

(2)             Forfiscal 2005, fees for GT tax services pertained to tax compliance.  For fiscal 2006 fees included tax servicesprovided by GT.

(3)             Forfiscal 2005, fees for E&Y audit services pertained to a franchise offeringcircular ($3,370), the review of our quarterly reports on Form 10-Q forthe periods ended January 27, 2005 and April 21, 2005 ($24,000), therestatement of our consolidated financial statements for periods spanning fromfiscal 2000 through the period ended January 27, 2005 to correct certainaccounting errors, primarily as a result of a review of our lease accountingpolicies and practices prompted by the views expressed by the Office of theChief Accountant of the Securities and Exchange Commission on February 7,2005 in a letter to the American Institute of Certified Public Accountants andother recent interpretations regarding certain operating 

45

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lease issues and theirapplication under U.S. Generally Accepted Accounting Principles ($207,672) andthe transition from E&Y to GT as our independent registered publicaccounting firm ($10,692).

(4)             Forfiscal 2006, fees for GT lease accounting review.

**Audit Committee pre-approval offees.**

Our Audit Committee meetswith the independent auditors prior to the audit to discuss the planning andstaffing of the audit and to approve the proposed fee for the audit and anyrequired special services.  The AuditCommittee is notified in advance of any proposed engagement of the independentauditor to provide non-audit services to the Company.  The Audit Committee adopted a pre-approvalpolicy for services by its independent accountant to comply with Securities andExchange Commission Release No. 33-8183 pursuant to which all servicesprovided by the principal accountant are pre-approved by the Audit Committee.  The Audit Committee pre-approved all servicesperformed by the principal accountants for fiscal years 2006 and 2005 inaccordance with the pre-approval policy.

**PART IV**

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

**(a)**                           Thefollowing are being filed as part of this Annual Report on Form 10-K.

**1.****                                     FinancialStatements**

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

**2.****                                     FinancialStatement Schedules**

None.

**3.****                                     Exhibits**

2.1                                 Stock Purchase Agreement, dated as of April 15,2003, by and among VI Acquisition Corp., Midway Investors Holdings Inc., theSellers listed on Schedule 1 thereto and the Preferred Holders listed onSchedule 1 thereto.  Schedules tothis exhibit have been omitted pursuant to Item 601(b)(2) of RegulationS-K promulgated under the Securities Act. The registrant agrees to furnish supplementally a copy of any omittedschedule to the Securities and Exchange Commission upon request. *

2.2                                 AmendmentNo. 1 to Stock Purchase Agreement, dated as of June 9, 2003, by andamong VI Acquisition Corp., Midway Investors Holdings Inc. and BancBostonVentures, Inc. and Marathon Fund Limited Partnership IV as the SellerRepresentatives *

2.3                                 AmendmentNo. 2 to Stock Purchase Agreement, dated as of June 12, 2003, by and amongVI Acquisition Corp., Midway Investors Holdings Inc. and BancBostonVentures, Inc. and Marathon Fund Limited Partnership IV as the SellerRepresentatives *

2.4                                 StockPurchase Agreement, dated as of June 13, 2003, by and among VI AcquisitionCorp., 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 as defined therein.  Schedules to this exhibit have been omittedpursuant to Item 601(b)(2) of Regulation S-K promulgated under theSecurities Act.  The registrant agrees tofurnish supplementally a copy of any omitted schedule to the Securitiesand Exchange Commission upon request. *

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

3.2                                 Bylawsof VICORP Restaurants, Inc. *

3.3                                 Certificateof Incorporation of VI Acquisition Corp. *

3.4                                 Bylawsof VI Acquisition Corp. *

46

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3.5                                 Certificateof Incorporation of Village Inn Pancake House of Albuquerque, Inc. *

3.6                                 Bylawsof Village Inn Pancake House of Albuquerque, Inc. *

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

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

4.3                                 AmendmentNo. 1 to Purchase Agreement, dated as of April 14, 2004, by and amongVICORP Restaurants, Inc., as issuer, J.P. Morgan Securities Inc. and CIBCWorld Markets Corp., as initial purchasers *

4.4                                 RegistrationRights Agreement, dated as of April 14, 2004, by and among VICORPRestaurants, Inc., as issuer, VI Acquisition Corp. and Village Inn PancakeHouse of Albuquerque, Inc., as guarantors, and J.P. Morgan Securities Inc.and CIBC World Markets Corp., as initial purchasers *

4.5                                 Form ofNote (included as Exhibit B to Exhibit 4.1) *

10.1                                 StockholdersAgreement, 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 Stockholders Agreement, dated as of June 13, 2003, byand among VI Acquisition Corp., Wind Point Partners IV, L.P., Wind PointPartners V, L.P., Wind Point IV Executive Advisor *

10.2                                 RegistrationRights Agreement, dated as of June 13, 2003, by and among VI AcquisitionCorp., 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 AcquisitionCorp. and Anthony Carroll *

10.4                                 JoinderAgreement, dated as of December 1, 2003, by and among VI Acquisition Corp.and Wind Point V Executive Advisor Partners, L.P. *

10.5                                 Amendedand Restated Loan and Security Agreement, dated as of April 14, 2004, byand among VI Acquisition Corp., VICORP Restaurants, Inc., the Lenders (asdefined therein) and Wells Fargo Foothill, Inc., as the arranger andadministrative agent for the Lenders *

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

10.7                                 ManagementAgreement, dated as of June 13, 2003, by and among VI Acquisition Corp.and Robert Kaltenbach *+

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

10.9                                 NonstatutoryStock Option Agreement, dated as of June 13, 2003, by and among VIAcquisition Corp. and Robert Kaltenbach *+

10.10                           SubscriptionAgreement, dated as of November 19, 2003, by and among VI AcquisitionCorp. and Mid Oaks Investments, LLC *

10.11                           SubscriptionAgreement, dated as of November 19, 2003, by and among VI AcquisitionCorp. and Walter Van Benthuysen *

47

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10.12                           Amendedand Restated Subscription Agreement, dated as of November 19, 2003, by andamong VI Acquisition Corp., Wind Point Partners IV, L.P., Wind Point PartnersV, L.P., Wind Point IV Executive Advisor Partners, L.P. and Wind PointAssociates IV, LLC *

10.13                           ManagementAgreement, dated as of February 12, 2004, by and among VI AcquisitionCorp. and Anthony Carroll *+

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

10.15                           ManagementAgreement, dated as of March 11, 2004, by and among VI Acquisition Corp.and Walter Van Benthuysen *+

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

10.17                           Amendmentto Employment Agreement, dated as of March 15, 2004, by and among VICORPRestaurants, Inc. and Debra Koenig *+

10.18                           EmploymentAgreement, dated as of June 13, 2003, by and among VI Acquisition Corp.and Robert Kaltenbach *+

10.19                           EmploymentAgreement, dated as of February 12, 2004, by and among VI AcquisitionCorp. and Anthony Carroll *+

10.20                           Form ofIndemnification Agreement for directors of VICORP Restaurants, Inc. *

10.21                           Form ofIndemnification Agreement for directors of VI Acquisition Corp. *

10.22                           Form ofIndemnification Agreement for directors of Village Inn Pancake House ofAlbuquerque, Inc.*

10.23                           ProfessionalServices Agreement, dated as of June 13, 2003, by and among VI AcquisitionCorp., Wind Point Investors IV, L.P. and Wind Point Investors V, L.P.*

10.24                           Agreementof Settlement of Class Actions, dated February 28, 2005, by and amongthe plaintiffs, as defined therein, and VICORP Restaurants, Inc., asdefendant.  Incorporated herein byreference to the Quarterly Report on Form 10-Q for the quarter endedJanuary 21, 2005.

10.25                           LetterAgreement, dated as of September 6, 2005, by and among VI AcquisitionCorp. and Kenneth Keymer (Incorporated by reference to Exhibit 10.25 of the Registrant’sAnnual Report on Form 10-K for the year ended November 2, 2005)+

10.26                           ManagementAgreement, dated as of September 1, 2005, by and among VI AcquisitionCorp. and Kenneth Keymer (Incorporated by reference to Exhibit 10.26 of theRegistrant’s Annual Report on Form 10-K for the year ended November 2, 2005)+

10.27                           JoinderAgreement, dated as of September 6, 2005, by and among VI AcquisitionCorp. and Kenneth Keymer (Incorporated by reference to Exhibit 10.27 of theRegistrant’s Annual Report on Form 10-K for the year ended November 2, 2005)+

10.28                           ManagementAgreement, dated as of April 26, 2006, by and among VI Acquisition Corp. andTimothy Casey

10.29                           EmploymentAgreement, dated as of April 26, 2006, by and among VI Acquisition Corp. andTimothy Casey

10.30                           Joinder Agreement, dated asof April 26, 2006, by and among VI Acquisition Corp. and Timothy Casey

10.31                           ManagementAgreement, dated as of June 26, 2006, by and among VI Acquisition Corp. andJeffry Guido

10.32                           EmploymentAgreement, dated as of June 26, 2006, by and among VI Acquisition Corp. andJeffry Guido

48

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10.33                           Joinder Agreement, dated asof June 26, 2006, by and among VI Acquisition Corp. and Jeffry Guido

12.1                                 StatementRegarding Computation of Ratios of Earnings and Fixed Charges

14.1                                 BusinessConduct Policy (Incorporated by reference to Exhibit 14.1 of the Registrant’sAnnual Report onForm 10-K for the year ended November 2, 2005)

21.1                                 Subsidiariesof the Company

31.1                                 Certificationby our Chief Executive Officer with respect to our Form 10-K for the yearended November 2, 2006, pursuant to Rule 13a-14 or 15d-14 of theSecurities Exchange Act of 1934, as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

31.2                                 Certificationby our Chief Financial Officer with respect to our Form 10-K for the yearended November 2, 2006, pursuant to Rule 13a-14 or 15d-14 of theSecurities Exchange Act of 1934, as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

32.1                                 Certificationsby our Chief Executive Officer and Chief Financial Officer with respect to ourForm 10-K for the year ended November 2, 2006, pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002.

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

+               Identifieseach management contract or compensatory plan or arrangement.

**(b)****                                  Reportson Form 8-K**

During the fourth quarterof fiscal 2006 ended November 2, 2006, we filed the following reports onForm 8-K:

### Current reporton Form 8-K on August 23, 2006, announcing financial results for our thirdquarter ended July 13, 2006.

**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.
| VICORP RESTAURANTS, INC. |                                                      |   |   |                   |
|--------------------------|-----------------------------------------------------------|--------|--------|------------------------|
| (Registrant)             |                                                      |   |   |                   |
|                     |                                                      |   |   |                   |   |
|                     |                                                      |   |   |                   |   |
| By:                      | /s/ Debra Koenig                                          |   |   | Date: January 30, 2007 |   |
|                     | Debra Koenig                                              |   |   |                   |   |
|                     | Chief Executive Officer                                   |   |   |                   |   |
|                     | (Principal Executive Officer)                             |   |   |                   |   |
|                     |                                                      |   |   |                   |   |
|                     |                                                      |   |   |                   |   |
| By:                      | /s/ Anthony Carroll                                       |   |   | Date: January 30, 2007 |   |
|                     | Anthony Carroll                                           |   |   |                   |   |
|                     | Chief Financial Officer and  Chief Administrative Officer |   |   |                   |   |
|                     | (Principal Financial and Accounting Officer)              |   |   |                   |   |

 

49

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Pursuant to therequirements of the Securities Exchange Act of 1934, this report has been signedbelow by the following persons on behalf of the Registrant, and in thecapacities and on the date indicated.
| Signature/Title                                             | ** ** | ** **             | ** ** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|------------|
|                                                        |       |                   |       |       |
| /s/ Walter Van Benthuysen                                   |       | Date: January 30, 2007 |       |       |
| Walter Van Benthuysen,  Director and  Chairman of the Board |       |                   |       |       |
|                                                        |       |                   |       |       |
| /s/ Robert Cummings                                         |       | Date: January 30, 2007 |       |       |
| Robert Cummings,  Director                                  |       |                   |       |       |
|                                                        |       |                   |       |       |
| /s/ Kenneth Keymer                                          |       | Date: January 30, 2007 |       |       |
| Kenneth Keymer,  Director                                   |       |                   |       |       |
|                                                        |       |                   |       |       |
| /s/ Wayne Kocourek                                          |       | Date: January 30, 2007 |       |       |
| Wayne Kocourek,  Director                                   |       |                   |       |       |
|                                                        |       |                   |       |       |
| /s/ Michael Solot                                           |       | Date: January 30, 2007 |       |       |
| Michael Solot, Director                                     |       |                   |       |       |

 

50

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**VIACQUISITION CORP.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**
| Reports of Independent  Registered Public Accounting Firms                                                                                                                                  |   | F-2 – F-3 |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|
|                                                                                                                                                                                        |   |           |
| Consolidated  Balance Sheets — As of November 2, 2006 and November 3, 2005                                                                                                        |   | F-4            |
|                                                                                                                                                                                        |   |           |
| Consolidated Statements of Operations — Fiscal year  ended November 2, 2006, fiscal year ended November 3, 2005, and  fiscal year ended October 28, 2004                |   | F-5            |
|                                                                                                                                                                                        |   |           |
| Consolidated Statements of Cash Flows — Fiscal year  ended November 2, 2006, fiscal year ended November 3, 2005, and  fiscal year ended October 28, 2004                |   | F-6            |
|                                                                                                                                                                                        |   |           |
| Consolidated Statements of Stockholders’ Equity —  Fiscal year ended November 2, 2006, fiscal year ended November 3,  2005, and fiscal year ended October 28, 2004 |   | F-7            |
|                                                                                                                                                                                        |   |           |
| Notes to Consolidated Financial Statements                                                                                                                                                  |   | F-8            |

 

F-1

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**Report of Grant Thornton LLP,Independent Registered Public Accounting Firm**

Board of DirectorsVI Acquisition Corp.

We have audited theaccompanying consolidated balance sheets of VI Acquisition Corp. as ofNovember 2, 2006 and November 3, 2005, and the related consolidatedstatements of operations, stockholders’ equity, and cash flows for the yearsthen ended.  These financial statementsare the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  We were not engaged to perform an audit ofthe Company’s internal control over financial reporting.  Our audits include consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of VI Acquisition Corp. as ofNovember 2, 2006 and November 3, 2005, and the results of their operationsand their cash flows for the years then ended in conformity with accountingprinciples generally accepted in the United States of America.

 
|   | /s/ GRANT THORNTON LLP |   |
|--------|------------------------|--------|

 

Denver, ColoradoJanuary 17, 2007

F-2

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**Report of Ernst & Young LLP,Independent Registered Public Accounting Firm**

To the Board of DirectorsVI Acquisition Corp.

We have auditedthe accompanying consolidated statements of operations, stockholders’ equity,and cash flows of VI Acquisition Corp. for the year ended October 28,2004. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audit.

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. We were not engaged to perform anaudit of the Company’s internal control over financial reporting. Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe thatour audit provides a reasonable basis for our opinion.

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the consolidated results of operations and cash flows of VIAcquisition Corp. for the year ended October 28, 2004, in conformity withU.S. generally accepted accounting principles.

 
|   | /s/ ERNST & YOUNG LLP |   |
|--------|--------------------------------|--------|

 

Denver, ColoradoDecember 10, 2004

 

F-3

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**VIAcquisition Corp.Consolidated Balance Sheets**
| **(In thousands, except share data)**                                                                                                                                                                                       | ** ** | **November 2,  2006** | ** ** | **November 3,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                                      | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| **Assets**                                                                                                                                                                                                                                      | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current assets:                                                                                                                                                                                                                                 |       |                       |       |                       |       |
| Cash and cash  equivalents                                                                                                                                                                                                                      |       | $                          | 1,938      |                       | $          | 2,099 |   |
| Receivables, net                                                                                                                                                                                                                                |       | 12,497                     |       | 15,756                     |       |
| Inventories                                                                                                                                                                                                                                     |       | 16,459                     |       | 12,425                     |       |
| Deferred income  taxes, short-term                                                                                                                                                                                                              |       | 2,387                      |       | 1,431                      |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                      |       | 4,476                      |       | 3,175                      |       |
| Prepaid rent                                                                                                                                                                                                                                    |       | 2,459                      |       | 2,172                      |       |
| Income tax  receivable                                                                                                                                                                                                                          |       | 1,180                      |       | 733                        |       |
| Total current  assets                                                                                                                                                                                                                           |       | 41,396                     |       | 37,791                     |       |
| Property and equipment,  net                                                                                                                                                                                                                    |       | 94,234                     |       | 86,459                     |       |
| Assets under deemed  landlord financing liability, net                                                                                                                                                                                          |       | 99,884                     |       | 126,146                    |       |
| Goodwill                                                                                                                                                                                                                                        |       | 91,881                     |       | 91,881                     |       |
| Trademarks and  tradenames                                                                                                                                                                                                                      |       | 42,600                     |       | 42,600                     |       |
| Franchise rights, net  of accumulated amortization of $2,128 and $1,434                                                                                                                                                                         |       | 10,071                     |       | 10,765                     |       |
| Deferred income taxes                                                                                                                                                                                                                           |       | 2,623                      |       | 3,010                      |       |
| Other assets, net                                                                                                                                                                                                                               |       | 12,553                     |       | 13,613                     |       |
| Total assets                                                                                                                                                                                                                                    |       | $                          | 395,242    |                       | $          | 412,265 |   |
| **Liabilities and stockholders’  equity**                                                                                                                                                                                                  | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current liabilities:                                                                                                                                                                                                                            |       |                       |       |                       |       |
| Current  maturities of long-term debt and capitalized lease obligations                                                                                                                                                                         |       | $                          | 847        |                       | $          | 63 |   |
| Unpresented  checks                                                                                                                                                                                                                             |       | 7,363                      |       | 6,341                      |       |
| Accounts payable                                                                                                                                                                                                                                |       | 15,931                     |       | 13,291                     |       |
| Accrued  compensation                                                                                                                                                                                                                           |       | 8,170                      |       | 8,066                      |       |
| Accrued taxes                                                                                                                                                                                                                                   |       | 7,049                      |       | 7,746                      |       |
| Build-to-suit  liability                                                                                                                                                                                                                        |       | 2,549                      |       | —                     |       |
| Other accrued  expenses                                                                                                                                                                                                                         |       | 12,175                     |       | 12,992                     |       |
| Total current  liabilities                                                                                                                                                                                                                      |       | 54,084                     |       | 48,499                     |       |
| Long-term debt                                                                                                                                                                                                                                  |       | 153,181                    |       | 147,013                    |       |
| Capitalized lease  obligations                                                                                                                                                                                                                  |       | 140                        |       | 185                        |       |
| Deemed landlord  financing liability                                                                                                                                                                                                            |       | 108,033                    |       | 132,038                    |       |
| Other non-current  liabilities                                                                                                                                                                                                                  |       | 15,402                     |       | 11,596                     |       |
| Total  liabilities                                                                                                                                                                                                                              |       | 330,840                    |       | 339,331                    |       |
|                                                                                                                                                                                                                                            |       |                       |       |                       |       |
| Commitments and contingencies  (Note 17)                                                                                                                                                                                                        |       |                       |       |                       |       |
|                                                                                                                                                                                                                                            |       |                       |       |                       |       |
| Stock subject to  repurchase                                                                                                                                                                                                                    |       | 1,055                      |       | 1,063                      |       |
|                                                                                                                                                                                                                                            |       |                       |       |                       |       |
| Stockholders’ equity:                                                                                                                                                                                                                      |       |                       |       |                       |       |
| Series A  Preferred Stock, $0.0001 par value:                                                                                                                                                                                              |       |                       |       |                       |       |
| Series A,  100,000 shares authorized, 68,943 shares issued and outstanding at  November 2, 2006 and 68,944 shares issued and outstanding at November 3,  2005 (aggregate liquidation preference of $97,971 and $88,178, respectively) |       | 98,501                     |       | 89,287                     |       |
| 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, 1,361,753 shares issued and outstanding at  November 2, 2006 and 1,395,255 shares issued and outstanding at November  3, 2005                                                                  |       | —                     |       | —                     |       |
| Paid-in capital                                                                                                                                                                                                                                 |       | 2,446                      |       | 2,465                      |       |
| Treasury stock,  at cost, 1,371.87 shares of preferred stock and 140,490 shares of common  stock at November 2, 2006 and 923.87 shares of preferred stock and  80,603 shares of common stock at November 3, 2005                      |       | (1,057                     | )          | (1,004                     | )          |
| Accumulated  deficit                                                                                                                                                                                                                            |       | (36,543                    | )          | (18,877                    | )          |
| Total stockholders’  equity                                                                                                                                                                                                                |       | 63,347                     |       | 71,871                     |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                                                                |       | $                          | 395,242    |                       | $          | 412,265 |   |

 

*Seeaccompanying notes to consolidated financial statements.*

 

F-4

----

**VIAcquisition Corp.Consolidated Statements of Operations**
| **(In thousands)**                               | ** ** | **Year ended  November 2,  2006** | ** ** | **Year ended  November 3,  2005** | ** ** | **Year ended  October 28,  2004** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                            | ** ** | ** **                                  | ** ** | ** **                                  | ** ** | ** **                                  | ** ** |
| Revenues:                                             |       |                                        |       |                                        |       |                                        |       |
| Restaurant  operations                                |       | $                                           | 425,185    |                                        | $          | 407,424                                     |       | $ | 394,667 |   |
| Franchise  operations                                 |       | 5,058                                       |       | 5,280                                       |       | 5,057                                       |       |
| Manufacturing  operations                             |       | 36,065                                      |       | 26,641                                      |       | 31,796                                      |       |
|                                                  |       | 466,308                                     |       | 439,345                                     |       | 431,520                                     |       |
| Cost and expenses:                                    |       |                                        |       |                                        |       |                                        |       |
| Restaurant  costs:                                    |       |                                        |       |                                        |       |                                        |       |
| Food                                                  |       | 108,774                                     |       | 105,575                                     |       | 103,604                                     |       |
| Labor                                                 |       | 141,876                                     |       | 132,000                                     |       | 127,251                                     |       |
| Other operating expenses                              |       | 126,415                                     |       | 112,204                                     |       | 105,043                                     |       |
| Franchise  operating expenses                         |       | 2,148                                       |       | 2,181                                       |       | 2,311                                       |       |
| Manufacturing  operating expenses                     |       | 35,350                                      |       | 24,809                                      |       | 32,322                                      |       |
| General and  administrative expenses                  |       | 29,417                                      |       | 29,602                                      |       | 27,028                                      |       |
| Litigation  settlement expenses                       |       | 600                                         |       | (408                                        | )          | 3,168                                       |       |
| Employee  severance                                   |       | 40                                          |       | 600                                         |       | 286                                         |       |
| Transaction  expenses                                 |       | —                                      |       | 15                                          |       | 125                                         |       |
| Management fees                                       |       | 850                                         |       | 850                                         |       | 1,159                                       |       |
| Loss on  disposition of assets                        |       | 1,395                                       |       | 110                                         |       | 438                                         |       |
| Asset  impairments                                    |       | 1,381                                       |       | —                                      |       | 1,101                                       |       |
|                                                  |       | 448,246                                     |       | 407,538                                     |       | 403,836                                     |       |
| Operating profit                                      |       | 18,062                                      |       | 31,807                                      |       | 27,684                                      |       |
| Interest expense                                      |       | (29,976                                     | )          | (28,951                                     | )          | (26,787                                     | )          |
| Debt extinguishment  costs                            |       | —                                      |       | —                                      |       | (6,856                                      | )          |
| Other income, net                                     |       | 586                                         |       | 745                                         |       | 522                                         |       |
| Income (loss) before  income taxes                    |       | (11,328                                     | )          | 3,601                                       |       | (5,437                                      | )          |
| Provision for income  taxes (benefit)                 |       | (3,457                                      | )          | 138                                         |       | (2,912                                      | )          |
| Net income (loss)                                     |       | (7,871                                      | )          | 3,463                                       |       | (2,525                                      | )          |
| Preferred stock  dividends                            |       | (9,795                                      | )          | (8,941                                      | )          | (7,665                                      | )          |
| Net income (loss) attributable to common stockholders |       | $                                           | (17,666    | )                                           | $          | (5,478                                      | )          | $ | (10,190 | ) |

 

*Seeaccompanying notes to consolidated financial statements.*

 

F-5

----

| **(In thousands)**                                                                 | ** ** | **Year ended  November 2,  2006** | ** ** | **Year ended  November 3,  2005** | ** ** | **Year ended  October 28,  2004** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                              | ** ** | ** **                                  | ** ** | ** **                                  | ** ** | ** **                                  | ** ** |
| Cash flows from  operating activities:                                                  |       |                                        |       |                                        |       |                                        |       |
| Net income  (loss)                                                                      |       | $                                           | (7,871     | )                                           | $          | 3,463                                       |       | $ | (2,525 | ) |
| Reconciliation  to cash provided by operations:                                         |       |                                        |       |                                        |       |                                        |       |
| Depreciation and  amortization                                                          |       | 22,184                                      |       | 20,482                                      |       | 18,962                                      |       |
| Asset  impairments                                                                      |       | 1,381                                       |       | —                                      |       | 1,101                                       |       |
| Amortization of  financing costs and original issue discounts                           |       | 1,250                                       |       | 1,255                                       |       | 1,085                                       |       |
| Amortization of  deferred gain/loss                                                     |       | (7                                          | )          | —                                      |       | —                                      |       |
| Loss on  disposition of assets                                                          |       | 1,395                                       |       | 110                                         |       | 438                                         |       |
| Deferred finance  charge write-off                                                      |       | —                                      |       | —                                      |       | 4,344                                       |       |
| Deferred income  tax benefit                                                            |       | (569                                        | )          | (1,128                                      | )          | (5,159                                      | )          |
| Interest on  warrants                                                                   |       | —                                      |       | —                                      |       | 88                                          |       |
| Accretion of  interest on deemed landlord financing obligations                         |       | 508                                         |       | 554                                         |       | 632                                         |       |
| Changes in  assets and liabilities:                                                     |       |                                        |       |                                        |       |                                        |       |
| Receivables, net                                                                        |       | (291                                        | )          | 171                                         |       | (2,479                                      | )          |
| Inventories                                                                             |       | (4,034                                      | )          | (180                                        | )          | (478                                        | )          |
| Unpresented  checks                                                                     |       | 1,022                                       |       | 3,151                                       |       | (1,676                                      | )          |
| Accounts  payable, trade                                                                |       | 2,640                                       |       | 117                                         |       | 469                                         |       |
| Accrued  compensation                                                                   |       | 104                                         |       | 928                                         |       | (108                                        | )          |
| Other current  assets and liabilities                                                   |       | (3,092                                      | )          | (7,939                                      | )          | 6,080                                       |       |
| Other non-current  assets and liabilities                                               |       | 3,270                                       |       | 3,506                                       |       | 4,347                                       |       |
| Cash provided by  operations                                                            |       | 17,890                                      |       | 24,490                                      |       | 25,121                                      |       |
| Cash flows from investing  activities:                                                  |       |                                        |       |                                        |       |                                        |       |
| Acquisitions of  franchisee locations                                                   |       | (650                                        | )          | —                                      |       | (8                                          | )          |
| Purchase of  property and equipment                                                     |       | (24,699                                     | )          | (21,081                                     | )          | (16,006                                     | )          |
| Purchase of  assets under deemed landlord financing liability                           |       | (7,452                                      | )          | (17,986                                     | )          | (8,409                                      | )          |
| Purchase of  build-to-suit assets                                                       |       | (6,553                                      | )          | —                                      |       | —                                      |       |
| Proceeds from  disposition of property                                                  |       | 232                                         |       | —                                      |       | 627                                         |       |
| Proceeds from build-to-suit  reimbursement                                              |       | 2,747                                       |       | —                                      |       | —                                      |       |
| Collection of  notes receivable                                                         |       | —                                      |       | 196                                         |       | 30                                          |       |
| Cash used in  investing activities                                                      |       | (36,375                                     | )          | (38,871                                     | )          | (23,766                                     | )          |
| Cash flows from  financing activities:                                                  |       |                                        |       |                                        |       |                                        |       |
| Payments of  debt, capital lease obligations, and deemed landlord financing obligations |       | (89,229                                     | )          | (9,333                                      | )          | (165,020                                    | )          |
| Proceeds from  issuance of debt                                                         |       | 95,720                                      |       | 14,275                                      |       | 163,651                                     |       |
| Proceeds from  deemed landlord financing                                                |       | 12,494                                      |       | 9,855                                       |       | 1,820                                       |       |
| Net proceeds  from issuance of preferred and common stock                               |       | 84                                          |       | 363                                         |       | 298                                         |       |
| Debt issuance  costs                                                                    |       | —                                      |       | (12                                         | )          | (6,094                                      | )          |
| Repurchase of  shares                                                                   |       | (745                                        | )          | —                                      |       | (4                                          | )          |
| Cash provided by  (used in) financing activities                                        |       | 18,324                                      |       | 15,148                                      |       | (5,349                                      | )          |
|                                                                                    |       |                                        |       |                                        |       |                                        |       |
| Increase (decrease) in  cash and cash equivalents                                       |       | (161                                        | )          | 767                                         |       | (3,994                                      | )          |
| Cash and cash  equivalents at beginning of period                                       |       | 2,099                                       |       | 1,332                                       |       | 5,326                                       |       |
| Cash and cash  equivalents at end of period                                             |       | $                                           | 1,938      |                                        | $          | 2,099                                       |       | $ | 1,332 |   |
|                                                                                    |       |                                        |       |                                        |       |                                        |       |
| Supplemental  disclosures of cash flow information:                                     |       |                                        |       |                                        |       |                                        |       |
| Cash paid during  the period for:                                                       |       |                                        |       |                                        |       |                                        |       |
| Interest (net of  amount capitalized)                                                   |       | $                                           | 29,190     |                                        | $          | 27,441                                      |       | $ | 25,700 |   |
| Income taxes                                                                            |       | 876                                         |       | 2,728                                       |       | 1,867                                       |       |
|                                                                                    |       |                                        |       |                                        |       |                                        |       |
| Supplemental  disclosures of non-cash investing and financing activities:               |       |                                        |       |                                        |       |                                        |       |
| Build-to-suit  reimbursements not yet received                                          |       | $                                           | 3,797      |                                        | $          | 7,030                                       |       | $ | 2,359 |   |
| Deemed landlord  financing — Third party direct pays                               |       | 7,636                                       |       | 2,470                                       |       | —                                      |       |
|                                                                                    |       |                                        |       |                                        |       |                                        |       |
| Dividends                                                                               |       | 9,795                                       |       | 8,941                                       |       | 7,665                                       |       |

 

*Seeaccompanying notes to consolidated financial statements.*

 

F-6

----

**VIAcquisition Corp.Consolidated Statements of Stockholders’ Equity**
| ** **                                    | ** ** | **Preferred stock** | ** ** | **Common stock** | ** ** | **Treasury** | ** ** | **Treasury** | ** ** | ** **    | ** ** | ** **      | ** ** | **Total**              | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|-----------------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------|------------|------------------------|------------|
| **(In thousands,**                       | ** ** | **Series A**        | ** ** | **Class A**      | ** ** | **stock**    | ** ** | **stock**    | ** ** | **Paid-in**   | ** ** | **Accumulated** | ** ** | **stockholders’** | ** ** |
| **except shares)**                       | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**   | ** ** | **Amount**   | ** ** | **preferred** | ** ** | **common**      | ** ** | **capital**            | ** ** | **deficit** | ** ** | **equity** | ** ** |
| Balances at  October 26, 2003            |       | 67,854                   |       | $                     | 71,465     |         | 1,298,649  |         | —     |          | $          | (924            | )          | $                      | (76        | ) | $ | 2,332 |   | $ | (3,209 | ) | $ | 69,588 |   |
| 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   |       | —                   |       | 7,665                 |       | —       |       | —       |       | —        |       | —          |       | —                 |       | (7,665 | ) | — |   |
| Preferred warrant  accretion                  |       | —                   |       | 88                    |       | —       |       | —       |       | —        |       | —          |       | —                 |       | — |   | 88 |   |
| Net loss                                      |       | —                   |       | —                |       | —       |       | —       |       | —        |       | —          |       | —                 |       | (2,525 | ) | (2,525 | ) |
| Balances at  October 28, 2004,           |       | 68,659                   |       | $                     | 80,022     |         | 1,386,552  |         | $          | —        |       | $               | (924       | )                      | $          | (80 | ) | $ | 2,426 |   | $ | (13,399 | ) | $ | 68,045 |   |
| Issuance of preferred  stock and common stock |       | 285                      |       | 324                   |       | 8,703        |       | —       |       | —        |       | —          |       | 39                     |       | — |   | 363 |   |
| Dividends on  Series A preferred stock   |       | —                   |       | 8,941                 |       | —       |       | —       |       | —        |       | —          |       | —                 |       | (8,941 | ) | — |   |
| Net income                                    |       | —                   |       | —                |       | —       |       | —       |       | —        |       | —          |       | —                 |       | 3,463 |   | 3,463 |   |
| Balances at  November 3, 2005            |       | 68,944                   |       | $                     | 89,287     |         | 1,395,255  |         | $          | —        |       | $               | (924       | )                      | $          | (80 | ) | $ | 2,465 |   | $ | (18,877 | ) | $ | 71,871 |   |
| Issuance of preferred  stock and common stock |       | 447                      |       | —                |       | 18,590       |       | —       |       | —        |       | —          |       | 84                     |       | — |   | 84 |   |
| Repurchase of preferred  and common shares    |       | (448                     | )          | (581                  | )          | (52,092      | )          | —       |       | (1            | )          | (52             | )          | (103                   | )          | — |   | (737 | ) |
| Dividends on  Series A preferred stock   |       | —                   |       | 9,795                 |       | —       |       | —       |       | —        |       | —          |       | —                 |       | (9,795 | ) | — |   |
| Net loss                                      |       | —                   |       | —                |       | —       |       | —       |       | —        |       | —          |       | —                 |       | (7,871 | ) | (7,871 | ) |
| Balances at November 2, 2006             |       | 68,943                   |       | $                     | 98,501     |         | 1,361,753  |         | $          | —        |       | $               | (925       | )                      | $          | (132 | ) | $ | 2,446 |   | $ | (36,543 | ) | $ | 63,347 |   |

 

*See accompanying notes toconsolidated financial statements.*

 

F-7

----

**VIAcquisition Corp.Notes to consolidated financial statements**

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

VI Acquisition Corp. (the“Company” or “VI Acquisition”), a Delaware corporation, was organized by WindPoint Partners and other individual co-investors.

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

Midway was a Delawarecorporation originally organized by BancBoston Ventures, Inc., GoldnerHawn Johnson & Morrison, Incorporated (“Goldner Hawn”), FairmontCapital, Inc. and other affiliates. Midway acquired VICORP inMay 2001 in a “going private” stock purchase transaction accounted forunder the purchase method of accounting pursuant to SFAS No. 141. Prior tothe acquisition of VICORP by Midway, VICORP operated as a publicly-tradedcompany.

The Company operatesfamily-style restaurants under the brand names “Bakers Square” and “VillageInn,” and franchises restaurants under the Village Inn brand name. AtNovember 2, 2006, the Company operated 309 Company-owned restaurants in 16states. Of the Company-owned restaurants, 148 are Bakers Squares and 161 areVillage Inns, with an additional 95 franchised Village Inn restaurants in 18states. The Company-owned and franchised restaurants are concentrated inArizona, California, Florida, the Rocky Mountain region, and the upper Midwest.In addition, the Company operates three pie manufacturing facilities located inSanta Fe Springs, California; Oak Forest, Illinois; and Chaska, Minnesota.

**2.Summary of significant accounting policies**

**Principlesof consolidation**

The accompanyingconsolidated financial statements of VI Acquisition Corp. as ofNovember 2, 2006 and November 3, 2005 and for the years endedNovember 2, 2006, November 3, 2005 and October 28, 2004 include theaccounts of the Company, Midway, VICORP and its wholly-owned subsidiaries.Neither VI Acquisition Corp. nor Midway has had any independent operations, andconsequently the consolidated financial statements of VI Acquisition Corp. andMidway are substantially equivalent to those of VICORP.

All intercompany accountsand balances have been eliminated.

**Fiscalyear**

The Company’s fiscalyear, which historically ended on the last Sunday in October, is comprised of52 or 53 weeks divided into four fiscal quarters of 12 or 13, 12, 12, and 16weeks.  Fiscal 2005 was comprised of 53weeks, or 371 days and fiscal 2006 was comprised of 52 weeks, or 364 days.  Beginning January 22, 2004, the Companychanged its fiscal year so that it ends on the Thursday nearest toOctober 31st of each year. This increased the number of days in the fiscalyear ended October 28, 2004 by four days. This change was made to facilitate restaurant operations by moving theend of the Company’s fiscal periods and weekly reporting and payroll periodsaway from weekends when the Company’s restaurants are busier.

**Estimates**

Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptions.These estimates and assumptions affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities, and thereported amounts of revenues and expenses. Actual results could differ materially from those estimates. Estimatesand assumptions are reviewed periodically, and the effects of revisions arereflected in the consolidated financial statements in the period that they aredetermined to be necessary. The Company’s critical accounting estimates include(i) useful life assignments and impairment evaluations associated withproperty and equipment and intangible assets, (ii) anticipated outcomes oflegal proceedings and other contingencies (iii) self-insurance reservesand (iv) valuation allowances associated with deferred tax assets.

F-8

----

**Change inAccounting Estimate**

It is the Company’spolicy to periodically review the estimated useful lives of its fixed assets.This review during 2006 indicated that actual lives for our building assetswere longer than the useful lives used for depreciation purposes in the Company’sfinancial statements. As a result, the Company revised the estimated usefullives of buildings from 30 years to 45 years. The Company reviewed its ownrestaurants, as well as using construction industry data and comparablerestaurant company estimated lives of building assets. The change was madeeffective during the third quarter. The Company believes the change moreappropriately reflects the remaining useful lives of the assets based upon thenature of the asset. This change has been accounted for prospectively inaccordance with the provisions of Accounting Principle Board Opinion No. 20:Accounting Changes. The effect of this change was a reduction of approximately$0.5 million to depreciation during fiscal 2006.

**Cash andcash equivalents**

Cash and cash equivalentsconsist of cash on hand and highly liquid instruments with original maturitiesof three months or less when purchased. Amounts in-transit from credit card processors are also considered cashequivalents because they are both short-term and highly liquid in nature andare typically converted to cash within three days of the sales transaction.

**Receivables**

Receivables generallyrepresent billings to third-party customers of our pie production facilities,construction billings due from landlords, billings to franchisees forroyalties, initial and renewal fees and equipment sales, and rent receivablefrom franchisees and other sublessees. Trade receivables are generally unsecured, while notes receivable aretypically secured by the property that gave rise to them.  Otherreceivables consist of various amounts due from others in the ordinary courseof business.

Theallowance for doubtful accounts is the Company’s best estimate of the amount ofprobable 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**

Financial instrumentsthat potentially subject the Company to a concentration of credit risk are cashand cash equivalents and receivables. The Company maintains deposits in excess of FDIC limits at two banks.The maximum loss that would have resulted from this risk amounted toapproximately $253,000 at November 2, 2006, which represents the excess ofthe deposit liabilities reported by the bank over the amounts that would havebeen covered by federal deposit insurance. The Company considers the concentration of credit risk within itsreceivables to be minimal as a result of payment histories and the generalfinancial condition of its third party-customers and franchisees.

**Inventories**

Inventories are stated atthe lower of cost (which is determined using standard cost which approximates afirst-in, first-out basis) or market and consist of food, paper products andsupplies. Inventories consisted of the following:

 

| (In thousands)               | ** ** | **November 2,  2006** | ** ** | **November 3,  2005** | ** ** |
|-----------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Production  facility inventories: |       |                       |       |                       |       |
| Raw materials                     |       | $                          | 6,453      |                       | $          | 4,408 |   |
| Finished goods                    |       | 6,940                      |       | 5,059                      |       |
|                              |       | 13,393                     |       | 9,467                      |       |
|                              |       |                       |       |                       |       |
| Restaurant  inventories           |       | 3,066                      |       | 2,958                      |       |
|                              |       | $                          | 16,459     |                       | $          | 12,425 |   |

 

F-9

----

Activity in the allowancefor inventory obsolescence reserve was as follows:

 

| (In thousands)  | ** ** | **Year ended  November 2,  2006** | ** ** | **Year ended  November 3,  2005** | ** ** |
|----------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| Beginning of  period |       | $                                           | 214        |                                        | $          | 197 |   |
| Additions/expense    |       | 403                                         |       | 482                                         |       |
| Write-offs           |       | (392                                        | )          | (465                                        | )          |
| End of period        |       | $                                           | 225        |                                        | $          | 214 |   |

 

TheCompany 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**

TheCompany renovates, remodels or improves its restaurants and productionfacilities (all or a portion depending on need), replaces aged equipment andperiodically 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.

TheCompany routinely incurs costs to repair and maintain its facilities andequipment, which are expensed as incurred. Such repairs and maintenancecosts generally relate to repairs to existing equipment, fixtures orfacilities, including, but not limited to, electrical, plumbing, refrigeration,air conditioning, heating, painting, tile work, roof repairs and wood repairs. The Company recorded repair and maintenanceexpense of $10.4 million, $9.7 million, and $9.2  million for the fiscal years endedNovember 2, 2006, November 3, 2005 and October 28, 2004,respectively.

**Propertyand equipment, build-to-suit projects and assets under deemed landlordfinancing liability**

Acquisitions of propertyand equipment are stated at cost, less accumulated depreciation andamortization.  Depreciation andamortization expense is calculated using the straight-line method. The usefullives of assets range from 20 to 45 years for buildings and three to ten yearsfor equipment and improvements. In general, assets acquired under capitalleases and initial leasehold improvements are amortized over the lesser of theuseful life or the lease term. Leasehold improvements added subsequent to theinception of a lease are amortized over the shorter of the useful life of theassets or a term that includes lease renewals, if such renewals are consideredreasonably assured.  Property andequipment additions include acquisitions of buildings, equipment and costsincurred in the development and construction of new stores.

For manyof the Company’s build-to-suit restaurant construction projects, it isconsidered the owner of the project during the construction period inaccordance with Emerging Issues Task Force (“EITF”) Issue No. 97-10, “TheEffect of Lessee Involvement in Asset Construction,” because the Company isdeemed to have substantially all of the construction period risk.  At the end of these construction projects, asale-leaseback could be deemed to occur in certain situations and the Companywould record the sale, remove all property and related liabilities from itsconsolidated balance sheet and recognize gain or loss from the sale, which isgenerally deferred and amortized as an adjustment to rent expense over the termof the lease.  However, many of theCompany’s historical real estate transactions and build-to-suit restaurantconstruction projects have not qualified for sale-leaseback accounting becauseof its deemed continuing involvement with the buyer-lessor, which results inthe transaction being recorded under the financing method.  In the majority of situations the Companybelieves it has continuing involvement in the leased property because of theexistence of “perpetual fixed price renewal options.”  This form of continuing involvement precludessale-leaseback accounting because the seller-lessee benefits from futureappreciation in the underlying property in a manner similar to a fixed-pricepurchase option.  Under the financingmethod, the assets remain on the consolidated balance sheet and are depreciatedover their useful life, and the proceeds from the transaction are recorded as afinancing liability.  A portion of leasepayments are applied as payments of deemed principal and imputed interest.

**Long-livedassets**

The Companyevaluates whether events and circumstances have occurred that indicate revisionto the remaining useful lives or the remaining balances of long-lived assetsmay be appropriate. Such events and circumstances include, but are not limitedto a change in business strategy or a change in current and long-term projectedoperating performance. When factors

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indicate that thecarrying amount of an asset may not be recoverable, the Company estimates thefuture cash flows expected to result from the use of such asset and itseventual disposition. If the sum of the expected future cash flows(undiscounted and without interest charges) is less than the carrying amount ofthe asset, the Company will recognize an impairment loss equal to the excess ofthe carrying amount over the fair value of the asset

**Intangibleassets**

Goodwill and otherintangible assets with indefinite lives are not subject to amortization but aretested for impairment annually or more frequently if events or change incircumstances indicate that the asset might be impaired.  SFAS No. 142 “Goodwill and otherIntangible Assets,” requires a two-step process for testing impairment. Forgoodwill, the fair value of each reporting unit is compared to its carryingvalue to determine whether an indication of impairment exists. If an impairmentis indicated, the fair value of the reporting unit’s goodwill is determined byallocating the unit’s fair value to its assets and liabilities (including anyunrecognized intangible assets) as if the reporting unit had been acquired in abusiness combination. For other indefinite lived intangibles, the fair value iscompared to the carrying value. The amount of impairment, if any, for goodwilland other intangible assets is measured as the excess of its carrying valueover its fair value. The Company has determined that no impairments haveexisted related to goodwill or other intangible assets in any of the periodspresented. Intangible assets with lives restricted by contractual, legal, orother means continue to be amortized over their useful lives.

Determining the fair value of the reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of the reporting unit (including unrecognized intangible assets) under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. Similarly, estimates and assumptions are used in determining the fair value of other intangible assets. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge.

In connection with theJune 14, 2003 purchase transaction and in accordance with SFASNo. 142, the Company had its trademarks and tradenames evaluated by anexternal third party. As a result of this evaluation, it was determined thatthe Company possesses $42.6 million in trademarks and tradenames which haveindefinite lives. The trademarks and tradenames are not amortized and areevaluated for impairment at least annually.

To assist in the processof determining goodwill and tradenames impairment, the Company engaged anoutside firm to perform a valuation analysis. Estimates of fair value areprimarily determined using discounted cash flows and market comparisons andrecent transactions.  These approachesuse significant estimates and assumptions including projected future cash flows(including timing), discount rate reflecting the risk inherent in future cashflows, perpetual growth rate, determination of appropriate market comparablesand the determination of whether a premium or discount should be applied tocomparables.  Based on the analysis therewas no impairment of goodwill or tradenames as of November 2, 2006.

At the date of theJune 14, 2003 purchase transaction, the remaining franchise rights wereadjusted to their then current fair market value of $12.2 million. This valueis being amortized over the remaining period expected to be benefited.Amortization expense of $694,000, $592,000 and $592,000 was recorded for thefiscal years ended November 2, 2006, November 3, 2005, andOctober 28, 2004, respectively. The Company expects to record annualamortization expense of $694,000 over the remaining 14.5 year life of the franchiserights.

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 pursuantand was paid a total of $2 million not to compete with the Company for a periodof five years after the purchase.  Thenon-competition agreement was reflected in other assets and amortized using thestraight-line method over a five-year period.

**Loss contingencies andself-insurance reserves**

The Company maintains accruedliabilities and reserves relating to the resolution of certain contingentobligations including reserves for self-insurance.  Contingent obligations are accounted for inaccordance with SFAS No. 5, “Accounting for Contingencies,” which requiresthat the Company assess each contingency to determine estimates of the degreeof probability 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 in consultation with an outside 

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insurance riskspecialist.

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,”as amended, which requires that leases be evaluated and classified as operatingor capital leases for financial reporting purposes.

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.  Incentivepayments received from landlords are recorded as landlord incentives and areamortized on a straight-line basis over the lease term as a reduction ofrent.  Certain of our leases areaccounted for under the financing method, as discussed above and in Note 8.

**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.

Franchise operationsgross revenues and expenses consisted of the following:

 

| (In thousands)                 | ** ** | **Year ended  November 2,  2006** | ** ** | **Year ended  November 3,  2005** | ** ** | **Year ended  October 28,  2004** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
|                                |       |                                        |       |                                        |       |                                        |       |
| Royalties                           |       | $                                           | 3,998      |                                        | $          | 4,129                                       |       | $ | 3,917 |   |
| Property rental                     |       | 1,060                                       |       | 1,144                                       |       | 1,120                                       |       |
| Interest income  on franchise notes |       | —                                      |       | 7                                           |       | 20                                          |       |
| Franchise revenues                  |       | 5,058                                       |       | 5,280                                       |       | 5,057                                       |       |
| Franchise  operating expenses       |       | (2,148                                      | )          | (2,181                                      | )          | (2,311                                      | )          |
| Franchise operations,  net          |       | $                                           | 2,910      |                                        | $          | 3,099                                       |       | $ | 2,746 |   |

 

Revenue from the Company’s pie manufacturingoperations is recognized in the period during which the products are shipped tothe customer.

**Advertisingcosts**

Advertising costs fortelevision, radio, newspapers, direct mail and point-of-purchase materials areexpensed in the period incurred. Advertising expense for the fiscal years endedNovember 2, 2006, November 3, 2005 and October 28, 2004 wasapproximately $14.6 million, $12.7 million, and $12.3 million,respectively.  Prepaid advertising coststotaled $0.7 million at November 2, 2006 and $0.9 million at November 3,2005 representing billings paid for media events not occurring for the firsttime 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 years ended November 2, 2006, November 3, 2005 andOctober 28, 2004 were 

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$2.1 million, $1.3million, and $0.5 million, respectively.

**Fairvalue of financial instruments**

At November 2, 2006and November 3, 2005, the fair value of cash and cash equivalents, accountsreceivable and accounts payable approximated their carrying value based on theshort-term nature of these instruments. See Note 7 for information concerning the fair value of the Company’slong-term debt and Note 8 for information regarding the fair value of theCompany’s financing obligations.

**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 differences betweenthe carrying value for financial reporting purposes and the tax basis of assetsand liabilities.  Deferred tax assets andliabilities are recorded using the enacted tax rates expected to apply totaxable income in the years in which such differences are expected to berecovered 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 carry forwards, including FICA tip credit, are recorded asdeferred tax assets.  A valuationallowance is recorded for the tax benefit of the deferred tax assets notexpected to be utilized.

**Accounting for stock basedcompensation**

SFASNo. 123, “Accounting for Stock-Based Compensation,” defines a fair valuemethod of accounting for employee stock compensation and encourages, but doesnot require, all entities to adopt that method of accounting. Entities electingnot to adopt the fair value method of accounting must make pro formadisclosures of net income as if the fair value method of accounting defined inSFAS No. 123 had been applied. The Company has elected not to adopt thefair value method and instead has elected to follow Accounting Principles Board(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” andrelated interpretations. Under APB Opinion No. 25, compensation expenserelated to stock options is calculated as the difference between the exerciseprice of the option and the fair market value of the underlying stock at thedate of grant. This expense is recognized over the vesting period of the optionor at the time of grant if the options immediately vest. As a result of theminimal number of fully vested options outstanding during all periods presentedin the accompanying consolidated financial statements, the pro forma effects ofapplying the fair value method to outstanding options over their respectivevesting periods had no effect on net income (loss).

**New accounting pronouncements**

In November 2004,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 151, “Inventory Costs, an amendment ofARB No. 43, Chapter 4.”  SFASNo. 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.  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 berecognized as an expense in the period incurred.  SFAS No. 151 iseffective for inventory costs incurred during fiscal years beginning afterJune 15, 2005.  The Company implemented SFAS No. 151 effectiveNovember 4, 2005 and because we did not have abnormal costs, the implementationdid not have a material impact on our financial position, results of operationsor cash flows during the year ended November 2, 2006.

On December 16,2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment,which is a revision of SFAS No. 123. SFAS 123(R) supersedes APBOpinion No. 25, Accounting for Stock Issued to Employees, and amends SFASNo. 95, Statement of Cash Flows. Generally, the approach inSFAS 123(R) is similar to the approach described in SFAS 123.However, SFAS 123(R) requires all share-based payments to employees,including grants of employee stock options, to be recognized in the incomestatement based on their fair values. Pro forma disclosure is no longer analternative.

SFAS 123(R) permitspublic companies to adopt its requirements using one of two methods:

1. A “modifiedprospective” method in which compensation cost is recognized beginning with theeffective date (a) based on the requirements of SFAS 123(R) for allshare-based payments granted after the effective date and (b) based on therequirements of SFAS 123 for all awards granted to employees prior to theeffective date of SFAS 123(R) that remain unvested on the effective date,after estimating forfeitures.

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2. A “modifiedretrospective” method which includes the requirements of the modified prospectivemethod described above, but also permits entities to restate based on theamounts previously recognized under SFAS 123 for purposes of pro formadisclosures for either (a) all prior periods presented or (b) priorinterim periods of the year of adoption.

The Company will use themodified prospective method when it adopts SFAS 123(R).  SFAS 123(R)is effective for non-public filers, with the first annual reporting period thatbegins after December 15, 2005. For purposes of this Statement, theCompany is considered a non-public filer because it is an entity that has onlydebt securities trading in a public market. As permitted by SFAS 123, theCompany had accounted for share-based payments to employees using APB Opinion25’s intrinsic value method and, as such, generally recognizes no compensationcost for employee stock options. Simultaneously with the closing of the Company’ssale transaction in June 2003, all options became immediately vested, thusthe Company did not recognize any compensation expense. Consequently, theadoption of SFAS 123(R) will only impact the Company’s results ofoperations if the Company grants share-based payments subsequent toNovember 2, 2006, the beginning of the Company’s 2007 fiscal year.

In May 2005, theFASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS154)”. SFAS 154 replaces APB No. 20, Accounting Changes, and SFASNo. 3, Reporting Accounting changes in Interim Financial Statements, andchanges the requirements for the accounting for and reporting of a change inaccounting principle. SFAS 154 requires retrospective application of changes inaccounting principle, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. SFAS 154defines retrospective application as the application of a different accountingprinciple to prior accounting periods as if that principle had always been usedor as the adjustment of previously issued financial statements to reflect achange in the reporting entity. SFAS 154 also redefines restatement as therevising of previously issued financial statements to reflect the correction ofan error.  SFAS 154 is effective for accounting changes and correction oferrors made in fiscal years beginning after December 15, 2005.

In October 2005, theFASB issued FSP No. FAS 13-1, “Accounting for Rental Costs Incurred duringa Construction Period.” FSP No. FAS 13-1 requires rental costs associatedwith operating leases that are incurred during a construction period to berecognized as rental expense. FSP No. FAS 13-1 is effective for reportingperiods beginning after December 15, 2005. The transition provisions ofFSP No. FAS 13-1 permit early adoption and retrospective application ofthe guidance. The Company historically capitalized rental costs incurred duringa construction period.  The Company implemented FSP No. FAS 13-1during the first quarter of fiscal 2006 and it did not have a material impactupon the Company’s financial position, results of operations or cash flows. TheCompany capitalized $0.7 million and $0.2 million in fiscal 2005 and 2004,respectively.

In July 2006, theFinancial Accounting Standards Board (FASB) issued FASB InterpretationNo. 48, *“Accounting for Uncertainty inIncome Taxes — an Interpretation of FASB Statement No. 109”*(FIN 48), which clarifies the accounting for uncertainty in tax positions.This interpretation requires that we recognize in our financial statements theimpact of a tax position if that position is more likely than not of beingsustained on audit, based on the technical merits of the position. Theprovisions of FIN 48 are effective for fiscal years beginning afterDecember 15, 2006.  We are currentlyevaluating the impact of adopting FIN 48 on our consolidated financialstatements.

On September 18, 2006,the FASB issued SFAS No. 157, *Fair ValueMeasurements*(“SFAS No. 157”), which defines fair value, establishesa framework for measuring fair value in accordance with GAAP and expandsdisclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15,2007.  We do not believe such adoptionwill have a material impact on our consolidated financial statements.

In September 2006, thestaff of the Securities and Exchange Commission (“SEC”) issued Staff AccountingBulletin No. 108, *Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements. *This bulletinprovides guidance on the consideration of the effects of prior yearmisstatements in quantifying current year misstatements for the purpose of amateriality assessment.  The Companyassesses the materiality of unrecorded misstatements under the roll overmethod.  The guidance in this bulletinmust be applied to financial reports covering the first fiscal year endingafter November 15, 2006, therefore the Company will adopt in fiscal 2007.  The Company is currently assessing thefinancial impact upon adoption.

**Reclassifications**

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

Although the primary focus is to produce pies forVillage Inn and Bakers Square, the third-party pie sales have increased overtime therefore beginning in fiscal 2006 the current and prior year results werereflected in separate captions on the income statement. The overall results ofoperations of the pie manufacturing historically have not had, and currently donot have, a material impact on operating profit.  In order to determine the operating profitfor third party sales, both variable and 

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fixed costs are allocated. As external sales increaseas a percentage of total pie production, the allocation method may cause adecrease in the operating profit due to the higher allocation of fixed costs tothe external sales. The net costs associated with internal “sales” to therestaurants are included in restaurant food cost.

**3.Receivables, net**

Receivables, netconsisted of the following:
| **(In thousands)**               | ** ** | **November 2,  2006** | ** ** | **November 3,  2005** | ** ** |
|---------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Trade receivables                     |       | $                          | 8,249      |                       | $          | 5,799 |   |
| Construction  receivables             |       | 3,797                      |       | 7,030                      |       |
| Indemnification  receivable (Note 17) |       | —                     |       | 2,557                      |       |
| Other  receivables                    |       | 584                        |       | 721                        |       |
| Notes receivable                      |       | 7                          |       | 7                          |       |
| Allowance for  doubtful accounts      |       | (140                       | )          | (358                       | )          |
| Receivables, net                      |       | $                          | 12,497     |                       | $          | 15,756 |   |

 

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

Activity in the allowancefor doubtful accounts was as follows:
| **(In thousands)**     | ** ** | **Year ended  November 2,  2006** | ** ** | **Year ended  November 3,  2005** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| Beginning of  period        |       | $                                           | 358        |                                        | $          | 378 |   |
| Bad debt expense            |       | 40                                          |       | 110                                         |       |
| Write-offs and  adjustments |       | (258                                        | )          | (130                                        | )          |
| End of period               |       | $                                           | 140        |                                        | $          | 358 |   |

 

**4.Property and equipment and assets under deemed landlord financing liability**

Property and equipmentconsisted of the following:
| **(In thousands)**         | ** ** | **November 2,  2006** | ** ** | **November 3,  2005** | ** ** |
|---------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                            |       |                       |       |                       |       |
| Land                            |       | $                          | 5,378      |                       | $          | 5,634 |   |
| Buildings and  improvements     |       | 56,987                     |       | 49,331                     |       |
| Equipment                       |       | 71,914                     |       | 57,926                     |       |
| Construction in  progress       |       | 9,740                      |       | 5,606                      |       |
| Capitalized lease  buildings    |       | 1,112                      |       | 1,284                      |       |
| Impairment  reserve (Note 14)   |       | (1,771                     | )          | (1,101                     | )          |
|                            |       | 143,360                    |       | 118,680                    |       |
| Less:  accumulated depreciation |       | (49,126                    | )          | (32,221                    | )          |
| Property and equipment,  net    |       | $                          | 94,234     |                       | $          | 86,459 |   |

 

Depreciation expense onproperty and equipment was $17.0 million, $14.8 million and $13.6 millionduring the years ended November 2, 2006, November 3, 2005 and October 28,2004, respectively.

 

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Assets under deemedlandlord financing liability consisted of the following:
| **(In thousands)**                               | ** ** | **November 2,  2006** | ** ** | **November 3,  2005** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                                  |       |                       |       |                       |       |
| Land                                                  |       | $                          | 44,691     |                       | $          | 48,806 |   |
| Buildings and  improvements                           |       | 65,776                     |       | 67,929                     |       |
| Construction in progress                              |       | 3,342                      |       | 19,917                     |       |
|                                                  |       | 113,809                    |       | 136,652                    |       |
| Less: accumulated  depreciation                       |       | (13,925                    | )          | (10,506                    | )          |
| Assets under deemed landlord financing liability, net |       | $                          | 99,884     |                       | $          | 126,146 |   |

 

Depreciation expense onassets under deemed landlord financing liability was $4.2 million, $4.6 millionand $4.4 million during the years ended November 2, 2006, November 3,2005 and October 28, 2004, respectively.

**5. Otherassets, net**

Other assets, netconsisted of the following:
| **(In thousands)**                     | ** ** | **November 2,  2006** | ** ** | **November 3,  2005** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                        |       |                       |       |                       |       |
| Non-competition  agreements                 |       | $                          | —     |                       | $          | 2,030 |   |
| Deferred debt financing  costs              |       | 8,150                      |       | 8,150                      |       |
| Deferred lease payments                     |       | 6,748                      |       | 6,610                      |       |
| Prepaid contracts                           |       | 123                        |       | 250                        |       |
| Deposits and  miscellaneous financing costs |       | 510                        |       | 331                        |       |
|                                        |       | 15,531                     |       | 17,371                     |       |
| Less: accumulated  amortization             |       | (2,978                     | )          | (3,758                     | )          |
| Other assets, net                           |       | $                          | 12,553     |                       | $          | 13,613 |   |

 

The deferred leasepayments asset was established at the date of the Company’s purchase of Midwayand represents the present value of the excess market rates in effect as ofthat date compared to the Company’s lease payments on individual properties.Also included is deferred lease payments resulting from sale leasebackaccounting.

**6. Otheraccrued expenses**

Other accrued expensesconsisted of the following:
| **(In thousands)**                           | ** ** | **November 2,  2006** | ** ** | **November 3,  2005** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Legal  settlements (Notes 3 and 17)               |       | $                          | 700        |                       | $          | 517 |   |
| Insurance                                         |       | 4,085                      |       | 4,346                      |       |
| Rent                                              |       | 1,504                      |       | 1,668                      |       |
| Interest                                          |       | 1,012                      |       | 983                        |       |
| Gift  certificates and cards                      |       | 1,974                      |       | 1,315                      |       |
| Advertising                                       |       | 476                        |       | 1,047                      |       |
| Reserve for  closed/subleased locations (Note 14) |       | 189                        |       | 406                        |       |
| Miscellaneous                                     |       | 2,235                      |       | 2,710                      |       |
|                                              |       | $                          | 12,175     |                       | $          | 12,992 |   |

 

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

**7. Debt**

Long-term debt consistedof the following:
| **(In thousands)**                                        | ** ** | **November 2,  2006** | ** ** | **November 3,  2005** | ** ** |
|----------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| 101⁄2% Senior Unsecured Notes:                              |       | $                          | 126,530    |                       | $          | 126,530 |   |
| Amended and Restated Senior Secured Credit Facility:           |       |                       |       |                       |       |
| Term loan                                                      |       | 15,000                     |       | 15,000                     |       |
| Revolving credit facility                                      |       | 12,625                     |       | 6,675                      |       |
| Gross amount payable                                           |       | 154,155                    |       | 148,205                    |       |
| Unamortized original issue discount on senior  unsecured notes |       | (974                       | )          | (1,192                     | )          |
| Long-term debt                                                 |       | $                          | 153,181    |                       | $          | 147,013 |   |

 

OnApril 14, 2004, the Company completed a private placement of $126.5million aggregate principal amount of 101⁄2% senior unsecured notes maturing onApril 15, 2011.  The notes wereissued at a discounted price of 98.791% of face value, resulting in netproceeds before transaction expenses of $125.0 million.  The senior unsecured notes were issued byVICORP Restaurants, Inc. and are fully and unconditionally guaranteed byVI Acquisition Corp.  In August 2004,the Company’s registration statement with the Securities and Exchange Commissionon Form S-4 was declared effective and the senior unsecured notes andguarantees were exchanged for registered notes and guarantees havingsubstantially the same terms and evidencing the same indebtedness.  Interest is payable semi-annually on eachApril 15 and October 15 until maturity.

Concurrently with theissuance of the 101⁄2% senior unsecured notes, we entered into an amended andrestated senior secured credit facility consisting of a $15.0 million term loanand a $30.0 million revolving credit facility, with a $15.0 million sub-limitfor letters of credit.  As ofNovember 2, 2006, we had issued letters of credit aggregating $7.4 millionand had $12.6 million of borrowings outstanding under the senior securedrevolving credit facility.  As of November2, 2006, the senior secured revolving credit facility permitted borrowingsequal to the lesser of (a) $30.0 million and (b) 1.2 times trailingtwelve 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 November 2,2006, we had the ability to borrow the full $30 million, less the amount ofoutstanding letters of credit, under the senior secured revolving creditfacility, or $10.0 million.  Borrowingsunder both the revolving credit facility and the term loan bear interest atfloating rates tied to either the base rate of the agent bank under the creditagreement or LIBOR rates for a period of one, two or three months, in each caseplus a margin that will adjust based on the ratio of our Adjusted EBITDA tototal indebtedness, as defined in the senior secured credit agreement. Bothfacilities are secured by a lien of all of the assets of VICORPRestaurants, Inc., and guaranteed by VI Acquisition Corp. The guaranteesare also secured by the pledge of all of the outstanding capital stock ofVICORP Restaurants, Inc. by VI Acquisition Corp. The term loan does notrequire periodic principal payments, but requires mandatory repayments undercertain events, including proceeds from sale of assets, issuance of equity, andissuance of new indebtedness.  Bothfacilities mature in April 2009.

Our senior secured creditfacility and the indenture governing the senior unsecured notes contain anumber of covenants that, among other things, restrict, subject to certainexceptions, our ability and the ability of our subsidiaries, to sell assets,incur additional indebtedness, as defined in the agreements, or issue preferredstock, repay other indebtedness, pay dividends and distributions or repurchaseour capital stock, create liens on assets, make investments, loans or advances,make certain acquisitions, engage in mergers or consolidations, enter intosale-leaseback transactions, engage in certain transactions with affiliates,amend certain material agreements governing our indebtedness, change thebusiness conducted by us and our subsidiaries and enter into hedgingagreements. In addition, our senior secured credit facility requires us tomaintain or comply with a minimum Adjusted EBITDA, a minimum Fixed ChargeCoverage ratio, and a maximum Growth Capital Expenditures limitation.  As of November 2, 2006, we were incompliance with these requirements.

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

The Company recognizedinterest expense of $30.0 million, $29.0 million, and $26.8 million during thefiscal years ended November 2, 2006, November 3, 2005 and October 28,2004, respectively.  In addition to theseamounts $379,000, $457,000, and $193,000 were capitalized in the fiscal yearsended November 2, 2006, November 3, 2005 and October 28, 2004,respectively.

F-17

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As of November 2, 2006the Company recognized a current obligation of $792,000 related to propertyinsurance financing.

Excluding capitalizedlease obligations (Note 9), the aggregate maturities of debt obligations forthe five years following November 2, 2006 are:
| (In thousands)  | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|
| 2007                 |       | $          | 792        |   |
| 2008                 |       | —     |       |
| 2009                 |       | 27,625     |       |
| 2010                 |       | —     |       |
| 2011                 |       | 126,530    |       |
| 2012 and  thereafter |       | —     |       |
|                 |       | $          | 154,947    |   |

 

Theestimated fair value of the Company’s long-term debt (excluding capitalizedlease obligations) was approximately $149.1 million at November 2,2006.  The Company believes that thecarrying value of debt balances under its Senior Secured Credit Facilityapproximates fair value, because of its variable interest feature and thedifference between the estimated fair value of long-term debt compared to itshistorical cost reported in the consolidated balance sheets at November 2,2006, relates primarily to market quotations for the 101⁄2% Senior Unsecured Notes.

**8.Deemed landlord financing liability**

For many of ourbuild-to-suit projects, we are considered the owner of the project during theconstruction period in accordance with Emerging Issues Task Force (“EITF”)Issue No. 97-10, “The Effect of Lessee Involvement in Asset Construction,”because we are deemed to have substantially all of the construction periodrisk.  At the end of these construction projects, a sale-leaseback couldbe deemed to occur in certain situations and the seller-lessee would record thesale, remove all property and related liabilities from its balance sheet andrecognize gain or loss from the sale, which is generally deferred and amortizedas an adjustment to rent expense over the term of the lease.  However,many of our historical real estate transactions and build-to-suit projects havenot qualified for sale-leaseback accounting because of our deemed continuinginvolvement with the buyer-lessor, which results in the transaction beingrecorded under the financing method.  Under the financing method, theassets remain on the consolidated balance sheet and are depreciated over theiruseful life, and the proceeds from the transaction are recorded as a financingliability.  A portion of lease payments are applied as payments of deemedprincipal and imputed interest.

The Company’s continuinginvolvement for most of its leases currently accounted for under the financingmethod resulted from its ability to control the property with pre-determinedrental payments through at least 90 percent of the economic life of theproperty, even though lease renewals would need to be exercised by the Companyto effectuate such control. These “perpetual fixed-price renewal options” areconsidered continuing involvement because the seller-lessee is deemed tobenefit from future appreciation in the underlying property in a manner similarto a fixed-price purchase option. Such continuing involvement precludes the useof sale-leaseback accounting until such time that the continuing involvement nolonger exists.

During the third quarterof fiscal 2006, the Company changed the estimated useful lives of its buildings(Note 2). This change removed the Company’s ability to control the propertythrough at least 90% of its economic life for 26 of our 126 restaurantsaccounted for using the financing method. As a result, the Company recognizedthe “sale” of these 26 units by removing both the assets and financingobligations associated with the restaurants and recording any gain or loss inaccordance with Financial Accounting Standards Board (“FASB”) Statement ofFinancial Accounting Standards (“SFAS”) No. 98, “Accounting for Leases”. Theleases were then tested under the provisions of SFAS” No. 13 “Accounting forLeases” for treatment as capital or operating leases. All 26 leases qualifiedas operating and deferred rent was recorded in accordance with SFAS No. 98 andSFAS No.13. The effect of this change was a reduction in the Company’sfinancing obligation of $30.5 million, a reduction of financing assets of $29.3million, an increase in deferred rent of $1.2 million, and a net loss on thetransactions of $50,000. The net loss has been deferred and will be amortizedto rent expense over the remaining reasonably assured lease term in accordancewith SFAS No. 13.

The agreements related tothe Company’s deemed landlord financing liability generally contain an initialterm of 15 or 20 years plus renewal options and also require payment ofproperty taxes, maintenance, insurance and utilities.

The following summarizesfuture minimum payments under the Company’s agreements related to the deemedlandlord financing liability having an initial or remaining non-cancelable termof one year or more as of November 2, 2006 :

F-18

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| **(In thousands)**                     | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2007                                        |       | $          | 11,524     |   |
| 2008                                        |       | 11,688     |       |
| 2009                                        |       | 11,587     |       |
| 2010                                        |       | 12,172     |       |
| 2011                                        |       | 12,119     |       |
| 2012 and  thereafter                        |       | 202,775    |       |
|                                        |       | 261,865    |       |
| Less: amount  representing imputed interest |       | (153,832   | )          |
| Present value of  minimum payments          |       | $          | 108,033    |   |

 

Theimputed interest rates on the deemed landlord financing liability ranged from9.8% to 12.1%.  Imputed interest expenseon the deemed landlord financing liability totaled $13.6 million, $13.1million, and $11.8 million during the fiscal years ended November 2, 2006,November 3, 2005, and October 28, 2004, respectively.

**9.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 20 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 accounting period as the liabilitiesare incurred utilizing prorated periodic sales targets.  Under most leases, the Company is responsiblefor 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 November 2,2006:
| **(In thousands)**                                    | ** ** | **Capital  leases** | ** ** | **Operating  leases** | ** ** | **Lease and  sublease  income** | ** ** |
|------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|--------------------------------------|------------|
|                                                       |       |                |       |                  |       |                                 |       |
| 2007                                                       |       | $                   | 74         |                  | $          | 24,897                               |       | $ | 723 |   |
| 2008                                                       |       | 66                  |       | 23,237                |       | 574                                  |       |
| 2009                                                       |       | 37                  |       | 22,385                |       | 382                                  |       |
| 2010                                                       |       | 37                  |       | 20,715                |       | 257                                  |       |
| 2011                                                       |       | 27                  |       | 17,991                |       | 119                                  |       |
| 2012 and  thereafter                                       |       | —              |       | 80,431                |       | 299                                  |       |
| Total minimum  lease payments                              |       | 241                 |       | $                     | 189,656    |                                 | $          | 2,354 |   |
| Less: amount  representing interest                        |       | (46                 | )          |                  |       |                                 |       |
| Present value of  minimum lease payments                   |       | 195                 |       |                  |       |                                 |       |
| Less: current  maturities of capitalized lease obligations |       | (55                 | )          |                  |       |                                 |       |
| Capitalized lease  obligations                             |       | $                   | 140        |                  |       |                                 |       |   |

 

F-19

----

Two of our leasedproperties are subject to capital lease obligations. These capital leases haveexpiration dates of July 2008 and June 2011.  Implicit interest rates are 10.14% on capitalleases.

Net rental expenseconsisted of the following:
| **(In thousands)**                 | ** ** | **Year ended  November 2,  2006** | ** ** | **Year ended  November 3,  2005** | ** ** | **Year ended  October 28,  2004** | ** ** |
|-----------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
|                                    |       |                                        |       |                                        |       |                                        |       |
| Restaurant land and  buildings:         |       |                                        |       |                                        |       |                                        |       |
| Minimum rentals                         |       | $                                           | 23,539     |                                        | $          | 18,963                                      |       | $ | 17,944 |   |
| Contingent  rentals                     |       | 1,820                                       |       | 2,091                                       |       | 2,061                                       |       |
| Equipment                               |       | 320                                         |       | 313                                         |       | 437                                         |       |
| Gross rental expense                    |       | 25,679                                      |       | 21,367                                      |       | 20,442                                      |       |
| Less: lease and  sublease rental income |       | (1,262                                      | )          | (1,442                                      | )          | (1,458                                      | )          |
| Net rental expense                      |       | $                                           | 24,417     |                                        | $          | 19,925                                      |       | $ | 18,984 |   |

 

**10.Other non-current liabilities**

Other non-currentliabilities and credits consisted of the following:
| **(In thousands)**                            | ** ** | **November 2,  2006** | ** ** | **November 3,  2005** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                               |       |                       |       |                       |       |
| Reserve for  closed/subleased properties (Note 14) |       | $                          | 440        |                       | $          | 602 |   |
| Deferred straight-line  rent payable               |       | 6,179                      |       | 2,685                      |       |
| Deferred lease payments                            |       | 2,134                      |       | 2,499                      |       |
| Deferred gain on sale-leasebacks                   |       | 1,030                      |       | —                     |       |
| Insurance                                          |       | 4,864                      |       | 4,980                      |       |
| Landlord incentive                                 |       | 732                        |       | 807                        |       |
| Other                                              |       | 23                         |       | 23                         |       |
|                                               |       | $                          | 15,402     |                       | $          | 11,596 |   |

 

The deferred leasepayments liability was established at the date of the Company’s purchase ofMidway and represents the present value of the difference between the marketrates in effect as of that date compared to the Company’s lease payments onindividual properties.

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

**Preferredstock**

The VI Acquisition Corp.Series A preferred stock has a par value of $0.0001 per share with aliquidation preference of $1,000 per share, plus accrued and unpaid dividends.Dividends on the Series A preferred stock accrue cumulatively on a dailybasis at a fixed rate of 10% and are payable upon liquidation or redemption.Accrued dividends were approximately $9.8 million and $8.9 million for theyears ended November 2, 2006 and November 3, 2005, respectively.  Holders of the Series A preferred stockhave no voting rights in relation to matters of the Company.

**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**

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 theholder.  Since the put feature is at theoption of the holders’ estate but is not mandatory, these shares have beenclassified as mezzanine equities. These shares have resulted in commonmezzanine equity of 27,453 shares, or $27,453 and 35,248 shares, or $35,248 atNovember 2, 2006 and November 3, 2006, respectively and preferred mezzanineequity of 1,027.85 shares, or $1,028,000 at November 2, 2006 and November 3,2006.

F-20

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**Treasurystock**

Following the separationof a member of management from the Company during the period endedOctober 28, 2004, the Company repurchased 4,500 shares of common stock ata cost of $1.00.  No stock was repurchasedduring the year ended November 3, 2005. During the year ended November 2, 2006, the Company repurchased52,092 shares of common stock and 448 shares of preferred stock at a cost of$1.00 and $24.80 per share plus accrued dividends, respectively, following theseparation of two other members of management. The aggregate purchase price paid to the former officers wasapproximately $745,000.

**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 stockand an aggregate of 0.06 shares of Series A preferred stock at $0.01 pershare. The preferred stock warrant holders are subject to an anti-dilutionprovision, which allows their ownership to remain at approximately 6% of thevalue of the accrued dividends on the Series A preferred stock. As ofNovember 2, 2006, the preferred warrants were exercisable for an aggregateof 1,765.23 shares of preferred stock.

***Management agreements***

Ms. Koenig andMr. Carroll have entered into certain Management Agreements with uspursuant to which they purchased restricted shares of our common stock at aprice equal to $1.00 per share.  Theshares vest over a period of five years at the rate of 20% per year and aresubject to certain repurchase 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 ofemployment, we may elect, or, in the event of their deaths, their respectiveestates may compel us, to repurchase certain shares of our preferred stock andcommon stock previously acquired by Ms. Koenig 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 toMs. Koenig’s and Mr. Carroll’s put right following death, in whichcase the purchase price will be the lesser of the foregoing amounts or theoriginal cost of the shares.

Mr. Keymer enteredinto a Management Agreement with the Company pursuant to which he purchasedrestricted shares of the Company’s common stock at a price equal to $4.53 pershare.  The shares vest over a period offour years at the rate of 25% per year and are subject to certain repurchaserights upon termination of Mr. Keymer’s service as a member of the Company’sBoard of Directors.  Upon termination ofMr. Keymer’s services as a member of the Board of Directors, all vestingceases and the unvested shares may be repurchased by the Company at theiroriginal cost and the vested shares may be repurchased at fair market value.

Messrs. Guido and Caseyhave entered into a Management Agreements with us to commit to purchaserestricted shares of our common stock at a price equal to $4.53 per share.  The shares vest over a period of five yearsat the rate of 20% per year and are subject to certain repurchase rights upontermination of employment.  Upontermination of employment, all vesting ceases and the unvested shares may berepurchased by us at their original cost and the vested shares may berepurchased at fair market value (unless termination is for “cause” orvoluntarily by the employee without “good reason”, in which event all of theshares may be repurchased by us at the lesser of original cost or fair marketvalue).   As of November 2, 2006, Mr.Guido had purchased the restricted shares.

**12.Stock option and incentive program**

In connection with theacquisition of Midway by VI Acquisition, those members of management who choseto roll over options to purchase shares of Midway stock were granted options topurchase shares of Series A preferred stock of VI Acquisition Corp. for$24.80 per share. These options were fully vested as of the grant date and noexpense was recorded.

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

F-21

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| ** **                                    | ** ** | **Shares** | ** ** | **Weighted-  average  exercise  price** | ** ** |
|-----------------------------------------------|------------|------------|------------|-----------------------------------------|------------|
| Options  outstanding at October 26, 2003 |       | 647        |       | $                                       | 24.80      |   |
| Granted rollover options                      |       | —     |       | —                                  |       |
| Exercised                                     |       | —     |       | —                                  |       |
| Forfeited                                     |       | —     |       | —                                  |       |
| Options  outstanding at October 28, 2004 |       | 647        |       | 24.80                                   |       |
| Granted                                       |       | —     |       | —                                  |       |
| Exercised                                     |       | —     |       | —                                  |       |
| Forfeited                                     |       | —     |       | —                                  |       |
| Options  outstanding at November 3, 2005 |       | 647        |       | $                                       | 24.80      |   |
| Granted                                       |       | —     |       | —                                  |       |
| Exercised                                     |       | (447       | )          | —                                  |       |
| Forfeited                                     |       | —     |       | —                                  |       |
| Options outstanding at  November 2, 2006 |       | 200        |       | $                                       | 24.80      |   |

 

Theoptions outstanding at November 2, 2006 had a weighted average remainingcontractual life of 6.6 years.

**13.Employee benefit plans**

The Company maintains theVICORP Restaurants, Inc. Employees’ 401(k) Plan under Section 401(k)of the Internal Revenue Code of 1986, which provides for annual contributionsby the Company in the amount of 2% of the aggregate compensation ofparticipants. Full-time and part-time employees meeting a 1,000 hour servicerequirement are eligible to participate. During the years endedNovember 2, 2006, November 3, 2005 and October 24, 2004, the Companyrecorded expense of $670,000 and $620,000 and $587,000, respectively, for its401(k) contributions.

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

During the fiscal yearended November 2, 2006, the Company recorded a $1.4 million pretax impairmentcharge related to the write-down of assets for 12 restaurant locations, all ofwhich will continue to be operated. Management assessed various factors relevant to the assets, includingprojected negative cash flows, and concluded the historical performance trendsat the operating locations were unlikely to improve materially. Therefore animpairment charge was recognized to reduce the carrying value of the assets tofair market value, which was estimated based upon management’s historicalexperience associated with such assets. No impairment charges were recorded in the fiscal year ended November 3,2005 while a $1.1 million impairment charge was recorded for the fiscal yearended October 28, 2004.

As ofNovember 2, 2006 and November 3, 2005, the Company had recorded a reservefor closed/subleased restaurant locations (Notes 6 and 10) of approximately$0.6 million and $1.0 million, respectively, primarily representing estimatedfuture minimum lease payments related to the restaurant facilities, net ofexpected sublease income. Of the five restaurant locations to which thisreserve relates, four of such locations were subleased as of November 2,2006.

The following summarizesthe activities that occurred in the Company’s reserve for closed/subleasedrestaurant locations during the years ended November 2, 2006 and November3, 2005, respectively:
| **(In thousands)** | ** ** | **Year ended   November 2,  2006** | ** ** | **Year ended   November 3,  2005** | ** ** |
|-------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| Beginning of  period    |       | $                                                 | 1,008      |                                              | $          | 1,270 |   |
| Additions               |       | —                                            |       | —                                            |       |
| Payments                |       | (379                                              | )          | (262                                              | )          |
| End of period           |       | $                                                 | 629        |                                              | $          | 1,008 |   |

 

F-22

----

**15.Income taxes**

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

| (In thousands)                   | ** ** | **Year ended  November 2,  2006** | ** ** | **Year ended  November 3,  2005** | ** ** | **Year ended  October 28,  2004** | ** ** |
|---------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
|                                  |       |                                        |       |                                        |       |                                        |       |
| Current:                              |       |                                        |       |                                        |       |                                        |       |
| Federal                               |       | $                                           | (2,023     | )                                           | $          | 1,190                                       |       | $ | 1,394 |   |
| State                                 |       | (865                                        | )          | 76                                          |       | 853                                         |       |
|                                  |       | (2,888                                      | )          | 1,266                                       |       | 2,247                                       |       |
| Deferred:                             |       |                                        |       |                                        |       |                                        |       |
| Federal                               |       | (1,134                                      | )          | (1,262                                      | )          | (4,394                                      | )          |
| State                                 |       | 565                                         |       | 134                                         |       | (765                                        | )          |
|                                  |       | (569                                        | )          | (1,128                                      | )          | (5,159                                      | )          |
| Provision for income  taxes (benefit) |       | $                                           | (3,457     | )                                           | $          | 138                                         |       | $ | (2,912 | ) |

 

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

| (In thousands)                                                  | ** ** | **Year  ended  November 2,  2006** | ** ** | **Year  ended  November 3,  2005** | ** ** | **Year  ended  October 28,  2004** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
|                                                                 |       |                                    |       |                                    |       |                                    |       |   |   |   |   |   |   |
| Income tax  provision computed at statutory federal income tax rates |       | (3,965                                  | )          | 35                                      | %          | 1,261                                   |       | 35 | % | (1,903 | ) | 35 | % |
| FICA tip tax  credit                                                 |       | (1,364                                  | )          | 12                                      | %          | (1,147                                  | )          | (32 | )% | (1,049 | ) | 19 | % |
| Non-deductible  costs                                                |       | 45                                      |       | 0                                       | %          | 14                                      |       | 0 | % | 18 |   | 0 | % |
| AMT Credits                                                          |       | (517                                    | )          | 5                                       | %          | —                                  |       | 0 | % | — |   | 0 | % |
| State income tax  provision, net of federal benefit                  |       | (198                                    | )          | 2                                       | %          | 137                                     |       | 5 | % | 58 |   | (1 | )% |
| Valuation  allowances                                                |       | 2,435                                   |       | (22                                     | )%         | —                                  |       | 0 | % | — |   | 0 | % |
| Other, net                                                           |       | 107                                     |       | (1                                      | )%         | (127                                    | )          | (4 | )% | (36 | ) | 1 | % |
| Income tax expense  (benefit)                                        |       | (3,457                                  | )          | 31                                      | %          | 138                                     |       | 4 | % | (2,912 | ) | 54 | % |

 

The components of the netdeferred tax assets (liabilities) were as follows:

| (In thousands)                              | ** ** | **November 2,  2006** | ** ** | **November 3,  2005** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                             |       |                       |       |                       |       |
| Net operating loss                               |       | $                          | 1,871      |                       | $          | — |   |
| FICA tax credit carry forwards                   |       | 16,148                     |       | 13,870                     |       |
| Alternative minimum tax credit carry forwards    |       | 3,883                      |       | 3,366                      |       |
| Accrued insurance claims not yet deductible      |       | 3,319                      |       | 3,522                      |       |
| Property and equipment                           |       | —                     |       | 1,264                      |       |
| Investment                                       |       | 2,691                      |       | 2,754                      |       |
| Leasing/financing transactions                   |       | 1,977                      |       | 2,098                      |       |
| Other                                            |       | 2,266                      |       | 1,682                      |       |
|                                             |       | $                          | 32,155     |                       | $          | 28,556 |   |
| Valuation  allowance                             |       | (5,195                     | )          | (2,760                     | )          |
| Deferred tax  assets, net of valuation allowance |       | $                          | 26,960     |                       | $          | 25,796 |   |
| Trademarks                                       |       | (16,612                    | )          | (16,999                    | )          |
| Franchise rights                                 |       | (3,927                     | )          | (4,296                     | )          |
| Property and equipment                           |       | (1,411                     | )          | —                     |       |
| Other                                            |       | —                     |       | (60                        | )          |
| Deferred tax  liabilities                        |       | $                          | (21,950    | )                          | $          | (21,355 | ) |
| Net deferred tax  assets                         |       | $                          | 5,010      |                       | $          | 4,441 |   |
|                                             |       |                       |       |                       |       |
| Deferred income  taxes, short-term               |       | $                          | 2,387      |                       | $          | 1,431 |   |
| Deferred income taxes,  long-term                |       | $                          | 2,623      |                       | $          | 3,010 |   |

 

As of November 2, 2006,the Company had aggregate federal net operating loss carry forwards ofapproximately $5 million 

F-23

----

which expire in years2024 through 2026.

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 carry forward for credits generated intax years beginning before 1998).  Thealternative minimum tax credit carry forwards never expire.

Approximately $10.2million of the FICA tip credit carry forwards were generated prior to theCompany’s acquisition in June 2003 and are subject to an annual uselimitation of approximately $0.7 million. Of these credit carry forwards, $6.2 million may be carried forward upto 15 years with expirations in 2008 through 2012 and $4.0 million may becarried forward up to 20 years with expirations in 2018 through 2022.  The remaining $5.9 million of FICA tip creditcarry forwards were generated post-acquisition, are not subject to annuallimitations and will expire in 2023 through 2026.  As of November 2, 2006, the Company recordeda valuation allowance of $2.5 million for FICA tip credits for which it is morelikely than not that a tax benefit will not be realized due to the impendingexpiration of such credits.

The Company established avaluation allowance of $2.8 million for the portion of its deferred tax assetrelated to an investment for which it is more likely than not that a taxbenefit will not be realized.  Thisinvestment arose from the sale of a subsidiary and in 1991 had been written-offfor financial reporting purposes.  Whilethe Company believes that this investment will ultimately be written-off fortax purposes, it does not believe that it will generate sufficient capitalgains to offset the capital loss.

**16.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 (there were no transaction or debtextinguishment costs during the year ended November 2, 2006).

| (In thousands)                           | ** ** | **Year ended  November 3,  2005** | ** ** | **Year ended  October 28,  2004** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| Transaction  expenses:                        |       |                                        |       |                                        |       |
| Legal, accounting and other professional fees |       | $                                           | 15         |                                        | $          | 75 |   |
| Legal settlements                             |       | —                                      |       | 50                                          |       |
| Total transaction expenses                    |       | $                                           | 15         |                                        | $          | 125 |   |
| Debt  extinguishment costs:                   |       |                                        |       |                                        |       |
| Debt prepayment penalties                     |       | $                                           | —     |                                        | $          | 2,305 |   |
| Write-off of deferred financing costs         |       | —                                      |       | 4,344                                       |       |
| Derivative termination                        |       | —                                      |       | 207                                         |       |
| Total debt  extinguishment costs              |       | $                                           | —     |                                        | $          | 6,856 |   |

 

**17. Commitmentsand 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 November 2, 2006, the Company hadplaced letters of credit totaling approximately $7.4 million, primarilyassociated with its insurance programs.

***Litigationcontingencies***

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 

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Company has been party tovarious assessments 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.

The Company settled twoclass action claims in California related to overtime and wage payments in June2005 for an aggregate payment of up to $6.5 million, subject to the followingpartial indemnification.  We filed a suitin December 2004 in Cook County, Illinois, seeking indemnification for damagesrelated to this litigation under the Purchase Agreement dated June 14, 2003,pursuant to which VICORP Restaurants, Inc., was acquired, in addition toassertion of other claims.  The formershareholders of Midway Investors Holdings Inc. filed a similar action inDecember 2004 in Superior Court in Massachusetts.  Through our parent company, VI AcquisitionCorp., an agreement to settle claims brought in both of these actions wasfinalized and VI Acquisition Corp. received a settlement payment in December2005 of $2.65 million.  The ultimate costto settle the two class actions was reduced to $5.3 million.

The Company is currentlydefendants in two class action claims in California.  The first class action was brought in March2006 by two former managers and alleges that we violated California law withregard to unpaid overtime, compensation for missed meals and rest periods,civil penalties for failure to provide itemized wage statements, failure toprovide notice on paychecks where paychecks may be cashed without any fees, andunfair business practices.  The classesand subclasses alleged in the action have not been certified by the court atthe current stage of the litigation but generally are claimed to be persons whohave been employed since February 1, 2005, in the position of restaurantmanagers, persons who have been employed in California since March 15, 2002, inany capacity who received a payroll check in California, and all restaurantmanagers who  have ended their employmentwith the Company prior to the effective date of any settlement, judgment, orother resolution of the action.  Nodollar amount in damages is requested in the Complaint and the Complaint seeksstatutory damages, and attorneys’ fees in an unspecified amount.

The second class actionwas brought in April 2006 by a former employee and alleges the Company violatedCalifornia laws with regard to failure to pay vested vacation pay and unfairbusiness practices.  The class alleged isany person who has been employed by us in California at any time from fouryears prior to the filing of the class action to date of trial.  No dollar amount in damages is requested inthe Complaint and the Complaint seeks attorneys’ fees in an unspecifiedamount.  In the fourth quarter of fiscal2006, the Company established a liability of $600,000 relating to this action.

***Guaranteesand commitments***

The Company guaranteedcertain leases for restaurant properties sold in 1986 and restaurant leases ofcertain franchisees. Minimum future rental payments remaining under theseleases were approximately $2.0 million as of November 2, 2006.  The Company has not made any payments due todefault under these agreements, and management believes the guarantee has nofair value.  Management believes theultimate disposition of these matters will not have a material adverse effecton the Company’s consolidated financial position or results of operations.

Contractual obligations, primarily for restaurantsunder construction, amounted to approximately $5.1 million as ofNovember 2, 2006.

***Indemnifications***

Inthe normal course of business, the Company is party to a variety of agreementsunder which it may be obligated to indemnify the other party for certainmatters. These obligations typically arise in contracts where the Companycustomarily agrees to hold the other party harmless against losses arising froma breach of representations or covenants for certain matters such as title toassets. The Company also has indemnificationobligations to its officers and directors. The duration of theseindemnifications varies, and in certain cases, is indefinite. In each of thesecircumstances, payment by the Company depends upon the other party making anadverse claim according to the procedures outlined in the particular agreement,which procedures generally allow the Company to challenge the other party’sclaims. In certain instances, the Company may have recourse against thirdparties for payments that we make.

TheCompany is unable to reasonably estimate the maximum potential amount of futurepayments under these or similar agreements due to the unique facts andcircumstances of each agreement and the fact that certain indemnificationsprovide for no limitation to the maximum potential future payments under the indemnification. The Company has not recorded anyliability for these indemnifications in the accompanying consolidated balancesheets; however, the Company does accrue losses for any known contingentliability, including those that may arise from indemnificationprovisions, when the obligation is both probable and reasonably estimable.

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**18.Related party transactions**

In June 2003, VI Acquisition Corp. entered into aprofessional services agreement with Wind Point Investors IV, L.P. and WindPoint Investors V, L.P. pursuant to which they provide services relating tocorporate strategy, acquisition and divestiture strategy and advice regardingdebt and equity financings. In exchange for such services, Wind Point InvestorsIV, L.P. is entitled to an annual management fee of $231,668 plus itsreasonable out-of-pocket expenses, and Wind Point Investors V, L.P. is entitledto an annual management fee of $618,332 plus its reasonable out-of-pocketexpenses. In addition, upon repayment in full of all amounts owing under VIAcquisition Corp.’s prior senior secured credit agreement and its prior subdebtcredit agreement, Wind Point Investors IV, L.P. and Wind Point Investors V,L.P. was paid a fee equal to the sum of $250,000 plus the product of $70,000multiplied by the result of a fraction, the numerator of which is the number ofdays from June 13, 2003 until such repayment and the denominator of whichis 365. We paid Wind Point Investors IV, L.P. and Wind Point Investors V, L.P.approximately $309,000 pursuant to this provision upon repayment of our priorsenior credit facility in connection with the April 2004 refinancing.

The professional services agreement will continueuntil the occurrence of a change of control of VI Acquisition Corp.; providedthat if at such time VI Acquisition Corp. pays in full all amounts owing underits existing senior secured credit facility and mezzanine credit agreement, theprofessional services agreement shall remain in effect as long as VIAcquisition Corp.’s current stockholders own at least 10% of the common stockor preferred stock of VI Acquisition Corp. The professional services agreement,however, may be terminated by VI Acquisition Corp. if either Wind PointInvestors IV, L.P. or Wind Point Investors V, L.P. is in material breach andhas not cured such breach within 60 days of notice thereof.  The professional services agreement containscustomary indemnification provisions in favor of Wind Point Investors IV, L.P.,Wind Point Investors V, L.P. and their affiliates. Mr. Cummings is amanaging director and Mr. Solot is a principal of Wind Point Advisors LLC,an affiliate of Wind Point Investors IV, L.P. and Wind Point Investors V, L.P.

Total management feespaid to Wind Point Investors, IV, L.P. and Wind Point Investors V, L.P. totaled$850,000, $1,063,000, and $1,088,000 for the fiscal years endedNovember 2, 2006, November 3, 2005 and October 28, 2004,respectively.  Total management feeexpense for the fiscal years ended November 2, 2006, November 3, 2005, andOctober 28, 2004 was $850,000, $850,000, and $1,159,000, respectively. Asof November 2, 2006 and November 3, 2005, $63,000 of such management feeswere accrued but unpaid, respectively.

In March 2004, Walter Van Benthuysen purchased10,000 shares of our common stock for $10,000, Debra Koenig purchased 3,575shares of our common stock for $3,575 and Anthony Carroll purchased 14,295shares of our common stock for $14,295.

In April 2005, Anthony Carroll purchased 5,802shares of common stock for $26,282 and 284.087 shares of our series A preferredstock for $322,200.  In May 2005, aformer employee purchased .913 shares of our series A preferred stock for$1,036.

In September 2005, Kenneth Keymer purchased 2,901shares of common stock for $13,142.

In June 2006, Anthony Carroll purchased 4,243 sharesof common stock for $19,200, Jeffry Guido purchased 10,948 shares of commonstock for $49,594 and another member of management purchased 3,399 shares ofcommon stock for $15,397.

**19. Quarterly financial data(unaudited)**

TheCompany’s quarterly results of operations for fiscal years 2006 and 2005 aresummarized as follows:

|                                           | ** ** | **Quarter ended (a)** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|
| **(In thousands)  Fiscal 2006** | ** ** | **January 26,  2006**      | ** ** | **April 20,  2006** | ** ** | **July 13,  2006** | ** ** | **November 2,  2006** | ** ** |
|                                      |       |                            |       |   |   |   |   |   |   |
| Revenues                                  |       | $                               | 112,132    |   | $ | 106,164 |   | $ | 105,433 |   | $ | 142,579 |   |
| Litigation  settlement expense            |       | —                          |       | — |   | — |   | 600 |   |
| Transaction costs                         |       | —                          |       | — |   | — |   | — |   |
| Asset impairment                          |       | 308                             |       | 513 |   | — |   | 560 |   |
| Operating profit                          |       | 6,598                           |       | 4,801 |   | 5,391 |   | 1,272 |   |
| Net income (loss)                         |       | 65                              |       | (1,290 | ) | (581 | ) | (6,065 | ) |
|                                           |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 

|                                | ** ** | **Quarter ended (a)** | ** ** |
|--------------------------------|------------|---------------------------------|------------|
| **Fiscal 2005**           | ** ** | **January 27,  2005**      | ** ** | **April 21,  2005** | ** ** | **July 14,  2005** | ** ** | **November 3,  2005** | ** ** |
|                           |       |                            |       |   |   |   |   |   |   |
| Revenues                       |       | $                               | 115,130    |   | $ | 97,511 |   | $ | 96,782 |   | $ | 129,922 |   |
| Litigation  settlement expense |       | —                          |       | — |   | (408 | ) | — |   |
| Transaction  costs             |       | 15                              |       | — |   | — |   | — |   |
| Asset impairment               |       | —                          |       | — |   | — |   | — |   |
| Operating profit               |       | 10,206                          |       | 6,770 |   | 7,723 |   | 7,108 |   |
| Net income (loss)              |       | 2,269                           |       | 456 |   | 1,308 |   | (570 | ) |
|                                |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

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(a)             TheCompany’s first, second and third quarters generally consist of twelve weekseach and the fourth quarter consists of sixteen weeks.  The first quarter of fiscal 2005 included anextra week.

 

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