**UNITEDSTATES SECURITIES AND EXCHANGECOMMISSION**

**Washington, DC 20549-1004**

**FORM 10-Q**

| **x**                                             |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------|--------|--------------------------------------------------------------------------------------|
| ** **                                        |   | ** **                                                                           |
| **For the  quarterly period ended July 12, 2007** |
| ** **                                        |
| **OR**                                            |
| ** **                                        |
| **o**                                             |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition periodfrom                 to                 **

**Commission file number 333-117263**

**VICORPRESTAURANTS, INC.**

(Exact name of registrant as specified in its charter)

| **COLORADO**                                         |   | **84-0511072**       |
|------------------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of                     |   | (I.R.S. Employer     |
| incorporation or  organization)                      |   | Identification  No.) |
|                                                 |   |                 |
| **400  WEST 48****TH AVENUE, DENVER, COLORADO** |   | **80216**            |
| (Address of  principal executive offices)            |   | Zip Code)            |

 

**(303)296-2121**

(Registrant’s telephone number, including area code)

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

**None**

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

**None**

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.

YES  o  NO  x

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

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months and (2) has been subject tosuch filing requirements for the past 90 days.   YES   x  NO   o

Indicate by check mark ifdisclosure of delinquent filers, pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated by referencein Part III of the Form 10-K or any amendment to this form 10-K: x

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.

Large accelerated filer o                            Acceleratedfiler  o         Non-acceleratedfiler  x

Indicate by check mark whether the registrant is a shell Company (asdefined in Rule 12b-2 of the Exchange Act).

YES  o                                                    NO  x

Number of shares of CommonStock, $0.0001 par value, outstanding at August 24, 2007: 1,271,928, excludingtreasury shares.

 

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**VICORPRESTAURANTS, INC.**

**July12, 2007**

**INDEX**
| **PART I - FINANCIAL  INFORMATION** | ** ** |
|-------------------------------------|------------|
|                                |       |   |   |
|                                | Item 1.    | Unaudited  Consolidated Financial Statements |   |
|                                |       |   |   |
|                                |       | Consolidated Balance  Sheets as of July 12, 2007 and November 2, 2006 |   |
|                                |       |   |   |
|                                |       | Consolidated  Statements of Operations for the 84 days ended July 12, 2007 and July 13,  2006 and the 252 days ended July 12, 2007 and July 13, 2006 |   |
|                                |       |   |   |
|                                |       | Consolidated  Statements of Cash Flows for the 252 days ended July 12, 2007 and July 13,  2006 |   |
|                                |       |   |   |
|                                |       | Notes to  Consolidated Financial Statements |   |
|                                |       |   |   |
|                                | Item 2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                |       |   |   |
|                                | Item 3.    | Quantitative  and Qualitative Disclosures About Market Risk |   |
|                                |       |   |   |
|                                | Item 4.    | Controls and  Procedures |   |
|                                |       |   |   |
| **PART II - OTHER  INFORMATION**    |       |
| ** **                          | ** ** | ** ** | ** ** | ** ** |
|                                | Item 1.    | Legal Proceedings |   |
|                                |       |   |   |
|                                | Item  1a.  | Risk  Factors |   |
|                                |       |   |   |
|                                | Item 2.    | Unregistered  Sales of Equity Securities and Use of Proceeds |   |
|                                |       |   |   |
|                                | Item 3.    | Defaults  Upon Senior Securities |   |
|                                |       |   |   |
|                                | Item 4.    | Submission  of Matters to a Vote of Security Holders |   |
|                                |       |   |   |
|                                | Item 5.    | Other Information |   |
|                                |       |   |   |
|                                | Item  6.   | Exhibits |   |
|                                |       |   |   |
| **SIGNATURES**                      |       |
|                                     |            |  |  |  |

 

2

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**PART I –FINANCIAL STATEMENTS**

**Item1.  UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS**

**VIAcquisition Corp.**

**Consolidated Balance Sheets**

**(Unaudited)**
| **(in thousands, except share data)**                                                                                                                                                                                          | ** ** | **July 12,  2007** | ** ** | **November 2,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| **Assets**                                                                                                                                                                                                                                         |       |                    |       |                       |       |
| Current assets:                                                                                                                                                                                                                                    |       |                    |       |                       |       |
| Cash and cash  equivalents                                                                                                                                                                                                                         |       | $                       | 2,464      |                       | $          | 1,938 |   |
| Receivables, net                                                                                                                                                                                                                                   |       | 7,108                   |       | 12,497                     |       |
| Inventories                                                                                                                                                                                                                                        |       | 14,325                  |       | 16,459                     |       |
| Deferred income  taxes, short-term                                                                                                                                                                                                                 |       | 2,360                   |       | 2,387                      |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                         |       | 4,523                   |       | 4,476                      |       |
| Prepaid rent                                                                                                                                                                                                                                       |       | 1,960                   |       | 2,459                      |       |
| Income tax  receivable                                                                                                                                                                                                                             |       | 302                     |       | 1,180                      |       |
| Total current  assets                                                                                                                                                                                                                              |       | 33,042                  |       | 41,396                     |       |
| Property and equipment,  net                                                                                                                                                                                                                       |       | 87,001                  |       | 94,234                     |       |
| Assets under deemed  landlord financing liability, net                                                                                                                                                                                             |       | 98,207                  |       | 99,884                     |       |
| Goodwill                                                                                                                                                                                                                                           |       | 91,881                  |       | 91,881                     |       |
| Trademarks and  tradenames                                                                                                                                                                                                                         |       | 42,600                  |       | 42,600                     |       |
| Franchise rights, net                                                                                                                                                                                                                              |       | 9,591                   |       | 10,071                     |       |
| Deferred income taxes                                                                                                                                                                                                                              |       | 2,650                   |       | 2,623                      |       |
| Other non-current  assets, net                                                                                                                                                                                                                     |       | 11,197                  |       | 12,553                     |       |
| Total assets                                                                                                                                                                                                                                       |       | $                       | 376,169    |                       | $          | 395,242 |   |
| **Liabilities and stockholders’  equity**                                                                                                                                                                                                     |       |                    |       |                       |       |
| Current liabilities:                                                                                                                                                                                                                               |       |                    |       |                       |       |
| Current  maturities of long-term debt and capitalized lease obligations                                                                                                                                                                            |       | $                       | 1,147      |                       | $          | 847 |   |
| Unpresented  checks                                                                                                                                                                                                                                |       | 4,705                   |       | 7,363                      |       |
| Accounts payable                                                                                                                                                                                                                                   |       | 14,031                  |       | 15,931                     |       |
| Accrued  compensation                                                                                                                                                                                                                              |       | 8,251                   |       | 8,170                      |       |
| Accrued taxes                                                                                                                                                                                                                                      |       | 8,618                   |       | 7,049                      |       |
| Build-to-suit  liability                                                                                                                                                                                                                           |       | —                  |       | 2,549                      |       |
| Other accrued  expenses                                                                                                                                                                                                                            |       | 15,756                  |       | 12,175                     |       |
| Total current  liabilities                                                                                                                                                                                                                         |       | 52,508                  |       | 54,084                     |       |
| Long-term debt, net of  current maturities                                                                                                                                                                                                         |       | 149,286                 |       | 153,181                    |       |
| Capitalized lease  obligations, net of current maturities                                                                                                                                                                                          |       | 225                     |       | 140                        |       |
| Deemed landlord  financing liability                                                                                                                                                                                                               |       | 108,760                 |       | 108,033                    |       |
| Other non-current  liabilities                                                                                                                                                                                                                     |       | 16,372                  |       | 15,402                     |       |
| Total  liabilities                                                                                                                                                                                                                                 |       | 327,151                 |       | 330,840                    |       |
| Commitments and  contingencies (Note 5)                                                                                                                                                                                                            |       |                    |       |                       |       |
| Stock subject to  repurchase                                                                                                                                                                                                                       |       | 489                     |       | 1,055                      |       |
| Stockholders’ equity:                                                                                                                                                                                                                         |       |                    |       |                       |       |
| Series A  Preferred Stock, $0.0001 par value:                                                                                                                                                                                                 |       |                    |       |                       |       |
| Series A,  100,000 shares authorized, 68,396 shares issued and outstanding at July 12,  2007 and 68,943 shares issued and outstanding at November 2, 2006  (aggregate liquidation preference of $104,179 and $97,971, respectively) |       | 105,804                 |       | 98,501                     |       |
| 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, 1,271,928 shares issued and outstanding at July  12, 2007 and 1,361,753 shares issued and outstanding at November 2, 2006                                                                         |       | —                  |       | —                     |       |
| Paid-in capital                                                                                                                                                                                                                                    |       | 2,465                   |       | 2,446                      |       |
| Treasury stock,  at cost, 2,466.54 shares of preferred stock and 249,395 shares of common  stock at July 12, 2007 and 1,371.87 shares of preferred stock and  140,490 shares of common stock at November 2, 2006                         |       | (2,261                  | )          | (1,057                     | )          |
| Accumulated  deficit                                                                                                                                                                                                                               |       | (57,479                 | )          | (36,543                    | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                   |       | 48,529                  |       | 63,347                     |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                                                                   |       | $                       | 376,169    |                       | $          | 395,242 |   |

 

*Seeaccompanying notes to consolidated financial statements.*

3

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**VIAcquisition Corp.**

**Consolidated Statements of Operations**

**(InThousands)**

**(Unaudited)**
| ** **                                    | ** ** | **For the 84 days ended** | ** ** | **For the 252 days ended** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                    | ** ** | **July 12,**                             | ** ** | **July 13,**                              | ** ** | **July 12,** | ** ** | **July 13,** | ** ** |
| ** **                                    | ** ** | **2007**                                      | ** ** | **2006**                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                          |       |                                          |       |                                           |       |   |   |   |   |
| **Revenues:**                                 | ** ** | ** **                                    | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Restaurant operations                         |       | $                                             | 97,097     |                                           | $          | 96,626 |   | $ | 301,892 |   | $ | 298,868 |   |
| Franchise operations                          |       | 1,167                                         |       | 1,166                                          |       | 3,501 |   | 3,497 |   |
| Manufacturing  operations                     |       | 8,640                                         |       | 7,641                                          |       | 30,649 |   | 21,364 |   |
| Total revenues                                |       | 106,904                                       |       | 105,433                                        |       | 336,042 |   | 323,729 |   |
| ** **                                    | ** ** | ** **                                    | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Costs  and expenses:**                      | ** ** | ** **                                    | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Restaurant costs:                             |       |                                          |       |                                           |       |   |   |   |   |
| Food                                          |       | 26,162                                        |       | 24,194                                         |       | 81,330 |   | 76,936 |   |
| Labor                                         |       | 34,141                                        |       | 32,227                                         |       | 103,601 |   | 98,501 |   |
| Other operating  expenses                     |       | 29,317                                        |       | 28,646                                         |       | 90,325 |   | 87,267 |   |
| Franchise operating  expenses                 |       | 496                                           |       | 502                                            |       | 1,453 |   | 1,488 |   |
| Manufacturing operating  expenses             |       | 8,435                                         |       | 7,381                                          |       | 30,350 |   | 21,166 |   |
| General and  administrative expenses          |       | 7,057                                         |       | 6,737                                          |       | 20,712 |   | 19,835 |   |
| Management fees –  related party         |       | 196                                           |       | 196                                            |       | 588 |   | 588 |   |
| Employee severance                            |       | 118                                           |       | —                                         |       | 618 |   | — |   |
| Loss on disposition of  assets                |       | 56                                            |       | 159                                            |       | 466 |   | 336 |   |
| Asset impairments                             |       | —                                        |       | —                                         |       | 1,555 |   | 821 |   |
| Operating profit                              |       | 926                                           |       | 5,391                                          |       | 5,044 |   | 16,791 |   |
| Interest expense                              |       | (6,648                                        | )          | (6,990                                         | )          | (19,814 | ) | (21,019 | ) |
| Other income,  net                            |       | 59                                            |       | 343                                            |       | 589 |   | 627 |   |
| Loss before  income taxes                     |       | (5,663                                        | )          | (1,256                                         | )          | (14,181 | ) | (3,601 | ) |
| Income tax  benefit                           |       | —                                        |       | (675                                           | )          | — |   | (1,795 | ) |
| Net loss                                      |       | (5,663                                        | )          | (581                                           | )          | (14,181 | ) | (1,806 | ) |
| Preferred stock  dividends and accretion      |       | (1,907                                        | )          | (2,322                                         | )          | (6,755 | ) | (6,749 | ) |
| Net loss attributable  to common stockholders |       | $                                             | (7,570     | )                                              | $          | (2,903 | ) | $ | (20,936 | ) | $ | (8,555 | ) |

 

*See accompanying notes toconsolidated financial statements.*

4

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**VIAcquisition Corp.**

**Consolidated Statements of Cash Flow**

**(InThousands)**

**(Unaudited)**
| ** **                                                                                      | ** ** | **For 252 days ended** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                      | ** ** | **July 12,**                     | ** ** | **July 13,** | ** ** |
| ** **                                                                                      | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| **Operating  activities:**                                                                      | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Net loss                                                                                        |       | $                                     | (14,181    | ) | $ | (1,806 | ) |
| Reconciliation  to net cash provided by operating activities:                                   |       |                                  |       |   |   |
| Depreciation and amortization                                                                   |       | 13,823                                |       | 15,471 |   |
| Asset impairments                                                                               |       | 1,555                                 |       | 821 |   |
| Amortization of financing costs and original issue  discounts                                   |       | 883                                   |       | 866 |   |
| Loss on disposition of assets                                                                   |       | 466                                   |       | 336 |   |
| Deferred income tax benefit                                                                     |       | —                                |       | 445 |   |
| Amortization of deferred gain/loss                                                              |       | 14                                    |       | (2 | ) |
| Accretion of interest on deemed landlord financing  obligations                                 |       | 228                                   |       | 421 |   |
| Changes in operating assets and liabilities:                                                    |       |                                  |       |   |   |
| Receivables, net                                                                                |       | 4,832                                 |       | 1,121 |   |
| Inventories                                                                                     |       | 2,134                                 |       | (734 | ) |
| Unpresented checks                                                                              |       | (2,658                                | )          | (3,997 | ) |
| Accounts payable                                                                                |       | (1,900                                | )          | (856 | ) |
| Accrued compensation                                                                            |       | 80                                    |       | (2,482 | ) |
| Other current assets and liabilities                                                            |       | 6,670                                 |       | 4,473 |   |
| Other non-current assets and liabilities, net                                                   |       | 1,837                                 |       | 2,076 |   |
| Net cash provided by operating activities                                                       |       | 13,783                                |       | 16,153 |   |
| **Investing  activities:**                                                                      | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Acquisition of  franchisee restaurants                                                          |       | —                                |       | (650 | ) |
| Purchase of  property and equipment                                                             |       | (8,007                                | )          | (16,929 | ) |
| Purchase of  assets under deemed landlord financing liability                                   |       | (1,072                                | )          | (10,380 | ) |
| Purchase of  build-to-suit assets                                                               |       | (1,083                                | )          | — |   |
| Proceeds from  build-to-suit reimbursements                                                     |       | 1,790                                 |       | 792 |   |
| Net cash (used in) investing activities                                                         |       | (8,372                                | )          | (27,167 | ) |
| **Financing  activities:**                                                                      | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Payments of  debt, capital lease obligations, and deemed landlord financing obligations         |       | (88,648                               | )          | (53,086 | ) |
| Proceeds from  issuance of debt                                                                 |       | 82,410                                |       | 54,550 |   |
| Proceeds from  deemed landlord financing                                                        |       | 1,459                                 |       | 10,525 |   |
| Debt amendment  costs                                                                           |       | (106                                  | )          | — |   |
| Issuance of  common stock                                                                       |       | —                                |       | 84 |   |
| Payments for  repurchase of stock                                                               |       | —                                |       | (745 | ) |
| Net cash (used) provided by financing activities                                                |       | (4,885                                | )          | 11,328 |   |
| Increase  (decrease) in cash and cash equivalents                                               |       | 526                                   |       | 314 |   |
| Cash and cash  equivalents at beginning of period                                               |       | 1,938                                 |       | 2,099 |   |
| Cash and cash  equivalents at end of period                                                     |       | $                                     | 2,464      |   | $ | 2,413 |   |
|                                                                                            |       |                                  |       |   |   |
| **Supplemental  disclosures of cash flow information:**                                         | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Cash paid during  the period for:                                                               |       |                                  |       |   |   |
| Interest on long-term debt and deemed landlord  financing liability (net of amount capitalized) |       | $                                     | 16,810     |   | $ | 18,016 |   |
| Income taxes                                                                                    |       | 17                                    |       | 861 |   |
|                                                                                            |       |                                  |       |   |   |
| **Supplemental  disclosures of non-cash investing and financing activities:**                   | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Deemed landlord / build-to-suit reimbursements not  yet received                                |       | $                                     | 2,360      |   | $ | 1,230 |   |
| Deemed landlord / build-to-suit financing–third  party direct pays                         |       | 983                                   |       | 5,952 |   |
| Capital lease – equipment                                                                  |       | 156                                   |       | — |   |
| Issuance of a promissory note to repurchase equity  securities                                  |       | 1,204                                 |       | — |   |
| Property insurance financing                                                                    |       | 1,066                                 |       | — |   |
| Preferred stock  dividends and accretion                                                        |       | $                                     | 6,755      |   | $ | 6,749 |   |

 

*See accompanying notes toconsolidated financial statements.*

5

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**VIAcquisition Corp.**

**Notes to Consolidated Financial Statements**

**July 12,2007**

**(Unaudited)**

**1.     Descriptionof the Business and Basis of Presentation**

**Description of Business**

VI AcquisitionCorp. (the “Company” or “VI Acquisition”), a Delaware corporation, wasorganized in June 2003 by Wind Point Partners and other co-investors. VICORPRestaurants, Inc. (“VICORP”) is wholly-owned by VI Acquisition Corp.  As a holding company, VI Acquisition Corp.does not have any independent operations and consequently its consolidatedstatements of operations are substantially equivalent to those of VICORPRestaurants, Inc.

The Companyoperates family style restaurants under the brand names “Bakers Square” and “VillageInn,” and franchises restaurants under the Village Inn brand name. At July 12,2007, the Company operated 316 Company-owned restaurants in 17 states.  Of the Company-owned restaurants, 146 areBakers Square restaurants and 170 are Village Inn restaurants, with anadditional 93 franchised Village Inn restaurants in 18 states.  The Company-owned and franchised restaurantsare concentrated in Arizona, California, Florida, the Rocky Mountain region,and the upper Midwest.  In addition, theCompany operates three pie manufacturing facilities located in Santa Fe Springs,California; Oak Forest, Illinois; and Chaska, Minnesota.

**Basis ofPresentation**

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith generally accepted accounting principles (“GAAP”) in the United States ofAmerica for interim financial information and with the instructions to Form10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by GAAP for complete financial statements.  In the opinion of management, the financialstatements include all adjustments, consisting of normal recurring adjustments,necessary for a fair presentation. However, operating results for the quarter ended July 12, 2007 are notnecessarily indicative of the results that may be expected for the fiscal yearending November 1, 2007.  Theconsolidated balance sheet at November 2, 2006, has been derived from theaudited consolidated financial statements at that date, but does not include allof the information and footnotes required by GAAP for complete financialstatements.  For further information,refer to the audited consolidated financial statements and footnotes theretofor the year ended November 2, 2006, included on Form 10-K.

**FiscalPeriods**

TheCompany utilizes a fiscal year based on thirteen periods whereby the last dayof the fiscal year is the nearest Thursday to October 31st.  Each period consists of four weeks, beginningon the first Friday following fiscal year end. Each quarter consists of three periods each, with the fourth quarterhaving four periods.  The third quarterof fiscal 2007 and 2006 ended on July 12, 2007 and July 13, 2006, respectively.

**Stock-BasedCompensation**

Priorto November 3, 2006, the Company accounted for share-based payments toemployees in accordance with the recognition and measurement provisions ofAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees*,”* (“APB No. 25”) and relatedinterpretations, as permitted by Statement of Financial Accounting Standards (“SFAS”)No. 123, “Accounting forStock-Based Compensation”.  UnderAPB No. 25, compensation expense related to stock options is calculated as thedifference between the exercise price of the option and the fair market valueof the underlying stock at the date of grant. This expense was recognized over the vesting period of the option or atthe time of grant if the options immediately vested.  Simultaneous with the closing of the Company’ssale transaction in June 2003, all options became immediately vested.

EffectiveNovember 3, 2006, the Company adopted the provisions of SFAS No. 123(revised 2004), “Share-Based Payment” (“SFAS 123(R)”), using the modifiedprospective method, requiring all share-based payments to employees, includinggrants of employee stock options, to be recognized in the income statementbased on their fair values.  For purposesof SFAS 123(R), the Company is considered a non-public filer because it is anentity that has only debt securities trading in a public

6

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marketand as such, the adoption date was for the first fiscal year beginning afterDecember 15, 2005.  As there have been nogrants of share-based payments since the adoption of SFAS123(R) and there wasno unamortized compensation expense at the date of adoption, there is no effecton the consolidated financial statements for the 252 days ended July 12, 2007and July 13, 2006, respectively.

**NewAccounting Pronouncements**

In June 2006, the Financial Accounting Standards Board(“FASB”) issued Interpretation No. 48, ‘‘Accounting for Uncertainty in IncomeTaxes – an interpretation of FASB Statement No. 109,’’ (“FIN 48”) whichclarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FASB Statement No. 109, ‘‘Accountingfor Income Taxes.’’  FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return.  The guidance set forthunder FIN 48 must be applied to financial reports covering the first fiscalyear beginning after December 15, 2006, therefore the Company will adoptthis guidance in fiscal 2008.  TheCompany is currently assessing financial impact to the consolidated financialstatements upon adoption.

In September 2006, theSecurities and Exchange Commission issued Staff Accounting Bulletin (“SAB”)No. 108, “Considering the Effectsof Prior Year Misstatements When Quantifying Misstatements in Current YearFinancial Statements*”* (“SAB108”).  SAB 108 provides guidance on theconsideration of the effects of prior year misstatements in quantifying currentyear misstatements for the purpose of a materiality assessment.  The Company assesses the materiality ofunrecorded misstatements under the rollover method.  The guidance set forth under SAB 108 must beapplied to financial reports covering the first fiscal year ending afterNovember 15, 2006, therefore the Company will adopt this guidance in thefourth quarter of fiscal 2007.  TheCompany is currently assessing financial impact to the consolidated financialstatements upon adoption.

On September 18,2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”),which defines fair value, establishes a framework for measuring fair value inaccordance with GAAP and expands disclosures about fair valuemeasurements.  SFAS No. 157 is effectivefor fiscal years beginning after November 15, 2007.  The Company does not believe such adoptionwill have a material impact on the consolidated financial statements.

In June 2006, the FASBratified the consensus on Emerging Issues Task Force Issue No. 06-3 (“EITFNo. 06-3”), “How Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement”. The scope ofEITF No. 06-3 includes any tax assessed by a governmental authority thatis directly imposed on a revenue-producing transaction between a seller and acustomer and may include, but is not limited to, sales, use, value added andsome excise taxes.  The Task Forceaffirmed its conclusion that entities should present these taxes in the incomestatement on either a gross or a net basis based on their accounting policy,which should be disclosed pursuant to Accounting Principles Board Opinion No. 22,“Disclosure of Accounting Policies.”  Ifsuch taxes are significant and are presented on a gross basis, the amounts ofthose taxes should be disclosed.  Theconsensus on EITF No. 06-3 will be effective for interim and annualreporting periods beginning after December 15, 2006; therefore, theCompany adopted this guidance in the second quarter of fiscal 2007.  As it is the accounting policy of the Companyto present such taxes on the income statement on a net basis, such adoption isnot expected to affect current disclosures.

**Reclassifications**

Certain immaterialprior period amounts in the accompanying consolidated financial statements havebeen reclassified to conform to the presentation in fiscal 2007.  These reclassifications had no effect on theCompany’s consolidated net loss.

7

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**2.     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:
|                                                                              | ** ** | **July 12,** | ** ** | **November 2,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| **(in thousands)**                                                      | ** ** | **2007**          | ** ** | **2006**             | ** ** |
| Inventories at  pie production facilities and third-party storage locations: |       |              |       |                 |       |
| Raw materials                                                                |       | $                 | 5,389      |                 | $          | 6,453 |   |
| Finished goods                                                               |       | 5,463             |       | 6,940                |       |
|                                                                         |       | 10,852            |       | 13,393               |       |
| Restaurant  inventories                                                      |       | 3,473             |       | 3,066                |       |
| Total inventories                                                            |       | $                 | 14,325     |                 | $          | 16,459 |   |

 

**3.     Receivables, net**

Receivables, net consisted of the following:
|                                  | ** ** | **July 12,** | ** ** | **November 2,** | ** ** |
|----------------------------------|------------|-------------------|------------|----------------------|------------|
| **(in thousands)**          | ** ** | **2007**          | ** ** | **2006**             | ** ** |
|                             |       |              |       |                 |       |
| Trade receivables                |       | $                 | 4,214      |                 | $          | 8,249 |   |
| Construction  receivables        |       | 2,360             |       | 3,797                |       |
| Other  receivables               |       | 629               |       | 591                  |       |
| Allowance for  doubtful accounts |       | (95               | )          | (140                 | )          |
| Receivables, net                 |       | $                 | 7,108      |                 | $          | 12,497 |   |

 

**4.     Debt**

On April 14, 2004,the Company completed a private placement of $126.5 million aggregate principalamount of 10.5% senior unsecured notes maturing on April 15, 2011. The noteswere issued at a discounted price of 98.791% of face value, resulting in netproceeds before transaction expenses of $125.0 million. The senior unsecurednotes were issued by VICORP Restaurants, Inc. and are guaranteed by VIAcquisition Corp. Concurrently with the issuance of the 10.5% senior unsecurednotes, the Company entered into an amended and restated senior secured creditfacility consisting of a $15.0 million term loan and a $30.0 million revolvingcredit facility, with a $15.0 million sub-limit for letters of credit.

On February 16,2007 the Company entered into an amendment to the senior secured creditfacility which provided for an increase in the revolving credit facility to$35.0 million, and changed the borrowing base governing the revolving creditfacility to be the lesser of (a) $35.0 million and (b) 1.8 times trailingtwelve months Adjusted EBITDA (as defined in the senior secured creditagreement) minus the outstanding principal amount of the senior secured termloan.  Under the amended formula, theCompany had the ability to borrow a total of $29.9 million under the revolvingcredit facility as of July 12, 2007.

The senior securedcredit facility requires the Company to maintain or comply with a minimumAdjusted EBITDA, a minimum Fixed Charge Coverage ratio, and a maximum GrowthCapital Expenditures limitation. Under the February 16, 2007 amendment, thedefinition of Adjusted EBITDA and certain of the financial covenants governingthe senior secured credit facility were amended, and the interest rate marginsassociated with both base rate and LIBOR borrowings were reduced.

On July 27, 2007, the Company entered into amendment number three tothe amended and restated senior secured credit facility.  Theamended agreement provides for the definition of Adjusted EBITDA and certain ofthe financial covenants governing the senior secured credit facility wereamended.  As of July 12, 2007, theCompany was in compliance with these covenants.

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In connection with the resignation of the Company’s formerCEO, Debra Koenig, on March 5, 2007, the Company entered into an agreement torepurchase the equity securities of the Company held by the officer.  The Company issued a subordinated promissorynote in the principal amount of $1.2 million with an annual interest rateof  8.25% to repurchase the equitysecurities held by the officer.  Theclosing date for the purchase was June 22, 2007.  The Company’s obligation to pay principal andinterest is subject to and limited by the Company’s senior indebtedness.  The promissory note includes a provision thatin the event of a sale of the Company that results in a specified return onequity the Company will pay the officer an additional $0.2 million.

  **5.           Commitments and Contingencies**

**Insurance reserves**

The Company retains a significant portion of certaininsurable risks primarily in the medical, dental, workers’ compensation,general liability and property areas. The Company had an insurance reserveliability of $9.3 million and $8.9 million recorded as of July 12, 2007 andNovember 2, 2006, respectively. Traditional insurance coverage is obtainedfor catastrophic losses. Provisions for losses expected under these programsare recorded based upon the Company’s estimates of liabilities for claimsincurred, including those not yet reported. Such estimates utilize priorcompany history and actuarial assumptions followed in the insurance industry.As of July 12, 2007, the Company had placed letters of credit totalingapproximately $6.5 million, associated with its insurance programs.

**Litigation 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 state agencies.Management believes the ultimate disposition of these matters will not have amaterial adverse effect on the Company’s consolidated financial position orresults of operations.

The Company iscurrently a defendant in two purported class action claims in California. Thefirst purported class action was brought in March 2006 by two former managersand alleges that the Company violated California law with regard to unpaidovertime, compensation for missed meals and rest periods, civil penalties forfailure to provide itemized wage statements, failure to provide notice onpaychecks where paychecks may be cashed without any fees, and unfair business practices.The classes and subclasses alleged in the action have not been certified by thecourt at the current stage of the litigation but generally are claimed to bepersons who have been employed since February 1, 2005, in the position ofrestaurant managers, persons who have been employed in California since March15, 2002, in any capacity who received a payroll check in California, and allrestaurant managers who have ended their employment with the Company prior tothe effective date of any settlement, judgment, or other resolution of theaction. No dollar amount in damages is requested in the Complaint and theComplaint seeks statutory damages, and attorneys’ fees in an unspecifiedamount. The Company intends to vigorously defend this action.

The second purported class action was brought in April 2006 by a formeremployee and alleges the Company violated California laws with regard tofailure to pay vested vacation pay and unfair business practices. The classalleged is any person who has been employed by the Company in California at anytime from four years prior to the filing of the class action to date of trial.In the fourth quarter of fiscal 2006, the Company accrued $600,000 as theestimated cost of settling this action. The Company entered into a settlementof this class action litigation which was preliminarily approved by the courton April 24, 2007 for approximately $600,000 previously accrued, includingthe settlement amount and representative’s, attorney and administrativefees.  On May 31, 2007, the SettlementAdministrator sent notice of the proposed settlement to 3,347 identifiableclass members pursuant to the Court’s Order of May 22, 2007.  The notice gave the class until July 11,2007, to opt out or object.  No memberexpressed objection or an intent to appear at the final approval hearing, butthree members did elect to opt out.

**Guarantees and commitments**

VICORP guaranteed certain leases for restaurantproperties sold in 1986 and restaurant leases of certain franchisees. Minimumfuture rental payments remaining under these leases were approximately $1.8million as of July 12, 2007. The Company has not made any payments due todefault under these agreements, and management believes the guarantee has no

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fair value. Management believes the ultimatedisposition of these matters will not have a material adverse effect on theCompany’s consolidated financial position or results of operations.

Contractual obligations, primarily for restaurantsunder construction, amounted to approximately $4.3 million as of July 12, 2007.

**Indemnifications**

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

The Company is unable to reasonably estimate themaximum potential amount of future payments under these or similar agreementsdue to the unique facts and circumstances of each agreement and the fact thatcertain indemnifications provide for no limitation to the maximum potentialfuture payments under the indemnification. The Company has not recorded anyliability for these indemnifications in the accompanying consolidated balancesheets; however, the Company will accrue losses for any known contingentliability, including those that may arise from indemnification provisions, whenthe obligation is both probable and reasonably estimable.

**6.     Asset Impairments, AssetDisposals and Related Costs**

Each quarter,management assesses various factors relevant to its restaurant assets,including undiscounted projected cash flows and the historical performancetrends at the operating locations. If the carrying value of the restaurantassets exceed the undiscounted cash flows for a location, the carrying value ofthe assets are reduced to fair market value if the carrying costs exceed theestimated fair market value. During the quarter ended July 12, 2007, there wasno impairment charge related to the write-down of assets, and for the threequarters ended July 12, 2007, the Company recorded a $1.6 million impairmentcharge on eight restaurant locations. During the quarter ended July 13, 2006,the Company recorded no impairment charge related to the write-down of assets,and for the three quarters ended July 13, 2006, the Company recorded a $0.8million impairment charge on 11 restaurant locations.

As of July 12,2007 and November 2, 2006, the Company had recorded a reserve forclosed/subleased restaurant locations of approximately $0.5 million and $0.6million, respectively, primarily representing estimated future minimum lease paymentsrelated to the restaurant facilities, net of expected sublease income. Of thefive restaurant locations to which this reserve relates, four of such locationswere subleased as of July 12, 2007.

**7.     Deemed Landlord Financing Liability**

For many of thebuild-to-suit projects, the Company is considered the owner of the projectduring the construction period in accordance with Emerging Issues Task Force (“EITF”)Issue No. 97-10, “The Effect of Lessee Involvement in Asset Construction (“EITF97-10”),” because the Company is deemed to have substantially all of theconstruction 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 of the Company’s real estate transactionsand build-to-suit projects have not qualified for sale-leaseback accountingbecause of the deemed continuing involvement with the buyer-lessor, whichresults in the transaction being recorded under the financing method. Under thefinancing method, the assets remain on the consolidated balance sheet and aredepreciated over their useful life, and the proceeds from the transaction arerecorded as a financing liability. A portion of lease payments are applied aspayments of deemed principal and imputed interest. Of the nine restaurantsopened during fiscal 2007, two units are accounted for under the financingmethod, three units were not subject to EITF 97-10, which are consideredregular operating leases and an additional four units qualified for saleleaseback treatment. The Company recognized the “sale” of these four unitsduring fiscal 2007 by removing both the assets and built-to-suit liabilityassociated with the restaurants and recording any gain or loss in accordancewith FASB SFAS No. 98, “Accounting for Leases” (“SFAS No. 98”). The leases

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were then testedunder the provisions of SFAS No. 13 “Accounting for Leases” (“SFAS No. 13”) fortreatment as capital or operating leases. The leases qualified as operating anddeferred rent was recorded in accordance with SFAS No. 98 and SFAS No.13. Theeffect of the sale-leaseback accounting was a reduction in the Company’sbuild-to-suit liability of $0.9 million in the third quarter of fiscal 2007 and$4.5 million on a year-to-date basis, a reduction of property, plant andequipment of $1.0 million in the third quarter of fiscal 2007 and $4.7 millionon a year to date basis, and a net loss on the transactions of $0.1 million inthe third quarter of fiscal 2007 and $0.2 million on a year-to-date basis. Thenet loss has been deferred and will be amortized to rent expense over theremaining reasonably assured lease term in accordance with SFAS No. 13.

**8.             Acquisitions**

The Company purchased the assets of four restaurantsduring the first quarter of fiscal 2006 from a franchisee in Oklahoma for $0.7million. The Company purchased one additional restaurant from the samefranchisee during the second quarter of fiscal 2006.

**9.****              Stock Repurchase**

As of June 2007, the Companyrepurchased the equity securities of the Company held by a former officer.  The Company issued a subordinated promissorynote (see note 4) in the principal amount of $1.2 million to repurchase theequity securities held by the officer. In connection with the repurchase, the former officer agreed to forgo thepreviously accrued preferred stock dividends and accretion and therefore theseamounts were reversed toretained earnings.

In January 2006, the Company agreed to repurchaseshares of common stock and preferred stock that had been previously acquired byformer officers. The aggregate purchase price paid to the former officers wasapproximately $0.7 million.

**10.  EmployeeSeverance and Executive Incentive Program**

In May 2007, theCompany recorded a severance charge of $0.1 million primarily related to a severancecharge due to the departure of one of the Company’s officers.

In May 2007, theCompany entered into an employment agreement with the Company’s Chief ExecutiveOfficer, effective April 5, 2007. As part of the employment agreement, the executiveis entitled to an appreciation payment in an amount equal to a specifiedpercentage of the appreciation amount based on the adjusted proceeds inconnection with the sale of the Company, which vests ratably over fiveyears.  Upon sale of the Company theappreciation payment shall become 100% vested. In the event the executive terminates his employment prior to a sale ofthe Company all vesting of the appreciation payment shall cease and the valueof the appreciation amount shall be fixed as of the date of termination andcalculated based on a prescribed formula.

In April 2007, theCompany recorded a severance charge of $0.5 million related to a severancecharge due to the departure of one of the Company’s officers.

**11.  IncomeTaxes**
| (in thousands)                | ** ** | **July 12,  2007** | ** ** | **November 2,  2006** | ** ** |
|------------------------------------|------------|-------------------------|------------|----------------------------|------------|
|                               |       |                    |       |                       |       |
| Deferred income  taxes, short-term |       | $                       | 2,360      |                       | $          | 2,387 |   |
| Deferred income  taxes, long-term  |       | 2,650                   |       | 2,623                      |       |
| Total deferred  income taxes       |       | $                       | 5,010      |                       | $          | 5,010 |   |

 

The Companyrecorded an additional valuation allowance of $1.9 million during the thirdquarter of fiscal 2007 and $5.8 million for the 252 days ended July 12, 2007,respectively, for FICA tip credits and net operating loss carry forwards forwhich it is more likely than not that a tax benefit will not be realized. Thevaluation allowance has been determined based on reversals of the Company’sexisting deferred tax items and estimates of future taxable income by eachjurisdiction in which the Company operates as a result of available taxplanning strategies. In the event that actual results differ from theseestimates, the Company is unable to implement certain tax planning strategiesor adjusts these estimates in future periods, the Company may need to establishan additional valuation allowance which could have a material negative impacton results of operations or financial position.

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**Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

*Statementsincluded in Management’s Discussion and Analysis of Financial Condition andResults of Operations and elsewhere in this report are, or may be deemed to be,“forward-looking statements” within the meaning of Section 27A of theSecurities Act and Section 21E of the Securities Exchange Act of 1934, asamended (the “Exchange Act”). These forward-looking statements include allmatters that are not historical facts. By their nature, forward-lookingstatements involve risks and uncertainties because they relate to events anddepend on circumstances that may or may not occur in the future. We caution youthat forward-looking statements are not guarantees of future performance andthat our actual results of operations, financial condition and liquidity, andthe development of the industry in which we operate may differ materially fromthose made in or suggested by the forward-looking statements contained in thisinformation report. See the “Risk Factors” section of our Annual Report on Form10-K for the year ended November 2, 2006, for a discussion of some of thefactors that may affect the Company and its operations. Such factors includethe following: competitive pressures within the restaurant industry; changes inconsumer preferences; the level of success of our operating strategy and growthinitiatives; the level of our indebtedness and the terms and availability ofcapital; fluctuations in commodity prices; changes in economic conditions;government regulation; litigation; and seasonality and weather conditions. Inaddition, even if our results of operations, financial condition and liquidity,and the development of the industry in which we operate are consistent with theforward-looking statements contained in this announcement, those results ordevelopments may not be indicative of results or developments in subsequentperiods. Any forward-looking statements which we make in this report speak onlyas of the date of such statement, and we undertake no obligation to update suchstatements. Comparisons of results for current and any prior periods are notintended to express any future trends or indications of future performance andshould only be viewed as historical data.*

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**CompanyProfile and Management Overview**

*The following discussion containsforward-looking statements that involve numerous risks and uncertainties. Ouractual results could differ materially from those discussed in theforward-looking statements as a result of these risks and uncertainties,including those set forth on our Form 10-K under “Forward-looking  Statements” and under “Risk Factors.” Youshould read the following discussion in conjunction with “Item 6. Selectedfinancial data” and our audited consolidated financial statements and notesappearing elsewhere on our Form 10-K.*

**Company Profile**

The Company operates family-dining restaurants undertwo well-recognized brands, Village Inn and Bakers Square. As of July 12, 2007,the Company, which was founded in 1958, had 409 restaurants in 25 states,consisting of 316 company-operated restaurants and 93 franchised restaurants.The Company also produces premium pies at three strategically locatedfacilities that serve the restaurants and sell to third parties.

Village Inn restaurants are known for serving freshbreakfast items throughout the day, and have leveraged the breakfast heritageto include traditional American fare at lunch and dinner. Bakers Squarerestaurants have built upon the reputation of signature pies to offer qualitymeals at breakfast, lunch and dinner. The broad offering of affordable menuitems is designed to appeal to a demographically diverse customer base,including families, senior citizens and other value-oriented diners.

The followingtable sets forth the year-to-date changes to the number of Company-operated andfranchised restaurants for the periods presented below:
| (units)                                      | ** ** | **July 12,  2007** | ** ** | **July 13,  2006** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Village Inn  Company-operated restaurants:   |       |                    |       |                    |       |
| Beginning of fiscal year                     |       | 161                     |       | 135                     |       |
| Openings/Purchases                           |       | 9                       |       | 22                      |       |
| Closings                                     |       | —                  |       | (1                      | )          |
| End of period                                |       | 170                     |       | 156                     |       |
|                                         |       |                    |       |                    |       |
| Bakers Square  Company-operated restaurants: |       |                    |       |                    |       |
| Beginning of fiscal year                     |       | 148                     |       | 152                     |       |
| Openings                                     |       | —                  |       | —                  |       |
| Closings                                     |       | (2                      | )          | (3                      | )          |
| End of period                                |       | 146                     |       | 149                     |       |
|                                         |       |                    |       |                    |       |
| Total Company-operated restaurants           |       | 316                     |       | 305                     |       |
|                                         |       |                    |       |                    |       |
| Village Inn  franchised restaurants:         |       |                    |       |                    |       |
| Beginning of fiscal year                     |       | 95                      |       | 100                     |       |
| Closings/Sales                               |       | (2                      | )          | (5                      | )          |
| End of period                                |       | 93                      |       | 95                      |       |
|                                         |       |                    |       |                    |       |
| Total  restaurants                           |       | 409                     |       | 400                     |       |

 

Restaurant revenues are affected by restaurantopenings and closings and same unit sales performance. Same unit sales is ameasure of the percentage increase or decrease of the sales of units open atleast 18 months relative to the same period in the prior year. Restaurantsopened for less than 18 months are excluded in order to allow a new restaurant’soperations and sales time to stabilize and provide more meaningful results.Same unit sales is an important indicator within the restaurant industrybecause small changes in same unit sales can have a proportionally higherimpact on operating margins because of the high degree of fixed costsassociated with operating restaurants.

Financial Summaryfor the 84 Days ended July 12, 2007 compared to the 84 Days ended July 13, 2006

·                  Combined samestore sales declined 3.2% compared to the prior year. Village Inn same storesales declined 2.3% and Bakers Square same store sales declined 4.0% compared tothe prior year.  The same store salesdeclines in both 

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Village Inn and Bakers Square were directly the resultof lower guest entrée counts during the quarter versus the comparable quarterof 2006.

·                  There are 11 newrestaurants, net of closures, opened since the end of the third quarter offiscal 2006.

·                  Revenues in thethird quarter of fiscal 2007 increased by 1.4% to $106.9 million.

·                  Operating profitdecreased from $5.4 million in the third quarter of fiscal 2006 to $1.0 millionfor the same period in 2007.

·                  Net loss alsoincreased from $0.6 million in the third quarter of fiscal 2006 to a net lossof $5.7 million in the third quarter of fiscal 2007.

Financial Summary for the252 Days ended July 12, 2007 compared to the 252 days ended July 13, 2006

·                  Combined samestore sales declined 3.5% compared to the prior year. Village Inn same storesales declined 2.3% and Bakers Square same store sales declined 4.7% comparedto the prior year.  The same store salesdeclines in both Village Inn and Bakers Square were directly the result oflower guest entrée counts.

·                  There are 11 newrestaurants, net of closures, opened since the end of the third quarter offiscal 2006.

·                  Revenues infiscal 2007 increased by 3.8% to $336.0 million.

·                  Operating profitdecreased from $16.8 million in fiscal 2006 to $5.0 million in fiscal 2007.

·                  Net lossincreased from $1.8 million in fiscal 2006 to a net loss of $14.2 million infiscal 2007.

**CriticalAccounting Policies and Estimates**

The Company’scritical accounting policies have not changed from those reported in Management’sDiscussion and Analysis of Financial Condition and Results of Operations in theCompany’s Form 10-K for the fiscal year-ended November 2, 2006.

**NewAccounting Pronouncements**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No. 48, ‘‘Accountingfor Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,’’(“FIN 48”) which clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109, ‘‘Accounting for Income Taxes.’’ FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. The guidance set forth under FIN 48 must be applied to financialreports covering the first fiscal year beginning after December 15, 2006,therefore the Company will adopt this guidance in fiscal 2008. The Company iscurrently assessing financial impact to the consolidated financial statementsupon adoption.

In September 2006,the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”)No. 108, “Considering the Effectsof Prior Year Misstatements When Quantifying Misstatements in Current YearFinancial Statements*”* (“SAB108”). SAB 108 provides guidance on the consideration of the effects of prioryear misstatements in quantifying current year misstatements for the purpose ofa materiality assessment. The Company assesses the materiality of unrecordedmisstatements under the rollover method. The guidance set forth under SAB 108must be applied to financial reports covering the first fiscal year endingafter November 15, 2006; therefore the Company will adopt this guidance inthe fourth quarter of fiscal 2007. The Company is currently assessing financialimpact to the consolidated financial statements upon adoption.

On September 18,2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value,establishes a framework for measuring fair value in accordance with GAAP andexpands disclosures about fair value measurements. SFAS No. 157 is effectivefor fiscal years beginning

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after November 15,2007. The Company does not believe such adoption will have a material impact onthe consolidated financial statements.

In June 2006, theFASB ratified the consensus on Emerging Issues Task Force Issue No. 06-3 (“EITFNo. 06-3”), “How Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement”. The scope ofEITF No. 06-3 includes any tax assessed by a governmental authority thatis directly imposed on a revenue-producing transaction between a seller and acustomer and may include, but is not limited to, sales, use, value added andsome excise taxes. The Task Force affirmed its conclusion that entities shouldpresent these taxes in the income statement on either a gross or a net basisbased on their accounting policy, which should be disclosed pursuant toAccounting Principles Board Opinion No. 22, “Disclosure of AccountingPolicies.” If such taxes are significant and are presented on a gross basis,the amounts of those taxes should be disclosed. The consensus on EITF No.06-3 will be effective for interim and annual reporting periods beginning afterDecember 15, 2006; therefore, the Company adopted this guidance in thesecond quarter of fiscal 2007. As it is the accounting policy of the Company topresent such taxes on the income statement on a net basis, such adoption is notexpected to affect current disclosures.

**FactorsAffecting Comparability**

The fiscal year iscomprised of 52 or 53 weeks divided into four fiscal quarters of 12 or 13, 12,12, and 16 weeks. The third quarter of fiscal 2007 and 2006 each consisted of12 weeks, or 84 days and fiscal 2007 and 2006 consist of 52 weeks or 364 totaldays.

**Seasonality**

Sales fluctuateseasonally and as mentioned previously, the quarters do not all have the sametime duration. Specifically, the fourth quarter generally has an extra three tofour weeks compared to other quarters of the fiscal year. Historically, averagedaily sales are highest in the first quarter (November through January) as aresult of holiday pie sales while the fourth quarter (mid-July through October)records the lowest average daily sales. Therefore, the quarterly results arenot necessarily indicative of results that may be achieved for the full fiscalyear. Factors influencing relative sales variability, in addition to thosenoted above, include the frequency and popularity of advertising andpromotions, the relative sales level of new and closed locations, holidays andweather.

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**Results of Consolidated Operations**

**(Unaudited)**
| ** **                                   | ** ** | **For the 84 days ended** | ** ** | **For the 252 days ended** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------|------------|
| **(in thousands)**                      | ** ** | **July 12,  2007**                       | ** ** | **July 13,  2006**                        | ** ** | **July 12,  2007** | ** ** | **July 13,  2006** | ** ** |
|                                         |       |                                          |       |                                           |       |   |   |   |   |
| Revenues:                                    |       |                                          |       |                                           |       |   |   |   |   |
| Restaurant operations                        |       | $                                             | 97,097     |                                           | $          | 96,626 |   | $ | 301,892 |   | $ | 298,868 |   |
| Franchise operations                         |       | 1,167                                         |       | 1,166                                          |       | 3,501 |   | 3,497 |   |
| Manufacturing  operations                    |       | 8,640                                         |       | 7,641                                          |       | 30,649 |   | 21,364 |   |
| Total revenues                               |       | 106,904                                       |       | 105,433                                        |       | 336,042 |   | 323,729 |   |
| Costs and expenses:                          |       |                                          |       |                                           |       |   |   |   |   |
| Restaurant costs:                            |       |                                          |       |                                           |       |   |   |   |   |
| Food                                         |       | 26,162                                        |       | 24,194                                         |       | 81,330 |   | 76,936 |   |
| Labor                                        |       | 34,141                                        |       | 32,227                                         |       | 103,601 |   | 98,501 |   |
| Other operating  expenses                    |       | 29,317                                        |       | 28,646                                         |       | 90,325 |   | 87,267 |   |
| Franchise operating  expenses                |       | 496                                           |       | 502                                            |       | 1,453 |   | 1,488 |   |
| Manufacturing operating  expenses            |       | 8,435                                         |       | 7,381                                          |       | 30,350 |   | 21,166 |   |
| General and administrative  expenses         |       | 7,057                                         |       | 6,737                                          |       | 20,712 |   | 19,835 |   |
| Management fees –  related party        |       | 196                                           |       | 196                                            |       | 588 |   | 588 |   |
| Employee severance                           |       | 118                                           |       | —                                         |       | 618 |   | — |   |
| Loss on disposition of  assets               |       | 56                                            |       | 159                                            |       | 466 |   | 336 |   |
| Asset impairments                            |       | —                                        |       | —                                         |       | 1,555 |   | 821 |   |
| Total costs and  expenses                    |       | 105,978                                       |       | 100,042                                        |       | 330,998 |   | 306,938 |   |
| Operating profit                             |       | 926                                           |       | 5,391                                          |       | 5,044 |   | 16,791 |   |
| Interest expense                             |       | (6,648                                        | )          | (6,990                                         | )          | (19,814 | ) | (21,019 | ) |
| Other income, net                            |       | 59                                            |       | 343                                            |       | 589 |   | 627 |   |
| Loss before income  taxes                    |       | (5,663                                        | )          | (1,256                                         | )          | (14,181 | ) | (3,601 | ) |
| Income tax benefit                           |       | —                                        |       | (675                                           | )          | — |   | (1,795 | ) |
| Net loss                                     |       | (5,663                                        | )          | (581                                           | )          | (14,181 | ) | (1,806 | ) |
| Preferred stock  dividends and accretion     |       | (1,907                                        | )          | (2,322                                         | )          | (6,755 | ) | (6,749 | ) |
| Net loss attributable to common stockholders |       | $                                             | (7,570     | )                                              | $          | (2,903 | ) | $ | (20,936 | ) | $ | (8,555 | ) |

 

The followingtable presents each revenue stream as a percentage of total revenue, cost andexpenses as a percentage of each respective revenue stream and general andadministrative expenses and operating profit as a percentage of total revenues.
| ** **                           | ** ** | **For the 84 days ended** | ** ** | **For the 252 Days ended** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------|------------|
| ** **                           | ** ** | **July 12,  2007**                       | ** ** | **July 13,  2006**                        | ** ** | **July 12,  2007** | ** ** | **July 13,  2006** | ** ** |
|                                 |       |                                          |       |                                           |       |   |   |   |   |
| Revenues:                            |       |                                          |       |                                           |       |   |   |   |   |
| Restaurant operations                |       | 90.8                                          | %          | 91.7                                           | %          | 89.8 | % | 92.3 | % |
| Franchise operations                 |       | 1.1                                           |       | 1.1                                            |       | 1.1 |   | 1.1 |   |
| Manufacturing operations             |       | 8.1                                           |       | 7.2                                            |       | 9.1 |   | 6.6 |   |
| Total revenues                       |       | 100.0                                         |       | 100.0                                          |       | 100.0 |   | 100.0 |   |
| Costs and  expenses:                 |       |                                          |       |                                           |       |   |   |   |   |
| Restaurant costs:                    |       |                                          |       |                                           |       |   |   |   |   |
| Food (1)                             |       | 26.9                                          |       | 25.0                                           |       | 26.9 |   | 25.7 |   |
| Labor (1)                            |       | 35.2                                          |       | 33.4                                           |       | 34.3 |   | 33.0 |   |
| Other operating expenses (1)         |       | 30.2                                          |       | 29.6                                           |       | 29.9 |   | 29.2 |   |
| Franchise operating expenses (2)     |       | 42.5                                          |       | 43.1                                           |       | 41.5 |   | 42.6 |   |
| Manufacturing operating expenses (3) |       | 97.6                                          |       | 96.6                                           |       | 99.0 |   | 99.1 |   |
| General and administrative expenses  |       | 6.6                                           |       | 6.4                                            |       | 6.2 |   | 6.1 |   |
| Operating profit                     |       | 0.9                                           | %          | 5.1                                            | %          | 1.5 | % | 5.2 | % |

 

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(1)  Restaurant costs percentages are based on restaurantoperations revenues.

16

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(2)  Franchise operating expense percentage isbased on franchise operations revenues.

(3)  Manufacturing operating expense percentage isbased on manufacturing operations revenues.

Allother cost percentages are based on total revenues.

**ThirdQuarter Results:  84 Days ended July 12,2007 Compared to the 84 Days ended July 13, 2006**

***Total revenues*** increased by $1.5million, or 1.4%, to $106.9 million in the third quarter of fiscal 2007, from$105.4 million for the same period in fiscal 2006. This increase was primarilydue to the increase in third party pie sales, which increased $1.0 million or13.1%, to $8.6 million compared to $7.6 million in the same period in fiscal2006, which was primarily a result of the addition of a large customer at theend of the first quarter of fiscal 2006. Overall restaurant revenues increasedfrom sales at the 11 new restaurants, net of closures, opened or acquired sincethe end of the third quarter of 2006 offset by declines in same unit sales. Sameunit combined restaurant sales for the third quarter of 2007 declined 3.2%versus the previous year’s third quarter. Same unit restaurant sales forVillage Inn and Bakers Square decreased 2.3% and 4.0%, respectively. The sameunit restaurant sales declines were a direct result of lower guest entréecounts in both concepts during the quarter, driven by numerous factors,including increased competition within the markets in which the conceptsoperate and increased cost-consciousness within the midscale family diningsegment.  Average guest spendingincreased 3.2% at Village Inn and 0.9% at Bakers Square in the third quarter offiscal 2007 compared to the third quarter of fiscal 2006.

***Food costs*** increased by $2.0 million,or 8.3%, to $26.2 million in the third quarter of fiscal 2007, from $24.2million for the third quarter of fiscal 2006. Food costs as a percentage ofrestaurant revenues increased to 26.9% for the third quarter of fiscal 2007from 25.0% for the third quarter of fiscal 2006 primarily due to highercommodity cost increases, including the cost of eggs and vegetables, as well asdue to the impact of certain food quality upgrade and new product initiativesat Bakers Square.

***Labor costs*** increased by $1.9 million,or 5.9%, to $34.1 million in the third quarter of fiscal 2007, from $32.2million for the third quarter of fiscal 2006. Labor costs as a percentage ofrestaurant revenues increased to 35.2% from 33.4% over these periods. Therelative increase in labor costs was due to lower operating efficiency,increased average wage due to minimum wage increases in several states,negative leverage associated with the same store sales declines and laborinefficiencies at the new restaurants in start up mode.

***Other operating expenses*** increased by$0.7 million, or 2.4%, to $29.3 million in the third quarter of fiscal 2007from $28.6 million for the third quarter of fiscal 2006. Other operatingexpenses as a percentage of restaurant revenues increased to 30.2% from 29.6%over these periods. This increase was primarily driven by higher occupancycosts associated with new store growth. The Company has engaged a third party to assist with negotiations oflease terms associated with certain underperforming Bakers Square storelocations.

***Manufacturing operating expenses***increased by $1.0 million, or 13.5%, to $8.4 million in the third quarter offiscal 2007 from $7.4 million for the third quarter of fiscal 2006. Thisincrease was primarily due to higher third party pie sales associated with theaddition of a large customer at the end of the first quarter of 2006.Manufacturing operating expenses as a percentage of manufacturing revenuesincreased to 97.6% from 96.6% over these periods primarily due to increasedcommodity costs. Both variable and fixed costs are allocated to external sales.As external sales increase as a percentage of total pie production, theallocation method may cause a decrease in the operating profit due to thehigher allocation of fixed costs to the external sales.

***General and administrative expenses***increased $0.4 million, or 6.0%, to $7.1 million for the third quarter offiscal 2007 from $6.7 million for the third quarter of fiscal 2006. Theincrease was primarily attributed to lower capitalization of internal architectureand construction costs as a result of fewer stores under construction,resulting in such costs being reflected as period costs.  As a percentage of total revenues, generaland administrative expenses for the third quarter of fiscal 2007 were fairly consistentat 6.6% compared to 6.4% in the third quarter of fiscal 2006.

***Employeeseverance*** in the third quarter of fiscal 2007 relatedprimarily to a severance charge due to the departure of one of the Company’sofficers.

***Losson disposition of assets*** was $0.1 million for the thirdquarter of fiscal 2007 and $0.2 million for the third quarter of fiscal 2006.The charges related primarily to site investigation, architectural andenvironmental research associated with properties that the Company has decidednot to develop.

17

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***Operating profit***decreased by $4.4 million from a $5.4 million operating profit for the thirdquarter of fiscal 2006 to a $1.0 million operating profit in the thirdquarter of fiscal 2007.

***Interest expense*** decreased by $0.4 million or 5.7%, to $6.6 millionin the third quarter of fiscal 2007 from $7.0 million for the third quarter offiscal 2006. The decrease was due to the Company recognizing the “sale”, in thethird quarter of fiscal 2006, of 26 units by removing the assets and financingobligations associated with the restaurants and recording any gain or loss inaccordance with SFAS No. 98, “Accounting for Leases”. The effect of this changewas a reduction in the financing obligation of $30.5 million therefore reducinginterest expense prospectively.

***Income tax benefit***for the thirdquarter of fiscal 2006 was $0.7 million. The effective tax rate for the thirdquarter of fiscal 2006 was 53.7%. The provision/benefit differs from theCompany’s statutory rate of approximately 40% due to general business creditsthat the Company earns from FICA taxes paid on employee tips, partially offsetby nondeductible amortization related to franchise rights. Consistent with thefirst two quarters of fiscal 2007, the Company recorded a valuation allowance of$1.9 million in the third quarter of fiscal 2007 for FICA tip credits and netoperating carry forwards for which it is more likely than not that a taxbenefit will not be realized. The valuation allowance has been determined basedon reversals of the Company’s existing deferred tax items and estimates offuture taxable income by each jurisdiction in which the Company operates as aresult of available tax planning strategies. In the event that actual resultsdiffer from these estimates, the Company is unable to implement certain taxplanning strategies or adjusts these estimates in future periods, the Companymay need to establish an additional valuation allowance which could have amaterial negative impact on results of operations or financial position.

***Net loss***increased to $5.7 million in the thirdquarter of fiscal 2007 compared to net loss of $0.6 million in the thirdquarter in fiscal 2006.

***Preferred stock dividends and accretion***decreased by $0.4 million to $1.9 million in the third quarter of fiscal 2007from $2.3 million for the third quarter of fiscal 2006 due to the reversal ofpreviously accrued preferred stock dividends and accretion related to therepurchase of a former officer’s stock.

**Year-To-DateResults:  252 Days ended July 12, 2007Compared to the 252 Days ended July 13, 2006**

***Total revenues*** increased by $12.3million, or 3.8%, to $336.0 million in fiscal 2007 from $323.7 million infiscal 2006. This increase was primarily due to the increase in third party piesales, which increased $9.2 million or 43.0%, to $30.6 million in fiscal 2007from $21.4 million in fiscal 2006, which was primarily a result of the additionof a large customer at the end of the first quarter of fiscal 2006. Overallrestaurant revenues increased from sales at the 11 new restaurants, net ofclosures, opened or acquired since the end of the third quarter of 2006 offsetby declines in same unit sales. Same unit combined restaurant sales declined3.5% versus the previous year. Same unit restaurant sales for Village Inn andBakers Square decreased 2.3% and 4.7%, respectively.   The same unit restaurant sales declines werea direct result of lower guest entrée counts in both concepts during thequarter, driven by numerous factors, including increased competition within themarkets in which the concepts operate and increased cost-consciousness withinthe midscale family dining segment. Average guest spending increased 2.5% at Village Inn and 0.9% at BakersSquare in fiscal 2007 compared to fiscal 2006.

***Food costs*** increased by $4.4 million,or 5.7%, to $81.3 million in fiscal 2007, from $76.9 million in fiscal 2006.Food costs as a percentage of restaurant revenues increased to 26.9% for fiscal2007 from 25.7% for the same period in fiscal 2006 primarily due to higher commodityprices cost increases, including the cost of eggs and vegetables, as well asdue to the impact of certain food quality upgrade and new product initiativesat Bakers Square.

***Labor costs*** increased by $5.1 million,or 5.2%, to $103.6 million in fiscal 2007, from $98.5 million in fiscal 2006.Labor costs as a percentage of restaurant revenues increased to 34.3% from33.0% over these periods. The relative increase in labor costs was due to loweroperating efficiency, increased average wage due to minimum wage increases,negative leverage associated with the same store sales declines and laborinefficiencies at the new restaurants in start up mode.

***Other operating expenses*** increased by$3.0 million, or 3.4%, to $90.3 million in fiscal 2007 from $87.3 million infiscal 2006. Other operating expenses as a percentage of restaurant revenuesincreased to 29.9% from 29.2% over these periods. This increase was primarilydriven by higher occupancy costs associated with new store growth.  The Company has engaged a third party toassist with negotiations of lease terms associated with certain underperformingBakers Square store locations.

***Manufacturing operating expenses***increased by $9.2 million, or 43.4%, to $30.4 million in fiscal 2007 from $21.2million in fiscal 2006. This increase was primarily due to higher third partypie sales associated with the addition of a large customer

18

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at the end of thefirst quarter of 2006. Manufacturing operating expenses as a percentage ofmanufacturing revenues decreased slightly from 99.1% to 99.0% over theseperiods. Both variable and fixed costs are allocated to external sales. Asexternal sales increase as a percentage of total pie production, the allocationmethod may cause a decrease in the operating profit due to the higherallocation of fixed costs to the external sales.

***General and administrative expenses***increased $0.9 million, or 4.5%, to $20.7 million for fiscal 2007 from $19.8million for fiscal 2006.  The increasewas also primarily attributed to lower capitalization of internal architectureand construction costs as a result of fewer stores under construction,resulting in such costs being reflected as period costs. Broker fees related tothird party pie sales also increased. As a percentage of total revenues,general and administrative expenses were fairly consistent at 6.2% for fiscal2007 and 6.1% for fiscal 2006.

***Employeeseverance*** for fiscal 2007 related primarily to aseverance charge due to the departure of two of the Company’s officers.

***Losson disposition of assets*** was $0.5 million for fiscal 2007and $0.3 million for fiscal 2006. The losses related primarily from servicesrelated to site investigation, architectural and environmental researchassociated with properties that the Company has decided not to develop.

***Impairment expense***duringfiscal 2007 was $1.6 million related to the write down of eight restaurantlocations compared to $0.8 million******inthe fiscal 2006 due to the write down of eleven restaurant locations.

***Operating profit***decreased by $11.8 million to $5.0 million in fiscal 2007 from $16.8 million infiscal 2006.

***Interest expense*** decreased by $1.2 million or 5.7%, to $19.8million in fiscal 2007 from $21.0 million in fiscal 2006. The decrease was dueto the Company recognizing the “sale”, in the third quarter of fiscal 2006, of26 units by removing the assets and financing obligations associated with therestaurants and recording any gain or loss in accordance with SFAS No. 98, “Accountingfor Leases”. The effect of this change was a reduction in the financingobligation of $30.5 million therefore reducing interest expense prospectively.

***Income tax benefit***for fiscal 2006 was$1.8 million. The effective tax rate was 49.8% for fiscal 2006. Theprovision/benefit differs from the Company’s statutory rate of approximately40% due to general business credits that the Company earns from FICA taxes paidon employee tips, partially offset by nondeductible amortization related tofranchise rights. During fiscal 2007, the Company recorded a valuation allowanceof $5.8 million for FICA tip credits and net operating carry forwards for whichit is more likely than not that a tax benefit will not be realized. Thevaluation allowance has been determined based on reversals of existing deferredtax items and estimates of future taxable income by each jurisdiction in whichthe Company operates as a result of available tax planning strategies. In theevent that actual results differ from these estimates, the Company is unable toimplement certain tax planning strategies or adjusts these estimates in futureperiods, the Company may need to establish an additional valuation allowancewhich could have a material negative impact on results of operations orfinancial position.

***Net loss***increased by $12.4 million to $14.2million in fiscal 2007 compared to $1.8 million in fiscal 2006.

***Preferred stock dividends and accretion***was consistent at $6.8 million in fiscal 2007 and in fiscal 2006 as a result ofthe compounding effect of unpaid preferred stock dividends offset by thereversal of previously accrued preferred stock dividends and accretion relatedto the repurchase of a former officer’s stock.

 **Liquidity and CapitalResources**

***CashRequirements***

The Company’sprincipal liquidity requirements are to continue to finance operations, servicedebt and fund capital expenditures for maintenance and expansion. Cash flowfrom operations has historically been sufficient to finance continuingoperations and meet normal debt service requirements. However, the Company ishighly leveraged and the ability to repay debt borrowings at maturity is likelyto depend in part on the Company’s ability to refinance the debt when itmatures, which will be contingent on continued successful operation of thebusiness as well as other factors beyond the Company’s control, including thedebt and capital market conditions at that time.

19

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TheCompany’s cash balance and working capital needs are generally low, as salesare made for cash or through credit cards that are quickly converted to cash,purchases of food and supplies and other operating expenses are generally paidwithin 30 to 60 days after receipt of invoices and labor costs are paidbi-weekly. The timing of sales collections and vendor and labor payments areconsistent with other companies engaged in the restaurant industry.  Seasonal sales of pies from the Company’s piemanufacturing operations, particularly outside third party sales, increases theCompany’s working capital needs in the second half of each fiscal year, due toincreases in related accounts receivable and inventories.

For the balance offiscal 2007, the Company anticipates capital expenditures and net build-to-suitconstruction of approximately $3.5 million. The Company has opened 9 new storesin fiscal 2007.  No additional new storeopenings are planned for the remainder of the fiscal year.

In connection withthe new restaurant development program, the Company entered into build-to-suitdevelopment agreements whereby third parties will purchase property, fund thecosts to develop new restaurant properties and lease the properties to theCompany upon completion. Under these agreements, the Company is generallyresponsible for the construction of the restaurant and remitting payments tothe contractors on the projects, which are subsequently reimbursed by theproperty owner. These amounts advanced and subsequently reimbursed are notincluded in the anticipated capital spending totals above. On July 12, 2007,the Company had outstanding receivables of $2.4 million relating to these typesof agreements. In certain of these agreements, the Company is obligated topurchase the property in the event the Company is unable to complete theconstruction within a specified time frame, and is also responsible for costoverruns above specified amounts.

***Debtand Other Obligations and Liabilities***

On April 14, 2004,the Company completed a private placement of $126.5 million aggregate principalamount of 10.5% senior unsecured notes maturing on April 15, 2011. The noteswere issued at a discounted price of 98.791% of face value, resulting in netproceeds before transaction expenses of $125.0 million. The senior unsecurednotes were issued by VICORP Restaurants, Inc. and are guaranteed by VIAcquisition Corp. Concurrently with the issuance of the 10.5% senior unsecurednotes, the Company entered into an amended and restated senior secured creditfacility consisting of a $15.0 million term loan and a $30.0 million revolvingcredit facility, with a $15.0 million sub-limit for letters of credit.

On February 16,2007 the Company entered into an amendment to the senior secured creditfacility which provided for an increase in the revolving credit facility to$35.0 million, and changed the borrowing base governing the revolving creditfacility to be the lesser of (a) $35.0 million and (b) 1.8 times trailingtwelve months Adjusted EBITDA minus the outstanding principal amount of thesenior secured term loan.  Under theamended formula, the Company had the ability to borrow a total of $29.9 millionunder the revolving credit facility as of July 12, 2007.  While the borrowing base provision did notimpact the Company’s access to needed borrowings during the third quarter offiscal 2007, a further decline in trailing Adjusted EBITDA could impair  the Company’s access to borrowings forworking capital or capital expenditure funds.

The senior securedcredit facility requires the Company to maintain or comply with a minimumtrailing Adjusted EBITDA, a minimum Fixed Charge Coverage ratio, and a maximumGrowth Capital Expenditures limitation. Under the February 16, 2007 amendment,the definition of Adjusted EBITDA and certain of the financial covenantsgoverning the senior secured credit facility were amended, and the interestrate margins associated with both base rate and LIBOR borrowings were reduced.

On July 27, 2007, the Company entered into amendment number three tothe amended and restated senior secured credit facility.  Theagreement amended the definition of Adjusted EBITDA and certain of thefinancial covenants governing the senior secured credit facility.  As of July 12, 2007, the Company was incompliance with these covenants.  Underthe amended facility, the amount of excess Adjusted EBITDA in the trailingAdjusted EBITDA covenant as of July 12, 2007 was approximately $1 million.  In management’s opinion, given recentoperating performance and trends in the business, this amount of excessAdjusted EBITDA over the covenant is less than optimal and increases the riskof a breach of the Company’s obligations. The Company remains committed to working with its lenders while closelymonitoring performance, to ensure compliance with its senior credit agreement.

20

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In connection with the resignation of the Company’s formerCEO, Debra Koenig, on March 5, 2007, the Company entered into an agreement torepurchase the equity securities of the Company held by the officer.  The Company issued a subordinated promissorynote in the principal amount of $1.2 million with an annual interest rate of8.25% to repurchase the equity securities held by the officer.  The closing date for the purchase was June22, 2007.  The Company’s obligation topay principal and interest is subject to and limited by the Company’s seniorindebtedness.  The promissory noteincludes a provision that in the event of a sale of the Company that results ina specified return on equity the Company will pay the officer an additional$0.2 million.

In May 2007, theCompany entered into an employment agreement with the Company’s Chief ExecutiveOfficer, effective April 5, 2007. As part of the employment agreement, the executiveis entitled to an appreciation payment in an amount equal to a specifiedpercentage of the appreciation amount based on the adjusted proceeds inconnection with the sale of the Company, which vests ratably over fiveyears.  Upon sale of the Company theappreciation payment shall become 100% vested. In the event the executive terminates prior to a sale of the Company allvesting of the appreciation payment shall cease and the value of theappreciation amount shall be fixed as of the date of termination and calculatedbased on a prescribed formula.

The Company is theprime lessee under various operating leases for land, building and equipmentfor Company-operated and franchised restaurants, pie production facilities andlocations subleased to non-affiliated first parties. These leases have initialterms ranging from 15 to 30 years and, in most instances, provide for renewaloptions ranging from five to 20 years. These leases expire at various datesthrough March 2028.   The Company hasengaged a third party to assist with negotiations of lease terms associatedwith certain underperforming Bakers Square store locations.

The Company hasguaranteed certain leases for restaurant properties sold in 1986 and restaurantleases of certain franchisees. Estimated minimum future rental paymentsremaining under these leases were approximately $1.8 million as of July 12,2007.

As of July 12,2007, the Company’s commitments with respect to the above obligations were asfollows (in millions):
|                                              | ** ** | **Payments due by periods** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | ** **                                 | ** ** | **Less than** | ** ** | **1-3** | ** ** | ** ** | ** ** | **More than 5** | ** ** |
| ** **                                   | ** ** | **Total**                                  | ** ** | **one year** | ** ** | **years** | ** ** | **3-5 years** | ** ** | **years** | ** ** |
| Senior secured  credit facility              |       | $                                          | 22.4       |   | $ | — |   | $ | 22.4 |   | $ | — |   | $ | — |   |
| 10.5% senior unsecured  notes                |       | 126.5                                      |       | — |   | — |   | 126.5 |   | — |   |
| Subordinated  promissory note                |       | 1.2                                        |       | — |   | — |   | 1.2 |   | — |   |
| Total long-term debt                         |       | 150.1                                      |       | — |   | 22.4 |   | 127.7 |   | — |   |
| Capital lease  obligations (1) (2)           |       | 0.2                                        |       | 0.1 |   | 0.1 |   | — |   | — |   |
| Operating lease  obligations(2)              |       | 190.9                                      |       | 25.4 |   | 47.5 |   | 39.0 |   | 79.0 |   |
| Deemed landlord  financing liability (1) (2) |       | 255.5                                      |       | 11.7 |   | 23.8 |   | 24.6 |   | 195.4 |   |
| Other debt (3)                               |       | 1.1                                        |       | 1.1 |   | — |   | — |   | — |   |
| Letters of  credit (4)                       |       | 6.5                                        |       | 6.5 |   | — |   | — |   | — |   |
| Purchase  commitments(5)                     |       | 4.3                                        |       | 4.3 |   | — |   | — |   | — |   |
| Total                                        |       | $                                          | 608.6      |   | $ | 49.1 |   | $ | 93.8 |   | $ | 191.3 |   | $ | 274.4 |   |

 

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

(2)   Manyof the leases and financing obligations contain provisions that requireadditional rent payments contingent on sales performance and the payment ofcommon area maintenance charges and real estate taxes. Amounts in this table donot reflect any of these additional amounts.

(3)   Propertyinsurance financing.

(4)   Lettersof credit outstanding primarily relate to guarantee performance under insurancecontracts. The letters of credit are irrevocable and have one-year renewableterms.

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(5)   Purchasecommitments primarily relate to purchase of property and equipment. Portions ofsuch contracts not completed at July 12, 2007 as noted in the table above werenot reflected as assets or liabilities in the consolidated financialstatements.

**Sourcesand Uses of Cash**

The followingtable presents a summary of the Company’s cash flows from operating, investingand financing activities for the 252 days ended July 12, 2007 and July 13, 2006indicated (in millions):
|                                                      | ** ** | **252 days ended** | ** ** | **252 days ended** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                           | ** ** | **July 12,**            | ** ** | **July 13,**            | ** ** |
| ** **                                           | ** ** | **2007**                     | ** ** | **2006**                     | ** ** |
|                                                 |       |                         |       |                         |       |
| Net cash provided  by operating activities           |       | $                            | 13.8       |                         | $          | 16.2 |   |
| Net cash used in  investing activities               |       | (8.4                         | )          | (27.2                        | )          |
| Net cash (used  in) provided by financing activities |       | (4.9                         | )          | 11.3                         |       |
|                                                 |       |                         |       |                         |       |
| Net increase in cash  and cash equivalents           |       | $                            | 0.5        |                         | $          | 0.3 |   |

 

***Operating Activities***

During fiscal2007, cash flows from operating activities decreased $2.4 million compared tofiscal 2006 primarily due to the increased net loss.

***Investing Activities***

Capitalexpenditures, excluding amounts related to assets under financing obligations,for fiscal 2007 and 2006, respectively, were comprised of the following (inmillions):
|                                              | ** ** | **252 days ended** | ** ** | **252 days ended** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                   | ** ** | **July 12, 2007**  | ** ** | **July 13, 2006**  | ** ** |
|                                         |       |                         |       |                         |       |
| New store  construction                      |       | $                            | 2.6        |                         | $          | 7.2 |   |
| Existing store  remodel and refurbishments   |       | 1.1                          |       | 4.8                          |       |
| Store capital  maintenance                   |       | 2.3                          |       | 4.4                          |       |
| Pie production  facility capital maintenance |       | 1.1                          |       | 0.0                          |       |
| Corporate  related                           |       | 0.9                          |       | 0.5                          |       |
| Purchase of  property and equipment          |       | $                            | 8.0        |                         | $          | 16.9 |   |

 

In addition to the capital expenditures noted above,the Company spent $1.1 million for assets under deemed landlord financingliability and $1.1 million for assets under build-to-suit construction duringfiscal 2007 compared to $10.4 million for assets under deemed landlordfinancing liability.  In fiscal 2007, theCompany also received net proceeds of $1.8 million related to build-to-suitconstruction. Nine new restaurants were opened in fiscal 2007 compared to 22new restaurants, including the five units acquired from a franchisee, duringfiscal 2006. Additionally, there are four locations under commitment as of July12, 2007.

***FinancingActivities***

Cash used infinancing activities was $4.9 million in fiscal 2007, consisting principally ofthe $6.2 million of net repayments under the revolving line of credit and othershort term debt. Additionally, $0.1 million was paid in connection with theamendments to the Company’s senior secured credit facility which was offset byproceeds from deemed landlord financing.

Financingactivities provided cash of $11.3 million during fiscal 2006, consistingprimarily of net proceeds of $1.5 million under the revolving line of creditnet of payments on other short term debt, $10.5 million of proceeds from deemedlandlord financing transactions associated with new restaurant construction,partially offset by payments for the repurchase of stock of $0.8 million.

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**Cash Management**

The Company historically funded the majority ofcapital expenditures with cash provided by operating activities. The Companyhas on occasion obtained, and may in the future obtain, capitalized leasefinancing for certain expenditures related to equipment. The investmentrequirements for new restaurant development include requirements foracquisition of land, building and equipment. Historically the Company eitheracquired all of these assets for cash, or purchased building and equipmentassets for cash and acquired a leasehold interest in land. The Company enteredinto sale-leaseback arrangements for many of the land and building assets purchasedin the past, many of which have been accounted for as financing transactions.Since the initial net cash investment required for leased units issignificantly lower than for owned properties, the Company intends to focus onleasing sites for future growth so the only funding required relates to theequipment portion. The Company believes that this will reduce upfront cashrequirements associated with new restaurant growth and enable increased returnson these investments, although it will result in significant long termobligations under either operating or capital leases.

### **Item 3.    Quantitative and Qualitative DisclosuresAbout Market Risk**

There have been no material changes from the AnnualReport on Form 10-K for the fiscal year ended November 2, 2006 related to theCompany’s exposure to market risk from interest rates however the Company hasexperienced increases in food commodity prices.

**Item 4.    Controls andProcedures**

### **Evaluation of Disclosure Controlsand Procedures**

Withinthe 84-day period prior to the filing date of this report, management, underthe supervision of the Chief Executive Officer and Chief Financial Officer,carried out an evaluation of the effectiveness of the design and operation ofdisclosure controls and procedures pursuant to Rules 13a-14 and 15d-14 underthe Securities Exchange Act of 1934 (the “Exchange Act”), as amended. Basedupon their evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that disclosure controls and procedures are effective in alertingthem timely to material information required to be included in the Exchange Actfilings. There have not been any significant changes in internal controls or inother factors that could significantly affect these controls subsequent to thedate of the evaluation.

### **Limitations on the Effectivenessof Controls**

Acontrol system, no matter how well designed and operated, can provide onlyreasonable, not absolute, assurance that the control system’s objectives willbe met. Further, the design of a control system must reflect the fact thatthere are resource constraints, and the benefits of controls must be consideredrelative to their costs. Because of the inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within the Company have beendetected. These inherent limitations include the realities that judgments indecision-making can be faulty, that breakdowns can occur because of simpleerror or mistake, and that controls can be circumvented by the acts ofindividuals or groups. Because of the inherent limitations in a cost-effectivecontrol system, misstatements due to error or fraud may occur and not bedetected.

### **PART II – OTHER INFORMATION**

**Item 1.    LegalProceedings**

From time-to-time,the Company has been involved in various lawsuits and claims. Such lawsuitstypically involve claims from customers and others related to operationalissues and complaints and allegations from former and current employees. Thesematters are believed to be common for restaurant businesses. The Companybelieves the ultimate disposition of these matters will not have a materialadverse effect on the consolidated financial position or results of operations.

**Item 1A.   Risk Factors**

A decline in Adjusted EBITDA may limit theCompany’s ability to borrow under and result in a default under its seniorsecured credit facility.

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On February 16,2007 the Company entered into an amendment to the senior secured creditfacility which provided for an increase in the revolving credit facility to$35.0 million, and changed the borrowing base governing the revolving creditfacility to be the lesser of (a) $35.0 million and (b) 1.8 times trailingtwelve months Adjusted EBITDA minus the outstanding principal amount of thesenior secured term loan.  Under theamended formula, the Company had the ability to borrow a total of $29.9 millionunder the revolving credit facility as of July 12, 2007.  While the borrowing base provision did notimpact the Company’s access to needed borrowings during the third quarter offiscal 2007, a further decline in trailing Adjusted EBITDA could impair theCompany’s access to borrowings for working capital or capital expenditurefunds.

The senior secured credit facility requires that the Company maintain aminimum amount of Adjusted EBITDA on a trailing twelve month basis.  On July 27, 2007, the Company further amended the senior securedcredit facility to change thedefinition of Adjusted EBITDA and certain of the financial covenants governingthe senior secured credit facility.    Under the amended facility, the amount of excess Adjusted EBITDA in thetrailing Adjusted EBITDA covenant as of July 12, 2007 was approximately $1million.  A decline in Adjusted EBITDAcould cause the Company to violate its senior secured credit facility byfailing to maintain the required amount of Adjusted EBITDA on a trailing twelvemonth basis.  Such violation could causea default under the Company’s senior secured credit facility and give theCompany’s lenders the right to accelerate the repayment of the Company’sobligations.

There have been no other material changes to the risk factorspreviously disclosed in the Company’s Annual Report on Form 10-K for the fiscalyear ended November 2, 2006.

**Item 2.    UnregisteredSales of Equity Securities and Use of Proceeds**

Not applicable.

**Item 3.    Defaults UponSenior Securities**

Not applicable.

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

Not applicable.

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**Item 5.    OtherInformation**

Not applicable.

**Item 6.    Exhibits**
| **(a)** | **Exhibits**                                                                                                                                         |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                                                                                                 |
|    | 31.1                                                                                                                                                 | Certification by the Chief Executive Officer with  respect to the Form 10-Q for the quarterly period ended July 12, 2007,  pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|    |                                                                                                                                                 |   |
|    | 31.2                                                                                                                                                 | Certification by the Chief Financial Officer with  respect to the Form 10-Q for the quarterly period ended July 12, 2007,  pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|    |                                                                                                                                                 |   |
|    | 32.1                                                                                                                                                 | Certifications by the Chief Executive Officer and  Chief Financial Officer with respect to the Form 10-Q for the quarterly  period ended July 12, 2007, pursuant to Rule 13a-14 or 15d-14 of the  Securities Exchange Act of 1934 and Title 18 of the United States Code  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |
|    |                                                                                                                                                 |
| **(b)** | **Reports on Form 8-K**                                                                                                                              |
|    |                                                                                                                                                 |
|    | During the third quarter  of fiscal 2007 ended July 12, 2007, the Company filed the following reports  on Form 8-K:                                  |
|    |                                                                                                                                                 |
|    | Current report on Form 8-K on July 31, 2007,  regarding an amendment to the senior secured credit facility.                                     |
|    |                                                                                                                                                 |
|    | Current report on Form 8-K on June 26, 2007,  regarding the repurchase of stock from the Company’s former Chief Executive  Officer.             |
|    |                                                                                                                                                 |
|    | Current report on Form 8-K on May 31, 2007,  announcing the financial results for the second quarter of fiscal 2007 ended April 19,  2007. |

 

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                       | VICORP Restaurants, Inc.                                  |
|-----------------------|-----------------------------------------------------------|
|                  |                                                      |
|                  |                                                      |
| Date: August 27, 2007 |                                                      |
|                  |                                                      |
|                  |                                                      |
|                  | /s/ Kenneth Keymer                                        |   |
|                  | Kenneth Keymer                                            |
|                  | Chief Executive Officer                                   |
|                  | (Principal Executive Officer)                             |
|                  |                                                      |
|                  |                                                      |
| Date: August 27, 2007 |                                                      |
|                  |                                                      |
|                  |                                                      |
|                  | /s/ Anthony Carroll                                       |   |
|                  | Anthony Carroll                                           |
|                  | Chief Financial Officer and Chief Administrative  Officer |
|                  | (Principal Financial and Accounting Officer)              |
|                       |                                                           |  |  |

 

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