** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

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

 

**FORM 10-K**

 
| **(Mark One)**                                                                                                         |                                                                                                     |   |
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| **ý**                                                                                                             | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**     |
|                                                                                                                   |                                                                                                     |   |
| **For the Fiscal Year Ended November 3, 2005**                                                                    |
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| **o**                                                                                                                  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                   |                                                                                                     |   |
| **For the transition period from          to       ** |
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| **Commission File Number:  333-117263**                                                                           |                                                                                                     |   |
|                                                                                                                        |                                                                                                          |        |  |

 

**VICORPRESTAURANTS, 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’s telephone number, including area code)             |
|                                                                  |         |                |
| Securities registered pursuant to Section 12(b) of the Act: |
| **None**                                                              |
|                                                                  |         |                |
| Securities registered pursuant to Section 12(g) of the Act: |
| **None**                                                              |

 

Indicate bycheck mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.       YES   o   NO   ý

 

Indicate by check mark if the registrant isnot required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act.       YES   ý   NO   o

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months and (2) has beensubject to such filing requirements for the past 90 days.     YES   ý   NO   o

 

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

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or a non-acceleratedfiler.  See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o  Acceleratedfiler o  Non-accelerated filer ý

 

Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).        YES   o   NO   ý.

 

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

 

Number of shares of Common Stock, $.0001 parvalue, outstanding at December 31, 2005: 1,430,503, excluding treasuryshares.

 

 

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

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

 

1

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**FORWARD-LOOKING STATEMENTS**

 

*This Annual Report on Form 10-K and thedocuments incorporated by reference into the Annual Report on Form 10-Kinclude forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Actof 1934.  These forward-lookingstatements can be identified by the use of forward-looking terminology,including the words “believes,” “estimates,” “anticipates,” “expects,” “intends,”“may,” “will” or “should,” or, in each case, their negative or other variationsor comparable terminology.  Theseforward-looking statements include all matters that are not historicalfacts.  They appear in a number of placesthroughout this Annual Report on Form 10-K and include statementsregarding our intentions, beliefs or current expectations concerning, amongother things, our results of operations, financial condition, liquidity,prospects, growth, strategies and the industry in which we operate.*

 

*By their nature, forward-looking statementsinvolve risks and uncertainties because they relate to events and depend oncircumstances that may or may not occur in the future.  We caution you that forward-looking statementsare not guarantees of future performance and that our actual results ofoperations, financial condition and liquidity, and the development of theindustry in which we operate may differ materially from those made in orsuggested by the forward-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, butnot necessarily all, of the factors that may cause actual results to differfrom those anticipated 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;

•      the loss of key employees;

•      the impact of having a controlling shareholder; and

•      Loss development factors used in determining our insurance reserves.

 

*These forward-looking statements are subjectto numerous risks, uncertainties and assumptions about us, including thefactors described under “Item 1. Business - Risk factors related to ourbusiness.”  The forward-looking events wediscuss in this Annual Report on Form 10-K speak only as of the date ofsuch statement and might not occur in light of these risks, uncertainties andassumptions. We undertake no obligation and disclaim any obligation to publiclyupdate or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.*

 

*Unless otherwise provided in this AnnualReport on Form 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**

 

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

 

**Ourcompany**

 

We operatefamily-dining restaurants under two proven and well-recognized brands, VillageInn and Bakers Square. As of November 3, 2005, our company, which wasfounded in 1958, had 387 restaurants in 25 states, consisting of 287company-operated restaurants and 100 franchised restaurants.  ** **Our restaurant locations areconcentrated in particular regions in order to maximize operating efficiencies,including regional management, purchasing and advertising penetration. Inaddition to our restaurants, we operate three strategically located pieproduction facilities that produce premium pies that are offered in ourrestaurants and sold to third-party customers. Our revenues increased from$379.9 million in 2001 to $412.7 million in 2005. Both of our restaurantconcepts operate in the stable family-dining segment of the restaurantindustry. Over our 47-year history, we have concentrated on providing ourcustomers great-tasting, high-quality food at reasonable prices with fast andfriendly service. Our commitment to an attractive price-to-value relationshiphas enabled us to develop a stable base of repeat customers.

 

We continuallyseek to increase the efficiency of our operations, increase customer visits andsales per customer, provide new menu options for our guests and increase salesof higher margin items. Significant investments in our brands and operationalimprovements, including an investment of approximately $7.2 million to upgradeour information and restaurant point-of-sale (“POS”) systems in 2002 and 2003,ongoing remodeling of our restaurants and reductions in purchasing andmanufacturing costs have enabled us to improve our prime margin, which is ourprofitability expressed as a percentage of restaurant sales after deducting ourtwo most significant costs, food and labor. Prime margin improved from 38.8% in 2001 to 41.5% in 2005.  In addition, we have increased our margins byproviding our managers with extensive training and the tools necessary toeffectively operate our business, such as on-line ordering and bill processingand real-time information on key business metrics. We continually engage inselective menu engineering and the development of updated menu items for ourrestaurants such as our signature oven-roasted focaccia sandwiches in ourVillage Inn restaurants, seasonal offerings such as artisan-style bread bowlsfilled with hearty soups and stews and new flavors of pie offerings in ourBakers Square restaurants. Our other efforts to drive sales growth includecreative marketing programs, the hiring of a new ad agency, and expansion ofour third-party customer base for our pies.

 

***Village Inn***

 

We opened ourfirst Village Inn restaurant in 1958, and as of November 3, 2005 we had235 locations, 135 of which were operated by our company and 100 of which wefranchised. Our company-operated Village Inn restaurants are located in tenstates, primarily in the Rocky Mountain region (82 units), the Midwest (38units), and Florida (13 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 60% of Village Inn sales in 2005. 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.

 

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Our VillageInn restaurants are predominantly free-standing units which averageapproximately 5,000 square feet in size and can seat between 120 and 180people. We are typically open from 6 a.m. to 12 a.m., allowing us toeffectively generate revenue in all three day parts. Our typical entrée pricesrange from $4.29 to $9.99 for breakfast items and from $4.99 to $10.89 forlunch and dinner items, with an average per-person check of $7.41 overall in2005. In order to improve our efficiency and purchasing power, our menus arestandardized throughout the United States, with some variations driven byregional preferences. In 2005, Village Inn’s average unit sales were $1.54million, and corresponding average restaurant operating cash flow was $307,000,representing a 19.9% margin.

 

***Bakers Square***

 

The BakersSquare concept began in 1983 when we acquired 59 Poppin Fresh Pies restaurantsfrom the Pillsbury Restaurant Group. Since then, we have grown Bakers Square to152 company-operated restaurants as of November 3, 2005. Our Bakers Squarerestaurants are located in eight states, including California (48 units),Illinois (47 units) and Minnesota (25 units). The foundation of the BakersSquare concept is our signature freshly baked pies, which accounted for 25.0%of Bakers Square’s sales in 2005. 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, Slow-RoastedTurkey Focaccia, Honey Mustard Chicken and Portabella Pot Roast.

 

Our BakersSquare restaurants are free-standing units which average approximately 4,500square feet 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 $4.29 to$9.99 for breakfast items and from $5.49 to $11.29 for lunch and dinner items,with an average per-person check of $8.76 overall in 2005. As with Village Inn,our menus are standardized across the United States, with some variationsdriven by regional preferences. In 2005, Bakers Square’s average unit saleswere $1.45 million, and corresponding average restaurant operating cash flowwas $220,000, representing a 15.2% margin.

 

In fiscal2005, we opened one remodeled test unit. We are currently in the process of evaluating performance data todetermine the appropriate model for the future Bakers Square units.

 

***Pie production operations***

 

Complementingour restaurant operations, we produce premium pies for the Bakers Square andVillage Inn restaurants and for sale to select third-party customers. In 2005,we produced 15.4 million premium pies. By producing pies at our threestrategically located facilities, we are able to control the quality,consistency and freshness of our pies and enhance our distributioncapabilities. We differentiate ourselves from other pie manufacturers byproducing multi-layer pies, using premium ingredients such as fresh cream,whole fruits and high quality pie crusts, and maintaining a strict shelf lifepolicy of no more than three days for the fresh pies in our restaurants. At the2005 National Pie Championships, we won 21 first place awards, which was morethan any other competitor.

 

We haveimproved the efficiency of our pie production operations and increased sales ofour pies to third parties, including the addition of several new accounts. Wehave used our enterprise resource planning system to manage inventory andcosts, concentrated our frozen pie production in our high volume Chaska,Minnesota facility to achieve economies of scale and restructured our deliveryarrangements to obtain substantial savings.

 

4

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**Industryoverview**

 

The restaurantindustry is a significant contributor to the U.S. economy, with total 2005sales of $476 billion, the fourteenth 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 continued growth in disposable incomes andkey age groups of the population. The restaurant industry can be divided intotwo primary operating segments: full service restaurants (“FSR”) and limitedservice restaurants (“LSR”). Restaurants operating in the FSR segment presentbroad menu choices that are served to patrons by a waitstaff, while restaurantsoperating in the LSR segment serve customers at a counter or through adrive-thru window.

 

Our VillageInn and Bakers Square concepts operate in the “family-dining” category of theFSR segment. 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 ourfirst restaurant under the name “Village Inn Pancake House” in Denver, Coloradoin 1958. Due to the success of the Village Inn concept, we began franchisingthe brand, 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 completedan initial public offering in 1982 and changed our name from Village InnPancake House, Inc. to VICORP Restaurants, Inc. Following our initialpublic offering, we were publicly traded until we were acquired in agoing-private transaction 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 PointPartners is a private equity investment firm that manages over $1 billion incommitments and has invested in more than 75 companies since its founding in1983. Wind Point’s strategy is to partner with top caliber CEOs and to alignits economic interests closely with those of company management teams throughsignificant equity participation. Wind Point typically invests between $20million and $70 million in transactions such as leveraged buyouts,recapitalizations, industry consolidations and expansion capital transactionsinvolving companies with revenue between $50 million and $500 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.

 

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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 believethat the locations of our restaurants are critical to our long-term success,and we devote significant time and resources to analyzing each prospectivesite. We plan to expand in a number of ways, including through the developmentof new sites, the conversion of competitors’ sites, and the purchase offranchised sites from franchisees. The costs of opening a Bakers Square orVillage Inn restaurant may vary by restaurant depending upon, among otherfactors, the location of the site, the method of acquisition and the amount ofconstruction required. With an average projected investment of approximately$450,000 for leased units, we believe we have a low-cost economic model for thecontinued development of new restaurants. At times, we receive landlorddevelopment and/or rent allowances for leasehold improvements, furniture,fixtures and equipment. In addition, we anticipate that we will enter intosale-leaseback transactions and other leasing arrangements with respect to ournewly constructed restaurant properties. The standardized decor and interiordesign of each of our restaurant concepts can be readily adapted to accommodatedifferent types of building configurations.

 

We use ourin-house development team, including real estate, design and legalprofessionals, to find, evaluate and negotiate new sites for our restaurants.We evaluate potential sites based on a number of criteria, includingsurrounding population density, demographic information, median householdincome and size, location, area restaurant competition, traffic, access,visibility, potential restaurant size, parking and signage capability. We alsoselectively use outside consultants who specialize in site evaluation toprovide independent validation of our sales potential estimates for new sites.In fiscal 2005, we opened 18 new restaurants.

 

We may alsopurchase our competitors’ sites and convert them to our restaurant concepts. Weevaluate each potential conversion site using the same criteria that we use toevaluate new restaurant sites. We believe that conversion can be acost-effective method for adding new restaurants.

 

We also seekto grow by purchasing franchised Village Inn restaurants from our franchisees.These opportunities may arise as our franchisees retire or seek liquidity fortheir investment. For example, in 2003 we acquired eight franchised Village Innrestaurants located in the Albuquerque, New Mexico area.  Additionally, we completed a transaction in January 2006with a franchisee in Oklahoma in which we purchased four Village Innrestaurants.  We plan to purchase oneadditional restaurant from the same franchisee by the end of March 2006.

 

**Restaurantstaffing and training**

 

Attraction andretention of quality employees, continuous employee development, regularcommunication of expectations and regular performance feedback are criticalfactors that help us achieve customer satisfaction. We believe we distinguishourselves by the quality of personnel and longevity of service among ourRegional Managers, restaurant general managers and hourly staff. We attributemuch of our success in retaining our management and employees to our extensivetraining programs, attractive cash incentive compensation program andcompetitive benefit programs.

 

Each of ourrestaurants is typically managed by one general manager, one associate managerand one assistant manager. On average, general managers possess over eightyears of experience with us. Each of our general managers has primaryresponsibility for day-to-day operations in one of our restaurants, includinghiring/firing, scheduling, cleanliness of the restaurant and restaurant cashflows. The restaurant managers are supported by Regional Managers, RegionalVice Presidents (or District Managers in California) and our corporate office.As of November 3, 2005, we had 34 Regional Managers, each of whom isresponsible for managing approximately nine restaurants in a designatedgeographic region in a manner consistent with our strategies, policies andstandards of quality. The Regional Managers report to one of three RegionalVice Presidents of Operations or the District Managers (in California). OurRegional Vice Presidents of Operations participate in every aspect of ourrestaurant operations, from organizing quality management teams for therestaurants to routine visits to each location.

 

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Our trainingprograms are designed to equip our employees and franchisees with the skillsnecessary to help us achieve our objectives. We focus on outcome-basedtraining, emphasizing the acquisition of basic skills and behavior that resultin desired performance for specific positions. The average time in training fora manager new to our company is eight to ten weeks.  At the successful completion of training theyare placed in a restaurant as an assistant manager.  At this point the manager continues to betrained and developed, utilizing a program called Management DevelopmentCriteria.  This ongoing trainingchallenges the new manager to thoroughly understand and demonstrate proficiencyin all facets of management of our restaurants. Upon completion, the manager is eligible to participate in our bonusprogram.  In addition to these programs,we conduct field training for our restaurant managers covering a variety oftopics such as new products, food safety and management development. For eachof our franchised restaurants, we require that a minimum of two managersreceive certification through our management training program. Additionally, werequire our franchisees to successfully complete our management training programprior to the scheduled opening of any of our franchised restaurants.

 

**Marketing,advertising and menu development**

 

Thefamily-dining segment in which our restaurant concepts operate attractscustomers seeking quality, consistency, variety and value, with an averageper-person check typically between $6 and $9. Our mid-range price positioningin the family-dining segment provides the competitive advantage of flexibilityin menu choices by offering higher or lower priced items based on customerpreferences. We use various marketing techniques, such as television and radio(in geographic markets where we have sufficient market penetration), newspaper,direct mail and point-of-purchase materials to promote our restaurant conceptsand gain market share.   During 2005, weengaged Catapult Marketing as our new ad agency.  We believe Catapult’s expertise in developingnational consumer promotions will enhance our efforts to continue to build boththe Village Inn and Bakers Square brands.

 

In our ongoingeffort to maximize our sales and profitability, we engage in careful menuengineering and the development of new menu items. We maintain a modern testkitchen at our headquarters staffed by highly qualified food professionals whocreate new menu offerings as well as new pie recipes. Before new items areintroduced, a program of testing is undertaken to assess customer acceptanceand implementation considerations. In preparing menu items, we emphasizequality and freshness, as well as trends in the family-dining segment. Newitems may be offered on a promotional or seasonal basis, serve as special itemsto provide variety to our regular menus, or become a permanent part of ourofferings.

 

**Purchasingand distribution**

 

Our ability tomaintain consistent quality throughout our restaurants depends in large partupon our ability to acquire food products and related items from reliablesources in accordance with our specifications. We make centralized, nationalpurchasing decisions for most menu ingredients to gain favorable prices andmaintain quality and freshness levels. We negotiate directly with our majorsuppliers to obtain competitive prices and use purchase agreements in an effortto stabilize the potentially volatile pricing associated with certaincommodities. We believe that we have good relationships with our suppliers andthat alternative supply sources are readily available if necessary.

 

We deliver ourpies from our three pie manufacturing facilities to all of our restaurants andto our third-party customers using external distributors and transportationcompanies.

 

**Franchiseprogram**

 

We establishedour first Village Inn franchise in 1961. As of November 3, 2005 we had atotal of 100 franchised Village Inn restaurants, operated by 25 franchisees,each with one to eleven restaurants. We believe that we currently enjoy solidworking relationships with our franchisees. We presently intend to focus ourexpansion efforts on company-operated restaurants but may pursue selectedfranchising opportunities.  We completeda transaction in January 2006 with a franchisee in Oklahoma in which wepurchased four Village Inn restaurants. We plan to purchase one additional restaurant from the same franchiseeby the end of March 2006.

 

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We generallyseek franchisees 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 between 2% and 4% of gross sales.  Additionally, our current franchisees paymarketing fees between zero and 2% of gross sales.  Our franchise consultants work towardvisiting each of our Village Inn franchisees approximately four times a year tomonitor their business and to ensure that their stores meet with our qualitystandards.

 

A franchiseeis required to pay an initial franchise fee for a 15 year franchise term. Untilthe end of their first year of operation, our franchisees also pay us a royaltyfee 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 fees of 4% of gross sales as well as marketing fees of2% of gross sales. Our standard franchise agreement gives our franchisees theright to use our trademarks, service marks, trade dress and our recipes,systems, manuals, processes and related items.

 

**Competition**

 

The restaurantindustry is highly competitive with respect to price, quality and speed ofservice, and quality and value of the food products offered. The number andlocation of units, attractiveness of facilities, effectiveness of advertisingand marketing programs, and new product development are also importantcompetitive factors. Changes in consumer tastes and preferences, economicconditions or population demographics as well as shifts in traffic patterns,can also impact operations and profitability.

 

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

 

**Intellectualproperty**

 

We have an extensiveportfolio of registered service marks, trademarks and logos, including “BakersSquare®,” “Village Inn®,” “Village Inn Pancake HouseÒ,”“Best Pie in AmericaÒ,” “Great Food.Unbelievable 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 our proprietaryrights will be adequate to prevent misappropriation of these rights or the useby others of restaurant features based upon, or otherwise similar to, ourconcepts. It may be difficult for us to prevent others from copying elements ofour concepts, and any litigation to enforce our rights will likely involvesignificant costs.

 

**Environmentalmatters**

 

Our operationsare subject 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.

 

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Some of ourproperties are located on or adjacent to sites that we know or suspect to havebeen used by prior owners or operators as retail gas stations or industrialfacilities. Such properties previously contained underground storage tanks, andsome of these properties may currently contain abandoned underground storagetanks. We do not believe that we have contributed to the contamination at anyof our properties. It is possible that petroleum products and othercontaminants may have been released at or migrated beneath our properties intoor through the soil or groundwater. Under applicable federal and stateenvironmental laws, we, as the current owner or operator of these sites, may bejointly and severally liable for the costs of investigation and remediation ofany contamination. While we seek to obtain certain assurances relating toenvironmental issues at the properties that we purchase from the prior ownersof the properties or from third parties, there can be no assurances that wewill not be liable for environmental conditions relating to our prior, existingor future restaurants or restaurant sites. If we are found liable for the costsof remediation of contamination at any of these properties, our operatingexpenses would likely increase and our operating results would be materiallyadversely affected.

 

**Governmentalregulation**

 

We are subjectto various federal, state and local laws affecting the operation of ourbusiness, as are our franchisees, including various health, sanitation, fireand safety standards. Each of our restaurants and pie production facilities issubject to licensing and regulation by a number of governmental authorities,which include zoning, health, safety, environmental, sanitation, building andfire agencies in the jurisdiction in which the restaurant is located. We arealso subject to the rules and regulations of the Federal Trade Commissionand various state laws regulating the offer and sale of franchises. Inaddition, all of our restaurants located in California sell beer and wine. As aresult, we are required to comply with applicable alcohol licensingrequirements and alcoholic beverage control regulations.

 

We also aresubject to the Fair Labor Standards Act, the Immigration Reform and Control Actof 1986 and various federal and state laws governing such matters as minimumwages, overtime and other working conditions. A significant portion of ourhourly staff is paid at rates consistent with the applicable federal or stateminimum wage and, accordingly, increases in the minimum wage will increase ourlabor cost.

 

The federalAmericans with Disability Act prohibits discrimination on the basis ofdisability in public accommodations and employment. We are required to complywith the Americans with Disabilities Act and regulations relating toaccommodating the needs of the disabled in connection with the construction ofnew facilities and with significant renovations of existing facilities.

 

**Employees**

 

As of November 3,2005, we had 12,674 employees, consisting of 7,607 part-time employees and5,067 full-time employees. We employ 175 employees at our corporateheadquarters. Our employees are not covered by any collective bargainingagreement, and we consider our employee relations to be good. In 2003,employees at one of our pie manufacturing facilities conducted an election tounionize our 138 employees at that facility. This effort was unsuccessful;however, our employees could engage in future unionization efforts that maysucceed.

 

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** **

**Riskfactors related to our business**

 

**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 aresignificantly leveraged. The following chart shows our level of indebtednessand certain other information as of November 3, 2005:

 
| **(In millions)**                   | ** ** | **As of  November 3,  2005** | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|
| Senior  secured credit facility     | ** ** | ** **                        | ** ** |
| Revolving credit facility(1)        |       | $                                 | 6.7        |   |
| Term loan                           |       | 15.0                              |       |
| 10 1⁄2% senior  unsecured notes  |       | 126.5                             |       |
| Unamortized original issue discount |       | (1.2                              | )          |
| Capitalized  leases                 |       | .2                                |       |
| Total indebtedness (2)              |       | $                                 | 147.2      |   |
| Stockholders’  equity          |       | $                                 | 71.9       |   |

 

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(1)   Does not include $7.3 million of outstanding letters of credit that wereissued under the senior secured revolving credit facility as of November 3,2005. We are able to borrow under the senior secured revolving credit facilitythe lesser of (a) $30.0 million and (b) 1.2 times trailing twelvemonths Adjusted EBITDA (as defined in the senior secured credit facility) minusthe original principal amount of our senior secured term loan. Our seniorsecured revolving credit facility has a $15.0 million sublimit for letters ofcredit. As of November 3, 2005, our borrowing base supported $30.0 millionof borrowings.

 

(2)   Does notinclude deemed landlord financing liability.

 

Oursubstantial degree of leverage could have important consequences, including thefollowing:

 

•      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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** **

**Wemay have difficulty implementing our expansion strategy.**

 

Our ability toopen new restaurants is dependent upon a number of factors, many of which arebeyond our control, 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 achievesits targeted level of performance. This phenomenon is due to higher operatingcosts caused by start-up and other temporary inefficiencies associated withopening new restaurants, such as lack of market familiarity and acceptance whenwe enter new markets and lack of experienced staff. We may not be able toattract enough customers to new restaurants because potential customers may beunfamiliar with our restaurants or our restaurants’ atmosphere or menus mightnot appeal to them.

 

**Wemay not be able to open new restaurants profitably, which could negativelyaffect our growth strategy.**

 

We havehistorically added, and plan to continue to add, new restaurants through newconstruction, acquisitions and conversions. We have traditionally used cashflow from operations and sale-leaseback transactions as the primary fundingsources for additional restaurants. We cannot guarantee that our cash flowswill be sufficient 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 ina highly competitive industry. Price, restaurant location, food quality andtype, service and attractiveness of facilities are important aspects ofcompetition in the restaurant industry, and the competitive environment isoften affected by factors beyond a particular restaurant management’s control,including changes in the public’s taste and eating habits, population, trafficpatterns and general economic conditions. Competitive pressures may have theeffect of limiting our ability to increase prices, which may adversely affectour operating earnings. This competitive environment makes it more difficult forus to continue to provide high levels of service while maintaining ourreputation for value without adversely affecting operating margins.Additionally, to the extent we raise prices, our customer traffic may decline.Our restaurants compete with a large number of other restaurants, includingnational and regional restaurant chains and franchised restaurant operations,as well as independently owned restaurants, for customers, restaurantlocations, qualified management and other restaurant staff. Many of ourcompetitors have greater financial and other resources than we have. Inaddition, the restaurant industry has few non-economic barriers to entry, andtherefore new competitors may emerge at any time. We may not be able to competesuccessfully against our competitors in the future, and competition may have amaterial adverse effect on our operations.

 

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** **

**Thesuccess of our restaurants is highly dependent on their location.**

 

The success ofour company-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.

 

**Weare vulnerable to fluctuations in the cost, availability and quality of ouringredients.**

 

The cost,availability and quality of the ingredients we use to prepare our food aresubject to a range of factors, many of which are beyond our control. We dependon frequent deliveries of fresh ingredients, thereby subjecting us to the riskof shortages or interruptions in supply. Fluctuations in economic and politicalconditions, weather and demand could adversely affect the cost of ouringredients. Our efforts to pass along price increases may be subject to delaysassociated with our cycle of updating our menus. We have no control overfluctuations in the price of commodities, and we may be unable to pass throughcost increases to our customers. For example, we did not pass on to ourcustomers the 75% increase in the price of eggs (one of our largest food costs)which occurred during the 2004 fiscal year. We currently do not enter intofutures contracts with respect to potential price fluctuations in the cost offood and other supplies, which we purchase at prevailing market or contractedprices. Although we at times enter into arrangements locking in the price ofcertain ingredients for a specified period of time, we typically do not rely onlong-term written contracts with our suppliers. Our suppliers could implementsignificant price increases. All of these factors could adversely affect ourfinancial results.

 

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

 

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

 

We depend onour distribution 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 ofillness or injury relating to food quality or food handling are common in thefood service industry, and a number of these claims may exist at any giventime. We cannot guarantee that our internal controls and training will beeffective in preventing all food-borne illnesses. Some food-borne illnessincidents could be caused by third-party food suppliers and transportersoutside of our control. New illnesses resistant to our current precautions maydevelop in the future, or diseases with long incubation periods could arise,such as Bovine Spongiform Encephalopathy (also known as Mad Cow Disease), thatcould give rise to claims or allegations on a retroactive basis. We could beadversely affected by negative publicity resulting from food quality orhandling claims at one or more of our restaurants. Food-borne illnesses spreadat restaurants have generated significant negative publicity at otherrestaurant chains in the past, which has had a negative impact on their resultsof operations. One or more instances of food-borne illness in one of ourrestaurants could negatively affect our restaurants’ image and sales. Theserisks exist even if it were later determined that an illness was wronglyattributed to one of our restaurants.

 

In addition,the impact of adverse publicity relating to one of our restaurants may extendbeyond that restaurant to affect some or all of our other restaurants. The riskof negative publicity is particularly great with respect to our franchisedrestaurants because we have limited ability to control their operations,especially on a real-time basis. A similar risk exists with respect tounrelated food service businesses if customers mistakenly associate them withour operations.

 

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**Weface the risk of litigation in connection with our operations.**

 

We are fromtime to time the subject of complaints or litigation from our consumersalleging illness, injury or other food quality, health or operational concerns.Adverse publicity resulting from these allegations may materially adverselyaffect us, regardless of whether the allegations are valid or whether we areultimately held liable. In addition, employee claims against us based on, amongother things, discrimination, harassment, wrongful termination or wage, restbreak and meal break issues, including those relating to overtime compensation,may divert our financial and management resources that would otherwise be usedto benefit the future performance of our operations. We have been subject tosuch claims from time to time.

 

In 2001, wesettled an individual labor-related legal claim and two class actions relatingto overtime and other wage payments at our Bakers Square restaurants inCalifornia for a total of $8.9 million plus attorneys’ fees and expenses.

 

We were a defendant in twopurported class action claims in California related to overtime and other wagepayments. The first class action claim was brought in October 2003 by twoformer employees and one current employee, and the second class action claimwas brought in May 2004 by two former employees. The parties entered intoa settlement agreement which was approved June 1, 2005. Under the terms ofthe settlements, we agreed to pay up to an aggregate of $6.55 million for thealleged claims and associated legal fees, subject to partial indemnification asnoted below.

 

We filed a lawsuit on December 3, 2004 against the formershareholders of Midway Investors Holdings Inc. (the former parent of VICORPRestaurants, Inc.), including certain members of current management, inthe Circuit Court of Cook County, Illinois seeking indemnification for all ofthe damages related to such litigation under the purchase agreement dated June 14,2003 pursuant to which VICORP Restaurants, Inc. was acquired, in additionto the assertion of other claims.

 

The former shareholders of Midway Investors Holdings Inc. filed alawsuit on December 22, 2004 in Suffolk County Superior Court inMassachusetts.  The former shareholdersof Midway Investors Holdings Inc. claimed, among other allegations, that weimproperly sought indemnification and denied liability for the portion of thedamages in the previously mentioned class action lawsuits that arose followingthe closing of the June 2003 acquisition, and for certain settlements forwhich they claim they did not receive appropriate notice or approval rights.

 

The former shareholders of Midway Investors Holdings Inc. haveacknowledged they are liable to us for the pre-closing portion of settlementagreements. During the fourth quarter of fiscal 2004, we established areceivable of $3.4 million on our consolidated balance sheet for the formershareholders’ estimated portion of the settlement.   In the third quarter of 2005, the $6.55million reserve mentioned above was reduced to $5.3 million, as the informationregarding the ultimate costs was finalized by the trustee.  The associated receivable from the formerMidway shareholders was reduced by $0.8 million, in conjunction with thereduction to the estimated reserve for the settlement agreements, resulting in areceivable balance of $2.65 million

 

We have, through our parent VIAcquisition Corp., entered into an agreement to settle claims brought againstthe former shareholders of Midway Investor Holdings Inc., in the Circuit Courtof Cook County, Illinois, seeking indemnification under the purchase agreementdated June 14, 2003 and to settle claims brought against us by the formershareholders of Midway Investor Holdings Inc. in the Superior Court, Departmentof Trial Court in the Commonwealth of Massachusetts, Business LitigationSection, seeking release of the escrow funds under the purchase agreement. Inconnection with the settlement of these claims, VI Acquisition Corp. received asettlement payment of $2.65 million in December 2005.

 

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

 

Our businessis subject to seasonal fluctuations that may vary depending upon the region inwhich a particular restaurant is located. In addition, the sales of our piestypically increase 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. Adverseweather conditions can also negatively impact our financial results. Forexample, 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.

 

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**Wemay incur additional costs or liabilities and lose revenues and profits as aresult of government regulation.**

 

Our businessis subject to extensive federal, state and local government regulation,including regulations related to the preparation and sale of food, the sale ofalcoholic beverages, 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 local rules andregulations could impair our ability to continue operating our business.

 

All of ourrestaurants located in California and some of our restaurants in the Midwestsell beer and wine. Typically, each restaurant’s license to sell alcoholicbeverages must be renewed annually and may be suspended or revoked at any timefor cause. Alcoholic beverage control regulations relate to various aspects ofdaily operations of our restaurants, including the minimum age of patrons andemployees, hours of operation, advertising, wholesale purchasing and inventorycontrol, handling and storage.

 

Ourrestaurants that sell beer and wine are also subject to “dram shop” laws, whichallow a person to sue us if that person was injured by a legally intoxicatedperson who was wrongfully served alcoholic beverages at one of our restaurants.A judgment against us under a dram shop law could exceed our liabilityinsurance coverage policy limits and could result in substantial liability forus and have a material adverse effect on our profitability.

 

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

 

**Wemay be locked into long-term and non-cancelable leases that we want to cancel,and may be unable to renew leases that we want to extend at the end of theirterms.**

 

Many of ourcurrent leases are non-cancelable and typically have terms ranging from 15 to20 years and renewal options for terms ranging from ten to 20 years. Leasesthat we enter into in the future likely will also be long-term andnon-cancelable and have similar renewal options. If we close a restaurant, wemay remain committed to perform our obligations under the applicable lease,which would include, among other things, payment of the base rent for thebalance of the lease term. As of November 3, 2005, we were responsible forlease payments at 4 closed restaurant locations. Additionally, the potentiallosses associated with our inability to cancel leases may result in our keepingopen restaurant locations that are performing significantly below targetedlevels. As a result, ongoing lease operations at closed or underperformingrestaurant locations could impair our results of operations.

 

In addition,at the end of the lease term and any renewal period for a restaurant, we may beunable to renew the lease without substantial additional cost, if at all. As aresult, we may be required to close or relocate a restaurant, which couldsubject us to construction and other costs and risks, and could have a materialadverse effect on our business and results of operations.

 

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

 

Food servicebusinesses are often affected by changes in consumer tastes, national, regionaland local economic conditions and demographic trends. Factors such as trafficpatterns, local demographics and the type, number and location of competingrestaurants may adversely affect the performance of individual locations. Inaddition, inflation and increased food and energy costs may harm the restaurantindustry in general and our locations in particular. Adverse changes in any ofthese factors could reduce consumer traffic or impose practical limits onpricing, which could harm our business. Our continued success will depend inpart on our ability to anticipate, identify and respond to changing consumerpreferences and economic conditions.

 

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The success ofour restaurants is significantly influenced by the attractiveness and conditionof our 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 business may be adversely affected by laws restricting smoking inrestaurants, particularly in areas where smoking is only allowed in restaurantsthat serve alcohol, since most of our restaurants do not serve alcohol. Adversechanges involving any of these factors could further reduce our guest traffic andimpose practical limits on pricing, which could further reduce our revenues andoperating income.

 

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

 

Our futuregrowth may be a function, in part, of acquisitions of other restaurants. To theextent that we grow through acquisitions, we will face the operational andfinancial risks commonly encountered with that type of a strategy. We wouldalso face operational risks, such as failing to assimilate the operations andpersonnel of the acquired businesses, disrupting our ongoing business,dissipating our limited management resources and impairing relationships withemployees and customers of the acquired business as a result of changes inownership and management. Additionally, we may incur additional indebtedness tofinance future acquisitions, as permitted under our senior secured creditfacility and our indenture, in which case we would also face certain financialrisks associated with the incurrence of this indebtedness, such as reductionsin our liquidity, access to capital markets and financial stability.

 

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

 

We operatethree pie manufacturing plants which produce pies for Bakers Square and VillageInn as well as third-party customers that account for a portion of currentproduction. Any prolonged disruption in the operations of any of these plants,whether as a result of technical or labor difficulties, destruction or damageto the facilities or other reasons, could result in increased costs and reducedrevenues, and our relationships with third-party customers could be harmed.

 

**Werely in part on our franchisees.**

 

We rely inpart on our Village Inn franchisees and the manner in which they operate theirlocations to develop, promote and operate our Village Inn business. Our VillageInn franchises generated revenues to us of $5.3 million during the 2005 fiscal year.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.

 

**Wecould face labor shortages that could slow our growth and increase our laborcosts.**

 

Our successdepends in part upon our ability to attract, motivate and retain qualifiedemployees, including restaurant managers, kitchen staff and servers, inquantities sufficient to keep pace with our expansion schedule and meetthe needs of our existing restaurants. A sufficient number of qualifiedindividuals of the requisite caliber to fill these positions may be in shortsupply in some areas. Additionally, competition for qualified employees couldrequire us to pay higher wages, which could result in higher labor costs. Anyfuture inability to recruit and retain qualified individuals may delay theplanned openings of new restaurants and could adversely impact our existingrestaurants. Any such delays, any material increases in employee turnover ratesin existing restaurants or any widespread employee dissatisfaction could have amaterial adverse effect on our operations. Additionally, any labor disruptionresulting from unionization efforts or otherwise could result in increasedcosts and reduced revenues. In 2003, employees at one of our pie manufacturingfacilities conducted an election to unionize our workforce of 138 employees atthat facility. This effort was unsuccessful; however, future unionizationefforts could result in our being subject to collective bargaining agreementsthat are on terms that are not as economically attractive as our currentarrangements with our employees.

 

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**Changesin employment laws may adversely affect our business.**

 

Variousfederal and state labor laws govern our relationship with our employees andaffect operating costs. These laws include minimum wage requirements, overtimeand tip credits, working conditions, unemployment tax rates, workers’compensation rates and citizenship requirements. Significant additionalgovernment-imposed increases in the following areas could materially affect ourresults of operations:

 

•      minimumwages;

 

•      mandatedhealth benefits;

 

•      paidleaves of absence;

 

•      taxreporting; or

 

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

 

**Wemay not be able to protect our trademarks, service marks, logos and otherproprietary rights.**

 

We believethat our trademarks, service marks, logos and other proprietary rights areimportant to our success and our competitive position. Accordingly, we protectour trademarks, service marks, logos and proprietary rights. However, theactions taken by us may be inadequate to prevent imitation of our products andconcepts by others or to prevent others from claiming violations of theirtrademarks, service marks, logos and proprietary rights by us. In addition, ourintellectual property rights may not have the value that we believe they have.If we are unsuccessful in protecting our intellectual property rights, or ifanother party prevails in litigation against us relating to our intellectualproperty rights, we may incur significant costs and may be required to changecertain aspects of our operations.

 

**Weface risks associated with environmental laws.**

 

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

 

•      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,under applicable 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 or industrialfacilities. Such properties previously contained underground storage tanks, andsome of these properties may currently contain abandoned underground storagetanks. It is possible that petroleum products and other contaminants may havebeen released at or migrated beneath our properties into or through the soil orgroundwater. Under applicable federal and state environmental laws, we, as thecurrent owner or operator of these sites, may be jointly and severally liablefor the costs of investigation and remediation of any contamination. If we arefound liable for the costs of remediation of contamination at any of theseproperties, our operating expenses would likely increase and our operatingresults could be materially adversely affected. Environmental conditionsrelating to our prior, existing or future restaurants or restaurant sites couldhave a material adverse effect on our business and results of operations.

 

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

 

Our seniorexecutives are important to our success because they have been instrumental insetting our strategic direction, operating our business, identifying,recruiting and training key personnel, identifying expansion opportunities andarranging necessary financing. Losing the services of any of these individualscould adversely affect our business until a suitable replacement could befound. See “Item 10. Directors and Executive Officers of the Registrant.”

 

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**Weare controlled by affiliates of Wind Point**.

 

As a result oftheir control 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 interestsof Wind Point may not in all cases be aligned with the interests of our otherequity holders and the holders of our indebtedness. For example, if weencounter financial difficulties or are unable to pay our debts as they mature,the interests of Wind Point as a holder of equity might conflict with theinterests of our other equity holders and the holders of our indebtedness. WindPoint also may have an interest in pursuing acquisitions, divestitures,financings or other transactions that, in its judgment, could enhance itsequity investment, even though such transactions might involve risks to otherequity holders and the holders of our indebtedness.

 

We have twoindependent directors (as defined under the federal securities laws) on ourBoard of Directors and, as a result, our Board of Directors and Audit Committeehave not met, and do not meet, the standard “independence” requirements thatwould be applicable if our equity securities were traded on the Nasdaq NationalMarket or the New York Stock Exchange.

 

**Item2.****                    Properties.**

 

We own ourexecutive offices consisting of approximately 93,050 square feet in Denver,Colorado. In addition, we own two pie production facilities, each withapproximately 63,000 square feet, located in Chaska, Minnesota and Oak Forest,Illinois, and we lease a pie production facility consisting of approximately68,000 square feet located in Santa Fe Springs, California. We believe that ourcurrent office and operating space is suitable and adequate for its intendedpurposes and that we have the ability to increase production at our pieproduction facilities without significant capital expenditures.

 

Ourrestaurants for both Village Inn and Bakers Square provide seating capacity forapproximately 120 to 180 customers and typically average around 5,000 squarefeet. We currently own the land and building at eight of our restaurantproperties. The rest of our company-operated restaurants are leased, in wholeor in part.

 

We also lease11 restaurants that we sublease to franchisees and lease four restaurants thatwe sublease to others. All of our other franchise restaurants are leased orowned directly by the respective franchisees.  As of November 3, 2005, we owned one idle property.

 

Our seniorsecured credit facility is secured by a lien on all of our assets, includingour real properties.

 

**Locations*.***  As of November 3, 2005, we and ourfranchisees operated 387 restaurants as follows:

 

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**VillageInn restaurants:**

 
| **State of operation** | ** ** | **Number of  company-  operated  restaurants** | ** ** | **Number of  franchised  restaurants** | ** ** | **Total  number of  restaurants** | ** ** |
|------------------------|------------|------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------|------------|
| Alaska                 |       | —                                         |       | 3                                      |       | 3                                 |       |
| Arizona                |       | 23                                             |       | —                                 |       | 23                                |       |
| Arkansas               |       | —                                         |       | 4                                      |       | 4                                 |       |
| Colorado               |       | 36                                             |       | 16                                     |       | 52                                |       |
| Florida                |       | 13                                             |       | 15                                     |       | 28                                |       |
| Illinois               |       | 2                                              |       | 1                                      |       | 3                                 |       |
| Iowa                   |       | 17                                             |       | 4                                      |       | 21                                |       |
| 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                  |       | 1                                              |       | 8                                      |       | 9                                 |       |
| Utah                   |       | 13                                             |       | 2                                      |       | 15                                |       |
| Virginia               |       | —                                         |       | 1                                      |       | 1                                 |       |
| Washington             |       | —                                         |       | 3                                      |       | 3                                 |       |
| Wyoming                |       | —                                         |       | 9                                      |       | 9                                 |       |
| Total                  |       | 135                                            |       | 100                                    |       | 235                               |       |

 

**BakersSquare restaurants:**

 
| **State of operation** | ** ** | **Number of  company-  operated  restaurants** | ** ** | **Number of  franchised  restaurants** | ** ** | **Total  number of  restaurants** | ** ** |
|------------------------|------------|------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------|------------|
| California             |       | 48                                             |       | —                                 |       | 48                                |       |
| Illinois               |       | 47                                             |       | —                                 |       | 47                                |       |
| Indiana                |       | 4                                              |       | —                                 |       | 4                                 |       |
| Iowa                   |       | 3                                              |       | —                                 |       | 3                                 |       |
| Michigan               |       | 9                                              |       | —                                 |       | 9                                 |       |
| Minnesota              |       | 25                                             |       | —                                 |       | 25                                |       |
| Ohio                   |       | 8                                              |       | —                                 |       | 8                                 |       |
| Wisconsin              |       | 8                                              |       | —                                 |       | 8                                 |       |
| Total                  |       | 152                                            |       | —                                 |       | 152                               |       |

 

**Leaseexpirations**

 

In fiscal 2006,leases for 15 of our properties are scheduled to expire.  Of these expiring leases, we plan to exerciseoptions to extend the lease term on 13 properties.  Of the two leases we expect to let expire,both are associated with currently operating restaurants which will close.

 

18

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** **

**Item3.****                    Legalproceedings.**

 

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

 

We were adefendant in two purported class action claims in California related toovertime and other wage payments. The first class action claim was brought in October 2003by two former employees and one current employee, and the second class actionclaim was brought in May 2004 by two former employees. Theparties entered into a settlement agreement which was approved June 1,2005. Under the terms of the settlements, we agreed to pay up to an aggregateof $6.55 million for the alleged claims and associated legal fees, subject topartial indemnification as noted below.

 

We filed a lawsuit on December 3, 2004 against the formershareholders of Midway Investors Holdings Inc. (the former parent of VICORPRestaurants, Inc.), including certain members of current management, inthe Circuit Court of Cook County, Illinois seeking indemnification for all ofthe damages related to such litigation under the purchase agreement dated June 14,2003 pursuant to which VICORP Restaurants, Inc. was acquired, in additionto the assertion of other claims.

 

The former shareholders of Midway Investors Holdings Inc. filed alawsuit on December 22, 2004 in Suffolk County Superior Court inMassachusetts.  The former shareholdersof Midway Investors Holdings Inc. claimed, among other allegations, that weimproperly sought indemnification and denied liability for the portion of thedamages in the previously mentioned class action lawsuits that arose followingthe closing of the June 2003 acquisition, and for certain settlements forwhich they claim they did not receive appropriate notice or approval rights.

 

The former shareholders of Midway Investors Holdings Inc. haveacknowledged they are liable to us for the pre-closing portion of settlementagreements. During the fourth quarter of fiscal 2004, we established areceivable of $3.4 million on our consolidated balance sheet for the formershareholders’ estimated portion of the settlement.   In the third quarter of 2005, the $6.55million reserve mentioned above was reduced to $5.3 million, as the informationregarding the ultimate costs was finalized by the trustee.  The associated receivable from the formerMidway shareholders was reduced by $0.8 million, in conjunction with thereduction to the estimated reserve for the settlement agreements, resulting ina receivable balance of $2.65 million.

 

We have, through our parent VI Acquisition Corp., entered into anagreement to settle claims brought against the former shareholders of MidwayInvestor Holdings Inc., in the Circuit Court of Cook County, Illinois, seekingindemnification under the purchase agreement dated June 14, 2003 and tosettle claims brought against us by the former shareholders of Midway InvestorHoldings Inc. in the Superior Court, Department of Trial Court in theCommonwealth of Massachusetts, Business Litigation Section, seeking release ofthe escrow funds under the purchase agreement. In connection with the settlement of these claims, VI Acquisition Corp.received a settlement payment of $2.65 million in December 2005.

 

We believethat these matters, individually and in the aggregate, will not have asignificant adverse effect on our financial condition, and that establishedreserves adequately provide for the estimated resolution of these claims.However, a significant increase in the number of these claims or an increase inthe number of successful claims would materially adversely affect our business,prospects, financial condition, operating results or cash flows.

 

**Item 4.****                    Submission ofMatters to a Vote of Security Holders.**

 

No matters were submitted to a vote of security holders of the Companyduring the fiscal year covered by this report.

 

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

 

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

 

19

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** **

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

 

The tablebelow presents selected historical consolidated financial data. The selectedhistorical consolidated financial data for, and at the end of, the period from October 28,2002 to June 13, 2003, the period from June 14, 2003 to October 26,2003, the fiscal year ended October 28, 2004 and the fiscal year ended November 3,2005 have been derived from our audited consolidated financial statementsincluded elsewhere herein. The selected historical consolidated financial datafor, and at the end of, the period from October 30, 2000 to May 13,2001, the period from May 14, 2001 to October 28, 2001 and the fiscalyear ended October 27, 2002 have been derived from our auditedconsolidated financial statements for those periods not included elsewhereherein.

 

On May 14,2001, Midway Investors Holdings Inc. purchased VICORP Restaurants, Inc.,which was a publicly owned company prior to the acquisition. On June 14,2003, VI Acquisition Corp. purchased Midway Investors Holdings Inc. Neither ofthese holding companies has had any independent operations, and consequentlythe consolidated statements of operations of VI Acquisition Corp. and MidwayInvestors Holdings Inc. are substantially equivalent to those of VICORPRestaurants, Inc. However, as a result of applying the required purchaseaccounting rules to these acquisitions, our financial statements 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 in differentaccounting bases being applied in different periods. As a result of thesechanges, the summary financial information presented below relate to the entityspecified below for the following periods:

 
| October 30, 2000 to May 13, 2001  |   | VICORP Restaurants, Inc.  |
|---------------------------------------------|--------|--------------------------------|
| May 14, 2001 to October 28, 2001  |   | Midway Investors Holdings Inc. |
| Fiscal year ended October 27, 2002     |   | Midway Investors Holdings Inc. |
| October 28, 2002 to June 13, 2003 |   | Midway Investors Holdings Inc. |
| June 14, 2003 to October 26, 2003 |   | VI Acquisition Corp.           |
| Fiscal year ended October 28, 2004     |   | VI Acquisition Corp.           |
| Fiscal year ended November 3, 2005     |   | VI Acquisition Corp.           |

 

The followingdata should be read in conjunction with “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and our consolidatedfinancial statements and notes thereto included elsewhere in this Annual Reporton Form 10-K.

 

20

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| ** **                                                                            | ** ** | **VICORP  Restaurants,  Inc.**                                  | ** ** | **Midway  Investors Holdings Inc.**                             | ** ** | **VI  Acquisition Corp.**                       | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(In  thousands)**                                                                   | ** ** | **Period  from  October 30,  2000 to  May 13,  2001** | ** ** | **Period  from  May 14,  2001 to  October 28,  2001** | ** ** | **Fiscal  year  ended  October 27,  2002** | ** ** | **Period  from  October 28,  2002 to  June 13,  2003** | ** ** | **Period  from  June 14,  2003 to  October 26,  2003** | ** ** | **Fiscal  year  ended  October 28,  2004** | ** ** | **Fiscal  year  ended  November 3,  2005** | ** ** |
| ** **                                                                            | ** ** | ** **                                                      | ** ** | ** **                                                      | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income  statement data:**                                                           | ** ** | ** **                                                      | ** ** | ** **                                                      | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                             |       |                                                            |       |                                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Restaurant  operations                                                                |       | $                                                               | 203,494    |                                                            | $          | 170,326                                         |       | $ | 377,630 |   | $ | 243,157 |   | $ | 138,696 |   | $ | 394,667 |   | $ | 407,424 |   |
| Franchise  operations                                                                 |       | 3,219                                                           |       | 2,902                                                           |       | 5,796                                           |       | 3,448 |   | 1,916 |   | 5,057 |   | 5,280 |   |
| Total revenues                                                                        |       | 206,713                                                         |       | 173,228                                                         |       | 383,426                                         |       | 246,605 |   | 140,612 |   | 399,724 |   | 412,704 |   |
| **Cost and  expenses:**                                                               |       |                                                            |       |                                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Restaurant costs:                                                                     |       |                                                            |       |                                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Food                                                                                  |       | 60,423                                                          |       | 49,319                                                          |       | 104,298                                         |       | 66,186 |   | 37,219 |   | 106,294 |   | 106,370 |   |
| Labor                                                                                 |       | 66,359                                                          |       | 56,388                                                          |       | 122,850                                         |       | 79,016 |   | 45,500 |   | 127,251 |   | 132,000 |   |
| Other operating  expenses(1)                                                          |       | 49,820                                                          |       | 43,415                                                          |       | 94,424                                          |       | 62,201 |   | 38,302 |   | 105,438 |   | 112,314 |   |
| Franchise  operating expenses                                                         |       | 1,242                                                           |       | 1,851                                                           |       | 3,092                                           |       | 1,583 |   | 978 |   | 2,311 |   | 2,181 |   |
| General and  administrative expenses                                                  |       | 15,049                                                          |       | 12,344                                                          |       | 26,598                                          |       | 16,533 |   | 9,447 |   | 25,193 |   | 27,575 |   |
| Litigation  settlement                                                                |       | —                                                          |       | —                                                          |       | —                                          |       | — |   | — |   | 3,168 |   | (408 | ) |
| Goodwill amortization(2)                                                              |       | —                                                          |       | 462                                                             |       | —                                          |       | — |   | — |   | — |   | — |   |
| Transaction  expenses(3)                                                              |       | 15,993                                                          |       | —                                                          |       | 279                                             |       | 9,436 |   | 1,226 |   | 125 |   | 15 |   |
| Management fees                                                                       |       | —                                                          |       | —                                                          |       | 1,000                                           |       | 674 |   | 185 |   | 1,159 |   | 850 |   |
| Asset impairments                                                                     |       | —                                                          |       | —                                                          |       | —                                          |       | 96 |   | — |   | 1,101 |   | — |   |
| Operating profit  (loss)                                                              |       | (2,173                                                          | )          | 9,449                                                           |       | 30,885                                          |       | 10,880 |   | 7,755 |   | 27,684 |   | 31,807 |   |
| Interest expense                                                                      |       | 1,889                                                           |       | 8,953                                                           |       | 19,312                                          |       | 11,353 |   | 9,719 |   | 26,787 |   | 28,951 |   |
| Debt  extinguishment costs(3)                                                         |       | —                                                          |       | —                                                          |       | —                                          |       | 6,516 |   | — |   | 6,856 |   | — |   |
| Other income, net                                                                     |       | 102                                                             |       | 625                                                             |       | 787                                             |       | 433 |   | 147 |   | 522 |   | 745 |   |
| Income (loss)  before income taxes                                                    |       | (3,960                                                          | )          | 1,121                                                           |       | 12,360                                          |       | (6,556 | ) | (1,817 | ) | (5,437 | ) | 3,601 |   |
| Provision for  income taxes (benefit)                                                 |       | (2,700                                                          | )          | (711                                                            | )          | 3,882                                           |       | (3,139 | ) | (1,235 | ) | (2,912 | ) | 138 |   |
| Net income (loss)                                                                     |       | $                                                               | (1,260     | )                                                               | $          | 1,832                                           |       | $ | 8,478 |   | $ | (3,417 | ) | $ | (582 | ) | $ | (2,525 | ) | $ | 3,463 |   |
|                                                                                  |       |                                                            |       |                                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Balance  sheet data (at end of period):**                                           |       |                                                            |       |                                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                                            |       | $                                                               | 11,510     |                                                            | $          | 5,568                                           |       | $ | 16,021 |   | $ | 9,036 |   | $ | 5,326 |   | $ | 1,332 |   | $ | 2,099 |   |
| Working  deficit(4)                                                                   |       | (10,600                                                         | )          | (27,922                                                         | )          | (14,758                                         | )          | (61,111 | ) | (25,679 | ) | (16,348 | ) | (10,458 | ) |
| Total assets                                                                          |       | 208,190                                                         |       | 271,709                                                         |       | 276,248                                         |       | 270,553 |   | 376,939 |   | 384,127 |   | 409,766 |   |
| Total debt(5)                                                                         |       | 3,272                                                           |       | 93,931                                                          |       | 91,700                                          |       | 80,611 |   | 143,169 |   | 141,918 |   | 142,261 |   |
| Deemed landlord  financing liability                                                  |       | 29,477                                                          |       | 88,875                                                          |       | 89,305                                          |       | 92,209 |   | 108,140 |   | 114,670 |   | 132,038 |   |
| Total  stockholders’ equity                                                      |       | 132,826                                                         |       | 37,171                                                          |       | 45,735                                          |       | 5,592 |   | 69,588 |   | 68,045 |   | 71,871 |   |
| **Cash  flow and other financial data:**                                              |       |                                                            |       |                                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Net rent  expense:(6)                                                                 |       |                                                            |       |                                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Net rent expense,  less amortization of rent- related purchase accounting adjustments |       | 7,544                                                           |       | 6,758                                                           |       | 14,615                                          |       | 10,093 |   | 6,012 |   | 17,387 |   | 18,343 |   |
| Amortization of  rent-related purchase accounting adjustments                         |       | —                                                          |       | (139                                                            | )          | (301                                            | )          | (222 | ) | 614 |   | 1,597 |   | 1,582 |   |
| Capital  expenditures(7)                                                              |       | 6,929                                                           |       | 4,265                                                           |       | 10,599                                          |       | 9,904 |   | 9,573 |   | 16,006 |   | 21,081 |   |
| Depreciation and  amortization                                                        |       | 10,220                                                          |       | 10,141                                                          |       | 19,059                                          |       | 11,215 |   | 6,869 |   | 18,962 |   | 20,482 |   |
| Cash flow from  operating activities                                                  |       | 18,303                                                          |       | (6,581                                                          | )          | 28,657                                          |       | 12,243 |   | 5,820 |   | 25,121 |   | 24,490 |   |
| Cash flow from  investing activities                                                  |       | (6,870                                                          | )          | (178,744                                                        | )          | (10,278                                         | )          | (13,743 | ) | (154,261 | ) | (23,766 | ) | (38,871 | ) |
| Cash flow from  financing activities                                                  |       | (926                                                            | )          | 179,383                                                         |       | (7,926                                          | )          | (5,485 | ) | 144,731 |   | (5,349 | ) | 15,148 |   |
|                                                                                  |       |                                                            |       |                                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| **Ratio  data:**                                                                      |       |                                                            |       |                                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Ratio of earnings  to fixed charges(8)                                                |       | 0.6                                                             | x          | 1.1                                                             | x          | 1.4                                             | x          | 0.7 | x | 0.9 | x | 0.8 | x | 1.1 | x |
| **Operating  data:**                                                                  |       |                                                            |       |                                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Village Inn  company-operated locations (at end of period)                            |       | 108                                                             |       | 109                                                             |       | 109                                             |       | 117 |   | 118 |   | 121 |   | 135 |   |
| Bakers Square  company-operated locations (at end of period)                          |       | 150                                                             |       | 147                                                             |       | 148                                             |       | 148 |   | 149 |   | 150 |   | 152 |   |
| Village Inn  franchised locations (at end of period)                                  |       | 116                                                             |       | 115                                                             |       | 115                                             |       | 106 |   | 105 |   | 103 |   | 100 |   |
| Change in same  unit sales—Village Inn                                           |       | 0.4                                                             | %          | (0.9                                                            | )%         | 0.2                                             | %          | (0.2 | )% | 0.4 | % | 2.2 | % | 0.9 | % |
| Change in same  unit sales—Bakers Square                                         |       | (0.6                                                            | )%         | (0.1                                                            | )%         | 1.8                                             | %          | (1.3 | )% | (4.7 | )% | (1.0 | )% | (3.1 | )% |
| Change in total  same unit sales                                                      |       | (0.2                                                            | )%         | (0.4                                                            | )%         | 1.1                                             | %          | (0.8 | )% | (2.6 | )% | 0.4 | % | (1.3 | )% |

 

21

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(1)  Other operating expense consists primarily of rent, utilities,depreciation, marketing expenses, supplies, repairs and maintenance, insuranceexpenses and workers’ compensation costs.

 

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

 

(3)  We incurred various expenses directly related to the May 2001 and June 2003acquisitions of the predecessor companies. The components of the transactionexpenses are as follows:

 
| ** **                                                 | ** ** | **VICORP  Restaurants,  Inc.**                                 | ** ** | **Midway Investors Holdings Inc.**                             | ** ** | **VI Acquisition Corp.**                       | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------------|------------|
| **(In thousands)**                                         | ** ** | **Period from  October 30,  2000 to  May 13,  2001** | ** ** | **Period from  May 14,  2001 to  October 28,  2001** | ** ** | **Fiscal year  ended  October 27,  2002** | ** ** | **Period from  October 28,  2002 to  June 13,  2003** | ** ** | **Period from  June 14,  2003 to  October 26,  2003** | ** ** | **Fiscal year  ended  October 28,  2004** | ** ** | **Fiscal year  ended  November 3,  2005** | ** ** |
| Transaction expenses:                                      | ** ** | ** **                                                     | ** ** | ** **                                                     | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Employment contract termination and stock  compensation(a) |       | $                                                              | 6,018      |                                                           | $          | —                                         |       | $ | — |   | $ | 5,574 |   | $ | — |   | $ | — |   | $ | — |   |
| Legal, accounting and other professional  fees             |       | 1,675                                                          |       | —                                                         |       | 279                                            |       | 3,862 |   | 49 |   | 75 |   | 15 |   |
| Severance costs(b)                                         |       | —                                                         |       | —                                                         |       | —                                         |       | — |   | 1,177 |   | — |   | — |   |
| Legal settlements(c)                                       |       | 8,300                                                          |       | —                                                         |       | —                                         |       | — |   | — |   | 50 |   | — |   |
| Total transaction expenses                                 |       | $                                                              | 15,993     |                                                           | $          | —                                         |       | $ | 279 |   | $ | 9,436 |   | $ | 1,226 |   | $ | 125 |   | $ | 15 |   |
| Debt extinguishment  costs:(d)(e)                          |       |                                                           |       |                                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Debt prepayment penalties                                  |       | $                                                              | —     |                                                           | $          | —                                         |       | $ | — |   | $ | 1,298 |   | $ | — |   | $ | 2,305 |   | — |   |
| Write-off of deferred debt financing costs                 |       | —                                                         |       | —                                                         |       | —                                         |       | 3,322 |   | — |   | 4,344 |   | — |   |
| Derivative termination                                     |       | —                                                         |       | —                                                         |       | —                                         |       | 1,896 |   | — |   | 207 |   | — |   |
| Total debt extinguishment costs                            |       | $                                                              | —     |                                                           | $          | —                                         |       | $ | — |   | $ | 6,516 |   | $ | — |   | $ | 6,856 |   | — |   |

 

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(a)  We recognized $6.0 million of compensation expense associated with theexercise of stock options in connection with the May 2001 acquisition. Inconnection with the June 2003 acquisition we paid senior employees a 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)  We made severance payments totaling $1.2 million, primarily related toour former chief executive officer, pursuant to contractual provisionstriggered by the June 2003 acquisition.

 

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

 

(d)  In connection with the June 2003 acquisition, we incurred $6.5million of debt extinguishment costs, including prepayment penalties of $1.3million relating to the prepayment of existing debt, $3.3 million of noncashwrite-offs of unamortized deferred debt financing costs related to prior creditfacilities and $1.9 million of costs related to terminating interest rate swapseffected to hedge interest rate risk on existing debt.

 

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

 

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

 

(5) Total debt at theend of each of the periods presented represents the following:

 

VICORPRestaurants, Inc.—Capitalized lease obligations and other long-term debt;

 

MidwayInvestors Holdings Inc.—Term loan and revolving borrowings outstanding under asenior secured credit facility, subordinated debt (net of original issue discounts),capitalized lease obligations and redeemable preferred stock;

 

22

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VIAcquisition Corp. (October 26, 2003) —Term loan and revolving borrowingsunder our prior senior secured credit facility, subordinated debt (net oforiginal issue discounts), capitalized lease obligations and a letter of creditsecured by our capital stock; and

 

VIAcquisition Corp. (October 28, 2004 and November 4, 2005) —Seniorunsecured notes payable, term loan and revolving borrowings under our seniorsecured credit facility, subordinated debt (net of original issue discounts)and capitalized lease obligations. Amounts exclude deemed landlord financing liability.

 

(6)  Net rent expense includes the effects of recording the known escalationsin our rent expense on a straight-line basis over the committed term of thelease. Additionally, net rent expense includes amortization of the fair marketrent adjustments which we were required to recognize under purchase accountingat the time of each of the May 2001 and June 2003 acquisitions.

 

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

 

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

 

23

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**Item 7.****                    Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

 

*The following discussion contains forward-looking statements thatinvolve numerous risks and uncertainties. Our actual results could differmaterially from those discussed in the forward-looking statements as a resultof these risks and uncertainties, including those set forth in this AnnualReport on Form 10-K under “Forward-looking statements” and under “Riskfactors.” You should read the following discussion in conjunction with “Item 6.Selected financial data” and our audited consolidated financial statements andnotes appearing elsewhere in this Annual Report on Form 10-K.*

 

**Companyprofile**

 

We operatefamily-dining restaurants under two well-recognized brands, Village Inn andBakers Square. As of November 3, 2005, our company, which was founded in1958, had 387 restaurants in 25 states, consisting of 287 company-operatedrestaurants and 100 franchised restaurants. We also produce premium pies at three strategically located facilitiesthat we serve in our restaurants or sell to third parties.

 

Our VillageInn restaurants are known for serving fresh breakfast items throughout the day,and we have leveraged our breakfast heritage to include traditional Americanfare at lunch and dinner. Our Bakers Square restaurants have built upon thereputation of our signature pies to offer quality meals at breakfast, lunch anddinner. 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 followingtable sets forth the changes to the number of company-operated and franchisedrestaurants for the periods presented below.

 
| **(Units)**                                  | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Village Inn  company-operated restaurants:   |       |     |       |     |       |     |       |
| Beginning of period                          |       | 109      |       | 118      |       | 121      |       |
| Acquired from franchisee                     |       | 8        |       | 1        |       | —   |       |
| Openings                                     |       | 2        |       | 5        |       | 14       |       |
| Conversion to a Bakers Square                |       | —   |       | (1       | )          | —   |       |
| Closings                                     |       | (1       | )          | (2       | )          | —   |       |
| End of period                                |       | 118      |       | 121      |       | 135      |       |
| Bakers  Square company-operated restaurants: |       |     |       |     |       |     |       |
| Beginning of period                          |       | 148      |       | 149      |       | 150      |       |
| Openings                                     |       | 3        |       | 3        |       | 4        |       |
| Conversion from a Village Inn                |       | —   |       | 1        |       | —   |       |
| Closings                                     |       | (2       | )          | (3       | )          | (2       | )          |
| End of period                                |       | 149      |       | 150      |       | 152      |       |
| Total company-operated restaurants           |       | 267      |       | 271      |       | 287      |       |
| Village Inn  franchised restaurants:         |       |     |       |     |       |     |       |
| Beginning of period                          |       | 115      |       | 105      |       | 103      |       |
| Openings                                     |       | 2        |       | —   |       | —   |       |
| Acquired by our company                      |       | (8       | )          | (1       | )          | —   |       |
| Closings                                     |       | (4       | )          | (1       | )          | (3       | )          |
| End of period                                |       | 105      |       | 103      |       | 100      |       |
| Total restaurants                            |       | 372      |       | 374      |       | 387      |       |

 

24

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Our Village Innand Bakers 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 waitstaff, while restaurants operating in the “limitedservice” segment serve customers at a counter or through a drive-thru window.We believe the family-dining category has a loyal customer base and stablecharacteristics. According to Crest/NPD, during the period from 2003 throughthe third quarter of 2005, the family-dining segment grew at annual ratesbetween 0% and 2.0% and is expected to be flat in 2006. In the family-diningcategory, the average per-person check generally ranges from $7 to $9, anddiners in this category are sensitive to changes in price. In 2005, the averageper-person check at Village Inn was $7.88 and the average per person check atBakers Square was $8.99. One of the important elements of our business strategyis to provide our customers with an attractive value by offering quality foodat reasonable prices. As a result, we continually strive to maintain andimprove the efficiency of our operations.

 

**Managementoverview**

 

Our restaurantrevenues are 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. We do not use new restaurants in our calculation ofsame unit sales until they are open for 18 months in order to allow a newrestaurant’s operations and sales time to stabilize and provide more meaningfulresults.  Same unit sales is an importantindicator within the restaurant industry because small changes in same unitsales can have a proportionally higher impact on operating margins because ofthe high degree of fixed costs associated with operating restaurants.

 

The VillageInn restaurant count has increased over 14% in the last three years.  We plan to continue to increase the number ofCompany-operated Village Inn restaurants significantly over the next severalyears. Within Bakers Square, the restaurant count has only increased modestlyover the last three years.   We willcontinue to evaluate our growth plans for Bakers Square based on theperformance data of the remodeled unit that opened in 2005.  We currently expect to open or acquire anestimated 33 to 37 new restaurants in fiscal 2006.

 

Like much ofthe restaurant industry, we view same unit sales as a key performance metric,at the individual unit level, within regions, across each chain and throughoutour company. With our field-level and corporate information systems, we monitorsame unit sales on a daily, weekly and four-week period basis from the chainlevel down to the individual unit level. The primary drivers of same unit salesperformance are changes in the average per-person check and changes in thenumber of customers, or customer count. Average check performance is primarilyaffected by menu price increases and changes in the purchasing habits of ourcustomers. We also monitor entrée count, exclusive of take-out business, andsales of whole pies, which we believe is indicative of overall customer trafficpatterns. To increase average unit sales, we focus marketing and promotionalefforts on increasing customer visits and sales of particular products. We alsoselectively increase prices, but are constrained by the price sensitivity ofcustomers in our market segment and our desire to maintain an attractiveprice-to-value relationship that is a fundamental characteristic of ourconcepts. For example, we raised prices in our Bakers Square units in fiscal2002 and fiscal 2003, and while some unit sales increased in fiscal 2003, guesttraffic declined. As a result, we generally have increased prices in line withincreases in the consumer price index, and expect to continue to do so in thefuture. Same unit sales performance is also affected by other factors, such asfood quality, the level and consistency of service within our restaurants, theattractiveness and physical condition of our restaurants, as well as local andnational economic factors. From fiscal 2000 through fiscal 2005, Village Innrecorded average annual same unit sales growth of 1.0% and Bakers Squarerecorded a modest average annual same unit sales decline of 0.4%.

 

As of November 3,2005, we had 100 franchised Village Inn restaurants in 19 states, operated by25 franchisees which operate one to eleven restaurants each.  Our revenue attributable to franchiseoperations, consisting primarily of royalty income has averaged approximately1.4% of our total revenues over the last three years. On February 24,2003, we acquired eight restaurants from a franchisee in Albuquerque, NewMexico for $4.6 million, which subsequently reduced our franchise revenue andincreased our company-operated restaurant revenue. Although we may increasefranchise revenues by increasing the number of franchised Village Innrestaurants, we expect that our franchise revenues will decline as a percentageof our total revenue as we emphasize growth in the number of company-operatedunits.

 

25

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In addition to unit sales, the other majorfactor affecting 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 cost element. Theprincipal drivers of labor cost are wage rates, particularly for thesignificant number of hourly employees in our restaurants, and the number oflabor hours utilized in serving our customers and operating our restaurants, aswell as health insurance costs for our employees. Wage rates are largely marketdriven, with increases to minimum wage rates causing corresponding increases inour pay scales. Differences in minimum wage laws among the various statesimpact the relative profitability of the restaurants in those states. In May 2005and again on January 1, 2006, the minimum wage rate for the state ofFlorida increased.  The state of Oregon’sminimum wage increased in both 2005 and 2006 and the states of Minnesota andWisconsin will also increase their minimum wage in 2006

 

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 basisthroughout each week. We have been able to modestly reduce our labor costpercentage from 32.3% in fiscal 2001 to 32.0% in fiscal 2005 as a result ofmodifying our internal processes to provide our restaurant managers greatercontrol over employee utilization and overtime.

 

In managing prime margin, we also focus onpercentage food cost, which is food cost expressed as a percentage of totalrevenues. Our food cost is affected by several factors, including market pricesfor the food ingredients, our effectiveness at controlling waste and properportioning, and shifts in our customers’ buying habits between low-food-costand high-food-cost menu items. Our ReMACS food cost management system withineach restaurant measures actual ingredient costs and actual customer productpurchases against an “ideal” food cost standard. Ideal food cost is calculatedwithin each restaurant based on the cost of ingredients used, assuming properportion size, adherence to recipes, limited waste and similar factors. We trackvariances from ideal food cost within each restaurant and seek to address thecauses of such variances, to the extent they are within our control, in orderto improve our percentage food cost. In addition, our centralized purchasingdepartment buys a majority of the products used in both Village Inn and BakersSquare (as well as our pie production operations), leveraging the purchasingvolumes of our restaurants and our franchisees to obtain favorable prices. Weattempt to stabilize potentially volatile prices for certain high-costingredients such as chicken, beef, coffee and dairy products for three totwelve month periods by entering into purchase contracts when we believe thatthis will improve our food cost. We also use “menu engineering” to promote menuitems which have a lower percentage food cost. However, we are vulnerable tofluctuations in food costs. Given our customers’ sensitivity to price increasesand since we only reprint our full menus every six months, our ability toadjust prices and featured menu items in response to rapidly changing commodityprices is limited.

 

Since we produce a majority of our pies forVillage Inn and Bakers Square and since our third-party pie sales historicallyhave not had, and currently do not have, a material impact on our operatingprofit, we include the net results of our pie manufacturing operations as anoffset to our food costs. As a result, any profit (or loss) from third-partypie sales has the effect of reducing (or increasing) our total 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, renegotiatingour distribution contracts and rebalancing the production among our threeplants to increase efficiency.

 

26

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As a result of our efforts, we lowered ourconsolidated food cost percentage at our restaurants to 25.8% of total revenuesfor fiscal 2005 from 28.9% of total revenues for fiscal 2001.  Controlling food costs presents ongoingchallenges.

 

Other operating expenses principally includeoccupancy costs, depreciation, supplies, repairs and maintenance, utilitycosts, 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 and insurance expenses. In order to maintain our operatingperformance levels, and to address expected cost increases, we will be requiredto increase efficiency in restaurant operations and increase sales, althoughthere is no assurance that we will be able to offset future cost increases.

 

Our 2005 financial results included:

 

•      Growthof revenues by 3.2% to $412.7 million from 2004 to 2005, reflecting the netaddition of 20 company-operated restaurants over the past two years (includingthe net addition of 16 restaurants during 2005).  Same store sales modestly decreased by 0.4%from 2004 to 2005.

•      Improvementin operating profit to $31.8 million from $27.7 million in 2004.  Our 2004 results included a $3.2 millionlitigation settlement expense.

•      Netincome improved to $3.5 million in 2005 from a $2.5 million loss in 2004,reflecting the net addition of 16 restaurants during 2005.  In fiscal 2004, we incurred debtextinguishment costs of $6.9 million and litigation settlement expense of $3.2million.  Interest expense increased $2.2million in 2005 as a result of a re-financing completed in April 2004.

 

**Factors affecting comparability**

 

On May 14, 2001, Midway InvestorsHoldings Inc., a newly created holding company, purchased VICORP Restaurants, Inc.,which was 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. As a result,the financial information for the periods from October 28, 2002 to June 13,2003, from June 14, 2003 through October 26, 2003 and from October 27,2003 through November 3, 2005 are not comparable to one another in certainrespects. The term “predecessor” refers to Midway Investors Holdings Inc. whichwas merged into VI Acquisition Corp. in connection with the refinancing.

 

As a result of these changes, the historicalfinancial information in this Annual Report on Form 10-K and relateddiscussions relate to the entity specified below for the following periods:

 

| 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.           |

 

In our analysis, we combine partial periodsinto fiscal periods to aid the discussion of financial information. Thecombined periods are not necessarily comparable and should not be given moreemphasis than the individual components.

 

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At the time of each of the two acquisitions,we also sold certain properties under sale-leaseback transactions to helpfinance the acquisitions. Specifically, we sold 48 properties in May 2001for an aggregate of $57.2 million and an additional ten properties in June 2003for an aggregate of $13.9 million. The sale-leaseback transactions haveresulted in higher interest expense as a result of recording these transactionsunder the financing method.

 

On February 24, 2003, we purchased oneof our franchisees which owned and operated eight Village Inn restaurants inthe Albuquerque, New Mexico area for $4.6 million. After the acquisition,revenue associated with these restaurants was included in our restaurantrevenues, and since the date of the acquisition we have not earned franchiserevenues from those units. Please refer to the table above for information onunit openings during the relevant periods.

 

Our fiscal year, which historically ended onthe last Sunday in October, is comprised of 52 or 53 weeks divided into fourfiscal quarters of 12 or 13, 12, 12, and 16 weeks. Fiscal 2005 was comprised of53 weeks, or 371 days.  Beginning January 22,2004, we changed our fiscal year so that it ends on the Thursday nearest to October 31stof each year. This increased fiscal 2004 by an extra four days (368 days infiscal 2004 versus 364 in fiscal 2003). This change was made to facilitaterestaurant operations by moving the end of our fiscal periods and weeklyreporting and payroll periods away from weekends when our restaurants arebusier.

 

**Critical accounting policies and estimates**

 

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 differ significantlyfrom those estimates and assumptions. We believe that the following discussionaddresses our most critical accounting policies, which are those that are mostimportant to the portrayal of our financial condition and results of operationsand require management judgment about the effect of matters that are uncertain.

 

On an ongoing basis, managementevaluates its estimates and assumptions, including those related torecoverability of long-lived assets, revenue recognition and goodwill.Management bases its estimates and assumptions on historical experience and onvarious other factors that are believed to be reasonable at the time theestimates and assumptions are made. Actual results may differ from theseestimates and assumptions under different circumstances or conditions.

 

To assist in the process, we perform internal valuation analyses and consider other market information that is publicly available. Estimates of fair value are primarily determined using discounted cash flows and market comparisons and recent transactions.  These approaches use significant estimates and assumptions including projected future cash flows (including timing), discount rate reflecting the risk inherent in future cash flows, perpetual growth rate, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables.

 

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:

 

***Inventories***

 

Inventories are stated at thelower of cost or market value. Cost is principally determined by the first-in,first-out method. The valuation of inventory requires us to estimate obsoleteor excess inventory as well as inventory that is not of saleable quality. Bothour manufactured pie inventories and individual store food inventories aresubject to spoilage. We use estimates of future demand as well as historicaltrend information to schedule manufacturing and ordering. If our demandforecast for specific products is greater than actual demand, we could berequired to record additional inventory reserves or losses which would have anegative impact on our gross margin.

 

***Property and equipment, build-to-suitprojects and assets under 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

 

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to the inception of a lease areamortized over the shorter of the useful life of the assets or a term thatincludes lease renewals, if such renewals are considered reasonablyassured.  The useful lives of assetsrange from 20 to 40 years for buildings and three to ten years for equipmentand improvements. Changes in circumstances such as the closing of units withinunderproductive markets or changes in our capital structure could result in theactual useful lives of these assets differing from our estimates.

 

For many of our build-to-suitprojects, we are considered the owner of the project during the constructionperiod in accordance with Emerging Issues Task Force (“EITF”) Issue No. 97-10,“The Effect of Lessee Involvement in Asset Construction,” because we are deemedto 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 theseller-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 real estate transactions and build-to-suit projects have not qualified forsale-leaseback accounting because of our deemed continuing involvement with thebuyer-lessor, which results in the transaction being recorded under thefinancing method.  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.

 

We review long-lived assets,including land, buildings and building improvements, for impairments on aquarterly 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 is deemedto 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 economic conditionsor changes in operating performance. During fiscal 2004, we concluded that a $1.1 million impairment chargewas necessary.  No impairment wasrecorded in fiscal 2005.

 

Following the June 2003acquisition, we analyzed fixed assets and adjusted these assets to their fairmarket values as of the date of the transaction. Asset fair market values weredetermined through receipt of third party real estate appraisals as well as theapplication of management judgment for those properties for which externalvaluations could not be obtained. These procedures resulted in our increasingthe value of property and equipment by $7.7 million following the June 2003acquisition.

 

***Leases***

 

We lease a substantial amountof 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 rent liability. Incentive paymentsreceived from landlords are recorded as deferred rent liabilities 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.  Future authoritative changes to the methodsof accounting for leases could have a material impact on our reported resultsof operations and financial position.

 

Following the June 2003acquisition, we analyzed all capital and operating leases which had not beeninitiated or renewed in the past 18 months to determine the fair market valueof these agreements. Lease fair market values were determined by obtainingcomparable rents for select locations through third-party advisors and reviewingsale-leaseback transactions within the past 18 months to determine an averagerent as a percentage of unit sales. This average was applied to each locationto determine fair value rents. As a result, an additional rent asset of $7.9million was recorded in June 2003. These additional rents are amortizedover the remaining life of the underlying lease agreements.

 

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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 capitalized $0.7 million and $0.2 million for fiscal 2005 and 2004, respectively.  We will implement FSP No. FAS 13-1 during the first quarter of fiscal 2006 and do not believe that it will a material impact upon the Company’s financial position, results of operations or cash flows.

 

***Insurance reserves***

 

We self-insure a significantportion of our employee medical insurance, workers’ compensation and generalliability insurance plans.  We had aninsurance reserve liability of $9.3 million and $8.8 million recorded as of November 3,2005 and October 28, 2004, respectively. We have obtained stop-loss insurance policies to protect from individuallosses over specified dollar values ($175,000 for employee health insuranceclaims, $250,000 workers’ compensation and $150,000 for general liability forfiscal 2005 and 2006). The full extent of certain claims, especially workers’compensation and general liability claims, may not become fully determined forseveral years. Therefore, we estimate potential obligations for liabilitiesthat have been incurred but not yet reported based upon historical data,experience, and use of outside consultants. Although management believes thatthe amounts accrued for these obligations are reasonably estimated, anysignificant increase in the number of claims or costs associated with claimsmade under these plans could have a material adverse effect on our financialresults.  Favorable workers compensationclaims experience related to recent years has permitted a reduction in workerscompensation expense accruals in fiscal 2005 versus previous years. Should the current claims experience trends continue, it is likely furtherexpense reductions will be made.

 

***Loss contingencies***

 

We maintain accrued liabilitiesand reserves relating to the resolution of certain contingent obligations.  Significant contingencies include thoserelated to litigation.  We account forcontingent obligations in accordance with Statement of Financial Accounting Standards(“SFAS”) No. 5, “Accounting for Contingencies,” as interpreted by FASBInterpretation No. 14 which requires that we assess each contingency todetermine estimates of the degree of probability and range of possiblesettlement.  Contingencies which aredeemed to be probable and where the amount of such settlement is reasonablyestimable 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 tax assets andliabilities are recognized for the expected future income tax consequences ofcarryforwards and temporary differences between the book and tax basis ofassets and liabilities. Valuation allowances are established for deferred taxassets that are deemed unrealizable.  Asof November 3, 2005, we had gross deferred tax assets of $28.6 million,which included $13.9 million of FICA tip credit carryforwards, expiring atvarious dates through 2025. Approximately $9.5 million of the FICA tip credit carryforwards weregenerated prior to our acquisition in June 2003 and are subject to anannual use limitation of $0.7 million.

 

We must assess the likelihoodthat we will be able to recover our deferred tax assets. If recovery is notlikely, valuation allowances are established. The valuation allowance is basedon our estimates of future taxable income by each jurisdiction in which weoperate, tax planning strategies and the period over which our deferred taxassets will be recoverable. In the event that actual results differ from theseestimates, we are unable to implement certain tax

 

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planning strategies or weadjust these estimates in future periods, we may need to establish anadditional valuation allowance which could have a material negative impact onour results of operations or financial position.

 

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**

 
| ** **                                    | ** ** | **Predecessor**   | ** ** | **Fiscal year**      | ** ** | **Fiscal year** | ** ** |
|-----------------------------------------------|------------|-------------------|------------|----------------------|------------|-----------------|------------|
| ** **                                    | ** ** | **Periods ended** | ** ** | **Combined**         | ** ** | **ended**       | ** ** | **ended** | ** ** |
| ** **                                    | ** ** | **June 13,** | ** ** | **October 26,** | ** ** | **2003**        | ** ** | **October 28,** | ** ** | **November 3,** | ** ** |
| **(In thousands)**                            | ** ** | **2003**          | ** ** | **2003**             | ** ** | **Period**      | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                          |       |              |       |                 |       |            |       |   |   |   |   |
| Revenues:                                     |       |              |       |                 |       |            |       |   |   |   |   |
| Restaurant operations                         |       | $                 | 243,157    |                 | $          | 138,696         |       | $ | 381,853 |   | $ | 394,667 |   | $ | 407,424 |   |
| Franchise operations                          |       | 3,448             |       | 1,916                |       | 5,364           |       | 5,057 |   | 5,280 |   |
|                                          |       | 246,605           |       | 140,612              |       | 387,217         |       | 399,724 |   | 412,704 |   |
| Costs and expenses:                           |       |              |       |                 |       |            |       |   |   |   |   |
| Restaurant costs:                             |       |              |       |                 |       |            |       |   |   |   |   |
| Food                                          |       | 66,186            |       | 37,219               |       | 103,405         |       | 106,294 |   | 106,370 |   |
| Labor                                         |       | 79,016            |       | 45,500               |       | 124,516         |       | 127,251 |   | 132,000 |   |
| Other operating expenses                      |       | 62,201            |       | 38,302               |       | 100,503         |       | 105,438 |   | 112,314 |   |
| Franchise operating expenses                  |       | 1,583             |       | 978                  |       | 2,561           |       | 2,311 |   | 2,181 |   |
| General and administrative expenses           |       | 16,533            |       | 9,447                |       | 25,980          |       | 25,193 |   | 27,575 |   |
| Litigation settlement                         |       | —            |       | —               |       | —          |       | 3,168 |   | (408 | ) |
| Transaction expenses                          |       | 9,436             |       | 1,226                |       | 10,662          |       | 125 |   | 15 |   |
| Management fees                               |       | 674               |       | 185                  |       | 859             |       | 1,159 |   | 850 |   |
| Asset impairments                             |       | 96                |       | —               |       | 96              |       | 1,101 |   | — |   |
|                                          |       | 235,725           |       | 132,857              |       | 368,582         |       | 372,040 |   | 380,897 |   |
| Operating profit                              |       | 10,880            |       | 7,755                |       | 18,635          |       | 27,684 |   | 31,807 |   |
| Interest expense                              |       | (11,353           | )          | (9,719               | )          | (21,072         | )          | (26,787 | ) | (28,951 | ) |
| Debt extinguishment costs                     |       | (6,516            | )          | —               |       | (6,516          | )          | (6,856 | ) | — |   |
| Other income, net                             |       | 433               |       | 147                  |       | 580             |       | 522 |   | 745 |   |
| Income (loss) before income taxes             |       | (6,556            | )          | (1,817               | )          | (8,373          | )          | (5,437 | ) | 3,601 |   |
| Provision for income taxes (benefit)          |       | (3,139            | )          | (1,235               | )          | (4,374          | )          | (2,912 | ) | 138 |   |
| Net income (loss)                             |       | (3,417            | )          | (582                 | )          | (3,999          | )          | (2,525 | ) | 3,463 |   |
| Preferred stock dividends and accretion       |       | (2,260            | )          | (2,627               | )          | (4,887          | )          | (7,665 | ) | (8,941 | ) |
| Net loss attributable to common  stockholders |       | $                 | (5,677     | )                    | $          | (3,209          | )          | $ | (8,886 | ) | $ | (10,190 | ) | $ | (5,478 | ) |
|                                          |       |              |       |                 |       |            |       |   |   |   |   |
| ** **                                    | ** ** | **Predecessor**   | ** ** | **Fiscal year**      | ** ** | **Fiscal year** | ** ** |
| ** **                                    | ** ** | **Periods ended** | ** ** | **Combined**         | ** ** | **ended**       | ** ** | **Ended** | ** ** |
| ** **                                    | ** ** | **June 13,** | ** ** | **October 26,** | ** ** | **2003**        | ** ** | **October 28,** | ** ** | **November 3,** | ** ** |
| ** **                                    | ** ** | **2003**          | ** ** | **2003**             | ** ** | **Period**      | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                          |       |              |       |                 |       |            |       |   |   |   |   |
| Revenues:                                     |       |              |       |                 |       |            |       |   |   |   |   |
| Restaurant operations                         |       | 98.6              | %          | 98.6                 | %          | 98.6            | %          | 98.7 | % | 98.7 | % |
| Franchise operations                          |       | 1.4               |       | 1.4                  |       | 1.4             |       | 1.3 |   | 1.3 |   |
|                                          |       | 100.0             |       | 100.0                |       | 100.0           |       | 100.0 |   | 100.0 |   |
| Costs and expenses                            |       |              |       |                 |       |            |       |   |   |   |   |
| Restaurant costs:                             |       |              |       |                 |       |            |       |   |   |   |   |
| Food                                          |       | 26.8              |       | 26.5                 |       | 26.7            |       | 26.6 |   | 25.8 |   |
| Labor                                         |       | 32.0              |       | 32.4                 |       | 32.2            |       | 31.8 |   | 32.0 |   |
| Other operating expenses                      |       | 25.2              |       | 27.2                 |       | 25.9            |       | 26.4 |   | 27.2 |   |
| Franchise operating expenses                  |       | 0.7               |       | 0.7                  |       | 0.7             |       | 0.6 |   | 0.5 |   |
| General and administrative expenses           |       | 6.7               |       | 6.7                  |       | 6.7             |       | 6.3 |   | 6.7 |   |
| Litigation settlement                         |       | —            |       | —               |       | —          |       | 0.8 |   | (0.1 | ) |
| Transaction expenses                          |       | 3.8               |       | 0.9                  |       | 2.8             |       | 0.0 |   | 0.0 |   |
| Management fees                               |       | 0.3               |       | 0.1                  |       | 0.2             |       | 0.3 |   | 0.2 |   |
| Asset impairments                             |       | 0.1               |       | —               |       | 0.0             |       | 0.3 |   | 0.0 |   |
|                                          |       | 95.6              |       | 94.5                 |       | 95.2            |       | 93.1 |   | 92.3 |   |
| Operating profit                              |       | 4.4               |       | 5.5                  |       | 4.8             |       | 6.9 |   | 7.7 |   |
| Interest expense                              |       | (4.6              | )          | (6.9                 | )          | (5.4            | )          | (6.7 | ) | (7.0 | ) |
| Debt extinguishment costs                     |       | (2.7              | )          | —               |       | (1.7            | )          | (1.7 | ) | (0.0 | ) |
| Other income, net                             |       | 0.2               |       | 0.1                  |       | 0.2             |       | 0.1 |   | 0.2 |   |
| Income (loss) before income taxes             |       | (2.7              | )          | (1.3                 | )          | (2.1            | )          | (1.4 | ) | 0.9 |   |
| Provision for income taxes (benefit)          |       | (1.3              | )          | (0.9                 | )          | (1.1            | )          | (0.8 | ) | 0.1 |   |
| Net income (loss)                             |       | (1.4              | )          | (0.4                 | )          | (1.0            | )          | (0.6 | ) | 0.8 |   |
| Preferred stock dividends and accretion       |       | (0.9              | )          | (1.9                 | )          | (1.3            | )          | (1.9 | ) | (2.2 | ) |
| Net loss attributable to common  stockholders |       | (2.3              | )%         | (2.3                 | )%         | (2.3            | )%         | (2.5 | )% | (1.3 | )% |

 

32

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**Fiscal 2005 compared to fiscal 2004**

 

***Total revenues***increased by $13.0 million, or 3.3%, to $412.7 million in fiscal 2005, from$399.7 million for fiscal 2004.  Theincrease was largely due to operating 7.3 more locations on average in fiscal2005 compared to fiscal 2004 and three extra days in fiscal 2005 compared tofiscal 2004.  However, we experienced a1.3% decrease in same 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.

 

***Food costs***increased by $0.1 million, or 0.1%, to $106.4 million in fiscal 2005, from$106.3 million for fiscal 2004.  Foodcosts as a percentage of total revenues decreased to 25.8% for fiscal 2005 from26.6% in fiscal 2004.  Food commoditycosts were very volatile in fiscal 2004 and were moderate in fiscal 2005.  Menu engineering and menu price increasesgenerally offset unfavorable commodity cost increases experienced in fiscal2004.

 

***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 totalrevenues increased to 32.0% from 31.8% over these periods.  A factor in the labor increase is the fact thatwe continue to be impacted by the increases in minimum wage in the states inwhich we operate.

 

***Other operating expenses***increased by $6.9 million, or 6.5%, to $112.3 million in fiscal 2005 from$105.4 million for fiscal 2004. Other operating expenses as a percentage oftotal revenues increased from 26.4% to 27.2% 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.

 

***General and administrative expenses***increased $2.4 million, or 9.5%, to $27.6 million for fiscal 2005 from $25.2million for fiscal 2004. This increase resulted from $0.6 million in severancecharges related to the departure of one of our officers, increased supportexpenses related to new store openings, increased audit fees due to thepreviously reported restatement of our financing obligations and increasedlegal fees related to our employment litigation.

 

***Litigation settlement***was a credit of $0.4 million in fiscal 2005 due to the net effects of the $1.2million reduction in the accrued litigation reserve as a result of the ultimatecosts being finalized by the trustee for the class action lawsuits and thecorresponding $0.8 million reduction in our indemnification receivable fromformer shareholders.  The original chargewas previously recorded in fiscal 2004 at $3.2 million.

 

***Impairment expense***of $0.0 million was incurred in fiscal 2005 compared to $1.1 million in fiscal2004.  The impairment in fiscal 2004related to 10 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***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 6.9% to 7.7% 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 8.2%, to $29.0 million in fiscal 2005, from $26.8million for fiscal 2004. Interest expense as a percentage of total revenuesincreased from 6.7% to 7.0% over these periods. This increase was due primarily to the higher average debt balances andinterest rates resulting 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 in April 2004.  These expenses included $2.3 million ofprepayment penalties, a write-off of deferred financing costs of $4.4 millionassociated with the previous obligations and settlement of outstandingderivative obligations in the amount of $0.2 million.  There were no debt extinguishment costs infiscal 2005.

 

***Provision for income taxes provision(benefit)*** for fiscal 2005 was $0.1 million.  For fiscal 2004, an income tax benefit of$2.9 million was recorded. 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.

 

***Net income (loss)***increased by $6.0 million to $3.5 million in fiscal 2005, from a $2.5 millionloss for fiscal 2004.  Net income (loss)as a percentage of total revenues improved to 0.8% from (0.6%) over these periods.

 

33

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***Preferred stock dividends and accretion***increased by $1.2 million to $8.9 million in fiscal 2005 from $7.7 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 2004 compared to the combined periodsbeginning October 28, 2002 through June 13, 2003 and beginning June 14,2003 through October 26, 2003 (together, the “Combined 2003 Period”)**

 

***Total revenues***increased by $12.5 million, or 3.2%, to $399.7 million in fiscal 2004, from$387.2 million for the Combined 2003 Period. The increase was largely due to operating six more locations on averagein fiscal 2004 compared to the Combined 2003 Period.  We also experienced a 0.4% increase in sameunit sales for fiscal 2004 over the Combined 2003 Period, and fiscal 2004 hadfour extra days compared to the Combined 2003 Period. Village Inn same unitsales for fiscal 2004 increased 2.2% over the Combined 2003 Period, and BakersSquare same unit sales decreased 1.0% over the same period. Average guestspending increased 1.6% at Village Inn and 3.7% at Bakers Square in fiscal 2004compared to the Combined 2003 Period.

 

***Food costs***increased by $2.9 million, or 2.8%, to $106.3 million in fiscal 2004, from$103.4 million for the Combined 2003 Period. Food costs as a percentage of total revenues slightly decreased to 26.6%for fiscal 2004 from 26.7% in the Combined 2003 Period.  Menu engineering and menu price increasesgenerally offset unfavorable commodity costs experienced in fiscal 2004.  Food commodity costs were very volatile infiscal 2004 and generally were very high in the early- to mid-portions of thefiscal year with moderation near the end of the fiscal year.  During the year, we experienced the highestprices we have seen in the last five years for butter, eggs, poultry, pork andfryer oil all of which are important ingredients in our products.  In addition, beef prices remained historicallyhigh and record high diesel fuel prices increased our delivery costs.

 

***Labor costs***increased by $2.8 million, or 2.2%, to $127.3 million in fiscal 2004, from$124.5 million for the Combined 2003 Period, but as a percentage of totalrevenues declined to 31.8% from 32.2% over these periods. Labor costs as apercentage of revenues decreased between the periods as the result of hourlylabor efficiencies and reduced overtime due in part to moving our end of weekto a Thursday from a Sunday which allowed for us to manage scheduling andovertime issues during less busy times of the week.  In addition, management bonus expensedecreased as a result of revisions in the management incentive bonus programsimplemented at the beginning of fiscal 2004, which established moreconservative bonus qualifier thresholds and limited the eligibility toparticipate in the bonus program based upon completion of specified trainingprograms.

 

***Other operating expenses***increased by $4.9 million, or 4.9%, to $105.4 million in fiscal 2004 from$100.5 million for the Combined 2003 Period. Other operating expenses as apercentage of total revenues increased from 25.9% to 26.4% over theseperiods.  Partially offsetting thisincrease was a decrease in advertising expenses.

 

***General and administrative expenses***decreased $0.8 million, or 3.1%, to $25.2 million for fiscal 2004 from $26.0million for the Combined 2003 Period. This decrease resulted from $0.5 millionin deferred compensation charges recorded in the Combined 2003 Period comparedto no such charges in fiscal 2004, lower direct construction oversight andsupport expenses in fiscal 2004 due to increased construction capitalizationactivity and lower manager-in-training costs in fiscal 2004.  Partially offsetting the decrease were $0.6million of expenses in fiscal 2004 related to a Bakers Square brandrevitalization study.  As a percentage ofrevenues, general and administrative expenses were 6.3% in fiscal 2004 comparedto 6.7% in the Combined 2003 Period, which was reflective of the reduced costsand economies of scale associated with the higher revenues.

 

***Litigation settlement expenses***increased by $3.2 million in fiscal 2004 due to the proposed settlement of twoclass action employee practices claims. No litigation settlement was incurred in the Combined 2003 Period.

 

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

 

***Impairment expense***of $1.1 million was incurred in fiscal 2004 compared to $0.1 million in theCombined 2003 Period.  The impairment infiscal 2004 related to 10 restaurant locations for which the estimated futurecash flows could not recover

 

34

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the carrying value of theapplicable long-term assets and the fair market value of the assets was lessthan the carrying value.  The impairmentin the Combined 2003 Period related to one such restaurant location.

 

***Operating profit***increased by $9.1 million, or 48.9%, to $27.7 million in fiscal 2004, from$18.6 million for the Combined 2003 Period. Operating profit as a percentage oftotal revenues for fiscal 2004 increased from 4.8% to 6.9% over the Combined2003 Period. This increase in profit margin was primarily due to the $10.7million of transaction costs in the Combined 2003 Period partially offset by$3.2 million of litigation settlement costs in fiscal 2004.

 

***Interest expense***increased by $5.7 million, or 27.0%, to $26.8 million in fiscal 2004, from$21.1 million for the Combined 2003 Period. Interest expense as a percentage oftotal revenues increased from 5.4% to 6.7% over these periods. This increasewas due primarily to larger outstanding average debt balances during the fiscal2004 compared to the Combined 2003 Period. The increase in interest expense infiscal 2004 was the result of the borrowings made in June 2003 to helpfinance the acquisition of our company which were outstanding for the entirefiscal 2004 year.

 

***Debt extinguishment******costs*** of $6.9 million were incurredin fiscal 2004 in connection with the refinancing of our debt that closed April 14,2004.  These expenses included $2.3million of prepayment penalties, a write-off of deferred financing costs of$4.4 million associated with the previous obligations and settlement ofoutstanding derivative obligations in the amount of $0.2 million.  Debt extinguishment costs of $6.5 millionwere recorded for the Combined 2003 Period as a result of costs related toterminating financing arrangements prior to their maturity in connection withthe June 2003 acquisition of our company. Included within the $6.5 million in debt extinguishment costs were awrite-off of deferred financing cost of $3.3 million, early termination costsof $1.3 million and costs associated with terminating unfavorable derivativeinstruments of $1.9 million.

 

***Provision for income taxes (benefit)***for fiscal 2004 was a benefit of $2.9 million. For the Combined 2003 Period, an income tax benefit of $4.4 million wasrecorded. The provisions differ from our statutory rate of 39.9% due to generalbusiness credits that we earn from FICA taxes paid on employee tips, partiallyoffset by nondeductible amortization related to franchise rights.

 

***Net income (loss)***increased by $1.5 million to a $2.5 million loss in fiscal 2004, from a $4.0million loss for the Combined 2003 Period. Net income (loss) as a percentage of total revenues improved to (0.6)%from (1.0%) over these periods.

 

***Preferred stock dividends and accretion***increased by $2.8 million to $7.7 million in fiscal 2004 from $4.9 million forthe Combined 2003 Period as a result of the redemption of $36.5 millionliquidation preference of preferred stock of Midway Investors Holdings Inc.that accrued dividends at a rate of 8.94% per annum and the issuance of $69.7million liquidation preference of preferred stock of VI Acquisition Corp. thataccrue dividends at a rate of 10.0% per annum in connection with the June 2003acquisition. Until the June 2003 acquisition, Midway Investors HoldingsInc. had, and following the June 2003 acquisition VI Acquisition Corp.has, outstanding preferred stock. Dividends on VI Acquisition Corp.’s preferredstock accumulate and compound but are not payable until dividends are declared.Covenants contained in our senior secured credit agreement and the indenturegoverning our 101⁄2% notes restrict our ability to declare dividends on ourpreferred stock.

 

**Liquidity and capital resources**

 

***Cash requirements***

 

Our principal liquidity requirementsare to continue to finance our operations, service our debt and fund capitalexpenditures for maintenance and expansion. Cash flow from operations has historically been sufficient to financecontinuing operations and meet normal debt service requirements.  However, we are highly leveraged and ourability to repay borrowings at maturity is likely to depend in part on ourability to refinance the debt when it matures, which will be contingent on ourcontinued successful operation of the business as well as other factors beyondour control, including the debt and capital market conditions at that time.

 

Our cash balance and working capital needs aregenerally low, as sales are made for cash or through credit cards that arequickly converted to cash, purchases of food and supplies and other operatingexpenses are generally paid within 30 to 60 days after receipt of invoices andlabor costs are paid bi-weekly.  Thetiming of our sales collections and vendor and labor payments are consistentwith other companies engaged in the restaurant industry.

 

During fiscal 2006, weanticipate capital expenditures before build-to-suit construction (as discussedbelow) of approximately $27 million.  Ofthis amount, $12 million is expected to be spent on new store construction, $7million for

 

35

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remodels and the remainder oncapital maintenance and other support related projects.  We currently expect to open or acquire anestimated 33 to 37 new stores in fiscal 2006.

 

In connection with our newrestaurant development program, we have entered into build-to-suit developmentagreements whereby third parties will purchase property, fund the costs todevelop new restaurant properties for us and lease the properties to us upon completion.  Under these agreements, we generally areresponsible for the construction of the restaurant, and remitting payments tothe contractors on the projects, which are subsequently reimbursed by theproperty owner.  These amounts advancedand subsequently reimbursed are not included in the anticipated capitalspending totals above.  On November 3,2005, we had outstanding receivables of $7.0 million relating to these types ofagreements.  In 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 the issuanceof the 101⁄2% senior unsecured notes, we entered into an amended and restatedsenior secured credit facility consisting of a $15.0 million term loan and a$30.0 million revolving credit facility, with a $15.0 million sub-limit forletters of credit. As of November 3, 2005, we had issued letters of creditaggregating $7.3 million and had $6.7 million of borrowings outstanding underthe senior secured revolving credit facility. The senior secured revolving credit facility permits borrowings equal tothe lesser of (a) $30.0 million and (b) 1.2 times trailing twelvemonths Adjusted EBITDA (as defined in the senior secured credit agreement)minus the original amount of the senior secured term loan.  Under this formula, as of November 3,2005, we had the ability to borrow the full $30 million, less the amount ofoutstanding letters of credit, under the senior secured revolving creditfacility, or $16.0 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 VICORP Restaurants, Inc.,and guaranteed by VI Acquisition Corp. The guarantees are also secured by thepledge of all of the outstanding capital stock of VICORP Restaurants, Inc.by VI Acquisition Corp. The term loan does not require periodic principalpayments, but requires mandatory repayments under certain events, includingproceeds from sale of assets, issuance of equity, and issuance of newindebtedness.  Both facilities 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 maximum total leverage ratio, a minimum interestcoverage ratio and a maximum capital expenditures limitation.  As of November 3, 2005, we were incompliance with these requirements.

 

We are subject to capital leaseobligations related to six of our leased properties. The principal component ofour capital lease obligations was $0.2 million as of November 3, 2005.These capital leases have expiration dates ranging from December 2004 to January 2025.We are also the prime lessee under various operating leases or agreements underdeemed landlord financing transactions for land, building and equipment forcompany-operated and franchised restaurants, pie production facilities andlocations subleased to non-affiliated third parties. These leases andagreements have initial terms ranging from 15 to 20 years and, in mostinstances, provide for renewal options ranging from five to 20 years. Theseleases and agreements expire at various dates through January 2025.

 

We have guaranteed certainleases for restaurant properties sold in 1986 and restaurant leases of certainfranchisees. Estimated minimum future rental payments remaining under theseleases were approximately $2.2 million as of November 3, 2005.

 

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On November 3, 2005, ourcontractual 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                   |       | $                          | 21.7       |   | $ | — |   | $ | — |   | $ | 21.7 |   | $ | — |   |
| 101⁄2% senior unsecured notes                 |       | 126.5                      |       | — |   | — |   | — |   | 126.5 |   |
| Total long-term debt                             |       | 148.2                      |       | — |   | — |   | 21.7 |   | 126.5 |   |
| Capital lease obligations(1) (2)            |       | 0.3                        |       | 0.1 |   | 0.2 |   | 0.0 |   | 0.0 |   |
| Operating lease obligations (2)                  |       | 194.5                      |       | 19.4 |   | 35.0 |   | 28.8 |   | 111.3 |   |
| Deemed landlord financing liability (1) (2) |       | 332.7                      |       | 13.4 |   | 27.1 |   | 27.9 |   | 264.3 |   |
| Letters of credit (3)                            |       | 7.3                        |       | 7.3 |   | — |   | — |   | — |   |
| Purchase commitments (4)                         |       | 11.0                       |       | 11.0 |   | — |   | — |   | — |   |
| Total                                            |       | $                          | 694.0      |   | $ | 51.2 |   | $ | 62.3 |   | $ | 78.4 |   | $ | 502.1 |   |

 

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(1)   Amounts payable under capital leases and thedeemed landlord financing liability represent gross rent payments, includingboth deemed principal and imputed interest components.

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

(3)   We have letters of credit outstandingprimarily to guarantee performance under insurance contracts.  The letters of credit are irrevocable andhave one-year renewable terms.

(4)   We have commitments under contracts for thepurchase of property and equipment. Portions of such contracts not completed at November 3, 2005 asstated above were not reflected as assets or liabilities in our consolidatedfinancial statements.

 

***Prior indebtedness***

 

Our previous credit facilitiesconsisted of a $25.0 million revolving credit facility, a term A loan, and aterm B loan issued pursuant to a credit agreement dated June 13,2003.  In addition, we had outstandingsubordinated indebtedness in the original principal amount of $45.0 millionissued 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 financingcosts in fiscal 2004 related to the prior debt.

 

**Sourcesand uses of cash**

 

The following table presents asummary of our cash flows from operating, investing and financing activitiesfor the periods indicated:

 

| ** **                                            | ** ** | **Predecessor**   | ** ** | ** **           | ** ** | ** **           | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                            | ** ** | **Period ended**  | ** ** | **Combined**         | ** ** | **Fiscal year**      | ** ** | **Fiscal year** | ** ** |
| ** **                                            | ** ** | **June 13,** | ** ** | **October 26,** | ** ** | **October 26,** | ** ** | **October 28,** | ** ** | **November 3,** | ** ** |
| **(In millions)**                                     | ** ** | **2003**          | ** ** | **2003**             | ** ** | **2003**             | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net cash provided by operating activities             |       | $                 | 12. 2 |                 | $          | 5.8                  |       | $ | 18.0 |   | $ | 25.1 |   | $ | 24.5 |   |
| Net cash used for investing activities                |       | (13.7             | )          | (154.2               | )          | (167.9               | )          | (23.8 | ) | (38.9 | ) |
| Net cash provided by (used for) financing  activities |       | (5.5              | )          | 144.7                |       | 139.2                |       | (5.3 | ) | 15.2 |   |
| Net increase (decrease) in cash and cash  equivalents |       | (7.0              | )          | (3.7                 | )          | (10.7                | )          | (4.0 | ) | 0.8 |   |
|                                                       |            |                   |            |                      |            |                      |            |  |  |  |  |  |  |  |  |  |

 

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***Operating activities***

 

For fiscal 2005, cash flowsfrom operating activities decreased $631,000 compared to fiscal 2004.  The decrease resulted primarily from thepayment of the settlement amounts related to the class action lawsuits, offsetby a favorable change in the funding of the cash overdraft balances whichrelate to outstanding checks issued by us.

 

For fiscal 2004, cash flowsfrom operating activities increased $6.9 million compared to the Combined 2003Period.  The increase resulted primarilyfrom the use of $11.6 million of operating cash in the Combined 2003 Period fortransaction and debt extinguishment costs compared to $2.6 million in fiscal2004.  This was partially offset in partby $6.0 million of higher interest payments in fiscal 2004 due to the debtincurred as a result of the June 2003 acquisition.

 

***Investing activities***

 

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

 

| **(In millions)**                           | ** ** | **Combined  2003  Period** | ** ** | **Fiscal  2004** | ** ** | **Fiscal  2005** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|------------------|------------|------------------|------------|
| New store construction                      |       | $                          | 6.1        |             | $          | 3.6              |       | $ | 7.9 |   |
| Existing store remodel and refurbishment    |       | 2.7                        |       | 5.8              |       | 5.8              |       |
| Point-of-sale computer roll-out             |       | 5.9                        |       | —           |       | —           |       |
| Store capital maintenance                   |       | 3.6                        |       | 4.3              |       | 4.8              |       |
| Pie production facility capital maintenance |       | 0.6                        |       | 1.4              |       | 2.0              |       |
| Corporate related                           |       | 0.6                        |       | 0.9              |       | 0.6              |       |
| Purchase of property and equipment          |       | $                          | 19.5       |             | $          | 16.0             |       | $ | 21.1 |   |

 

In addition to the capital expenditures notedabove, we spent $18.0 million, $8.4 million and $2.1 million for the purchaseof assets under deemed landlord financing liability in fiscal 2005, fiscal 2004and the Combined 2003 Period, respectively. Also, we used $153.3 million of cash in the Combined 2003 Period for theJune 2003 acquisition of our company and $3.8 million for our acquisitionof Village Inn Pancake House of Albuquerque, Inc., a former Village Innfranchisee.

 

***Financing activities***

 

Our financing activitiesprovided cash of $15.1 million during fiscal 2005, consisting principally of $9.9million of proceeds from deemed landlord financing transactions associated withour new restaurant construction, and an increase in borrowings under our creditfacility 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.

 

During the Combined 2003 Period, we generatedcash from financing activities of $139.2 million, consisting principally ofborrowings under our senior secured credit facility and $72.8 million from theissuance of new capital stock in connection with the June 2003acquisition, all of which was used to repay existing indebtedness and partiallyfund the acquisition. We also generated $18.4 million from sale-leasebacktransactions accounted for as deemed landlord financings and $5.3 million fromborrowings under our senior secured revolving credit facility.  During the Combined 2003 Period we used $2.8million of cash to repay a portion of our senior secured term loans. We alsohad $5.4 million of debt financing costs incurred in the June 2003acquisition and real estate financing transactions. In addition, we used cashof $1.0 million to redeem the shares of our former chief executive officerduring the Combined 2003 Period.

 

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**Cash management**

 

We have historically funded the majority ofour capital expenditures out of cash from operations. We have on occasionobtained, and may in the future obtain, capitalized lease financing for certainexpenditures related to equipment. Our investment requirements for newrestaurant development include requirements for acquisition of land, buildingand equipment.  Historically we haveeither acquired all of these assets for cash, or purchased building andequipment assets for cash and acquired a leasehold interest in land. We haveentered into sale-leaseback arrangements for many of the land and buildingassets that we have purchased in the past, many of which have been accountedfor as financing transactions. Since the initial net cash investment requiredfor leased units is significantly lower than for owned properties, we intend tofocus on leasing sites for future growth so that we only have to fund theequipment portion of our new restaurant capital costs from our cash flows. Webelieve that this will reduce our upfront cash requirements associated with newrestaurant growth and enable us to increase our return on these investments,although it will result in significant long term obligations under operatingleases, capital leases or financing liabilities.

 

**Newaccounting pronouncements**

 

In November 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 151, “Inventory Costs, an amendment ofARB No. 43, Chapter 4.”  SFAS No. 151clarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs and wasted material and requires that such items berecognized as current-period charges regardless of whether they meet the “soabnormal” criterion outlined in ARB No. 43.  SFAS No. 151 also introduces the conceptof “normal capacity” and requires the allocation of fixed production overheadsto inventory based on the normal capacity of the production facilities.  Unallocated overheads must be recognized asan expense in the period incurred.  SFAS No. 151is effective for inventory costs incurred during fiscal years beginning after June 15,2005.  We are implementing SFAS No. 151for our first quarter of fiscal 2006, and we currently do not believe that itwill have a material impact on our financial position, results of operations orcash flows.

 

On December 16, 2004, theFASB issued SFAS No. 123 (revised 2004), *Share-BasedPayment*, which is a revision of SFAS No. 123. SFAS 123(R)supersedes APB Opinion No. 25, *Accountingfor Stock Issued to Employees*, and amends SFAS No. 95, *Statement of Cash Flows*. Generally, theapproach in SFAS 123(R) is similar to the approach described inSFAS 123. However, SFAS 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values. Pro forma disclosure is no longeran alternative.

 

SFAS 123(R) permits publiccompanies to adopt its requirements using one of two methods:

 

1. A *“modified prospective”* method in whichcompensation cost is recognized beginning with the effective date (a) basedon the requirements of SFAS 123(R) for all share-based payments grantedafter the effective date and (b) based on the requirements ofSFAS 123 for all awards granted to employees prior to the effective dateof SFAS 123(R) that remain unvested on the effective date.

 

2. A *“modified retrospective”* method whichincludes the requirements of the modified prospective method described above,but also permits entities to restate based on the amounts previously recognizedunder SFAS 123 for purposes of pro forma disclosures for either (a) allprior periods presented or (b) prior interim periods of the year ofadoption.

 

We will use the modifiedprospective method when we adopt SFAS 123(R).  SFAS 123(R) is effective for non-publicfilers with the first annual reporting period that begins after December 15,2005. As permitted by SFAS 123, we had accounted for share-based paymentsto employees using APB Opinion 25’s intrinsic value method and, as such,generally recognize no compensation cost for employee stock options.Simultaneously with the closing of our sale transaction in April 2003, alloptions became immediately vested, thus we would not have recognized ancompensation expense. Consequently, the adoption of SFAS 123(R) will onlyimpact our results of operations if we grant share-based payments subsequent toNovember 3, 2006, the beginning of our 2007 fiscal year.

 

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS 154)”. SFAS 154 replaces APB No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 requires retrospective application of changes in accounting principle, unless it is impracticable to determine either the

 

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period-specific effects or the cumulative effect of the change. SFAS 154 defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. SFAS 154 also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error.  SFAS 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.

 

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 capitalized $0.7 million and $0.2 million for fiscal 2005 and 2004, respectively.  We will implement FSP No. FAS 13-1 during the first quarter of fiscal 2006 and do not believe that it will a material impact upon our financial position, results of operations or cash flows.

 

**Item 7A.****                 Quantitative and QualitativeDisclosures about Market Risk.**

 

We are exposed to market riskprimarily from changes in interest rates and changes in food commodity prices.

 

We are subject to changes in interest rateson borrowings under our senior secured credit facility that bear interest atfloating rates.  As of November 3, 2005,$21.7 million, or 14.7% of our total debt and capitalized lease obligations of$147.2****million, bears interest ata floating rate.  A hypothetical onehundred basis increase in interest rates for our variable rate borrowings, asof November 3, 2005, would increase our future interest expense byapproximately $0.2 million per year. This sensitivity analysis does not factor in potential changes in thelevel of our variable interest rate borrowings, or any actions that we mighttake to mitigate our exposure to changes in interest rates.

 

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 severalsources and we have the ability to modify recipes or vary our menu itemsoffered.  Historically, we have also beenable to increase certain menu prices in response to food commodity priceincreases and believe the opportunity may exist in the future.  To compensate for a hypothetical priceincrease of 10% for food ingredients, we would need to increase prices chargedto our guests by an average of approximately 2.7%.  We have not historically used financialinstruments to hedge our commodity ingredient prices.

 

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**Item 8.****                    Financial Statements and SupplementaryData.**

 

The information required underthis Item 8 is set forth on pages F-1 through F-38 of this Report.

 

**Item 9.****                    Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

 

On June 14, 2005, the Company filed a current report on Form 8-K,pursuant to Item 4 thereof, reporting that the Company had dismissed Ernst &Young LLP as its independent registered public accounting firm and haddetermined to engage Grant Thornton LLP as its independent registered publicaccounting firm for the fiscal year 2005.

 

The Company does not have any disagreements with its accountants onaccounting and financial disclosure matters.

 

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

 

**Evaluation of disclosure controlsand procedures**

 

Within the 90-day periodprior to the filing date of this report, our management, under the supervisionof our Chief Executive Officer and Chief Financial Officer, carried out anevaluation of the effectiveness of the design and operation of our disclosurecontrols and procedures pursuant to Rules 13a-14 and 15d-14 under theSecurities Exchange Act of 1934 (the “Exchange Act”), as amended.  Based upon their evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective in alerting them timely to materialinformation required to be included in our Exchange Act filings.

 

**Limitations on the effectivenessof controls**

 

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

 

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

 

Not applicable.

 

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**PART III**

 

**Item 10.****                 Directors and Executive Officers ofthe Registrant.**

 

The following table sets forth certaininformation regarding our Board of Directors and executive officers as of November 3,2005.

 
| **Name**              | ** ** | **Age** | ** ** | **Position**                                              |
|-----------------------|------------|---------|------------|-----------------------------------------------------------|
| Walter Van Benthuysen |       | 66      |       | Chairman of the Board and Director                        |
| Robert Cummings       |       | 58      |       | Director                                                  |
| Wayne Kocourek        |       | 68      |       | Director                                                  |
| Michael Solot         |       | 41      |       | Director                                                  |
| Kenneth Keymer        |       | 57      |       | Director                                                  |
| Debra Koenig          |       | 53      |       | Chief Executive Officer and Director                      |
| Anthony Carroll       |       | 54      |       | Chief Financial Officer and Chief  Administrative Officer |

 

*Debra Koenig*has been our Chief ExecutiveOfficer and one of our directors since June 2003. She joined us after a 25year career with McDonald’s Corporation. Ms. Koenig’s most recent positionwas President of the Southeast Division from 1997 to 2001. In this role she wasresponsible for McDonald’s largest U.S. division, with $4 billion in sales,consisting of approximately 2,675 franchised restaurants and 290company-operated restaurants in 14 states.

 

*Anthony Carroll*has been our Chief FinancialOfficer since February 2004 and our Chief Administrative Officer since December 2005.From June 2000 until December 2002 Mr. Carroll was ChiefFinancial Officer of ProcureZone.com, LLC, which provided an Internet-basedprocurement tool for the utility industry. Mr. Carroll was Chief FinancialOfficer for Au Bon Pain Co., Inc. and its successor, ABP Corporation, fromOctober 1988 until June 2000. Mr. Carroll began his career withPriceWaterhouseCoopers and is a Certified Public Accountant.

 

*Walter Van Benthuysen*has been one of ourdirectors and Chairman of the Board since June 2003. Mr. VanBenthuysen served as a member of the Board of Directors of Value Added BakeryHolding Company and as its Chairman of the Board from December 1998 until December 2003.He also served 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 ofColorado Baking Company and Nonni’s Food Company, Inc.

 

*Robert Cummings*has been one of our directorssince June 2003. Mr. Cummings has been a Managing Director of WindPoint Advisors LLC, a private equity investment firm, since 1987. Investmentfunds affiliated with Wind Point Advisors LLC control our company. He is also adirector of Procyon Technologies, Inc., Nonni’s Food Company, Inc.and United Subcontractors, Inc.

 

*Wayne Kocourek*has been one of our directorssince June 2003. He is Chairman, Chief Executive Officer and ManagingMember of Mid Oaks Investments LLC, a private equity investment company that hefounded in 1997. He is also currently a director of Little Rapids Corporation,Liquid Container Inc., Profile Products LLC, Environmental Materials LLC andWilkinson Industries, Inc.

 

*Michael Solot*has been one of our directorssince June 2003. He has been employed by Wind Point Advisors LLC, aprivate equity investment firm, since 1999, most recently as a ManagingDirector. Investment funds affiliated with Wind Point Advisors LLC control ourcompany. Prior to joining Wind Point, Mr. Solot spent six years in variousoperating and strategy positions with Werner Ladder Co. Mr. Solot has alsoheld positions as an Associate with Goldman, Sachs and Co. and as a Consultantwith Bain & Co.

 

*Kenneth Keymer*has been one of our directorssince August 2005. Mr. Keymer has been Chief Executive Officer of AFCEnterprises Inc., the franchisor and operator of Popeyes Chicken &Biscuits and President of Popeyes Chicken & Biscuits. From January 2002to November 2003, he was President and Co-Chief Executive Officer ofNoodles & Company.  He alsoserved as President and Chief Operating Officer of Sonic Corporation from July 1996to January 2002.  Mr. Keymerhas also served in board and/or senior executive officer positions with severalother restaurant companies, including Taco Bell, Boston Chicken and PerkinsFamily Restaurants.

 

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Ms. Koenig, Mr. VanBenthuysen, Mr. Cummings, Mr. Solot and Mr. Kocourek wereelected as directors in June 2003 pursuant to the stockholders agreementdescribed in “Item 13. Certain Relationships and Related Party Transactions.” Mr. Keymerwas appointed as a director in September 2005 pursuant to the stockholdersagreement.  Our directors serve untiltheir successors have been elected and qualified or until their earlierresignation or removal. Our executive officers are elected by and serve at thediscretion of our Board of Directors.

 

Our Board of Directors has anAudit Committee that is responsible, among other things, for overseeing ouraccounting 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 that Mr. Kocourekqualifies as an “audit committee financial expert” and that Mr. VanBenthuysen is “independent” as defined in federal securities laws.

 

VICORP Restaurants, Inc.,VI Acquisition Corp. and Village Inn Pancake House of Albuquerque, Inc.have entered into separate indemnification agreements with their directorsunder which each company has agreed to indemnify, and to advance expenses to,each of that company’s directors to the fullest extent permitted by applicablelaw with respect to liabilities they may incur in their capacities as thatcompany’s directors and officers.

 

We have adopted a BusinessConduct Policy effective as of January 24, 2005 that is applicable to allof our Board members, employees and executive officers, including our ChiefExecutive Officer (Principal Executive Officer) and Chief Financial Officer(Principal Financial Officer and Accounting Officer).

 

**Item 11.****                 Executive Compensation.**

 

The following table disclosesthe compensation awarded by us for services rendered during our last threefiscal years to the chief executive officer and to the other named executiveofficers.

 

**Summarycompensation table**

 
| ** **                   | ** ** | ** **              | ** ** | ** **     | ** ** | ** **                 | ** ** | **Long-term  Compensation** | ** ** | ** **     | ** ** |
|------------------------------|------------|-------------------------|------------|----------------|------------|----------------------------|------------|-----------------------------|------------|----------------|------------|
| ** **                   | ** ** | ** **              | ** ** | **Awards**     | ** ** | ** **                 | ** ** |
| **Name and principal**       | ** ** | **Annual compensation** | ** ** | **Restricted** | ** ** | **Securities  underlying** | ** ** | **All other**               | ** ** |
| **position**                 | ** ** | **Year**                | ** ** | **Salary**     | ** ** | **Bonus(13)**              | ** ** | **stock awards(1)**         | ** ** | **options(2)** | ** ** | **compensation** | ** ** |
| Debra Koenig(3)              |       | 2005                    |       | $              | 417,800    |                       | $          | 113,319                     |       | —         |       | — |   | $ | 552 | (4) |
| Chief Executive Officer      |       | 2004                    |       | 420,757        |       | 90,000                     |       | —                      |       | —         |       | 61,381 | (5) |
|                         |       | 2003                    |       | 251,505        |       | —                     |       | —                      |       | —         |       | 63,557 | (6) |
|                         |       |                    |       |           |       |                       |       |                        |       |           |       |   |   |
| Robert Kaltenbach            |       | 2005                    |       | $              | 438,840    |                       | $          | 118,424                     |       | —         |       | — |   | $ | 552 | (7) |
| Former Chief Operating       |       | 2004                    |       | 434,872        |       | 76,003                     |       | —                      |       | —         |       | 6,312 | (8) |
| Officer                      |       | 2003                    |       | 430,560        |       | 71,782                     |       | —                      |       | —         |       | 506,308 | (9) |
|                         |       |                    |       |           |       |                       |       |                        |       |           |       |   |   |
| Anthony Carroll(10)          |       | 2005                    |       | $              | 234,311    |                       | $          | 50,810                      |       | —         |       | — |   | $ | 16,320 | (11) |
| Chief Financial Officer and  |       | 2004                    |       | 165,796        |       | $                          | 23,381     |                        | —     |           | —     |   | 70,940 | (12) |
| Chief Administrative Officer |       | 2003                    |       | —         |       | —                     |       | —                      |       | —         |       | — |   |

 

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(1)           The shares represented by the restricted stockawards were purchased by the executives at a price equal to $1.00 per share,the fair market value on the date of each purchase, and are subject to certainrepurchase rights upon termination of employment.  The number of restricted shares held by Ms. Koenigat the end of 2003 was 86,250.  Thenumber of restricted shares held by Ms. Koenig at the end of 2004 and 2005was 89,825 and the book value of such shares at the end of last year was$89,825, which is equal to the total amount paid for the shares by Ms. Koenig.  Based on the last stock purchase prior to theend of the 2005 fiscal year, the value of Ms. Koenig’s shares is $406,907(89,825 x $4.53).  The number ofrestricted shares held by Mr. Kaltenbach at the end of 2003, 2004 and 2005was 45,000 and the book value of such shares at the end of each such year was$45,000, which is equal to the total amount paid for the shares by Mr. Kaltenbach.  Based on the last stock purchase prior to theend of the 2005 fiscal year, the value of Mr. Kaltenbach’s shares is$203,850 (45,000 x $4.53).  The number ofrestricted shares held for Mr. Carroll at the end of 2004 was 14,295.  The number of restricted shares held by Mr. Carrollat the end of 2005 was 20,097 and the book value of such shares at the end ofsuch year was $20,097, which is equal to the total amount paid for the sharesby Mr. Carroll. Based on the last stock purchase prior to the end of the2005 fiscal year, the value of Mr. Carroll’s shares is $91,039 (20,097 x$4.53).  Dividends are paid on sharesrepresented by the restricted stock awards. All of these shares vest over a five year period at the rate of 20% peryear, beginning on the respective date of purchase, and will become fullyvested upon a change in control.

 

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(2)           Prior to 2003, Mr. Kaltenbach was grantedoptions to purchase shares of Midway Investors Holdings Inc.  Upon the acquisition of Midway by VIAcquisition Corp., Mr. Kaltenbach exchanged his options to purchase sharesof Midway for options to purchase preferred stock of VI Acquisition Corp.  As a result of such exchange, Mr. Kaltenbachhas an option to purchase 458.57 shares of the preferred stock of VIAcquisition Corp. at an exercise price of $24.80 per share.  The option is fully vested and exercisable.

 

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

 

(4)           Consists in 2005 of our payment of $552 interm life insurance premiums on Ms. Koenig’s behalf.

 

(5)           Consists in 2004 of payments to Ms. Koenigtotaling $60,407 for relocation expenses and our payment of $975 in term lifeinsurance premiums on Ms. Koenig’s behalf.

 

(6)           Consists in 2003 of payments to Ms. Koenigtotaling $62,938 for relocation expenses and our payment of $619 in term lifeinsurance premiums on Ms. Koenig’s behalf.

 

(7)           Consists in 2005 of our payment of $552 interm life insurance premiums on Mr. Kaltenbach’s behalf.

 

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

 

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

 

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

 

(11)         Consists in 2005 of payments to Mr. Carrolltotaling $16,000 for relocation expenses and our payment of $320 in term life insurancepremiums on Mr. Carroll’s behalf.

 

(12)         Consists in 2004 of payments to Mr. Carrolltotaling $70,582 for relocation expenses and our payment of $358 in term lifeinsurance premiums on Mr. Carroll’s behalf.

 

(13)         Consists of actual bonuses paid for fiscal2003 and 2004 and accrued bonus amounts for fiscal 2005.

 

**Compensationcommittee interlocks and insider participation**

 

Our compensation committee iscurrently comprised of Messrs. Robert Cummings and Walter VanBenthuysen.  Neither of these individuals has been at any time an officeror employee of our company. Neither member of our compensation committee servesas a member of the board of directors or compensation committee of any entitythat has one or more executive officers serving as a member of our board ofdirectors or compensation committee.

 

**Directorcompensation**

 

Mr. Keymer receives a feeof $20,000 per annum in exchange for his service on our Board of Directors,payable in substantially equal quarterly installments.  During the fourth quarter of fiscal 2005, Mr. Keymerreceived a fee of $5,000 for his Board service.

 

**Employmentand severance agreements**

 

***Employment contracts***

 

We have entered into employmentagreements with Ms. Koenig and Mr. Carroll.  Under Ms. Koenig’s employment agreement,she is entitled to receive a minimum base salary of $400,000, less applicabletax withholding, as well as an annual performance bonus targeted at 50% of basesalary.  The annual performance bonus isbased upon achievement of our annual budget that is determined by our Board inits sole discretion.

 

If Ms. Koenig’s employmentis terminated by us without “cause”, she is entitled to a severance paymentequal to 12 months of her base salary, which severance is payable over the 12month period immediately 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’s employmentagreement is substantially the same as Ms. Koenig’s, except that he isentitled to receive a minimum annual base salary of $225,000, less applicabletax withholding, and his annual performance bonus is targeted at 40% of basesalary.  In addition, if Mr. Carroll’semployment is terminated by us without “cause” (or by him for “good reason”),he is entitled to receive as severance the continuation of his base salary thenin effect for a period of one month for each month in which he was employed byus, up to a maximum of 12 months, payable in accordance with our payrollpolicy.

 

Ms. Koenig and Mr. Carrollare also each subject to noncompetition restrictions for a period of at leasttwelve months following termination of their employment and nonsolicitationrestrictions for a period of two years following employment termination.  We may, in our discretion, extend thenoncompetition period up to a maximum period of twelve additional months bysimilarly extending the period for which they are entitled to receiveseverance.

 

***Management agreements***

 

Ms. Koenig****and Mr. Carroll have entered intocertain Management Agreements with us pursuant to which they purchasedrestricted shares of our common stock at a price equal to $1.00 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.  Upon terminationof employment, all vesting ceases and the unvested shares may be repurchased byus at their original cost and the vested shares may be repurchased at fairmarket value (unless termination is for “cause” or voluntarily by the employeewithout “good reason”, in which event all of the shares may be repurchased byus at the lesser of original cost or fair market value).  In addition, pursuant to the ManagementAgreements, following the termination of Ms. Koenig’s or Mr. Carroll’semployment, 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 to Ms. Koenig’sor Mr. Carroll’s put right following death, in which case the purchaseprice will be the lesser of the foregoing amounts or the original cost of theshares.

 

Mr. Keymer entered into aManagement Agreement with us pursuant to which he purchased restricted sharesof 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 of Mr. Keymer’sservices as a member of our Board of Directors, all vesting ceases and theunvested shares may be repurchased by us at their original cost and the vestedshares may be repurchased at fair market value.

 

***Severance agreements***

 

We entered into a severanceagreement with Mr. Robert Kaltenbach, our former Chief OperatingOfficer.  Mr. Kaltenbach’semployment terminated on December 3, 2005. Pursuant to the terms of hisagreement, we will pay Mr. Kaltenbach $500,000 and a portion of the costof Mr. Kaltenbach’s health care continuation coverage under COBRA on ourscheduled salary payment dates until December 3, 2006.  In exchange for these severance payments, Mr. Kaltenbachexecuted a release of all claims against us. Mr. Kaltenbach also is subject to an agreement that prohibits himfrom competing against us for a period of 12 months following the terminationof his employment.  In January 2006we exercised our right to repurchase certain shares of our common stock andpreferred stock that had been previously acquired by Mr. Kaltenbach.  The aggregate purchase price paid to Mr. Kaltenbachin connection with such repurchase was approximately $723,000.

 

**Item 12.****                 Security Ownership of CertainBeneficial Owners and Management.**

 

All of the outstanding capital stock ofVICORP Restaurants, Inc. is held by VI Acquisition Corp. The followingtable sets forth information with respect to the beneficial ownership of all ofthe common stock of VI Acquisition Corp. as of November 3, 2005 by:

 

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

•      eachof the named executive officers;

•      eachof our directors; and

•      allof our directors and executive officers as a group.

 

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To our knowledge, each of the holders ofshares listed below has sole voting and investment power as to the shares ownedunless otherwise noted. Our equity securities are privately held and no classof our voting securities is registered pursuant to Section 12 of theExchange Act.  The information set forthherein does 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                                        |       | 48.0                                                 | %          |
| Wind Point Partners IV, L.P.(4)                                        |       | 258,289                                        |       | 18.1                                                 | %          |
| Mid Oaks Investments LLC(5)                                            |       | 171,939                                        |       | 12.0                                                 | %          |
| Debra Koenig                                                           |       | 108,905                                        |       | 7.6                                                  | %          |
| Robert Kaltenbach                                                      |       | 52,795                                         |       | 3.7                                                  | %          |
| Anthony Carroll                                                        |       | 20,097                                         |       | 1.4                                                  | %          |
| Walter Van Benthuysen                                                  |       | 29,695                                         |       | 2.1                                                  | %          |
| Robert Cummings(3)(4)(6)                                               |       | 947,690                                        |       | 66.2                                                 | %          |
| Wayne Kocourek(7)                                                      |       | 171,939                                        |       | 12.0                                                 | %          |
| Michael Solot                                                          |       | —                                         |       | —                                               |       |
| Kenneth Keymer                                                         |       | 2,901                                          |       | 0.2                                                  | %          |
| All executive officers and directors as a  group (eight persons)(6)(7) |       | 1,334,022                                      |       | 93.3                                                 | %          |

 

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

 

(2)   As of November 3, 2005, VI AcquisitionCorp. had 1,430,503 issued and outstanding shares of common stock.

 

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

 

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

 

(5)   Includes 4,298 shares held by Donald Piazzaand 4,298 shares held by Michael Kocourek for which Mid Oaks Investments LLC (“MidOaks”) holds sole voting power. Mr. Kocourek, as the Chairman, ChiefExecutive Officer and managing member of Mid Oaks may be deemed to beneficiallyown the common shares held by Mid Oaks. Mr. Kocourek disclaims beneficialownership of any such shares in which he does not have a pecuniary interest.

 

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

 

(7)   Includes 171,939 shares held by Mid Oaks that Mr. Kocourekmay be deemed to beneficially own. Mr. Kocourek disclaims beneficialownership of any such shares in which he does not have a pecuniary interest.

 

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**Item 13.****                 Certain Relationships and RelatedParty Transactions.**

 

**Professional services agreement**

 

In June 2003, VI Acquisition Corp.entered into a professional services agreement with Wind Point Investors IV,L.P. and Wind Point Investors V, L.P. pursuant to which they provide servicesrelating to corporate strategy, acquisition and divestiture strategy and adviceregarding debt and equity financings. In exchange for such services, Wind PointInvestors IV, 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 willcontinue until the occurrence of a change of control of VI Acquisition Corp.;provided that if at such time VI Acquisition Corp. pays in full all amountsowing under its existing senior secured credit facility and mezzanine creditagreement, the professional services agreement shall remain in effect as longas VI Acquisition Corp.’s current stockholders own at least 10% of the commonstock or preferred stock of VI Acquisition Corp. The professional servicesagreement, however, may be terminated by VI Acquisition Corp. if either WindPoint Investors IV, L.P. or Wind Point Investors V, L.P. is in material breachand has not cured such breach within 60 days of notice thereof. In June 2003,VI Acquisition Corp. paid Wind Point Investors IV, L.P. professional servicefees of $89,122 and paid Wind Point Investors V, L.P. professional service feesof $234,248. VI Acquisition Corp. also paid Wind Point Investors IV, L.P. andWind Point Investors V, L.P. expense reimbursement of $22,208 in 2003. Theprofessional services agreement contains customary indemnification provisionsin favor of Wind Point Investors IV, L.P., Wind Point Investors V, L.P. andtheir affiliates. Mr. Cummings is a managing director and Mr. Solotis a principal of Wind Point Advisors LLC, an affiliate of Wind Point InvestorsIV, L.P. and Wind Point Investors V, L.P.

 

**Additional equity issuances**

 

In November 2003, Wind Point PartnersIV, L.P. purchased 1,324 shares of our common stock for $1,324 and 61.075shares of our series A preferred stock for $61,075, Wind Point Partners V, L.P.purchased 3,520 shares of our common stock for $3,520 and 162.331 shares of ourseries A preferred stock for $162,331, Wind Point IV Executive AdvisorPartners, L.P. purchased ten shares of our common stock for $10 and 0.459shares of our Series A Preferred Stock for $459, Wind Point Associates IV,LLC purchased five shares of our common stock for $5 and 0.226 shares of ourseries A preferred stock for $226, Mid Oaks Investments LLC purchased 629shares of our common stock for $629 and 29.028 shares of our series A preferredstock for $29,028 and Walter Van Benthuysen purchased 72 shares of our commonstock for $72 and 3.325 shares of our series A preferred stock for $3,325.

 

In March 2004, Walter Van Benthuysenpurchased 10,000 shares of our common stock for $10,000, Debra Koenig purchased3,575 shares of our common stock for $3,575 and Anthony Carroll purchased14,295 shares of our common stock for $14,295.

 

In April 2005, Anthony Carroll purchased5,802 shares of common stock for $26,282 and 284.087 shares of our series Apreferred stock for $322,200.  In May 2005,a former employee purchased .913 shares of our series A preferred stock for$1,036.

 

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

 

**Transaction fees in connection with the June 2003acquisition**

 

In June 2003, VI Acquisition Corp.entered into a stock purchase agreement with Wind Point Partners IV, L.P., WindPoint Partners V, L.P., Wind Point IV Executive Advisor Partners, L.P., WindPoint Associates IV, LLC and certain other parties, including RobertKaltenbach, pursuant to which VI Acquisition Corp. issued common stock andseries A preferred stock. In exchange for certain services in connection withthe capitalization of VI Acquisition Corp. and VI Acquisition Corp.’s

 

47

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purchase of all of the capital stock ofMidway Investors Holdings Inc., VI Acquisition Corp. paid Wind Point PartnersIV, L.P. and Wind Point Partners V, L.P. a transaction fee of $749,994 and feesand expense reimbursement in the amount of $60,000. Mid Oaks Investments LLCalso received reimbursement of $120,000 of its fees and expenses associatedwith the June 2003 transaction. Wayne Kocourek, one of our directors, isthe Chairman and Chief Executive Officer of Mid Oaks Investments LLC.

 

**Item 14.****                 Principal Accounting Fees andServices.**

 

The following table sets forththe aggregate fees and related expenses for professional services provided byErnst & Young LLP (“E&Y”) and Grant Thornton LLP (“GT”), for thefiscal years ended November 3, 2005 and October 28, 2004:

 
| ** **          | ** ** | **Fiscal   2005** | ** ** | **Fiscal   2004** | ** ** |
|---------------------|------------|-------------------|------------|-------------------|------------|
| ** **          | ** ** | **GT**            | ** ** | **E&Y**       | ** ** | **E&Y** | ** ** |
| Audit fees          |       | $                 | 171,813    | (1)               | $          | 245,734 | (3) | $ | 498,014 | (4) |
| Audit-related  fees |       | —            |       | —            |       | 17,050 | (5) |
| Tax fees            |       | 7,250             | (2)        | —            |       | 3,500 | (6) |
| All other  fees     |       | —            |       | —            |       | — |   |
| Total               |       | $                 | 179,063    |              | $          | 245,734 |   | $ | 518,564 |   |

 

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(1)     Forfiscal 2005, fees for GT audit services pertained to professional servicesrendered for the audit of our consolidated financial statements ($156,063) andthe review of our quarterly report on Form 10-Q for the period ended July 14,2005 ($15,750).

 

(2)     Forfiscal 2005, fees for GT tax services pertained to tax compliance.

 

(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 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 2004, fees for E&Y audit services pertained to professional servicesrendered for the audit of our consolidated financial statements ($206,817), thereview of our quarterly report on Form 10-Q for the period ended July 8,2004 ($20,200) and assistance with our private placement debt offeringmemorandum and subsequent Registration Statement on Form S-4 (includingall amendments thereto) filed with the Securities and Exchange Commission($270,997).

 

(5)     Forfiscal 2004, fees for E&Y audit-related services pertained to audits of our401(k) Plan ($11,000) and Vacation Plan ($6,050).  The fee for the auditof the 401(k) Plan was paid directly from assets of the 401(k) Plan.

 

(6)     Forfiscal 2004, fees for E&Y tax services pertained to tax compliance.

 

**AuditCommittee pre-approval of fees.**

 

Our Audit Committee meets withthe 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-

 

48

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approved by the AuditCommittee.  The Audit Committeepre-approved all services performed by the principal accountants for fiscalyears 2005 and 2004 in accordance with the pre-approval policy.

 

**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 Indexto Financial Statements which appears on Page F-1 hereof.

 

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

 

None.

 

**3.****             Exhibits**

 

2.1           StockPurchase Agreement, dated as of April 15, 2003, by and among VIAcquisition Corp., Midway Investors Holdings Inc., the Sellers listed on Schedule 1thereto and the Preferred Holders listed on Schedule 1 thereto.  Schedules to this exhibit have been omittedpursuant to Item 601(b)(2) of Regulation S-K promulgated under theSecurities Act.  The registrant agrees tofurnish supplementally a copy of any omitted schedule to the Securitiesand Exchange Commission upon request. *

 

2.2           Amendment No. 1 toStock Purchase Agreement, dated as of June 9, 2003, by and among VIAcquisition Corp., Midway Investors Holdings Inc. and BancBoston Ventures, Inc.and Marathon Fund Limited Partnership IV as the Seller Representatives *

 

2.3           Amendment No. 2 to Stock PurchaseAgreement, dated as of June 12, 2003, by and among VI Acquisition Corp.,Midway Investors Holdings Inc. and BancBoston Ventures, Inc. and MarathonFund Limited Partnership IV as the Seller Representatives *

 

2.4           Stock Purchase Agreement, dated as of June 13,2003, by and among VI Acquisition Corp., Wind Point Partners IV, L.P., WindPoint Partners V, L.P., Wind Point IV Executive Advisor Partners, L.P., WindPoint Associates IV, LLC, Mid Oaks Investments LLC, A.G. Edwards Private EquityPartners QP II, L.P., A.G. Edwards Private Equity Partners II, L.P., DebraKoenig, Walter Van Benthuysen, Robert Kaltenbach, Joseph Trungale and the otherExecutives as defined therein.  Schedulesto this 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 omitted schedule tothe Securities and Exchange Commission upon request. *

 

3.1           Amended and RestatedArticles of Incorporation of VICORP Restaurants, Inc. *

 

3.2           Bylaws of VICORPRestaurants, Inc. *

 

3.3           Certificate of Incorporation of VI AcquisitionCorp. *

 

3.4           Bylaws of VI Acquisition Corp. *

 

3.5           Certificate of Incorporation of Village InnPancake House of Albuquerque, Inc. *

 

3.6           Bylaws of Village Inn Pancake House ofAlbuquerque, Inc. *

 

4.1           Indenture, dated as of April 14,2004, by and among VICORP Restaurants, Inc., as issuer, the SecuritiesGuarantors, as defined therein, and Wells Fargo Bank, National Association, asTrustee *

 

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

 

49

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4.3           Amendment No. 1 to Purchase Agreement,dated as of April 14, 2004, by and among VICORP Restaurants, Inc., asissuer, J.P. Morgan Securities Inc. and CIBC World Markets Corp., as initialpurchasers *

 

4.4           Registration RightsAgreement, dated as of April 14, 2004, by and among VICORP Restaurants, Inc.,as issuer, VI Acquisition Corp. and Village Inn Pancake House of Albuquerque, Inc.,as guarantors, and J.P. Morgan Securities Inc. and CIBC World Markets Corp., asinitial purchasers *

 

4.5           Form of Note(included as Exhibit B to Exhibit 4.1) *

 

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

 

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

 

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

 

10.4           Joinder Agreement, dated as of December 1,2003, by and among VI Acquisition Corp. and Wind Point V Executive AdvisorPartners, L.P. *

 

10.5           Amended and Restated Loan and SecurityAgreement, dated as of April 14, 2004, by and among VI Acquisition Corp.,VICORP Restaurants, Inc., the Lenders (as defined therein) and Wells FargoFoothill, Inc., as the arranger and administrative agent for the Lenders *

 

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

 

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

 

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

 

10.9           Nonstatutory Stock Option Agreement, datedas of June 13, 2003, by and among VI Acquisition Corp. and RobertKaltenbach *+

 

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

 

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

 

10.12         Amended and Restated Subscription Agreement,dated as of November 19, 2003, by and among VI Acquisition Corp., WindPoint Partners IV, L.P., Wind Point Partners V, L.P., Wind Point IV ExecutiveAdvisor Partners, L.P. and Wind Point Associates IV, LLC *

 

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

 

50

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

 

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

 

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

 

10.17         Amendment to Employment Agreement, dated as ofMarch 15, 2004, by and among VICORP Restaurants, Inc. and DebraKoenig *+

 

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

 

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

 

10.20         Form of Indemnification Agreement fordirectors of VICORP Restaurants, Inc. *

 

10.21         Form of Indemnification Agreement fordirectors of VI Acquisition Corp. *

 

10.22         Form of Indemnification Agreement fordirectors of Village Inn Pancake House of Albuquerque, Inc.*

 

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

 

10.24         Agreement of Settlement of Class Actions,dated February 28, 2005, by and among the plaintiffs, as defined therein,and VICORP Restaurants, Inc., as defendant.  Incorporated herein by reference to theQuarterly Report on Form 10-Q for the quarter ended January 21, 2005.

 

10.25         Letter Agreement, dated as of September 6,2005, by and among VI Acquisition Corp. and Kenneth Keymer

 

10.26         Management Agreement, dated as of September 1,2005, by and among VI Acquisition Corp. and Kenneth Keymer

 

10.27         Joinder Agreement, dated as of September 6,2005, by and among VI Acquisition Corp. and Kenneth Keymer

 

12.1           Statement RegardingComputation of Ratios of Earnings and Fixed Charges

 

14.1           Business Conduct Policy

 

21.1           Subsidiaries of theCompany

 

31.1           Certification by ourChief Executive Officer with respect to our Form 10-K for the year ended November 3,2005, pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

31.2           Certification by ourChief Financial Officer with respect to our Form 10-K for the year ended November 3,2005, pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

32.1           Certifications by ourChief Executive Officer and Chief Financial Officer with respect to our Form 10-Kfor the year ended November 3, 2005, pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

51

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*     Incorporated by reference tothe Company’s Registration Statement on Form S-4 as filed with the SEC on July 9,2004 (Registration No. 333-117263).

+     Identifies each managementcontract or compensatory plan or arrangement.

 

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

 

During the fourth quarter offiscal 2005 ended November 3, 2005, we filed the following reports on Form 8-K:

 

Current reporton Form 8-K on September 7, 2005, announcing appointment of a newmember of our Board of Directors.

 

Current reporton Form 8-K on November 3, 2005, announcing the departure of aprincipal officer.

 

52

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
| VICORP  RESTAURANTS, INC.                                 |   |
|-----------------------------------------------------------|--------|
| (Registrant)                                              |   |
|                                                      |   |
| By: /s/  Debra Koenig                                     |   | Date: February 1,  2006 |
| Debra Koenig                                              |   |
| Chief  Executive Officer                                  |   |
| (Principal  Executive Officer)                            |   |
|                                                      |   |
|                                                      |   |
| By: /s/  Anthony Carroll                                  |   | Date: February 1,  2006 |
| Anthony  Carroll                                          |   |
| Chief  Financial Officer and Chief Administrative Officer |   |
| (Principal  Financial and Accounting Officer)             |   |

 

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant, and in thecapacities and on the date indicated.

 
| **Signature / Title**                                      | ** ** | ** ** | ** **                   |
|------------------------------------------------------------|------------|------------|------------------------------|
| ** **                                                 | ** ** | ** ** | ** **                   |
| /s/ Walter  Van Benthuysen                                 |       |       | Date: February 1,  2006 |   |
| Walter Van  Benthuysen, Director and Chairman of the Board |       |       |                         |
|                                                       |       |       |                         |
| /s/ Robert  Cummings                                       |       |       | Date: February 1,  2006 |   |
| Robert  Cummings, Director                                 |       |       |                         |
|                                                       |       |       |                         |
| /s/ Kenneth  Keymer                                        |       |       | Date: February 1,  2006 |   |
| Kenneth  Keymer, Director                                  |       |       |                         |
|                                                       |       |       |                         |
| /s/ Wayne  Kocourek                                        |       |       | Date: February 1,  2006 |   |
| Wayne  Kocourek, Director                                  |       |       |                         |
|                                                       |       |       |                         |
| /s/ Michael  Solot                                         |       |       | Date: February 1,  2006 |   |
| Michael  Solot, Director                                   |       |       |                         |

 

53

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**VI ACQUISITION CORP.**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 

| Reports of Independent Registered Public Accounting Firms                                                                                                                                                       |   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                                                                            |   |   |
| Consolidated Balance Sheets – As of November 3, 2005 and  October 28, 2004                                                                                                                       |   |   |
|                                                                                                                                                                                                            |   |   |
| Consolidated Statements of Operations – Fiscal year ended  November 3, 2005,  fiscal year ended October 28, 2004, and periods ended October 26,  2003 and June 13, 2003                |   |   |
|                                                                                                                                                                                                            |   |   |
| Consolidated Statements of Cash Flows – Fiscal year ended  November 3, 2005,  fiscal year ended October 28, 2004, and periods ended October 26,  2003 and June 13, 2003                |   |   |
|                                                                                                                                                                                                            |   |   |
| Consolidated Statements of Stockholders’ Equity – Fiscal year ended  November 3, 2005,  fiscal year ended October 28, 2004, and periods ended October 26,  2003 and June 13, 2003 |   |   |
|                                                                                                                                                                                                            |   |   |
| Notes to Consolidated Financial Statements                                                                                                                                                                      |   |   |

 

F-1

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**Report of Grant Thornton LLP,**

**Independent Registered Public Accounting Firm**

 

To the Boardof Directors

VI AcquisitionCorp.

 

We haveaudited the accompanying consolidated balance sheet of VI Acquisition Corp. asof November 3, 2005 and the related consolidated statements of operations,stockholders’ equity and cash flows for the year then ended. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit.

 

We conductedour audit in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement.We were not engaged to perform an audit of the Company’s internal control overfinancial reporting.  Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of VI Acquisition Corp.at November 3, 2005 and the consolidated results of its operations and itscash flows for the year then ended, in conformity with accounting principles generallyaccepted in the United States of America.

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

 

 

Denver,Colorado

January 18,2006

 

F-2

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**Report of Ernst & Young LLP,**

**Independent Registered Public Accounting Firm**

 

To the Board of Directors

VI Acquisition Corp.

 

We haveaudited the accompanying consolidated balance sheet of VI Acquisition Corp. asof October 28, 2004, and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for the year ended October 28,2004 and the period from June 14, 2003 through October 26, 2003.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

We conductedour audits 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 auditsincluded consideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

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

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

 

 

Denver, Colorado

December 10, 2004

 

F-3

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**Report of Ernst & Young LLP,**

**Independent Registered Public Accounting Firm**

 

To the Board of DirectorsMidway Investors Holdings Inc.

 

We haveaudited the accompanying consolidated statements of operations, stockholders’equity, and cash flows of Midway Investors Holdings Inc. (the predecessorcompany to VI Acquisition Corp.) for the period from October 28, 2002through June 13, 2003. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audit.

 

We conductedour audit 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 ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated results of operations and cash flows ofMidway Investors Holdings Inc. for the period from October 28, 2002through June 13, 2003, in conformity with U.S. generally acceptedaccounting principles.

 

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

 

 

Denver, Colorado

December 22, 2003

 

F-4

----

** **

**VI Acquisition Corp.**

**Consolidated balance sheets**

 
| **(In thousands, except share  data)**                                                                                                                                                                                                               | ** ** | **November 3, 2005** | ** ** | **October 28, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                                                                                                                                                                                                                           | ** ** | ** **                | ** ** | ** **                | ** ** |
| **Assets**                                                                                                                                                                                                                                           | ** ** | ** **                | ** ** | ** **                | ** ** |
| Current  assets:                                                                                                                                                                                                                                     |       |                      |       |                      |       |
| Cash and cash equivalents                                                                                                                                                                                                                            |       | $                         | 2,099      |                      | $          | 1,332 |   |
| Receivables, net                                                                                                                                                                                                                                     |       | 15,756                    |       | 11,915                    |       |
| Inventories                                                                                                                                                                                                                                          |       | 12,425                    |       | 12,245                    |       |
| Deferred income taxes, short-term                                                                                                                                                                                                                    |       | 1,431                     |       | 4,673                     |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                            |       | 3,425                     |       | 3,194                     |       |
| Prepaid rent                                                                                                                                                                                                                                         |       | 2,172                     |       | 238                       |       |
| Income tax receivable                                                                                                                                                                                                                                |       | 733                       |       | 270                       |       |
| Total current assets                                                                                                                                                                                                                                 |       | 38,041                    |       | 33,867                    |       |
| Property and  equipment, net                                                                                                                                                                                                                         |       | 86,459                    |       | 80,316                    |       |
| Assets under  deemed landlord financing liability, net                                                                                                                                                                                               |       | 126,146                   |       | 110,342                   |       |
| Long-term  receivables, net                                                                                                                                                                                                                          |       | —                    |       | —                    |       |
| Goodwill                                                                                                                                                                                                                                             |       | 91,881                    |       | 91,881                    |       |
| Trademarks  and tradenames                                                                                                                                                                                                                           |       | 42,600                    |       | 42,600                    |       |
| Franchise  rights, net of accumulated amortization of $1,434 and $841                                                                                                                                                                                |       | 10,765                    |       | 11,358                    |       |
| Other  assets, net                                                                                                                                                                                                                                   |       | 13,874                    |       | 13,763                    |       |
| Total assets                                                                                                                                                                                                                                         |       | $                         | 409,766    |                      | $          | 384,127 |   |
| **Liabilities  and stockholders’ equity**                                                                                                                                                                                                       |       |                      |       |                      |       |
| Current  liabilities:                                                                                                                                                                                                                                |       |                      |       |                      |       |
| Current maturities of long-term debt and  capitalized lease obligations                                                                                                                                                                              |       | $                         | 63         |                      | $          | 201 |   |
| Cash overdraft                                                                                                                                                                                                                                       |       | 6,341                     |       | 3,190                     |       |
| Accounts payable                                                                                                                                                                                                                                     |       | 13,291                    |       | 13,174                    |       |
| Accrued compensation                                                                                                                                                                                                                                 |       | 8,066                     |       | 7,138                     |       |
| Accrued taxes                                                                                                                                                                                                                                        |       | 7,746                     |       | 7,992                     |       |
| Other accrued expenses                                                                                                                                                                                                                               |       | 12,992                    |       | 18,520                    |       |
| Total current liabilities                                                                                                                                                                                                                            |       | 48,499                    |       | 50,215                    |       |
| Long-term  debt                                                                                                                                                                                                                                      |       | 147,013                   |       | 141,469                   |       |
| Capitalized  lease obligations                                                                                                                                                                                                                       |       | 185                       |       | 248                       |       |
| Deemed  landlord financing liability                                                                                                                                                                                                                 |       | 132,038                   |       | 114,670                   |       |
| Deferred  income taxes, long-term                                                                                                                                                                                                                    |       | —                    |       | 1,360                     |       |
| Other  noncurrent liabilities                                                                                                                                                                                                                        |       | 9,097                     |       | 7,057                     |       |
| Total liabilities                                                                                                                                                                                                                                    |       | 336,832                   |       | 315,019                   |       |
|                                                                                                                                                                                                                                                 |       |                      |       |                      |       |
| Commitments  and contingencies                                                                                                                                                                                                                       |       |                      |       |                      |       |
|                                                                                                                                                                                                                                                 |       |                      |       |                      |       |
| Stock  subject to repurchase                                                                                                                                                                                                                         |       | 1,063                     |       | 1,063                     |       |
|                                                                                                                                                                                                                                                 |       |                      |       |                      |       |
| Stockholders’  equity:                                                                                                                                                                                                                          |       |                      |       |                      |       |
| Series A Preferred Stock, $0.0001 par  value:                                                                                                                                                                                                   |       |                      |       |                      |       |
| Series A, 100,000 shares authorized,  68,944 shares issued and outstanding at November 3, 2005 and 68,659  shares issued and outstanding at October 28, 2004 (aggregate liquidation  preference of $88,178 and $78,951, respectively) |       | 89,287                    |       | 80,022                    |       |
| 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,  1,395,255 shares issued and outstanding at November 3, 2005 and  1,386,552 shares issued and outstanding at October 28, 2004                                                                   |       | —                    |       | —                    |       |
| Paid-in capital                                                                                                                                                                                                                                      |       | 2,465                     |       | 2,426                     |       |
| Treasury stock, at cost, 923.87 shares of  preferred stock and 80,603 shares of common stock at November 3, 2005  and 923.87 shares of preferred stock and 80,603 shares of common stock at  October 28, 2004                              |       | (1,004                    | )          | (1,004                    | )          |
| Accumulated deficit                                                                                                                                                                                                                                  |       | (18,877                   | )          | (13,399                   | )          |
| Total stockholders’ equity                                                                                                                                                                                                                      |       | 71,871                    |       | 68,045                    |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                      |       | $                         | 409,766    |                      | $          | 384,127 |   |

 

*See accompanying notes to consolidated financial statements.*

 

F-5

----

 

**VI Acquisition Corp.**

**Consolidated statements of operations**

 
| ** **                                             | ** ** | **VI Acquisition**                     | ** ** | **Midway**                             | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| **(In thousands)**                                     | ** ** | **Year ended  November 3,  2005** | ** ** | **Year ended  October 28,  2004** | ** ** | **Period ended  October 26,  2003** | ** ** | **Period ended  June 13,  2003** | ** ** |
| ** **                                             | ** ** | ** **                             | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                              |       |                                   |       |                                   |       |   |   |   |   |
|                                                   |       |                                   |       |                                   |       |   |   |   |   |
| Restaurant operations                                  |       | $                                      | 407,424    |                                   | $          | 394,667 |   | $ | 138,696 |   | $ | 243,157 |   |
| Franchise operations                                   |       | 5,280                                  |       | 5,057                                  |       | 1,916 |   | 3,448 |   |
|                                                   |       | 412,704                                |       | 399,724                                |       | 140,612 |   | 246,605 |   |
| Cost and  expenses:                                    |       |                                   |       |                                   |       |   |   |   |   |
| Restaurant costs:                                      |       |                                   |       |                                   |       |   |   |   |   |
| Food                                                   |       | 106,370                                |       | 106,294                                |       | 37,219 |   | 66,186 |   |
| Labor                                                  |       | 132,000                                |       | 127,251                                |       | 45,500 |   | 79,016 |   |
| Other operating expenses                               |       | 112,314                                |       | 105,438                                |       | 38,302 |   | 62,201 |   |
| Franchise operating expenses                           |       | 2,181                                  |       | 2,311                                  |       | 978 |   | 1,583 |   |
| General and administrative expenses                    |       | 27,575                                 |       | 25,193                                 |       | 9,447 |   | 16,533 |   |
| Litigation settlement                                  |       | (408                                   | )          | 3,168                                  |       | — |   | — |   |
| Transaction expenses                                   |       | 15                                     |       | 125                                    |       | 1,226 |   | 9,436 |   |
| Management fees                                        |       | 850                                    |       | 1,159                                  |       | 185 |   | 674 |   |
| Asset impairments                                      |       | —                                 |       | 1,101                                  |       | — |   | 96 |   |
|                                                   |       | 380,897                                |       | 372,040                                |       | 132,857 |   | 235,725 |   |
| Operating  profit                                      |       | 31,807                                 |       | 27,684                                 |       | 7,755 |   | 10,880 |   |
| Interest  expense                                      |       | (28,951                                | )          | (26,787                                | )          | (9,719 | ) | (11,353 | ) |
| Debt  extinguishment costs                             |       | —                                 |       | (6,856                                 | )          | — |   | (6,516 | ) |
| Other  income, net                                     |       | 745                                    |       | 522                                    |       | 147 |   | 433 |   |
| Income  (loss) before income taxes                     |       | 3,601                                  |       | (5,437                                 | )          | (1,817 | ) | (6,556 | ) |
| Provision  for income taxes (benefit)                  |       | 138                                    |       | (2,912                                 | )          | (1,235 | ) | (3,139 | ) |
| Net income  (loss)                                     |       | 3,463                                  |       | (2,525                                 | )          | (582 | ) | (3,417 | ) |
| Preferred  stock dividends                             |       | (8,941                                 | )          | (7,665                                 | )          | (2,627 | ) | (2,260 | ) |
| Net income  (loss) attributable to common stockholders |       | $                                      | (5,478     | )                                      | $          | (10,190 | ) | $ | (3,209 | ) | $ | (5,677 | ) |

 

*See accompanying notes to consolidated financial statements.*

 

F-6

----

 

**VI Acquisition Corp.**

**Consolidated statements of cash flows**

 
| ** **                                                                              | ** ** | **VI Acquisition**                    | ** ** | **Midway**                               | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------------|------------|
| **(In thousands)**                                                                      | ** ** | **Year ended  November 3, 2005** | ** ** | **Period ended  October 28,  2004** | ** ** | **Period ended  October 26,  2003** | ** ** | **Period ended  June 13,  2003** | ** ** |
| ** **                                                                              | ** ** | ** **                            | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows from operating activities:                                                   |       |                                  |       |                                     |       |   |   |   |   |
| Net income (loss)                                                                       |       | $                                     | 3,463      |                                     | $          | (2,525 | ) | $ | (582 | ) | $ | (3,417 | ) |
| Reconciliation to cash provided by  operations:                                         |       |                                  |       |                                     |       |   |   |   |   |
| Depreciation and amortization                                                           |       | 20,482                                |       | 18,962                                   |       | 6,869 |   | 11,215 |   |
| Asset impairments                                                                       |       | —                                |       | 1,101                                    |       | — |   | 96 |   |
| Amortization of financing costs and  original issue discounts                           |       | 1,255                                 |       | 1,085                                    |       | 371 |   | 1,604 |   |
| Stock-based compensation expense                                                        |       | —                                |       | —                                   |       | — |   | 2,299 |   |
| Warrants issued for anti-dilution                                                       |       | —                                |       | —                                   |       | — |   | 129 |   |
| Loss on disposition of assets                                                           |       | 110                                   |       | 438                                      |       | 141 |   | 237 |   |
| Deferred finance charge write-off                                                       |       | —                                |       | 4,344                                    |       | — |   | 3,322 |   |
| Deferred income tax benefit                                                             |       | (1,128                                | )          | (5,159                                   | )          | (1,646 | ) | (1,816 | ) |
| Interest on warrants                                                                    |       | —                                |       | 88                                       |       | 60 |   | — |   |
| Accretion of interest on deemed landlord  financing obligations                         |       | 554                                   |       | 632                                      |       | 218 |   | 267 |   |
| Changes in assets and liabilities:                                                      |       |                                  |       |                                     |       |   |   |   |   |
| Receivables, net                                                                        |       | 171                                   |       | (2,479                                   | )          | (979 | ) | (467 | ) |
| Inventories                                                                             |       | (180                                  | )          | (478                                     | )          | (2,655 | ) | 1,078 |   |
| Cash overdraft                                                                          |       | 3,151                                 |       | (1,676                                   | )          | 4,866 |   | — |   |
| Accounts payable, trade                                                                 |       | 117                                   |       | 469                                      |       | (1,047 | ) | 992 |   |
| Accrued compensation                                                                    |       | 928                                   |       | (108                                     | )          | 1,997 |   | (3,319 | ) |
| Other current assets and liabilities                                                    |       | (7,939                                | )          | 6,080                                    |       | (1,555 | ) | (742 | ) |
| Other noncurrent assets and liabilities                                                 |       | 3,506                                 |       | 4,347                                    |       | (238 | ) | 765 |   |
| Cash provided by operations                                                             |       | 24,490                                |       | 25,121                                   |       | 5,820 |   | 12,243 |   |
| Cash flows from investing activities:                                                   |       |                                  |       |                                     |       |   |   |   |   |
| Acquisitions, net of cash acquired                                                      |       | —                                |       | (8                                       | )          | (153,322 | ) | (3,834 | ) |
| Purchase of property and equipment                                                      |       | (21,081                               | )          | (16,006                                  | )          | (9,573 | ) | (9,904 | ) |
| Purchase of assets under deemed landlord  financing liability                           |       | (17,986                               | )          | (8,409                                   | )          | (2,076 | ) | (34 | ) |
| Proceeds from disposition of property                                                   |       | —                                |       | 627                                      |       | 10,704 |   | — |   |
| Collection of notes receivable                                                          |       | 196                                   |       | 30                                       |       | 6 |   | 29 |   |
| Cash used in investing activities                                                       |       | (38,871                               | )          | (23,766                                  | )          | (154,261 | ) | (13,743 | ) |
| Cash flows from financing activities:                                                   |       |                                  |       |                                     |       |   |   |   |   |
| Payments of debt, capital lease  obligations, and deemed landlord financing obligations |       | (9,333                                | )          | (165,020                                 | )          | (105,959 | ) | (8,278 | ) |
| Proceeds from issuance of debt                                                          |       | 14,275                                |       | 163,651                                  |       | 168,580 |   | — |   |
| Proceeds from deemed landlord financing                                                 |       | 9,855                                 |       | 1,820                                    |       | 15,713 |   | 2,637 |   |
| Net proceeds from issuance of preferred and  common stock                               |       | 363                                   |       | 298                                      |       | 72,774 |   | 228 |   |
| Debt issuance costs                                                                     |       | (12                                   | )          | (6,094                                   | )          | (5,377 | ) | (72 | ) |
| Repurchase of shares                                                                    |       | —                                |       | (4                                       | )          | (1,000 | ) | — |   |
| Cash provided by (used in) financing  activities                                        |       | 15,148                                |       | (5,349                                   | )          | 144,731 |   | (5,485 | ) |
|                                                                                    |       |                                  |       |                                     |       |   |   |   |   |
| Increase (decrease) in cash and cash  equivalents                                       |       | 767                                   |       | (3,994                                   | )          | (3,710 | ) | (6,985 | ) |
| Cash and cash equivalents at beginning of  period                                       |       | 1,332                                 |       | 5,326                                    |       | 9,036 |   | 16,021 |   |
| Cash and cash equivalents at end of period                                              |       | $                                     | 2,099      |                                     | $          | 1,332 |   | $ | 5,326 |   | $ | 9,036 |   |
|                                                                                    |       |                                  |       |                                     |       |   |   |   |   |
| Supplemental disclosures of cash flow  information:                                     |       |                                  |       |                                     |       |   |   |   |   |
| Cash paid during the period for:                                                        |       |                                  |       |                                     |       |   |   |   |   |
| Interest (net of amount capitalized)                                                    |       | $                                     | 27,441     |                                     | $          | 25,700 |   | $ | 7,869 |   | $ | 11,827 |   |
| Income taxes                                                                            |       | 2,728                                 |       | 1,867                                    |       | 2,188 |   | 1,878 |   |
|                                                                                    |       |                                  |       |                                     |       |   |   |   |   |
| Supplemental disclosures of non-cash  investing and financing activities:               |       |                                  |       |                                     |       |   |   |   |   |
| Build-to-suit reimbursements not yet  received                                          |       | $                                     | 7,030      |                                     | $          | 2,359 |   | $ | — |   | $ | — |   |
| Deemed landlord financing — Third party  direct pays                               |       | 2,470                                 |       | —                                   |       | — |   | — |   |
|                                                                                    |       |                                  |       |                                     |       |   |   |   |   |
| Dividends                                                                               |       | 8,941                                 |       | 7,665                                    |       | 2,627 |   | 2,260 |   |

 

*See accompanying notes to consolidated financial statements.*

 

F-7

----

 

**Midway Investors Holdings Inc.**

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

**Consolidated statements of stockholders’ equity**

 
| ** **                                         | ** ** | **Preferred  stock** | ** ** | **Common  stock** | ** ** |
|----------------------------------------------------|------------|----------------------|------------|-------------------|------------|
| ** **                                         | ** ** | **Class A**     | ** ** | **Class B**  | ** ** | **Class C** | ** ** | **Class A** | ** ** | **Class B** | ** ** | ** ** | ** ** |
| **(In thousands, except shares)**                  | ** ** | **Shares**           | ** ** | **Amount**        | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Balances at  October 27, 2002                 |       | 18,299               |       | $                 | 19,221     |   | 18,266 |   | $ | 16,807 |   | 2,380 |   | $ | 2,380 |   | 19,397 |   | 627 |   | — |   |
| Dividends on  Class A and B preferred stock   |       | —               |       | 1,027             |       | — |   | 1,025 |   | — |   | — |   | — |   | — |   | — |   |
| Class C  preferred stock issued, net          |       | —               |       | —            |       | — |   | (1,025 | ) | 1,025 |   | 1,025 |   | — |   | — |   | — |   |
| Accretion of  redeemable preferred stock           |       | —               |       | —            |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Issuance of  incentive stock options               |       | —               |       | —            |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Amortization of  deferred compensation             |       | —               |       | —            |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Issuance of  warrants                              |       | —               |       | —            |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Realization of  hedge transaction loss             |       | —               |       | —            |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Amortization of  deferred compensation             |       | —               |       | —            |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Exercise of  options                               |       | 1,543                |       | 1,544             |       | — |   | — |   | 287 |   | 287 |   | — |   | 2,431 |   | — |   |
| Exercise of  warrants                              |       | —               |       | —            |       | — |   | — |   | — |   | — |   | — |   | 1,182 |   | — |   |
| Repurchase of  Midway preferred stock              |       | (19,842              | )          | (21,792           | )          | (18,266 | ) | (16,807 | ) | (3,692 | ) | (3,692 | ) | — |   | — |   | — |   |
| Comprehensive  loss:                               |       | —               |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized loss  on hedge transactions, net of tax |       | —               |       | —            |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Net loss                                           |       | —               |       | —            |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Total  comprehensive loss                          |       | —               |       | —            |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Balances at  June 13, 2003                    |       | —               |       | —            |       | — |   | — |   | — |   | — |   | 19,397 |   | 4,240 |   | — |   |
| Elimination of  Midway equity                      |       | —               |       | —            |       | — |   | — |   | — |   | — |   | (19,397 | ) | (4,240 | ) | — |   |
| Balance at  June 13, 2003, post-transaction   |       | —               |       | $                 | —     |   | — |   | $ | — |   | — |   | $ | — |   | — |   | — |   | $ | — |   |
|                                                    |            |                      |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                         | ** ** | ** **  | ** ** | ** **    | ** ** | **Accumulated**   | ** ** | ** **       | ** ** | ** **             | ** ** |
|----------------------------------------------------|------------|-------------|------------|---------------|------------|-------------------|------------|------------------|------------|------------------------|------------|
| ** **                                         | ** ** | ** **  | ** ** | **Retained**  | ** ** | **other**         | ** ** | ** **       | ** ** | **Total**              | ** ** |
| ** **                                         | ** ** | **Paid-in** | ** ** | **Earnings**  | ** ** | **comprehensive** | ** ** | **Deferred**     | ** ** | **stockholders’** | ** ** |
| **(In thousands, except shares)**                  | ** ** | **capital** | ** ** | **(deficit)** | ** ** | **loss**          | ** ** | **compensation** | ** ** | **equity**             | ** ** |
| Balances at  October 27, 2002                 |       | $           | 3,989      |          | $          | 5,050             |       | $                | (1,290     | )                      | $          | (422 | ) | $ | 45,735 |   |
| Dividends on  Class A and B preferred stock   |       | —      |       | (2,052        | )          | —            |       | —           |       | —                 |       |
| Class C  preferred stock issued, net          |       | —      |       | —        |       | —            |       | —           |       | —                 |       |
| Accretion of  redeemable preferred stock           |       | —      |       | (212          | )          | —            |       | —           |       | (212                   | )          |
| Issuance of  incentive stock options               |       | 1,790       |       | —        |       | —            |       | (1,790           | )          | —                 |       |
| Amortization of  deferred compensation             |       | 87          |       | —        |       | —            |       | 436              |       | 523                    |       |
| Issuance of  warrants                              |       | 129         |       | —        |       | —            |       | —           |       | 129                    |       |
| Realization of  hedge transaction loss             |       | —      |       | —        |       | 1,263             |       | —           |       | 1,263                  |       |
| Amortization of  deferred compensation             |       | —      |       | —        |       | —            |       | 1,776            |       | 1,776                  |       |
| Exercise of  options                               |       | 228         |       | —        |       | —            |       | —           |       | 2,059                  |       |
| Exercise of  warrants                              |       | —      |       | —        |       | —            |       | —           |       | —                 |       |
| Repurchase of  Midway preferred stock              |       | —      |       | —        |       | —            |       | —           |       | (42,291                | )          |
| Comprehensive  loss:                               |       |        |       |          |       |              |       |             |       |                   |       |
| Unrealized loss  on hedge transactions, net of tax |       | —      |       | —        |       | 27                |       | —           |       | 27                     |       |
| Net loss                                           |       | —      |       | (3,417        | )          | —            |       | —           |       | (3,417                 | )          |
| Total  comprehensive loss                          |       | —      |       | (3,417        | )          | 27                |       | —           |       | (3,390                 | )          |
| Balances at  June 13, 2003                    |       | $           | 6,223      |          | $          | (631              | )          | —           |       | —                 |       | $ | 5,592 |   |
| Elimination of  Midway equity                      |       | (6,223      | )          | 631           |       | —            |       | —           |       | (5,592                 | )          |
| Balance at  June 13, 2003, post-transaction   |       | $           | —     |          | $          | —            |       | $                | —     |                   | $          | — |   | $ | — |   |

 

*See accompanying notes to consolidated financial statements.*

 

F-8

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**VI Acquisition Corp.**

**Consolidated statements of stockholders’ equity**

 
| ** **                                    | ** ** | **Preferred  stock** | ** ** | **Common  stock** | ** ** | **Treasury** | ** ** | **Treasury** | ** ** | ** **    | ** ** | ** **      | ** ** | **Total**              | ** ** |
|-----------------------------------------------|------------|----------------------|------------|-------------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------|------------|------------------------|------------|
| ** **                                    | ** ** | **Series A**    | ** ** | **Class A**  | ** ** | **stock**    | ** ** | **stock**    | ** ** | **Paid-in**   | ** ** | **Accumulated** | ** ** | **stockholders’** | ** ** |
| **(In  thousands, except shares)**            | ** ** | **Shares**           | ** ** | **Amount**        | ** ** | **Shares**   | ** ** | **Amount**   | ** ** | **preferred** | ** ** | **common**      | ** ** | **capital**            | ** ** | **deficit** | ** ** | **equity** | ** ** |
| Balances at  June 14, 2003               |       | —               |       | $                 | —     |         | —     |         | $          | —        |       | $               | —     |                   | $          | — |   | $ | — |   | $ | — |   | $ | — |   |
| Issuance of  preferred stock and common stock |       | 67,854               |       | 67,854            |       | 1,358,649    |       | —       |       | —        |       | —          |       | 1,358                  |       | — |   | 69,212 |   |
| Issuance of  preferred stock options          |       | —               |       | —            |       | —       |       | —       |       | —        |       | —          |       | 896                    |       | — |   | 896 |   |
| Warrants issued                               |       | —               |       | —            |       | —       |       | —       |       | —        |       | —          |       | 62                     |       | — |   | 62 |   |
| Exercise of  options                          |       | 924                  |       | 924               |       | —       |       | —       |       | —        |       | —          |       | —                 |       | — |   | 924 |   |
| Repurchase of  preferred and common shares    |       | (924                 | )          | —            |       | (60,000      | )          | —       |       | (924          | )          | (76             | )          | 16                     |       | — |   | (984 | ) |
| Dividends on Series A  preferred stock   |       | —               |       | 2,627             |       | —       |       | —       |       | —        |       | —          |       | —                 |       | (2,627 | ) | — |   |
| Preferred warrant  accretion                  |       | —               |       | 60                |       | —       |       | —       |       | —        |       | —          |       | —                 |       | — |   | 60 |   |
| Net loss                                      |       | —               |       | —            |       | —       |       | —       |       | —        |       | —          |       | —                 |       | (582 | ) | (582 | ) |
| 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 |   |

 

*See accompanying notes to consolidated financial statements.*

 

F-9

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**VI Acquisition Corp.**

**Notes to consolidated financial statements**

 

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

 

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

 

On June 14,2003, the Company acquired Midway Investors Holdings Inc. (“Midway”), and itswholly owned subsidiaries VICORP Restaurants, Inc. (“VICORP”) and VillageInn Pancake 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 aDelaware corporation originally organized by BancBoston Ventures, Inc.,Goldner Hawn Johnson & Morrison, Incorporated (“Goldner Hawn”),Fairmont Capital, Inc. and other affiliates. Midway acquired VICORP in May 2001in a “going private” stock purchase transaction accounted for under thepurchase method of accounting pursuant to SFAS No. 141. Prior to theacquisition of VICORP by Midway, VICORP operated as a publicly-traded company.

 

The Companyoperates family-style restaurants under the brand names “Bakers Square” and “VillageInn,” and franchises restaurants under the Village Inn brand name. At November 3,2005, the Company operated 287 Company-owned restaurants in 16 states. Of theCompany-owned restaurants, 152 are Bakers Squares and 135 are Village Inns,with an additional 100 franchised Village Inn restaurants in 19 states. TheCompany-owned and franchised restaurants are concentrated in Arizona,California, Florida, the Rocky Mountain region, and the upper Midwest. Inaddition, the Company operates three pie manufacturing facilities located inSanta Fe Springs, California; Oak Forest, Illinois; and Chaska, Minnesota.

 

**VIAcquisition’s purchase of Midway**

 

In connectionwith the June 14, 2003 purchase of Midway, the assets (includingspecifically identifiable intangible assets) and liabilities of the acquiredcompany were recorded at their estimated fair value of $143.2 million with theexcess of the purchase price over these amounts being recorded as goodwill of$82.8 million. Capitalization of the acquired company was funded by new seniorand subordinated debt under the terms of newly executed credit and investmentagreements dated as of June 14, 2003 (Note 7). In connection with theclosing of the purchase and subject to the terms of the stock purchaseagreement, the following transactions occurred:

 

•      Fixedassets were adjusted to their estimated fair market value, resulting in anincrease to the assets’ value of $7.7 million;

 

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

 

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

 

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

 

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

 

•      Rentsunder leases were revalued to their estimated fair market value resulting in anadditional asset of $7.9 million;

 

F-10

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

 

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

 

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

 

Theconsolidated financial statements for Midway for the period from October 28,2002 through June 13, 2003 represent the operations of the Company priorto the purchase by VI Acquisition and reflect the values established at thetime of Midway’s purchase of the Company on May 14, 2001. Therefore, theydo not reflect the effects of the purchase accounting adjustments of the June 14,2003 transaction discussed above. The consolidated financial statements andrelated notes as of November 3, 2005, October 28, 2004 and October 26,2003 and for the periods subsequent to June 14, 2003 reflect all purchaseaccounting adjustments resulting from the June 14, 2003 transaction.

 

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

 

On February 24,2003, VICORP purchased all of the outstanding shares of Village Inn PancakeHouse of Albuquerque, Inc. This transaction was accounted for as apurchase in accordance with SFAS No. 141. The purchase price wasoriginally allocated to the acquired assets (including specificallyidentifiable intangible assets) and assumed liabilities. Cash of $4.6 millionwas used to purchase net assets with the fair value of approximately $894,000,including $948,000 of property, plant and equipment resulting in goodwill of$3.7 million.  The amounts allocated forthis transaction were revalued in connection with the June 14, 2003transaction mentioned above.

 

**2.Summary of significant accounting policies**

 

**Principlesof consolidation**

 

Theaccompanying consolidated financial statements of VI Acquisition Corp. as of November 3,2005 and October 28, 2004 and for the years ended November 3, 2005, October 28,2004 and period from June 14, 2003 through October 26, 2003 includethe accounts 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.

 

Theaccompanying predecessor financial statements for the period from October 28,2002 through June 13, 2003 include the accounts of Midway, VICORP and itswholly-owned subsidiaries.

 

Allintercompany accounts and balances have been eliminated.

 

**Fiscalyear**

 

The Company’s fiscal year,which historically ended on the last Sunday in October, is comprised of 52 or53 weeks divided into four fiscal quarters of 12 or 13, 12, 12, and 16weeks.  Beginning January 22, 2004,the Company changed its fiscal year so that it ends on the Thursday nearest to October 31stof each year. This increased the fiscal year ended October 28, 2004 byfour days (368 days in fiscal 2004 versus 364 days in fiscal 2003). This changewas made to facilitate restaurant operations by moving the end of the Company’sfiscal periods and weekly reporting and payroll periods away from weekends whenthe Company’s restaurants are busier.

 

F-11

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** **

**Estimates**

 

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

 

**Cashand cash equivalents**

 

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

 

**Receivables**

 

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

 

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

 

**Concentrationsof credit risk**

 

Financialinstruments that potentially subject the Company to a concentration of creditrisk are cash and cash equivalents and receivables.  The Company maintains deposits in excess ofFDIC limits at two banks. The maximum loss that would have resulted from thisrisk amounted to approximately $132,000 at November 3, 2005, whichrepresents the excess of the deposit liabilities reported by the bank over theamounts that would have been covered by federal deposit insurance.  The Company considers the concentration ofcredit risk within its receivables to be minimal as a result of paymenthistories and the general financial condition of its third party-customers andfranchisees.

 

**Inventories**

 

Inventoriesare stated at the lower of cost (which is determined using standard cost whichapproximates a first-in, first-out basis) or market and consist of food, paperproducts and supplies. Inventories consisted of the following:

 
| **(In thousands)**                | ** ** | **November 3,  2005** | ** ** | **October 28,  2004** | ** ** |
|-----------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Production  facility inventories: |       |                       |       |                       |       |
| Raw materials                     |       | $                          | 4,408      |                       | $          | 4,353 |   |
| Finished goods                    |       | 5,059                      |       | 4,717                      |       |
|                              |       | 9,467                      |       | 9,070                      |       |
|                              |       |                       |       |                       |       |
| Restaurant  inventories           |       | 2,958                      |       | 3,175                      |       |
|                              |       | $                          | 12,425     |                       | $          | 12,245 |   |

 

F-12

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Activity inthe allowance for inventory obsolescence reserve was as follows:

 
| ** **           | ** ** | **VI Acquisition**                     | ** ** |
|----------------------|------------|----------------------------------------|------------|
| **(In thousands)**   | ** ** | **Year ended  November 3,  2005** | ** ** | **Period ended  October 28,  2004** | ** ** | **Period ended  October 26,  2003** | ** ** |
| Beginning of  period |       | $                                      | 197        |   | $ | 172 |   | $ | 187 |   |
| Additionsexpense     |       | 482                                    |       | 514 |   | 148 |   |
| Write-offs           |       | (465                                   | )          | (489 | ) | (163 | ) |
| End of  period       |       | $                                      | 214        |   | $ | 197 |   | $ | 172 |   |

 

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

 

**Renovations,improvements and repairs and maintenance**

 

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

 

The Company routinely incurs costs to repair and maintain itsfacilities and equipment, which are expensed as incurred. Suchrepairs and maintenance costs generally relate to repairs to existingequipment, fixtures or facilities, including, but not limited to, electrical,plumbing, refrigeration, air conditioning, heating, painting, tile work, roofrepairs and wood repairs. The Companyrecorded repair and maintenance expense of $9.7 million, $9.2 million, $3.4million, and $5.6  million for thefiscal years ended November 3, 2005 and October 28, 2004 and theperiods ended October 26, 2003 and June 13, 2003, respectively.

 

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

 

At the date ofthe June 14, 2003 purchase of Midway, all property and equipment wereadjusted to their estimated fair market values. This resulted in the Companyrecording an increase in its net property and equipment of $7.7 million and allsubsequent acquisitions of property and equipment are stated at cost, lessaccumulated depreciation and amortization.

 

Depreciationand amortization expense is calculated using the straight-line method. Theuseful lives of assets range from 20 to 40 years for buildings and three to tenyears for equipment and improvements. In general, assets acquired under capitalleases and 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 building and equipment and costsincurred in the development and construction of new stores.

 

For many of the Company’s build-to-suit restaurant constructionprojects, it is considered the owner of the project during the constructionperiod in accordance with Emerging Issues Task Force (“EITF”) Issue No. 97-10,“The Effect of Lessee Involvement in Asset Construction,” because the Companyis deemed 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 real estate transactions and build-to-suit restaurant constructionprojects have not qualified for sale-leaseback accounting because of its deemed

 

F-13

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continuing involvement with the buyer-lessor, which results in thetransaction being recorded under the financing method.  The Company believes it has continuinginvolvement in the leased property because of the existence of “perpetual fixedprice renewal options.”  This form ofcontinuing involvement precludes sale-leaseback accounting because theseller-lessee benefits from future appreciation in the underlying property in amanner similar to a fixed-price purchase option.  Under the financing method, the assets remainon the consolidated balance sheet and are depreciated over their useful life,and the proceeds from the transaction are recorded as a financingliability.  A portion of lease paymentsare applied as payments of deemed principal and imputed interest.

 

**Long-livedassets**

 

The Companyadopted SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” in the period beginning October 28, 2002. SFAS No. 144retained the fundamental provisions of existing generally accepted accountingprinciples with respect to the recognition and measurement of long-lived assetimpairment contained in SFAS No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed Of.” However, SFAS No. 144provided new guidance intended to address certain significant implementationissues associated with SFAS No. 121, including expanded guidance withrespect to appropriate cash flows to be used to determine whether recognitionof any long-lived asset impairment is required, and if required, how to measurethe amount of the impairment. SFAS No. 144 also required that any netassets to be disposed of by sale be reported at the lower of carrying value orfair value less cost to sell, and expanded the reporting of discontinuedoperations to include any component of any entity with operations and cashflows that can be clearly distinguished from the rest of the entity.

 

Prior to October 28,2002 and pursuant to SFAS No. 121, carrying values of long-lived assetswere reviewed for impairment when events or changes in circumstances indicatedthat the assets’ carrying values may not be recoverable from the estimatedfuture cash flows expected to result from the properties’ use and eventualdisposition. When undiscounted expected future cash flows were less thancarrying values, an impairment loss is recognized equal to the amount by whichthe carrying values exceed the net realizable values of the assets. The netrealizable value would typically be calculated using discounted expected futurecash flows, or determined by estimates provided by real estate professionalsand/or the Company’s past experience in disposing of restaurant properties.

 

**Intangibleassets**

 

Goodwill andother intangible assets with indefinite lives are not subject to amortizationbut are tested for impairment annually or more frequently if events or changein circumstances indicate that the asset might be impaired.  SFAS No. 142 “Goodwill and other IntangibleAssets,” requires a two-step process for testing impairment. For goodwill, thefair value of each reporting unit is compared to its carrying value todetermine whether an indication of impairment exists. If an impairment isindicated, 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 goodwill andother intangible assets is measured as the excess of its carrying value overits fair value. The Company has determined that no impairments have existedrelated to goodwill or other intangible assets in any of the periods presented.Intangible assets with lives restricted by contractual, legal, or other meanscontinue 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.

 

To assist inthe process of determining goodwill impairment, the Company performs internalvaluation analyses and considers other market information that is publiclyavailable. Estimates of fair value are primarily determined using discountedcash flows and market comparisons and recent transactions.  These approaches use significant estimatesand assumptions including projected future cash flows (including timing),discount rate reflecting the risk inherent

 

F-14

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in future cashflows, perpetual growth rate, determination of appropriate market comparablesand the determination of whether a premium or discount should be applied tocomparables.

 

In connectionwith the June 14, 2003 purchase transaction and in accordance with SFAS No. 142,the Company had its trademarks and tradenames evaluated by an external thirdparty. As a result of this evaluation, it was determined that the Companypossesses $42.6 million in trademarks and tradenames which have indefinitelives. The trademarks and tradenames are not amortized and are evaluated forimpairment at least annually.

 

Prior to the June 14,2003 purchase transaction, franchise rights with a value of $14.2 million wereamortized using the straight-line method over the period expected to bebenefited, or 20 years. Amortization expense of $500,000 was recorded for theperiod ended June 13, 2003. At the date of the June 14, 2003 purchasetransaction, the remaining franchise rights were adjusted to their then currentfair market value of $12.2 million. This value is being amortized over theremaining period expected to be benefited. Amortization expense of $592,000,$592,000 and $250,000 was recorded for the fiscal years ended November 3,2005, October 28, 2004 and period ended October 26, 2003,respectively. The Company expects to record annual amortization expense of$694,000 over the remaining 15.5 year life of the franchise rights.

 

Deferred debtfinancing costs are amortized to interest expense over the life of the relatedloan.

 

Uponcompletion of VICORP’s “going-private” transaction on May 14, 2001, theformer chairman of VICORP’s Board of Directors entered into a non-competitionand escrow agreement pursuant to which he will be paid a total of $2 millionnot to compete with the Company for a period of five years after the purchase.The agreement requires the escrow agent to pay the former chairman, on January 2of each year starting in 2002 through 2005, an amount equal to the lesser of (a) $500,000plus all interest and other earnings in the escrow account, less any fees thendue the escrow agent or (b) the entire amount then remaining in the escrowaccount. The non-competition agreement is reflected in other assets andamortized using the straight-line method over a five-year period.

 

**Losscontingencies and self-insurance reserves**

 

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

 

The assessmentof contingencies 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 anddeferred straight-line rent payable**

 

The Companyleases most of its restaurant properties. Leases are accounted for under the provisions of SFAS No. 13, “Accountingfor Leases,” as amended, which requires that leases be evaluated and classifiedas operating or capital leases for financial reporting purposes.

 

For leasesthat contain rent escalations, the Company records the total rent payableduring the lease term on a straight-line basis over the term of the lease andrecords the difference between the rent paid and the straight-line rent as adeferred straight-line rent payable. Incentive payments received from landlords are recorded as deferred rentliabilities and are amortized on a straight-line basis over the lease term as areduction of rent.  Certain of our leasesare accounted for under the financing method, as discussed above.

 

F-15

----

 

**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 arecalculated as a percentage of the franchisee gross sales and recognized in theperiod the sales are generated. Initial franchise fees are recognized as incomeupon commencement of the franchise operation and completion of all materialservices and conditions by the Company. Rental income on properties subleasedto franchisees is recognized on a straight-line basis over the life of thelease. Interest income on franchisee notes receivable is recognized whenearned.

 

F-16

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Franchiseoperations gross revenues and expenses consisted of the following:

 
| ** **                          | ** ** | **VI Acquisition**                     | ** ** | **Midway**                             | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| **(In thousands)**                  | ** ** | **Year ended  November 3,  2005** | ** ** | **Year ended  October 28,  2004** | ** ** | **Period  ended  October 26,  2003** | ** ** | **Period  ended  June 13,  2003** | ** ** |
|                                |       |                                   |       |                                   |       |   |   |   |   |
| Royalties                           |       | $                                      | 4,129      |                                   | $          | 3,917 |   | $ | 1,451 |   | $ | 2,612 |   |
| Initial and  renewal fees           |       | —                                 |       | —                                 |       | — |   | 67 |   |
| Property  rental                    |       | 1,144                                  |       | 1,120                                  |       | 457 |   | 754 |   |
| Interest  income on franchise notes |       | 7                                      |       | 20                                     |       | 8 |   | 15 |   |
| Franchise  revenues                 |       | 5,280                                  |       | 5,057                                  |       | 1,916 |   | 3,448 |   |
| Franchise  operating expenses       |       | (2,181                                 | )          | (2,311                                 | )          | (978 | ) | (1,583 | ) |
| Franchise  operations, net          |       | $                                      | 3,099      |                                   | $          | 2,746 |   | $ | 938 |   | $ | 1,865 |   |

 

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

 

**Advertisingcosts**

 

Advertisingcosts for television, radio, newspapers, direct mail and point-of-purchasematerials are expensed in the period incurred. Advertising expense for thefiscal years ended November 3, 2005 and October 28, 2004 and theperiods ended October 26, 2003 and June 13, 2003 was approximately$12.7 million, $12.3 million, $4.7 million, and $8.6 million,respectively.  Prepaid advertising coststotaled $0.9 million at November 3, 2005 and $0.3 million at October 28,2004 representing billings paid for media events not occurring for the firsttime until after the respective dates.

 

**Newstore pre-opening costs**

 

New storepre-opening costs consist of salaries and other direct expenses incurred inconnection with the setup and stocking of stores, employee training, andgeneral store management costs incurred prior to the opening of newrestaurants.  New store pre-opening costsare expensed as incurred in accordance with SOP 98-5, “Reporting on the Costsof Start-up Activities.”  New storepre-opening costs for the fiscal years ended November 3, 2005 and October 28,2004 and the periods ended October 26, 2003 and June 13, 2003 were$1.3 million, $532,000, $249,000, and $150,000, respectively.

 

**Comprehensiveincome**

 

Under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities,” the Company’sinterest rate swap agreements on its variable rate debt (Note 17) are recordedat fair value with changes in the value of such contracts, net of income taxes,reported in comprehensive income. For purposes of calculating income taxesrelated to comprehensive income, the Company uses the combined statutory ratefor federal and state income taxes.

 

**Fairvalue of financial instruments**

 

At November 3,2005 and October 28, 2004, the fair value of cash and cash equivalents,accounts receivable and accounts payable approximated their carrying valuebased on the short-term nature of these instruments.  See Note 7 for information concerning thefair value of the Company’s long-term debt and Note 8 for information regardingthe fair value of the Company’s financing obligations.

 

F-17

----

** **

**Derivativesand hedging activities**

 

SFAS No. 133established accounting standards for derivative instruments and hedgingactivities. Under SFAS No. 133, all derivatives are recognized as eitherassets or liabilities and measured at fair value. The accounting for changes infair value of derivatives is dependent upon the intended use of the derivative.The Company does not use derivative instruments for trading purposes and theCompany has procedures in place to monitor and control their use.

 

The Companyhas used interest rate swaps to manage its interest rate mix on the total debtportfolio and related overall cost of borrowing whereby it agreed to exchangethe variable rate on a portion of its term borrowings for a fixed rate. UnderSFAS No. 133, the Company’s interest rate swap agreements are typicallydesignated as cash flow hedges and recorded at fair value, with changes in thevalue of such contracts, net of income taxes, reported in comprehensive income.The net settlements made under the interest rate swap agreements are reflectedin the consolidated statements of operations as an adjustment to interestexpense over the term of the related swap. See Note 17 for further discussion.

 

**Incometaxes**

 

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

 

**Accountingfor stock based compensation**

 

SFAS No. 123,“Accounting for Stock-Based Compensation,” defines a fair value method ofaccounting for employee stock compensation and encourages, but does notrequire, all entities to adopt that method of accounting. Entities electing notto adopt the fair value method of accounting must make pro forma disclosures ofnet income as if the fair value method of accounting defined in SFAS No. 123had been applied. The Company has elected not to adopt the fair value methodand instead has elected to follow Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations. UnderAPB Opinion No. 25, compensation expense related to stock options iscalculated as the difference between the exercise price of the option and thefair market value of the underlying stock at the date of grant. This expense isrecognized over the vesting period of the option or at the time of grant if theoptions immediately vest. As a result of the minimal number of optionsoutstanding during all periods presented in the accompanying consolidatedfinancial statements, the pro forma effects of applying the fair value methodto outstanding options over their respective vesting periods had an immaterialeffect on net income (loss).

 

**New accounting pronouncements**

 

In November 2004, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “InventoryCosts, an amendment of ARB No. 43, Chapter 4.”  SFAS No. 151 clarifies the accountingfor abnormal amounts of idle facility expense, freight, handling costs andwasted material and requires that such items be recognized as current-periodcharges regardless of whether they meet the “so abnormal” criterion outlined inARB No. 43.  SFAS No. 151 alsointroduces the concept of “normal capacity” and requires the allocation offixed production overheads to inventory based on the normal capacity of theproduction facilities.  Unallocatedoverheads must be recognized as an expense in the period incurred.  SFAS No. 151 is effective for inventorycosts incurred during fiscal years beginning after June 15, 2005.  The Company is currently implementing SFAS No. 151and does not believe that it will have a material impact on our financialposition, results of operations or cash flows.

 

F-18

----

 

On December 16, 2004, the FASB issued SFAS No. 123 (revised2004), *Share-Based Payment*, whichis a revision of SFAS No. 123. SFAS 123(R) supersedes APB Opinion No. 25,*Accounting for Stock Issued to Employees*,and amends SFAS No. 95, *Statement ofCash Flows*. Generally, the approach in SFAS 123(R) is similarto the approach described in SFAS 123. However, SFAS 123(R) requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the income statement based on their fair values.Pro forma disclosure is no longer an alternative.

 

SFAS 123(R) permits public companies to adopt its requirementsusing one of two methods:

 

1. A *“modifiedprospective”* method in which compensation cost is recognizedbeginning with the effective date (a) based on the requirements ofSFAS 123(R) for all share-based payments granted after the effective dateand (b) based on the requirements of SFAS 123 for all awards grantedto employees prior to the effective date of SFAS 123(R) that remain unvestedon the effective date.

 

2. A *“modifiedretrospective”* method which includes the requirements of themodified prospective method described above, but also permits entities torestate based on the amounts previously recognized under SFAS 123 forpurposes of pro forma disclosures for either (a) all prior periodspresented or (b) prior interim periods of the year of adoption.

 

The Company will use themodified prospective method when it adopts. SFAS 123(R) is effective for non-public filers with the first annualreporting period that begins after December 15, 2005. As permitted bySFAS 123, the company had accounted for share-based payments to employeesusing APB Opinion 25’s intrinsic value method and, as such, generally recognizeno compensation cost for employee stock options. Simultaneously with theclosing of the company’s sale transaction in April 2003, all optionsbecame immediately vested, thus the company did not recognize any compensationexpense. Consequently, the adoption of SFAS 123(R) will only impact theCompany’s results of operations if the Company grants share-based paymentssubsequent to November 3, 2006, the beginning of the Company’s 2007 fiscalyear.

 

In May 2005, the FASBissued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS 154)”.SFAS 154 replaces APB No. 20, Accounting Changes, and SFAS No. 3,Reporting Accounting changes in Interim Financial Statements, and changes therequirements for the accounting for and reporting of a change in accountingprinciple. SFAS 154 requires retrospective application of changes in accountingprinciple, unless it is impracticable to determine either the period-specificeffects or the cumulative effect of the change. SFAS 154 defines retrospectiveapplication as the application of a different accounting principle to prioraccounting periods as if that principle had always been used or as theadjustment of previously issued financial statements to reflect a change in thereporting entity. SFAS 154 also redefines restatement as the revising of previouslyissued financial statements to reflect the correction of an error.  SFAS 154 is effective for accounting changesand correction of errors made in fiscal years beginning after December 15,2005.

 

In October 2005, the FASBissued FSP No. FAS 13-1, “Accounting for Rental Costs Incurred during aConstruction 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 Companycapitalized $0.7 million and $0.2 million for fiscal 2005 and 2004,respectively.  The Company will implementFSP No. FAS 13-1 during the first quarter of fiscal 2006 and do notbelieve that it will a material impact upon the Company’s financial position,results of operations or cash flows.

 

**Reclassifications**

 

Certainreclassifications have been made to prior year information to conform to thecurrent year presentation.

 

F-19

----

 

**3.Receivables, net**

 

Receivables,net consisted of the following:

 
| **(In thousands)**                          | ** ** | **November 3,  2005** | ** ** | **October 28,  2004** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                  | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Trade receivables                           |       | $                          | 5,799      |                       | $          | 5,373 |   |
| Construction receivables (Note 4)           |       | 7,030                      |       | 2,359                      |       |
| Indemnification receivable (Notes 6 and 19) |       | 2,557                      |       | 3,382                      |       |
| Other receivables                           |       | 721                        |       | 975                        |       |
| Notes receivable                            |       | 7                          |       | 204                        |       |
| Allowance for doubtful accounts             |       | (358                       | )          | (378                       | )          |
| Receivables, net                            |       | 15,756                     |       | 11,915                     |       |
| Less: long-term portion                     |       | —                     |       | —                     |       |
| Current portion                             |       | $                          | 15,756     |                       | $          | 11,915 |   |

 

Constructionreceivables represent amounts due from landlords for build-to-suit constructionprojects (Note 4).

 

Activity inthe allowance for doubtful accounts was as follows:

 
| ** **          | ** ** | ** **           | ** ** | **Midway**           | ** ** |
|---------------------|------------|----------------------|------------|----------------------|------------|
| ** **          | ** ** | **VI Acquisition**   | ** ** | **Period**           | ** ** |
| ** **          | ** ** | **Year ended**       | ** ** | **Period ended**     | ** ** | **Period ended** | ** ** | **ended** | ** ** |
| ** **          | ** ** | **November 3,** | ** ** | **October 28,** | ** ** | **October 26,** | ** ** | **June 13,** | ** ** |
| **(In thousands)**  | ** ** | **2005**             | ** ** | **2004**             | ** ** | **2003** | ** ** | **2003** | ** ** |
| Beginning of period |       | $                    | 378        |                 | $          | 492 |   | $ | 742 |   | $ | 552 |   |
| Bad debt expense    |       | 110                  |       | 11                   |       | 70 |   | 190 |   |
| Write-offs          |       | (130                 | )          | (125                 | )          | (320 | ) | — |   |
| End of period       |       | $                    | 358        |                 | $          | 378 |   | $ | 492 |   | $ | 742 |   |

 

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

 

Property andequipment consisted of the following:

 
| **(In thousands)**             | ** ** | **November 3,  2005** | ** ** | **October 28,  2004** | ** ** |
|--------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                           |       |                       |       |                       |       |
| Land                           |       | $                          | 5,634      |                       | $          | 5,634 |   |
| Buildings and improvements     |       | 49,331                     |       | 40,242                     |       |
| Equipment                      |       | 57,926                     |       | 45,917                     |       |
| Construction in progress       |       | 5,606                      |       | 6,225                      |       |
| Capitalized lease buildings    |       | 1,284                      |       | 1,284                      |       |
| Impairment reserve             |       | (1,101                     | )          | (1,101                     | )          |
|                           |       | 118,680                    |       | 98,201                     |       |
| Less: accumulated depreciation |       | (32,221                    | )          | (17,885                    | )          |
| Property and equipment, net    |       | $                          | 86,459     |                       | $          | 80,316 |   |

 

Depreciationexpense on property and equipment was $14.8 million, $13.6 million, $4.8million, and $8.1 million during the years ended November 3, 2005 and October 28,2004 and the periods ended October 26, 2003 and June 13, 2003,respectively.

 

F-20

----

 

Assets underdeemed landlord financing liability consisted of the following:

 
| **(In thousands)**                                     | ** ** | **November 3,  2005** | ** ** | **October 28,  2004** | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                                   |       |                       |       |                       |       |
| Land                                                   |       | $                          | 48,806     |                       | $          | 48,806 |   |
| Buildings and  improvements                            |       | 67,929                     |       | 65,523                     |       |
| Construction in  progress                              |       | 19,917                     |       | 2,025                      |       |
|                                                   |       | 136,652                    |       | 116,354                    |       |
| Less: accumulated  depreciation                        |       | (10,506                    | )          | (6,012                     | )          |
| Assets under deemed  landlord financing liability, net |       | $                          | 126,146    |                       | $          | 110,342 |   |

 

Depreciationexpense on assets under deemed landlord financing liability was $4.6 million, $4.4million, $1.6 million, and $2.4 million during the years ended November 3,2005 and October 28, 2004 and the periods ended October 26, 2003 and June 13,2003, respectively.

 

**5. Other assets, net**

 

Other assets, netconsisted of the following:

 
| **(In thousands)**                          | ** ** | **November 3,  2005** | ** ** | **October 28,  2004** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                        |       |                       |       |                       |       |
| Non-competition  agreements                 |       | $                          | 2,030      |                       | $          | 2,030 |   |
| Deferred debt financing  costs              |       | 8,150                      |       | 7,877                      |       |
| Deferred lease payments                     |       | 4,111                      |       | 7,904                      |       |
| Deferred tax asset                          |       | 3,010                      |       | —                     |       |
| Deposits and  miscellaneous financing costs |       | 331                        |       | 216                        |       |
|                                        |       | 17,632                     |       | 18,027                     |       |
| Less: accumulated  amortization             |       | (3,758                     | )          | (4,264                     | )          |
| Other assets, net                           |       | $                          | 13,874     |                       | $          | 13,763 |   |

 

During fiscal2004, deferred debt financing costs with a book value of $4.3 million werewritten off as a result of early extinguishment of debt associated with the April 2004refinancing transactions (Notes 7 and 18). Also during fiscal 2004, deferred financing costs totaling $6.1 millionwere added associated with the debt incurred as a result with the April 2004refinancing transactions (Note 7).

 

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.

 

**6. Other accrued expenses**

 

Other accruedexpenses consisted of the following:

 
| **(In thousands)**                                | ** ** | **November 3,  2005** | ** ** | **October 28,  2004** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Legal settlements  (Notes 3 and 19)               |       | $                          | 517        |                       | $          | 6,775 |   |
| Insurance                                         |       | 4,346                      |       | 4,372                      |       |
| Rent                                              |       | 1,668                      |       | 1,611                      |       |
| Interest                                          |       | 983                        |       | 729                        |       |
| Gift certificates and  cards                      |       | 1,315                      |       | 891                        |       |
| Advertising                                       |       | 1,047                      |       | 869                        |       |
| Reserve for  closed/subleased locations (Note 15) |       | 406                        |       | 556                        |       |
| Miscellaneous                                     |       | 2,710                      |       | 2,717                      |       |
|                                              |       | $                          | 12,992     |                       | $          | 18,520 |   |

 

F-21

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Accruedmiscellaneous expenses consisted primarily of accrued expenses for 401(k)employer contributions, credit card fees, royalty prepayments and legal,management and audit fees.

 

**7. Debt**

 

Long-term debtconsisted of the following:

 
| **(In thousands)**                                             | ** ** | **November 3,  2005** | ** ** | **October 28,  2004** | ** ** |
|----------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| 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                                     |       | 6,675                      |       | 1,350                      |       |
| Gross amount payable                                           |       | 148,205                    |       | 142,880                    |       |
| Unamortized original  issue discount on senior unsecured notes |       | (1,192                     | )          | (1,411                     | )          |
| Long-term debt                                                 |       | $                          | 147,013    |                       | $          | 141,469 |   |

 

On April 14, 2004, the Company completed a private placement of$126.5 million aggregate principal amount of 101⁄2% senior unsecured notesmaturing on April 15, 2011.  Thenotes were issued at a discounted price of 98.791% of face value, resulting innet proceeds before transaction expenses of $125.0 million.  The senior unsecured notes were issued by VICORPRestaurants, Inc. and are fully and unconditionally guaranteed by VIAcquisition Corp.  In August 2004, theCompany’s registration statement with the Securities and Exchange Commission onForm 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 each April 15and October 15 until maturity.

 

Concurrently with the issuance of the 101⁄2% senior unsecured notes, theCompany entered into an Amended and Restated Senior Secured Credit Facilityconsisting of a $15.0 million term loan and a $30.0 million revolving creditfacility, with a $15.0 million sub-limit for letters of credit.  As of November 3, 2005, the Company hadissued letters of credit aggregating $7.3 million and had $6.7 million of borrowingsoutstanding under the senior secured revolving credit facility.  Interest is payable monthly on the first ofeach month. The senior secured revolving credit facility permits 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 new senior secured term loan.  Under this formula, as of November 3,2005, the Company had the ability to borrow the full $30.0 million, less theamount of outstanding letters of credit and borrowings under the senior securedrevolving credit facility, or $16.0 million.

 

Borrowings under both the revolving credit facility and the term loan ofthe Amended and Restated Senior Credit Facility bear interest at floating ratestied to either the base rate of the agent bank under the credit agreement orLIBOR rates for a period of one, two or three months, in each case plus amargin that will adjust based on the ratio of our Adjusted EBITDA to totalindebtedness, as defined in the agreement.  At November 3, 2005, the interest rateson borrowings outstanding were 7.29% for term loan borrowings and 8.25% forloans under the revolving credit facility. Both facilities are secured by a lien of all of the assets of VICORPRestaurants, Inc., and guaranteed by VI Acquisition Corp. In addition, theguarantees are also secured by the pledge of all of the outstanding capitalstock of VICORP Restaurants, Inc. by VI Acquisition Corp. The term loandoes not require periodic principal payments, but requires mandatory repaymentsunder certain events, including proceeds from sale of assets, issuance ofequity, and issuance of new indebtedness. Both facilities mature on April 14, 2009.

 

The Amended and Restated Senior Secured Credit Facility and theindenture governing the 101⁄2% Senior Unsecured Notes contain a number ofcovenants that, among other things, restrict, subject to certain exceptions, theCompany’s ability and the ability of its subsidiaries, to sell assets, incuradditional 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, amendcertain material agreements governing our indebtedness, change the businessconducted by us and our subsidiaries and enter into hedging agreements. Inaddition, the Company’s Amended and Restated Senior Secured Credit Facilityrequires

 

F-22

----

 

us to maintain or comply with a maximum total leverage ratio, a minimuminterest coverage ratio and a maximum capital expenditures limitation.  On November 3, 2005, the Company was incompliance with these requirements.

 

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

 

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

 

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

 

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

 

The OriginalSenior Secured Credit Facility also provided for the issuance of letters ofcredit of up to $12.5 million under a sub-facility.  The Company was also required to pay fees onthe issuance, extension, or renewal of any letters of credit equal to theapplicable margin plus an amount equal to 0.125 of 1% per annum, as a frontingfee, plus other reasonable administrative fees in effect from time to time.

 

On June 14,2003, the Company also issued Subordinated Debt with a principal amount of $45million, which was subordinated to the senior indebtedness and was accompaniedby warrants for an aggregate of 95,745 shares of common stock and 0.06 sharesof preferred stock. See Note 11 (“Stockholders’ equity—VI AcquisitionCorp.—Warrants”) for further discussion. The discount was amortized to interestexpense over the term of the Subordinated Debt. The proceeds from the issuanceof the notes were used to finance, in part, the June 2003 purchase, and topay related transaction fees and expenses of approximately $8.0 million. Theprincipal amount of the notes was due in full on December 13, 2009, and accruedinterest at a fixed annual rate of 16%. Subject to the terms of the SubordinatedDebt, interest was to be paid in cash on a quarterly basis on each interestpayment date (October 1, January 1, April 1 and July 1) ata fixed rate of 13% annually. On each interest payment date, the Company, atits option, could (a) make an additional cash payment to the holders ofthe Subordinated Debt in an amount equal to 3% annually of the principaloutstanding under the note, (b) the then outstanding principal of the notecould be increased by a payment-in-kind amount, or (c) pay a portion ofthe additional cash payment to the holders and accrue to the holders a portionof the payment-in-kind amount equal to 3% annually of the principal outstandingunder the notes. This facility also contained covenants customary in lendingtransactions of this type.

 

The Companyincurred $29.0 million, $26.8 million, $9.7 million, and $11.4 million ofinterest charges during the fiscal years ended November 3, 2005 and October 28,2004 and the periods ended October 26, 2003 and June 13, 2003,respectively.  Of these amounts, $457,000,$193,000, $23,000, and $92,000 was capitalized in the fiscal years ended November 3,2005 and October 28, 2004 and the periods ended October 26, 2003 and June 13,2003, respectively.

 

F-23

----

 

Excluding capitalizedlease obligations (Note 9), the aggregate maturities of long-term debtobligations for the five years following November 3, 2005 are:

 

| **(In thousands)**  | ** ** | ** ** | ** ** |
|---------------------|------------|------------|------------|
| 2006                |       | $          | —     |   |
| 2007                |       | —     |       |
| 2008                |       | —     |       |
| 2009                |       | 21,675     |       |
| 2010                |       | —     |       |
| 2011 and thereafter |       | 126,530    |       |
|                |       | $          | 148,205    |   |

 

The estimated fair value of the Company’s long-term debt (excludingcapitalized lease obligations) was approximately $147.6 million at November 3,2005.  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 3,2005 relates primarily to market quotations for the 101⁄2% Senior Unsecured Notes.

 

**8. Deemed landlord financing liability**

 

The agreements related to the Company’s deemed landlord financingliability generally contain an initial term of 15 or 20 years plus renewaloptions and also require payment of property taxes, maintenance, insurance andutilities.

 

The followingsummarizes future minimum payments under the Company’s agreements related to thedeemed landlord financing liability having an initial or remainingnon-cancelable term of one year or more as of November 3,2005 :

 

| **(In thousands)**                          | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2006                                        |       | $          | 13,411     |   |
| 2007                                        |       | 13,518     |       |
| 2008                                        |       | 13,625     |       |
| 2009                                        |       | 13,729     |       |
| 2010                                        |       | 14,164     |       |
| 2011 and thereafter                         |       | 264,247    |       |
|                                        |       | 332,694    |       |
| Less: amount  representing imputed interest |       | (200,656   | )          |
| Present value of  minimum payments          |       | $          | 132,038    |   |

 

During the periodended June 13, 2003, the Company completed two sale-leaseback transactionsof real estate related to restaurant properties. The Company received $2.6million in proceeds. In connection with the purchase transaction on June 14,2003, the Company completed a sale-leaseback transaction of real estate relatedto ten restaurant properties. The Company received $13.9 million in proceeds.  In October 2003, the Company completed anadditional sale-leaseback transaction of real estate related to a restaurantproperty. The Company received $1.3 million in proceeds.  Each of the aforementioned sale-leasebacktransactions were recorded under the financing method due to deemed continuinginvolvement with the buyer-lessor.

 

The imputed interest rates on the deemed landlord financing liabilityranged from 9.0% to 13.6%.  Imputedinterest expense on the deemed landlord financing liability totaled $13.1million, $11.8 million, $4.4 million, and $6.1 million during the fiscal yearsended November 3, 2005, October 28, 2004, the periods ended October 26,2003 and June 13, 2003, respectively.

 

The Company believes that the carrying value of the deemed landlordfinancing liability approximates fair value.

 

F-24

----

 

**9. Leases**

 

The Company is theprime lessee under various land, building, and equipment leases forCompany-operated and franchised restaurants, pie production facilities andother locations. The leases 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 accountingperiod as the liabilities are incurred utilizing prorated periodic salestargets.  Under most leases, the Companyis responsible for occupancy costs including taxes, insurance and maintenance.  Subleases to franchisees and others generallyprovide for similar terms as the prime lease and an obligation for occupancycosts.

 

The followingsummarizes future minimum lease payments under capital and operating leaseshaving an initial or remaining non-cancelable term of one year or more as of November 3,2005:

 

| **(In thousands)**                                         | ** ** | **Capital  leases** | ** ** | **Operating  leases** | ** ** | **Lease and  sublease  income** | ** ** |
|------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|---------------------------------|------------|
|                                                       |       |                |       |                  |       |                            |       |
| 2006                                                       |       | $                   | 79         |                  | $          | 19,371                          |       | $ | 767 |   |
| 2007                                                       |       | 74                  |       | 18,566                |       | 691                             |       |
| 2008                                                       |       | 66                  |       | 16,424                |       | 542                             |       |
| 2009                                                       |       | 37                  |       | 15,271                |       | 350                             |       |
| 2010                                                       |       | 37                  |       | 13,522                |       | 225                             |       |
| 2011 and thereafter                                        |       | 27                  |       | 111,371               |       | 386                             |       |
| Total minimum lease  payments                              |       | 320                 |       | $                     | 194,525    |                            | $          | 2,961 |   |
| Less: amount  representing interest                        |       | (72                 | )          |                  |       |                            |       |
| Present value of  minimum lease payments                   |       | 248                 |       |                  |       |                            |       |
| Less: current maturities  of capitalized lease obligations |       | (63                 | )          |                  |       |                            |       |
| Capitalized lease  obligations                             |       | $                   | 185        |                  |       |                            |       |   |

 

Three of ourleased properties are subject to capital lease obligations. These capitalleases have expiration dates ranging from November 2006 to June 2011.  Implicit interest rates range from 9.7% to 14.0%on capital leases.

 

Net rental expenseconsisted of the following:

 

| ** **                              | ** ** | **VI Acquisition**                     | ** ** | **Midway**                             | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| **(In thousands)**                      | ** ** | **Year ended  November 3,  2005** | ** ** | **Year ended  October 28,  2004** | ** ** | **Period ended  October 26,  2003** | ** ** | **Period ended  June 13,  2003** | ** ** |
|                                    |       |                                   |       |                                   |       |   |   |   |   |
| Restaurant land and  buildings:         |       |                                   |       |                                   |       |   |   |   |   |
| Minimum rentals                         |       | $                                      | 18,963     |                                   | $          | 17,944 |   | $ | 6,316 |   | $ | 9,243 |   |
| Contingent rentals                      |       | 2,091                                  |       | 2,061                                  |       | 704 |   | 1,368 |   |
| Equipment                               |       | 313                                    |       | 437                                    |       | 202 |   | 314 |   |
| Gross rental expense                    |       | 21,367                                 |       | 20,442                                 |       | 7,222 |   | 10,925 |   |
| Less: lease and  sublease rental income |       | (1,442                                 | )          | (1,458                                 | )          | (596 | ) | (1,054 | ) |
| Net rental expense                      |       | $                                      | 19,925     |                                   | $          | 18,984 |   | $ | 6,626 |   | $ | 9,871 |   |

 

F-25

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**10. Other noncurrent liabilities**

 

Other noncurrentliabilities and credits consisted of the following:

 

| **(In thousands)**                                 | ** ** | **November 3,  2005** | ** ** | **October 28,  2004** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                               |       |                       |       |                       |       |
| Reserve for  closed/subleased properties (Note 15) |       | $                          | 602        |                       | $          | 714 |   |
| Deferred straight-line  rent payable               |       | 2,685                      |       | 1,354                      |       |
| Insurance                                          |       | 4,980                      |       | 4,477                      |       |
| Landlord incentive                                 |       | 807                        |       | 466                        |       |
| Other                                              |       | 23                         |       | 46                         |       |
|                                               |       | $                          | 9,097      |                       | $          | 7,057 |   |

 

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

 

**Preferredstock**

 

The VI AcquisitionCorp. 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 $8.9 million and $7.7 million at November 3,2005 and October 28, 2004, respectively.  Holders of the Series A preferred stockhave no voting rights in relation to matters of the Company.

 

**Commonstock**

 

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

 

**Mezzanineand collateralized securities**

 

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

 

Certain members ofmanagement have purchased shares of the Company’s common and preferred stock,and those shares are subject to a put by the holder upon the death of the holder. Since the put feature is at the optionof the holders’ estate but is not mandatory, these shares have been classifiedas mezzanine equities. These shares have resulted in common mezzanine equity of35,248 shares, or $35,248, and preferred mezzanine equity of 1,027.85 shares,or $1,028,000.

 

**Treasurystock**

 

Following theseparation of a member of management from the Company during the period ended October 26,2003, the Company repurchased 76,103 shares of common stock and 923.9 shares ofpreferred stock at a cost of $1.00 and $1,000 per share, respectively.  During the year ended October 28, 2004,the Company repurchased 4,500 shares of common stock at a cost of $1.00 pershare following the separation of another member of management.

 

F-26

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**Warrants**

 

In connection withthe issuance of senior debt on June 13, 2003, VI Acquisition issued commonand preferred stock purchase warrants which entitled the holders to purchase atany time through June 13, 2013 an aggregate of 95,745 shares of commonstock and an aggregate of 0.06 shares of Series A preferred stock at $0.01per share. 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 of November 3,2005, the preferred warrants were exercisable for an aggregate of 1,183.92shares of preferred stock.

 

***Management agreements***

 

Ms. Koenig****and Mr. Carroll have entered into certain ManagementAgreements with the Company pursuant to which they purchased restricted sharesof the Company’s common stock at a price equal to $1.00 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 the Company 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 the Company at the lesser of original cost or fairmarket value).  In addition, pursuant tothe Management Agreements, following the termination of Ms. Koenig’s or Mr. Carroll’semployment, the Company may elect, or, in the event of their deaths, theirrespective estates may compel the Company, to repurchase certain shares of ourpreferred stock and common 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 to Ms. Koenig’sor Mr. Carroll’s put right following death, in which case the purchaseprice will be the lesser of the foregoing amounts or the original cost of theshares.

 

Mr. Keymerentered into a Management Agreement with the Company pursuant to which hepurchased restricted shares of the Company’s common stock at a price equal to$4.53 per share.  The shares vest over aperiod of four years at the rate of 25% per year and are subject to certainrepurchase rights upon termination of Mr. Keymer’s service as a member ofthe Company’s Board of Directors.  Upontermination of Mr. Keymer’s services as a member of the Board ofDirectors, all vesting ceases and the unvested shares may be repurchased by theCompany at their original cost and the vested shares may be repurchased at fairmarket value.

 

**12. Stockholders’ equity—Midway Investors HoldingsInc.**

 

**Preferredstock**

 

The Midway Class Apreferred stock had a par value of $0.01 per share with a liquidationpreference of $1,000 per share, plus accrued and unpaid dividends. Dividends onthe Class A preferred stock accrued cumulatively on a daily basis at afixed annual rate of 8.94% through April 30, 2004, and 11.34% thereafter,and were payable upon liquidation or redemption. Accrued dividends wereapproximately $3.4 million at June 13, 2003. The Class A preferredstock was redeemable in cash, at Midway’s option, to all holders on a pro-ratabasis. Holders of the Class A preferred stock had no voting rights inrelation to matters of the Company.

 

In connection withthe issuance of the Subordinated Debt on May 14, 2001, Midway issued2,005.7 additional shares of Class A preferred stock, which were subjectto certain put and call provisions (the “Redeemable Preferred Stock”). Underthe terms of the Redeemable Preferred Stock, holders could require Midway toredeem their shares on the earliest of (i) May 14, 2006, (ii) achange in control, (iii) acceleration of the Subordinated Debt, (iv) noncomplianceof covenants in the Subordinated Debt agreement, or (v) the undertaking ofMidway in a fundamental asset transaction. Midway was also entitled to purchaseall of the Redeemable Preferred Stock at any time between May 14, 2007 andthe date of an initial public offering. The shares were to be redeemed at theaccumulated liquidation value.

 

The Midway Class Bpreferred stock had a par value of $0.01 per share with a liquidationpreference of $1,000 per share, plus accrued and unpaid dividends, and wasconvertible into an equal number of shares of Class A preferred stock.Dividends on the Class B Preferred Stock accrued cumulatively on a dailybasis at a fixed annual rate of 8.94% through April 30, 2004, and 11.34%thereafter, and were payable exclusively by issuance of a payment-in-

 

F-27

----

 

kind dividend of Class Cpreferred stock on the last day of each fiscal quarter. Fractional shares of Class Cpreferred stock could be issued in connection with any payment-in-kinddividend. The Class B preferred stock was redeemable in cash, at Midway’soption, to all holders of the preferred shares on a pro-rata basis. Holders ofthe Class B preferred stock had no voting rights in relation to matters ofthe Company.

 

The Class Cpreferred stock had a par value of $0.01 per share with a liquidationpreference of $1,000 per share. The Class C preferred stock was redeemablein cash, at Midway’s option, to all holders of the preferred shares on apro-rata basis. Holders of the Class C preferred stock had no votingrights in relation to matters of the Company.

 

**Commonstock**

 

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

 

The Midway Class Bcommon stock had a par value of $0.01 per share and was automaticallyconvertible into the same number of shares of Class A common stock uponthe closing of a qualified public offering. Holders of the Class B commonstock had no voting rights in relation to matters of the Company.

 

On June 14,2003, all previously outstanding shares of Class A preferred stock, Class Bpreferred stock, Class C preferred stock, Class A common stock, and Class Bcommon stock were redeemed by the previous holders and sold to VI AcquisitionCorp. At that time, all outstanding shares of common stock were sold to VIAcquisition Corp.

 

**Warrants**

 

In connection withthe issuance of the Midway Subordinated Debt, Midway issued common stockpurchase warrants entitling the holders to purchase from Midway at any timeprior to May 14, 2011, an aggregate of 1,063.7 shares of Class Bcommon stock for an exercise price of $0.01 per share. See also Note 7 relatedto the accretion of this amount as a discount to the Subordinated Debt.

 

During the periodof October 27, 2002 through June 13, 2003, the Company issued anadditional 118.18 warrants with a value of $129,000. The warrants were issuedin accordance with the antidilution provision in the warrant agreementfollowing the grant of additional employee stock options on October 28,2002. All warrants of Midway were exercised on June 13, 2003.

 

**13. Stock option and incentive program**

 

On October 28,2002, Midway’s Board of Directors authorized the issuance of options to certainkey management personnel to purchase 550.5 shares of Class B common stockfor an exercise price of $100 per share. It was determined that the marketprice of the Class B common stock at the date of grant was in excess of$100 per share and thus deferred compensation expense of $1.8 million wasaccrued based upon the difference in the market price, as determined by theBoard of Directors, and the exercise price. This charge was amortized intoexpense over the vesting period of the options and, during the period ended June 13,2003, the Company recorded compensation expense of $523,000. At June 13,2003, all outstanding options became fully vested as a result of the change incontrol and were exercised as a component of the acquisition of Midway by VIAcquisition Corp.

 

In connection withthe acquisition of Midway by VI Acquisition, those members of management whochose to roll over options to purchase shares of Midway stock were grantedoptions to purchase shares of Series A preferred stock of VI AcquisitionCorp. for $24.80 per share. These options were fully vested as of the grantdate and no expense was recorded.

 

F-28

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Informationregarding activity for stock options exercisable for shares of Series Apreferred stock outstanding under VI Acquisition Corp. Stock Option Plan is asfollows:

 
| ** **                                    | ** ** | **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      |   |
| Options exercisable at November 3,  2005 |       | 647        |       | $                                       | 24.80      |   |

 

The options outstanding at November 3, 2005 had a weighted averageremaining contractual life of 7.6 years.

 

**14. Employee benefit plans**

 

The Companymaintains the VICORP 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 ended November 3,2005 and October 28, 2004 and the periods ended October 26, 2003 and June 13,2003, the Company recorded expense of $620,000, $587,000, $232,000, and $406,000,respectively, for its 401(k) contributions.

 

**15. Asset impairments, asset disposals and relatedcosts**

 

During the fiscalyear ended October 28, 2004, the Company recorded a $1.1 million pretax impairmentcharge related to the write-down of assets for 11 restaurant locations, 10 ofwhich will continue to be operated and one which is closed.  Management assessed various factors relevantto the assets, including projected negative cash flows, and concluded thehistorical performance trends at the operating locations were unlikely toimprove materially. Therefore an impairment charge was recognized to reduce thecarrying value of the assets to fair market value, which was estimated basedupon management’s historical experience associated with such assets.

 

As of November 3, 2005 and October 28, 2004, the Company hadrecorded a reserve for closed/subleased restaurant locations (Notes 6 and 10)of approximately $1.0 million and $1.3 million, respectively, primarilyrepresenting estimated future minimum lease payments related to the restaurantfacilities, net of expected sublease income. Of the seven restaurant locationsto which this reserve relates, four of such locations were subleased as of November 3,2005.

 

F-29

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The followingsummarizes the activities that occurred in the Company’s reserve forclosed/subleased restaurant locations during the years ended November 3,2005 and October 28, 2004 and the periods ended October 26, 2003 and June 13,2003, respectively:

 
| ** **          | ** ** | **VI Acquisition**                      | ** ** | **Midway**                              | ** ** |
|---------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| **(In thousands)**  | ** ** | **Year ended   November 3,  2005** | ** ** | **Year ended   October 28,  2004** | ** ** | **Period ended   October 26,  2003** | ** ** | **Period ended   June 13,  2003** | ** ** |
| Beginning of period |       | $                                       | 1,270      |                                    | $          | 1,762 |   | $ | 2,005 |   | $ | 2,042 |   |
| Additions           |       | —                                  |       | 65                                      |       | — |   | — |   |
| Payments            |       | (262                                    | )          | (557                                    | )          | (243 | ) | (37 | ) |
| End of period       |       | $                                       | 1,008      |                                    | $          | 1,270 |   | $ | 1,762 |   | $ | 2,005 |   |

 

**16. Income taxes**

 

The totalprovisions for income tax expense (benefit) consisted of the following:

 

| ** **                            | ** ** | **VI Acquisition**                     | ** ** | **Midway**                             | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| **(In thousands)**                    | ** ** | **Year ended  November 5,  2005** | ** ** | **Year ended  October 28,  2004** | ** ** | **Period ended  October 26,  2003** | ** ** | **Period ended  June 13,  2003** | ** ** |
|                                  |       |                                   |       |                                   |       |   |   |   |   |
| Current:                              |       |                                   |       |                                   |       |   |   |   |   |
| Federal                               |       | $                                      | 1,190      |                                   | $          | 1,394 |   | $ | 458 |   | $ | (996 | ) |
| State                                 |       | 76                                     |       | 853                                    |       | (47 | ) | (327 | ) |
|                                  |       | 1,266                                  |       | 2,247                                  |       | 411 |   | (1,323 | ) |
| Deferred:                             |       |                                   |       |                                   |       |   |   |   |   |
| Federal                               |       | (1,262                                 | )          | (4,394                                 | )          | (1,548 | ) | (1,289 | ) |
| State                                 |       | 134                                    |       | (765                                   | )          | (98 | ) | (527 | ) |
|                                  |       | (1,128                                 | )          | (5,159                                 | )          | (1,646 | ) | (1,816 | ) |
| Provision for income  taxes (benefit) |       | $                                      | 138        |                                   | $          | (2,912 | ) | $ | (1,235 | ) | $ | (3,139 | ) |

 

F-30

----

 

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

 
| ** **                                                           | ** ** | **VI Acquisition**                      | ** ** | **Midway**                              | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| **(In thousands)**                                                   | ** ** | **Year  ended  November 3,  2005** | ** ** | **Year  ended  October 28,  2004** | ** ** | **Period  ended  October 26,  2003** | ** ** | **Period  ended  June 13,  2003** | ** ** |
|                                                                 |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income tax provision  computed at statutory federal income tax rates |       | 1,261                                   |       | 35                                      | %          | (1,903 | ) | 35 | % | (636 | ) | 35 | % | (2,295 | ) | 35 | % |
| FICA tip tax credit                                                  |       | (1,147                                  | )          | (32                                     | )%         | (1,049 | ) | 19 | % | (395 | ) | 22 | % | (634 | ) | 10 | % |
| Non-deductible costs                                                 |       | 14                                      |       | 0                                       | %          | 18 |   | 0 | % | (41 | ) | 2 | % | 623 |   | 10 | % |
| State income tax  provision, net of federal benefit                  |       | 137                                     |       | 5                                       | %          | 58 |   | (1 | )% | (94 | ) | 5 | % | (556 | ) | 8 | % |
| Other, net                                                           |       | (127                                    | )          | (4                                      | )%         | (36 | ) | 1 | % | (69 | ) | 4 | % | (277 | ) | 4 | % |
| Income tax expense  (benefit)                                        |       | 138                                     |       | 4                                       | %          | (2,912 | ) | 54 | % | (1,235 | ) | 68 | % | (3,139 | ) | 48 | % |

 

The components ofthe net deferred tax assets (liabilities) were as follows:

 

| **(In thousands)**                               | ** ** | **November 3,  2005** | ** ** | **October 28,  2004** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                             |       |                       |       |                       |       |
| FICA tax credit  carryforwards                   |       | $                          | 13,870     |                       | $          | 11,820 |   |
| Alternative minimum tax  credit carryforwards    |       | 3,366                      |       | 3,366                      |       |
| Accrued insurance  claims not yet deductible     |       | 3,522                      |       | 3,347                      |       |
| Property and equipment                           |       | 1,264                      |       | 4,867                      |       |
| Investment                                       |       | 2,754                      |       | 2,760                      |       |
| Leasing/financing  transactions                  |       | 2,098                      |       | —                     |       |
| Other                                            |       | 1,682                      |       | 3,146                      |       |
|                                             |       | $                          | 28,556     |                       | $          | 29,306 |   |
| Valuation allowance                              |       | (2,760                     | )          | (2,760                     | )          |
| Deferred tax assets,  net of valuation allowance |       | $                          | 25,796     |                       | $          | 26,546 |   |
| Trademarks                                       |       | (16,999                    | )          | (17,090                    | )          |
| Franchise rights                                 |       | (4,296                     | )          | (4,557                     | )          |
| Leasing/financing  transactions                  |       | —                     |       | (1,526                     | )          |
| Other                                            |       | (60                        | )          | (60                        | )          |
| Deferred tax liabilities                         |       | $                          | (21,355    | )                          | $          | (23,233 | ) |
| Net deferred tax assets  (liabilities)           |       | $                          | 4,441      |                       | $          | 3,313 |   |
|                                             |       |                       |       |                       |       |
| Deferred income taxes,  short-term               |       | $                          | 1,431      |                       | $          | 4,673 |   |
| Deferred income taxes,  long-term                |       | $                          | 3,010      |                       | $          | (1,360 | ) |

 

The FICA tipcredit is a general business income tax credit claimed by the Company foremployer social security taxes paid on employee tips exceeding the amounttreated as wages for minimum wage purposes. To the extent that the FICA tipcredit is claimed, a business deduction for the FICA tax is not received forthe FICA tax which is subject to the federal income tax credit.  Any unused FICA tip credit may be carriedback one year and forward 20 years (three-year carryback and 15-yearcarryforward for credits generated in tax years beginning before 1998).  The alternative minimum tax creditcarryforwards never expire.

 

F-31

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Approximately $9.5million of the FICA tip credit carryforwards 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 carryforwards, $5.5 million may be carried forward up to15 years with expirations in 2009 through 2013 and $4.0 million may be carriedforward up to 20 years with expirations in 2019 through 2023.  The remaining $4.0 million of FICA tip creditcarryforwards were generated post-acquisition, are not subject to annuallimitations and will expire in 2023 through 2025.  Management believes that, based upon pasthistorical and forecasted future taxable income, it is more likely than notthat these carryforwards will be fully utilized before expiration.  Annual taxable income of approximately $6.0million would be necessary to fully utilize the credit carryforwards.  Estimated taxable income for the fiscal yearended November 3, 2005 was $7.1 million.

 

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

 

**17. Hedging activities**

 

Effective October 27, 2003, the Company entered into an interestrate swap agreement to manage its cash flows associated with the interest payableunder the variable component of its prior senior secured credit agreement.  The swap agreement had an original notionalamount of $35 million. The contract was scheduled to expire October 27,2006 and the interest rate was fixed at 2.686%. In connection with the debt refinancing transaction on April 14,2004 (Note 7), the outstanding derivative obligations were settled for $0.2million.  The Company held no derivativeinstruments as of November 3, 2005 and October 28, 2004.

 

F-32

----

 

**18.Transaction and debt extinguishment expenses**

 

The Companyincurred various expenses directly related to the acquisitions of thepredecessor companies (Note 1). The components of the transaction expenses anddebt extinguishment costs were as follows:

 

| ** **                                              | ** ** | **VI Acquisition**                     | ** ** | **Midway**                             | ** ** |
|---------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| **(In thousands)**                                      | ** ** | **Year ended  November 3,  2005** | ** ** | **Year ended  October 28,  2004** | ** ** | **Period ended  October 26,  2003** | ** ** | **Period ended  June 13,  2003** | ** ** |
| Transaction expenses:                                   |       |                                   |       |                                   |       |   |   |   |   |
| Employment contract  termination and stock compensation |       | $                                      | —     |                                   | $          | — |   | $ | — |   | $ | 5,574 |   |
| Legal, accounting and  other professional fees          |       | 15                                     |       | 75                                     |       | 49 |   | 3,862 |   |
| Severance costs                                         |       | —                                 |       | —                                 |       | 1,177 |   | — |   |
| Legal settlements                                       |       | —                                 |       | 50                                     |       | — |   | — |   |
| Total transaction  expenses                             |       | $                                      | 15         |                                   | $          | 125 |   | $ | 1,226 |   | $ | 9,436 |   |
| Debt extinguishment  costs:                             |       |                                   |       |                                   |       |   |   |   |   |
| Debt prepayment  penalties                              |       | $                                      | —     |                                   | $          | 2,305 |   | $ | — |   | $ | 1,298 |   |
| Write-off of deferred  financing costs                  |       | —                                 |       | 4,344                                  |       | — |   | 3,322 |   |
| Derivative termination                                  |       | —                                 |       | 207                                    |       | — |   | 1,896 |   |
| Total debt  extinguishment costs                        |       | $                                      | —     |                                   | $          | 6,856 |   | $ | — |   | $ | 6,516 |   |

 

**19. Commitments and contingencies**

 

***Insurancereserves***

 

The Companyretains a significant portion of certain insurable risks primarily in themedical, 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 3, 2005, the Company hadplaced letters of credit totaling approximately $7.3 million, primarilyassociated with its insurance programs.

 

***Litigationand tax contingencies***

 

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

 

The Company was a defendant in twopurported class action claims in California. The first class action claim wasbrought in October 2003 by two former employees and one current employee,and the second class action claim was brought in May 2004 by two formeremployees. The parties entered into asettlement agreement, which was approved June 1, 2005. Under the terms ofthe settlements, the Company agreed to pay up to an aggregate of $6.55 millionfor the alleged claims and associated legal fees, subject to partialindemnification as noted in the lawsuit described below.

 

F-33

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The Company filed a lawsuit on December 3, 2004 against the formershareholders of Midway (the former parent of VICORP Restaurants, Inc.),including certain members of current management, in the Circuit Court of CookCounty, Illinois seeking indemnification for all of the damages related to suchlitigation under the purchase agreement dated June 14, 2003 pursuant towhich VICORP Restaurants, Inc. was acquired, in addition to the assertionof other claims.

 

The former shareholders of Midway Investors Holdings Inc. filed alawsuit on December 22, 2004 in Suffolk County Superior Court inMassachusetts.  The former shareholdersof Midway Investors Holdings Inc. claimed, among other allegations, that VICORPimproperly sought indemnification and denied liability for the portion of thedamages in the previously mentioned class action lawsuits that arose followingthe closing of the June 2003 acquisition, and for certain settlements forwhich they claim they did not receive appropriate notice or approval rights.

 

The former shareholders of Midway Investors Holdings Inc. haveacknowledged they are liable to the Company for the pre-closing portion ofsettlement agreements. During the fourth quarter of fiscal 2004, the Companyestablished a receivable of $3.4 million on our consolidated balance sheet forthe former shareholders’ estimated portion of the settlement.  In the third quarter of 2005, the $6.55million reserve mentioned above was reduced to $5.3 million, as the informationregarding the ultimate costs was finalized by the trustee.  The associated receivable from the Midway shareholderswas reduced by $0.8 million, in conjunction with the reduction to the estimatedreserve for the settlement agreements, resulting in a receivable balance of$2.65 million.

 

The Company has, through its parent VI Acquisition Corp., entered intoan agreement to settle claims brought against the former shareholders of MidwayInvestor Holdings Inc., in the Circuit Court of Cook County, Illinois, seekingindemnification under the purchase agreement dated June 14, 2003 and tosettle claims brought against the Company by the former shareholders of MidwayInvestor Holdings Inc. in the Superior Court, Department of Trial Court in theCommonwealth of Massachusetts, Business Litigation Section, seeking release ofthe escrow funds under the purchase agreement. In connection with the settlement of these claims, VI Acquisition Corp.received a settlement payment of $2.65 million in December 2005.

 

***Guaranteesand commitments***

 

VICORP guaranteedcertain leases for restaurant properties sold in 1986 and restaurant leases ofcertain franchisees. Minimum future rental payments remaining under theseleases was approximately $2.3 million as of November 3, 2005.  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.

 

Contractualobligations for restaurant construction amounted to approximately $11.0 millionas of November 3, 2005.

 

***Indemnifications***

 

In the normal course of business, theCompany is party to a variety of agreements under which it may be obligated toindemnify the other party for certain matters. These obligations typicallyarise in contracts where the Company customarily agree to hold the other partyharmless against losses arising from a breach of representations or covenantsfor certain matters such as title to assets. The Company also has indemnification obligations to its officers anddirectors. The duration of these indemnifications varies, and in certain cases,is indefinite. In each of these circumstances, payment by the Company dependsupon the other party making an adverse claim according to the proceduresoutlined in the particular agreement, which procedures generally allow theCompany to challenge the other party’s claims. In certain instances, theCompany may have recourse against third parties for payments that we make.

 

The Company is unable to reasonablyestimate the maximum potential amount of future payments under these or similaragreements due to the unique facts and circumstances of each agreement and thefact that certain indemnifications provide for no limitation to the maximumpotential future payments under the indemnification.The Company has not recorded any liability for these indemnifications in theaccompanying consolidated balance sheets; however, the Company does accruelosses for any known contingent liability, including those that may arise from indemnification provisions, when the obligation isboth probable and reasonably estimable.

 

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**20. Related party transactions**

 

On June 14,2003, the Company entered into a professional services agreement with WindPoint Investors, IV, L.P. and Wind Point Investors V, L.P., whereby certainmanagement, financial and other consulting services would be provided to theCompany.  Under terms of the agreement,the Company pays a total annual fee of $850,000 to the partnerships. Inconnection with the April 14, 2004 debt refinancing (Note 7), the Companyalso paid an additional $309,000 in fees to Wind Point Investors IV, L.P. andWind Point Investors V, L.P., which represented a deferral of a portion of thetransaction fee payable to Wind Point Investors IV, L.P. and Wind PointInvestors V, L.P. in connection with the June 2003 acquisition (Note 1).  Total management fees paid to Wind PointInvestors, IV, L.P. and Wind Point Investors V, L.P. totaled $1,063,000, $1,088,000and $315,000 for the fiscal years ended November 3, 2005, October 28,2004 and the period from June 14, 2003 through October 26, 2003, respectively.  Total management fee expense for the fiscalyears ended November 3, 2005, October 28, 2004 and the period from June 14,2003 through October 26, 2003 was $850,000, $1,159,000 and $315,000,respectively. As of November 3, 2005 and October 28, 2004, $63,000and $275,000 of such management fees were accrued but unpaid (Note 6).

 

The Company previouslyhad obtained a letter of credit which was required to secure the personal loanof a member of management. The proceeds under this arrangement were used by theindividual to participate in the acquisition of the Company’s stock (Note 11).  The Company assumed fees associated with thisletter of credit in the amount of approximately $8,000.  The loan was paid in full in February 2004.

 

On May 14,2001, the Company entered into management fee agreements with Goldner, Hawn,Johnson & Morrison, a Minnesota corporation, and Second CapitalCorporation of Boston (“Second Capital”), a Massachusetts corporation, wherebycertain management, financial and other consulting services would be providedto the Company’s predecessor.  Under theterms of the agreement, the Company paid a total annual fee of $1.0 million toGoldner Hawn and Second Capital. Management fees totaled approximately $575,000 for the period from October 28,2002 through June 13, 2003. This agreement terminated on June 13,2003.

 

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

### * *

The Company’s quarterly results of operations for fiscal years 2005 and2004 are summarized as follows:

 

| ** **                      | ** ** | **Quarter ended (a)**      | ** ** |
|---------------------------------|------------|----------------------------|------------|
| **(In thousands)  Fiscal 2005** | ** ** | **January 27,  2005** | ** ** | **April 21,  2005** | ** ** | **July 14,  2005** | ** ** | **November 3,  2005** | ** ** |
|                            |       |                       |       |   |   |   |   |   |   |
| Revenues                        |       | $                          | 105,752    |   | $ | 93,530 |   | $ | 92,508 |   | $ | 120,914 |   |
| Litigation settlement           |       | —                     |       | — |   | — |   | — |   |
| Transaction costs               |       | 15                         |       | — |   | — |   | — |   |
| Impairment expense              |       | —                     |       | — |   | — |   | — |   |
| Operating profit                |       | 10,206                     |       | 6,770 |   | 7,723 |   | 7,108 |   |
| Debt extinguishment  costs      |       | —                     |       | — |   | — |   | — |   |
| Net income (loss)               |       | 2,269                      |       | 456 |   | 1,308 |   | (570 | ) |
|                                 |            |                            |            |  |  |  |  |  |  |  |  |  |  |

 

| ** **                 | ** ** | **Quarter ended (a)**      | ** ** |
|----------------------------|------------|----------------------------|------------|
| **Fiscal 2004**            | ** ** | **January 22,  2004** | ** ** | **April 15,  2004** | ** ** | **July 8,  2004** | ** ** | **October 28,  2004** | ** ** |
|                       |       |                       |       |   |   |   |   |   |   |
| Revenues                   |       | $                          | 100,594    |   | $ | 93,125 |   | $ | 90,123 |   | $ | 115,882 |   |
| Litigation settlement      |       | —                     |       | — |   | — |   | 3,168 |   |
| Transaction costs          |       | 22                         |       | 23 |   | — |   | 80 |   |
| Impairment expense         |       | —                     |       | 22 |   | — |   | 1,079 |   |
| Operating profit           |       | 8,984                      |       | 7,017 |   | 7,492 |   | 4,191 |   |
| Debt extinguishment  costs |       | —                     |       | 6,856 |   | — |   | — |   |
| Net income (loss)          |       | 2,043                      |       | (3,663 | ) | 973 |   | (1,878 | ) |
|                            |            |                            |            |  |  |  |  |  |  |  |  |  |  |

 

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(a) The Company’s first, second and third quarters generallyconsist of twelve weeks each and the fourth quarter consists of sixteenweeks.  However, the first quarter offiscal 2004 included an additional four days due to a change made to end fiscalquarters on a Thursday rather than a Sunday (Note 1). The first quarter offiscal 2005 included an extra week.

 

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