**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549-1004**

 

**FORM 10-Q**

 
| **ý**                                                                                                                                                                                                                 | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                 |
| **For the quarterly period  ended January 27, 2005**                                                                                                                                                                  |
| ** **                                                                                                                                                                                                                 |
| **OR**                                                                                                                                                                                                                     |
| ** **                                                                                                                                                                                                                 |
| **o**                                                                                                                                                                                                                      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13  OF THE SECURITIES EXCHANGE ACT OF 1934** |
| **For the  transition period  from               to               ** |
| ** **                                                                                                                                                                                                                 |
| **Commission  file number 333-117263**                                                                                                                                                                                     |

 

**VICORPRESTAURANTS, INC.**

(Exact name of registrant asspecified in its charter)

 
| **STATE OF  COLORADO**                                                       | ** ** | **84-0511072**                        |
|------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)             |       | (I.R.S. Employer  Identification No.) |
|                                                                         |       |                                  |
| **400 WEST  48TH AVENUE, DENVER, COLORADO**                                  | ** ** | **80216**                             |
| (Address of principal  executive offices)                                    |       | (Zip Code)                            |
|                                                                         |       |                                  |
| Registrant’s telephone  number, including area code: **(303) 296-2121** |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

Yes   o   No   ý

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

Yes   o   No   ý

 

Numberof shares of Common Stock, $.0001 par value, outstanding at April 15,2005: 1,421,800, excluding treasury shares.

 

 

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**VICORPRESTAURANTS, INC.January 27, 2005INDEX**

 
| **PART I - FINANCIAL INFORMATION ** | ** **                                                                                                                                |
|------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|
|                                     |                                                                                                                                      |   |
| Item 1.                                  | Consolidated Financial Statements                                                                                                         |   |
|                                     |                                                                                                                                      |   |
|                                     | Consolidated Balance Sheets  as of January 27, 2005 and October 28, 2004 (As restated)                                          |   |
|                                     |                                                                                                                                      |   |
|                                     | Consolidated  Statements of Operations for the 91 days ended January 27, 2005 and 88  days ended January 22, 2004 (As restated) |   |
|                                     |                                                                                                                                      |   |
|                                     | Consolidated  Statements of Cash Flows for the 91 days ended January 27, 2005 and 88  days ended January 22, 2004 (As restated) |   |
|                                     |                                                                                                                                      |   |
|                                     | 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  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 INFORMATION**

 

**Item 1.****  CONSOLIDATED FINANCIAL STATEMENTS**

 

**VIAcquisition Corp.Consolidated Balance Sheets(In Thousands, Except Share and Per Share Data)(Unaudited)**

 
| ** **                                                                                                                                                                                                                                      | ** ** | **January 27, 2005** | ** ** | **October 28, 2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                                                                                                                                                                                                                      | ** ** | ** **                | ** ** | **(As restated)**         | ** ** |
| **Assets**                                                                                                                                                                                                                                      |       |                      |       |                      |       |
| Current  assets:                                                                                                                                                                                                                                |       |                      |       |                      |       |
| Cash and  cash equivalents                                                                                                                                                                                                                      |       | $                         | 8,416      |                      | $          | 1,332 |   |
| Receivables,  net                                                                                                                                                                                                                               |       | 9,648                     |       | 11,915                    |       |
| Inventories                                                                                                                                                                                                                                     |       | 9,310                     |       | 12,245                    |       |
| Deferred  income taxes, short-term                                                                                                                                                                                                              |       | 2,704                     |       | 2,463                     |       |
| Prepaid  expenses and other current assets                                                                                                                                                                                                      |       | 3,072                     |       | 3,432                     |       |
| Income tax  receivable                                                                                                                                                                                                                          |       | —                    |       | 270                       |       |
| Total  current assets                                                                                                                                                                                                                           |       | 33,150                    |       | 31,657                    |       |
| Property and  equipment, net                                                                                                                                                                                                                    |       | 79,923                    |       | 80,316                    |       |
| Assets under  deemed landlord financing liability, net                                                                                                                                                                                          |       | 111,391                   |       | 110,342                   |       |
| Deferred  income taxes, long-term                                                                                                                                                                                                               |       | 20,182                    |       | 19,401                    |       |
| Goodwill                                                                                                                                                                                                                                        |       | 72,979                    |       | 72,979                    |       |
| Trademarks  and tradenames                                                                                                                                                                                                                      |       | 42,600                    |       | 42,600                    |       |
| Franchise  rights, net                                                                                                                                                                                                                          |       | 11,221                    |       | 11,358                    |       |
| Other  assets, net                                                                                                                                                                                                                              |       | 13,118                    |       | 13,763                    |       |
| Total assets                                                                                                                                                                                                                                    |       | $                         | 384,564    |                      | $          | 382,416 |   |
|                                                                                                                                                                                                                                            |       |                      |       |                      |       |
| **Liabilities  and stockholders’ equity**                                                                                                                                                                                                  |       |                      |       |                      |       |
| Current  liabilities:                                                                                                                                                                                                                           |       |                      |       |                      |       |
| Current  maturities of long-term debt and capitalized lease obligations                                                                                                                                                                         |       | $                         | 162        |                      | $          | 201 |   |
| Cash  overdraft                                                                                                                                                                                                                                 |       | —                    |       | 3,190                     |       |
| Accounts  payable                                                                                                                                                                                                                               |       | 11,029                    |       | 13,174                    |       |
| Accrued  compensation                                                                                                                                                                                                                           |       | 5,782                     |       | 7,138                     |       |
| Accrued  taxes                                                                                                                                                                                                                                  |       | 9,665                     |       | 7,992                     |       |
| Other  accrued expenses                                                                                                                                                                                                                         |       | 22,048                    |       | 18,520                    |       |
| Total  current liabilities                                                                                                                                                                                                                      |       | 48,686                    |       | 50,215                    |       |
| Long-term  debt                                                                                                                                                                                                                                 |       | 140,170                   |       | 141,469                   |       |
| Capitalized  lease obligations                                                                                                                                                                                                                  |       | 233                       |       | 248                       |       |
| Deemed  landlord financing liability                                                                                                                                                                                                            |       | 116,127                   |       | 114,670                   |       |
| Other  noncurrent liabilities                                                                                                                                                                                                                   |       | 8,322                     |       | 7,057                     |       |
| Total  liabilities                                                                                                                                                                                                                              |       | 313,538                   |       | 313,659                   |       |
|                                                                                                                                                                                                                                            |       |                      |       |                      |       |
| Commitments  and contingencies                                                                                                                                                                                                                  |       |                      |       |                      |       |
|                                                                                                                                                                                                                                            |       |                      |       |                      |       |
| Stock  subject to repurchase                                                                                                                                                                                                                    |       | 1,063                     |       | 1,063                     |       |
|                                                                                                                                                                                                                                            |       |                      |       |                      |       |
| Stockholders’  equity:                                                                                                                                                                                                                     |       |                      |       |                      |       |
| Preferred  stock, $0.0001 par value:                                                                                                                                                                                                            |       |                      |       |                      |       |
| Series A,  100,000 shares authorized, 68,659 shares issued and outstanding at January 27,  2005 and 68,659 shares issued and outstanding at October 28, 2004  (aggregate liquidation preference of $81,040 and $78,846, respectively) |       | 82,069                    |       | 80,022                    |       |
| Unclassified  preferred stock, 100,000 shares authorized, no shares issued or outstanding                                                                                                                                                       |       | —                    |       | —                    |       |
| Common stock  $0.0001 par value:                                                                                                                                                                                                                |       |                      |       |                      |       |
| Class A,  2,800,000 shares authorized, 1,386,552 shares issued and outstanding at January 27,  2005 and 1,386,552 shares issued and outstanding at October 28, 2004                                                                   |       | —                    |       | —                    |       |
| Paid-in  capital                                                                                                                                                                                                                                |       | 2,426                     |       | 2,426                     |       |
| Treasury  stock, at cost, 923.87 shares of preferred stock and 80,603 shares of common  stock at January 27, 2005 and October 28, 2004                                                                                                |       | (1,004                    | )          | (1,004                    | )          |
| Accumulated  deficit                                                                                                                                                                                                                            |       | (13,528                   | )          | (13,750                   | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                |       | 69,963                    |       | 67,694                    |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                |       | $                         | 384,564    |                      | $          | 382,416 |   |

 

*See accompanying notes to consolidated financial statements.*

 

3

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**VIAcquisition Corp.Consolidated Statements ofOperations(In Thousands)(Unaudited)**

 
| ** **                                      | ** ** | **91 Days Ended  January 27,  2005** | ** ** | **88 Days Ended  January 22,  2004** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | ** **                                | ** ** | **(As restated)**                         | ** ** |
| **Revenues:**                                   |       |                                      |       |                                      |       |
| Restaurant  operations                          |       | $                                         | 104,523    |                                      | $          | 99,426 |   |
| Franchise  operations                           |       | 1,229                                     |       | 1,168                                     |       |
|                                            |       | 105,752                                   |       | 100,594                                   |       |
| **Costs  and expenses:**                        |       |                                      |       |                                      |       |
| Restaurant  costs:                              |       |                                      |       |                                      |       |
|   Food                                |       | 28,211                                    |       | 27,297                                    |       |
|   Labor                               |       | 32,240                                    |       | 30,807                                    |       |
|  Other  operating expenses                 |       | 27,766                                    |       | 26,535                                    |       |
| Franchise  operating expenses                   |       | 511                                       |       | 552                                       |       |
| General and  administrative expenses            |       | 6,607                                     |       | 6,201                                     |       |
| Transaction  expenses                           |       | 15                                        |       | 22                                        |       |
| Management  fees                                |       | 196                                       |       | 196                                       |       |
| Operating  profit                               |       | 10,206                                    |       | 8,984                                     |       |
| Interest  expense                               |       | (6,978                                    | )          | (6,206                                    | )          |
| Other  income, net                              |       | 88                                        |       | 23                                        |       |
| Income  before income taxes                     |       | 3,316                                     |       | 2,801                                     |       |
| Provision  for income taxes                     |       | 1,047                                     |       | 758                                       |       |
| Net income                                      |       | 2,269                                     |       | 2,043                                     |       |
| Preferred  stock dividends and accretion        |       | (2,047                                    | )          | (1,755                                    | )          |
| Net income  attributable to common stockholders |       | $                                         | 222        |                                      | $          | 288 |   |

 

*See accompanying notes to consolidated financial statements.*

 

4

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**VIAcquisition Corp.Consolidated Statements ofCash Flow(In Thousands)(Unaudited)**

 
| ** **                                                                                       | ** ** | **91 Days Ended  January 27,  2005** | ** ** | **88 Days Ended  January 22,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                       | ** ** | ** **                                | ** ** | **(As restated)**                         | ** ** |
| **Operating  activities:**                                                                       |       |                                      |       |                                      |       |
| Net income                                                                                       |       | $                                         | 2,269      |                                      | $          | 2,043 |   |
| Reconciliation  to net cash provided by operating activities:                                    |       |                                      |       |                                      |       |
| Depreciation  and amortization                                                                   |       | 4,480                                     |       | 4,296                                     |       |
| Amortization  of financing costs and original issue discounts                                    |       | 288                                       |       | 231                                       |       |
| Loss on  disposition of assets                                                                   |       | 28                                        |       | 41                                        |       |
| Deferred  income tax expense                                                                     |       | (1,022                                    | )          | (769                                      | )          |
| Interest on  warrants                                                                            |       | —                                    |       | 44                                        |       |
| Changes in  operating assets and liabilities:                                                    |       |                                      |       |                                      |       |
| Receivables,  net                                                                                |       | 3,071                                     |       | 1,307                                     |       |
| Inventories                                                                                      |       | 2,935                                     |       | 2,286                                     |       |
| Cash  overdraft                                                                                  |       | (3,190                                    | )          | (2,725                                    | )          |
| Accounts  payable, trade                                                                         |       | (2,145                                    | )          | 629                                       |       |
| Accrued  compensation                                                                            |       | (1,356                                    | )          | (1,519                                    | )          |
| Other  current assets and liabilities                                                            |       | 5,791                                     |       | 3,200                                     |       |
| Other  noncurrent assets and liabilities                                                         |       | 1,618                                     |       | 1,098                                     |       |
| Net cash  provided by operating activities                                                       |       | 12,767                                    |       | 10,162                                    |       |
| **Investing  activities:**                                                                       |       |                                      |       |                                      |       |
| Acquisitions,  net of cash acquired                                                              |       | —                                    |       | (10                                       | )          |
| Purchase of  property and equipment                                                              |       | (2,835                                    | )          | (3,430                                    | )          |
| Purchase of  assets under deemed landlord financing liability                                    |       | (2,122                                    | )          | (411                                      | )          |
| Proceeds  from disposition of property                                                           |       | 25                                        |       | 94                                        |       |
| Collection  of notes receivable                                                                  |       | 55                                        |       | 12                                        |       |
| Net cash  used in investing activities                                                           |       | (4,877                                    | )          | (3,745                                    | )          |
| **Financing  activities:**                                                                       |       |                                      |       |                                      |       |
| Payments of  debt and capital lease obligations                                                  |       | (9,004                                    | )          | (28,433                                   | )          |
| Proceeds  from issuance of debt                                                                  |       | 7,600                                     |       | 18,235                                    |       |
| Proceeds  from deemed landlord financing                                                         |       | 598                                       |       | 226                                       |       |
| Net proceeds  from issuance of preferred stock and common stock                                  |       | —                                    |       | 264                                       |       |
| Net cash  used in financing activities                                                           |       | (806                                      | )          | (9,708                                    | )          |
| Increase  (decrease) in cash and cash equivalents                                                |       | 7,084                                     |       | (3,291                                    | )          |
| Cash and  cash equivalents at beginning of period                                                |       | 1,332                                     |       | 5,326                                     |       |
| Cash and  cash equivalents at end of period                                                      |       | $                                         | 8,416      |                                      | $          | 2,035 |   |
|                                                                                             |       |                                      |       |                                      |       |
| **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) |       | $                                         | 3,418      |                                      | $          | 5,872 |   |
| Income taxes                                                                                     |       | 83                                        |       | 137                                       |       |

 

*See accompanying notes to consolidated financial statements.*

 

5

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**VIAcquisition Corp.**Notesto Consolidated Financial StatementsJanuary 27, 2005(Unaudited)

 

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

 

**Description of Business**

 

VI Acquisition Corp. (the “Company” or “VI Acquisition”), a Delawarecorporation, was organized in June 2003 by Wind Point Partners and otherco-investors.  VICORP Restaurants, Inc. (“VICORP”)and its subsidiaries are 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 Company operates family style restaurants under the brand names “BakersSquare” and “Village Inn,” and franchises restaurants under the Village Innbrand name.  At January 27, 2005,the Company operated 273 Company-owned restaurants in 15 states.  Of the Company-owned restaurants, 149 areBakers Square restaurants and 124 are Village Inn restaurants, with anadditional 103 franchised Village Inn restaurants in 19 states.  The Company-owned and franchised restaurantsare concentrated in Arizona, California, Florida, the Rocky Mountain region,and the upper Midwest. In addition, the Company operates three piemanufacturing facilities located in Santa Fe Springs, California; Oak Forest,Illinois; and Chaska, Minnesota.

 

**Basis of Presentation**

 

The accompanying unaudited consolidated financial statements have beenprepared in accordance with U.S. generally accepted accounting principles (“GAAP”)for interim financial information and with the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, they donot include all of the information and footnotes required by GAAP for completefinancial statements.  In the opinion ofmanagement, the financial statements include all adjustments, consisting ofnormal recurring adjustments, necessary for a fair presentation.  However, operating results for the 91-dayperiod ended January 27, 2005 are not necessarilyindicative of the results that may be expected for the fiscal year ending November 3,2005.  Additionally, operating resultsfor the first quarter of the fiscal year include increased sales due to theholidays in November and December. The consolidated balance sheet at October 28, 2004, as restated,has been derived from the audited consolidated financial statements at thatdate but does not include all of the information and footnotes required by GAAPfor complete financial statements.  Forfurther information, refer to the audited consolidated financial statements andfootnotes thereto for the year ended October 28, 2004 included in ourAnnual Report on Form 10-K, which will be amended for the restatement ofpreviously issued financial statements (see Note 2).

 

6

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**Stock-Based Compensation**

 

Financial Accounting Standards Board (“FASB”) Statement of FinancialAccounting Standards (“SFAS”) No. 123, “Accounting for Stock-BasedCompensation,” defines a fair value method of accounting for employee stockcompensation and encourages, but does not require, all entities to adopt thatmethod of accounting. Entities electing not to adopt the fair value method ofaccounting must make pro forma disclosures of net income as if the fair valuemethod of accounting defined in SFAS No. 123 had been applied. The Company haselected not to adopt the fair value method and instead has elected to followAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations (however, refer to thediscussion in the following paragraph related to the Company’s pending adoptionof SFAS No. 123R, “Share-Based Payment”). Under APB Opinion No. 25,compensation expense related to stock options is calculated as the differencebetween the exercise price of the option and the fair market value of theunderlying stock at the date of grant. This expense is recognized over thevesting period of the option or at the time of grant if the options immediatelyvest. As a result of the minimal number of stock options outstanding during allperiods presented in the accompanying consolidated financial statements, thepro forma effects of applying the fair value method to outstanding options overtheir respective vesting periods had an immaterial effect on net income.

 

**New Accounting Pronouncements**

 

In December 2004, the FASB issued SFAS No. 123R, which replacesthe prior SFAS No. 123 and supersedes APB Opinion No. 25.  SFAS 123R requires compensation costs relatedto share-based payment transactions to be recognized in the financialstatements.  With limited exceptions, theamount of compensation cost will be measured based on the grant-date fair valueof the equity or liability instruments issued. In addition, liability awards will be re-measured each reporting period.  Compensation cost will be recognized over theperiod that an employee provides services in exchange for the award.  This new standard will become effective forthe Company on November 4, 2005, (the first quarter of the Company's fiscal2006) and while the Company is still evaluating the impact of adopting SFAS No.123R, the Company does not believe such adoption will have a material impact onits consolidated financial statements because of the minimal number of stockoptions outstanding.

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs,an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies the accounting for abnormal amounts of idlefacility expense, freight, handling costs, and wasted material, and requiresthat such items be recognized as current-period charges regardless of whetherthey meet the “so abnormal” criterion outlined in ARB No. 43.  SFAS No. 151 also introduces the concept of “normalcapacity” and requires the allocation of fixed production overheads toinventory based on the normal capacity of the production facilities.  Unallocated overheads must be recognized asan expense in the period incurred.  SFASNo. 151 is effective for inventory costs incurred during fiscal years beginningafter June 15, 2005.  While theCompany is still evaluating the impact of this statement, it does not currentlybelieve it will have a material impact on its consolidated financialstatements.

 

7

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**Reclassifications**

 

Certain prior period amounts in the accompanying consolidated financialstatements have been reclassified to conform to the presentation in fiscal 2005.  These reclassifications had no effect on theCompany’s consolidated net income.

 

8

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**Fiscal Periods**

 

The Company’s fiscalyear is comprised of 52 or 53 weeks divided into four fiscal quarters of 12 or13, 12, 12, and 16 weeks.  The firstquarter of fiscal 2005 consisted of 13 weeks, or 91 days and ended on January 27,2005.  Beginning January 22, 2004,the Company changed its fiscal year so that it ends on the Thursday nearest to October 31stof each year. Previously, the Company’s fiscal year was on the last Sunday inOctober.  This change increased the firstquarter in fiscal 2004 by four days (88 days in the first quarter of fiscal2004 versus 84 days in the first fiscal quarter of 2003). The change was madeto facilitate restaurant operations by moving the end of our fiscal periods andweekly reporting and payroll periods away from weekends when the Company’srestaurants are busier.

 

**2.  Restatement of Previously Issued Financial Statements**

 

The Company hasrestated its financial statements for periods spanning from fiscal 2000 throughfiscal 2004 to correct the following accounting errors as a result of a reviewof its lease accounting policies and practices prompted by the views expressedby the Office of the Chief Accountant of the Securities and Exchange Commission(“SEC”) on February 7, 2005 in a letter to the American Institute ofCertified Public Accountants and other recent interpretations regarding certainoperating lease issues and their application under GAAP:

 

*(i)**                                 **Accounting for Real EstateTransactions*

 

Historically, theCompany had accounted for certain of its real estate transactions of restaurantproperties as sale-leaseback transactions. The Company has restated its financial statements to now report thesetransactions as financing transactions under SFAS No. 98, “Accounting forLeases,” rather than as sale-leaseback transactions as previously reported dueto a determination that certain lease agreement provisions reflect continuinginvolvement with the buyer-lessor. Our continuing involvement for most of ourleases now accounted for under the financing method results from our ability tocontrol the property with pre-determined rental payments through at least 90percent of the economic life of the property, even though lease renewals wouldneed to be exercised by the Company to effectuate such control.  These “perpetual fixed-price renewal options”are considered continuing involvement because the seller-lessee is deemed tobenefit from future appreciation in the underlying property in a manner similarto a fixed-price purchase option.  Suchcontinuing involvement precludes the use of sale-leaseback accounting untilsuch time that the continuing involvement no longer exists.  The affected real estate transactions relatedto an aggregate of 79 existing restaurants in 1999, 2001 and 2003 and nine newrestaurant locations opened in 2003 and 2004.

 

The impact of therestatement was to record on the Company’s consolidated balance sheets the assetsof the restaurants subject to these transactions as if they had not been sold andrecord the proceeds from these transactions (including any gains previouslydeferred) as liabilities under the caption “Deemed landlord financing liability”. Operating results were restated torecognize depreciation expense associated with the assets subject to thesetransactions and re-characterize the lease payments previously reported as rentexpense as principal repayments and imputed interest expense.  The rent expense reversal associated withthese transactions included the reversal of previously recorded expenses forstraight-line rents and rent reductions for certain purchase accounting adjustmentsmade 

 

9

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to account for the leases at fair marketvalue.  In addition, the capital leaseclassification for three leased properties was re-characterized as deemedlandlord financing assets and liabilities.

 

The net pre-tax impactto correctly classify the aforementioned leases as financing transactionstotaled $1,054,000 for the 88-day period ended January 22, 2004.  The correcting entries consisted of a $1,725,000decrease in other operating expenses, a $41,000 decrease in franchise operatingexpenses and a $2,820,000 increase in interest expense.

 

*(ii)**                             **Understated Straight-Line RentExpense*

 

GAAP requires thatleases for which there are scheduled rent increases over the term of the leasebe accounted for at the average rent payment, or on a straight-line basis, overthe applicable term with the differences being recorded on the balance sheet asa deferred rent liability.  The Companydid not appropriately straight-line its rents for certain locations.  The pre-tax impact to correctly straight-linerents was a $131,000 increase in rent expense for the 88-day period ended January 22,2004.

 

*(iii)**                         **Understated Depreciation andAmortization Expense*

 

The Company generallyhas historically depreciated its buildings and leasehold improvements over thelesser of the asset’s useful life or the initial term of the associated leaseunless an economic penalty would occur from not exercising renewal options, in whichcase, the assets are depreciated over the lesser of the asset’s useful life or thereasonably assured lease term.  However,in performing a detailed review of the Company’s depreciable assets, it wasdetermined that buildings and leasehold improvements for approximately 31 restaurantproperties had incorrect depreciable lives resulting in an understatement ofdepreciation expense, predominantly in earlier periods.  The pre-tax impact of the correction of theCompany’s leasehold improvement depreciable lives was a $19,000 increase indepreciation expense for the 88-day period ended January 22, 2004.

 

*(iv)**                           **Understated**Interest Expense on PreferredStock Warrant Accretion*

 

The Company also determined it was appropriate to record additionaladjustments which were previously deemed immaterial.  The adjustments related to interest expenseand preferred dividends imputed from the accretion of preferred stock warrants withanti-dilutive provisions issued originally to certain debt holders at the timeof the Company’s June 2003 purchase. For the 88-day period ended January 22, 2004, an additional $44,000of interest expense was recorded as a result of the correction of this error.

 

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The collective impact of these restatements on the Company’sconsolidated financial statements are summarized below (in thousands):

 
| ** **                                                              | ** ** | **As of October 28, 2004** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                              | ** ** | **Previously  reported**        | ** ** | **Corrections** | ** ** | **As restated** | ** ** |
| ** **                                                              | ** ** | **(Unaudited)**                 | ** ** |
| **Balance Sheet Data**                                                  |       |                            |       |   |   |   |   |   |   |   |
| Receivables                                                             |       | $                               | 13,676     |   | $ | (1,761 | ) | $ | 11,915 |   |
| Total  current assets                                                   |       | 33,418                          |       | (1,761 | ) | 31,657 |   |
| Property and  equipment, net                                            |       | 84,785                          |       | (4,469 | ) | 80,316 |   |
| Assets under  deemed landlord financing liability, net                  |       | —                          |       | 110,342 |   | 110,342 |   |
| Build-to-suit  construction-in-progress                                 |       | 6,258                           |       | (6,258 | ) | — |   |
| Deferred  income taxes, long-term                                       |       | 22,636                          |       | (3,235 | ) | 19,401 |   |
| Goodwill                                                                |       | 82,843                          |       | (9,864 | ) | 72,979 |   |
| Other  assets, net                                                      |       | 6,482                           |       | 7,281 |   | 13,763 |   |
| Total assets                                                            |       | 290,380                         |       | 92,036 |   | 382,416 |   |
|                                                                    |       |                            |       |   |   |   |   |
| Current  maturities of long-term debt and capitalized lease obligations |       | 258                             |       | (57 | ) | 201 |   |
| Accounts  payable                                                       |       | 12,865                          |       | 309 |   | 13,174 |   |
| Current  liabilities                                                    |       | 49,963                          |       | 252 |   | 50,215 |   |
| Capitalized  lease obligations                                          |       | 3,490                           |       | (3,242 | ) | 248 |   |
| Deemed  landlord financing liability                                    |       | —                          |       | 114,670 |   | 114,670 |   |
| Build-to-suit  liability                                                |       | 6,258                           |       | (6,258 | ) | — |   |
| Other  non-current liabilities                                          |       | 15,871                          |       | (8,814 | ) | 7,057 |   |
| Total  liabilities                                                      |       | 217,051                         |       | 96,608 |   | 313,659 |   |
| Preferred  stock                                                        |       | 79,769                          |       | 253 |   | 80,022 |   |
| Accumulated  deficit                                                    |       | (8,925                          | )          | (4,825 | ) | (13,750 | ) |
| Total  stockholders’ equity                                        |       | 72,266                          |       | (4,572 | ) | 67,694 |   |
| Total  liabilities and stockholders’ equity                        |       | 290,380                         |       | 92,036 |   | 382,416 |   |

 
| ** **                                      | ** ** | **88 Days Ended January 22,  2004** | ** ** |
|-------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                      | ** ** | **Previously  Reported**                 | ** ** | **Corrections** | ** ** | **As restated** | ** ** |
| ** **                                      | ** ** | **(Unaudited)**                          | ** ** |
| **Statement of Operations Data**                | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Other  operating expenses                       |       | $                                        | 28,110     |   | $ | (1,575 | ) | $ | 26,535 |   |
| Franchise  operating expenses                   |       | 593                                      |       | (41 | ) | 552 |   |
| Operating  profit                               |       | 7,368                                    |       | 1,616 |   | 8,984 |   |
| Interest  expense                               |       | (3,342                                   | )          | (2,864 | ) | (6,206 | ) |
| Income  before income taxes                     |       | 4,049                                    |       | (1,248 | ) | 2,801 |   |
| Provision  for income taxes                     |       | 1,259                                    |       | (501 | ) | 758 |   |
| Net income                                      |       | 2,790                                    |       | (747 | ) | 2,043 |   |
| Net income  attributable to common shareholders |       | 1,035                                    |       | (747 | ) | 288 |   |
|                                            |       |                                     |       |   |   |   |   |
| **Statement  of Cash Flows Data**               |       |                                     |       |   |   |   |   |
| Net cash  provided by operations                |       | $                                        | 10,306     |   | $ | (144 | ) | $ | 10,162 |   |
| Net cash  used in investing activities          |       | (3,621                                   | )          | (124 | ) | (3,745 | ) |
| Net cash  used in financing activities          |       | (9,976                                   | )          | 268 |   | (9,708 | ) |
| Net increase  in cash and cash equivalents      |       | (3,291                                   | )          | — |   | (3,291 | ) |

 

11

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The Company will restate its annual consolidated financial statementsand certain other interim period consolidated financial statements with thefiling of an amended Annual Report on Form 10-K with the SEC for the fiscalyear ended October 28, 2004.

 

**3.  Inventories**

 

Inventories are stated at the lower of cost (which is determined on afirst-in, first-out method) or market and consist of food, paper products andsupplies.  Inventories consisted of thefollowing (in thousands):

 

| ** **                                                                   | ** ** | **January 27,  2005** | ** ** | **October 28,  2004** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Inventories  at pie production facilities and third-party storage locations: |       |                       |       |                       |       |
| Raw  materials                                                               |       | $                          | 3,979      |                       | $          | 4,353 |   |
| Finished  goods                                                              |       | 1,991                      |       | 4,717                      |       |
|                                                                         |       | 5,970                      |       | 9,070                      |       |
| Restaurant  inventories                                                      |       | 3,340                      |       | 3,175                      |       |
|                                                                         |       | $                          | 9,310      |                       | $          | 12,245 |   |

 

**4.   Debt**

 

On April 14, 2004, the Company completed a private placement of$126.5 million aggregate principal amount of 101⁄2% senior unsecured notesmaturing on April 15, 2011.  Thenotes were issued at a discounted price of 98.791% of face value, resulting innet proceeds before transaction expenses of $125.0 million.  The senior unsecured notes were issued byVICORP Restaurants, Inc. and are guaranteed by VI Acquisition Corp. and VillageInn Pancake House of Albuquerque, Inc. In August 2004, the Company’s registration statement with theSecurities and Exchange Commission on Form S-4 was declared effective and thesenior unsecured notes and guarantees were exchanged for registered notes andguarantees having substantially the same terms and evidencing the sameindebtedness.  Interest is payable semi-annuallyon April 15 and October 15 until maturity.

 

The Company has an Amended and Restated Senior Secured Credit Facilityconsisting of a $15.0 million term loan and a $30.0 million revolving creditfacility, with a $15.0 million sub-limit for letters of credit.  As of January 27, 2005, the Company hadissued letters of credit aggregating $6.6 million and had no borrowingsoutstanding under the senior secured revolving credit facility.  The senior secured revolving credit facilitypermits borrowings equal to the lesser of (a) $30.0 million and (b) 1.2 timestrailing twelve months Adjusted EBITDA (as defined in the senior secured creditagreement) minus the original amount of the new senior secured term loan.  Under this formula, as of January 27,2005, the Company had the ability to borrow the full $30.0 million, less theamount of outstanding letters of credit and borrowings under the senior securedrevolving credit facility, or $23.4 million.

 

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Borrowings under both the revolving credit facility and the term loanof the Amended and Restated Senior Credit Facility bear interest at floatingrates tied to either the base rate of the agent bank under the credit agreementor LIBOR rates for a period of one, two or three months, in each case plus a marginthat will adjust based on the ratio of our Adjusted EBITDA to totalindebtedness, as defined in the agreement. At January 27, 2005, the interest rates were 5.6% for term loanborrowings.  Both facilities are securedby a lien on all of the assets of VICORP Restaurants, Inc., and guaranteed byVI Acquisition Corp. and Village Inn Pancake House of Albuquerque, Inc. Inaddition, the guarantees also are secured by the pledge of all of theoutstanding capital stock of VICORP Restaurants, Inc. by VI Acquisition Corp.The term loan does not require periodic principal payments, but requiresmandatory repayments under certain events, including proceeds from sale ofassets, issuance of equity and issuance of new indebtedness.  Both facilities mature on April 14,2009.

 

The Amended and Restated Senior Secured Credit Facility and theindenture governing the 101⁄2% Senior Unsecured Notes contain a number ofcovenants that, among other things, restrict, subject to certain exceptions,the Company’s ability and the ability of its subsidiaries, to sell assets,incur additional indebtedness, as defined, or issue preferred stock, repayother indebtedness, pay dividends and distributions or repurchase our capitalstock, create liens on assets, make investments, loans or advances, makecertain acquisitions, engage in mergers or consolidations, enter intosale-leaseback transactions, engage in certain transactions with affiliates,amend certain material agreements governing our indebtedness, change thebusiness conducted by us and our subsidiaries and enter into hedgingagreements. In addition, the Company’s Amended and Restated Senior SecuredCredit Facility requires us to maintain or comply with a maximum total leverageratio, a minimum interest coverage ratio and a maximum capital expenditureslimitation.  On January 27, 2005,the Company was in compliance with these requirements.

 

The Company delayedfiling its quarterly report on Form 10-Q for the quarterly period ended January 27,2005 beyond the extended filing deadline with the Securities and ExchangeCommission of March 21, 2005 due to the length of time needed to examinecertain aspects of its lease accounting (Note 2).  The lenders participating in the Company’sAmended and Restated Senior Secured Credit Facility agreed to extend the timeperiod for the Company to deliver required financial information until April 15,2005. The Company filed its Form 10-Q on April 15, 2005.

 

**5.   Commitmentsand Contingencies**

 

***Insurance reserves***

 

The Companyretains a significant portion of certain insurable risks primarily in themedical, dental, workers’ compensation, generalliability and property areas. Traditional insurance coverage is obtained forcatastrophic losses.  Provisions forlosses expected under these programs are recorded based upon the Company’sestimates of liabilities for claims incurred, including those not yetreported.  Such estimates utilize priorCompany history and actuarial assumptions followed in the insurance industry.  As of January 27, 2005, the Company hadplaced letters of credit totaling approximately $6.6 million, primarilyassociated with its insurance programs.

 

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***Litigation and tax contingencies***

 

From time-to-time, the Company has been involved in various lawsuitsand claims arising from the conduct of its business. Such lawsuits typicallyinvolve claims from customers and others related to operational issues andcomplaints and allegations from former and current employees. These matters arebelieved to be common for restaurant businesses. Additionally, the Company hasbeen party to various assessments of taxes, penalties and interest from federaland state agencies.  Management believesthe ultimate disposition of these matters will not have a material adverseeffect on the Company’s consolidated financial position or results ofoperations.

 

The Company was a defendant in two purported class action claims inCalifornia. The first class action claim was brought in October 2003 bytwo former employees and one current employee, and the second class actionclaim was brought in May 2004 by two former employees. The complaints allegedthat the Company violated California law with regard to rest and meal periods,bonus payment calculations (in the October 2003 complaint), overtimepayments (in the May 2004 complaint) and California law regarding unfairbusiness practices. The classes and subclasses alleged in the actions have notbeen certified by the respective courts at the current stages of thelitigation, but generally are claimed in the 2003 complaint to include personswho have been employed by the Company in California since October 17, 1999in the positions of food server, restaurant general manager and assistantrestaurant manager, and generally are claimed in the 2004 complaint to includepersons who have been employed by the Company in California since May 21,2000 in the positions of restaurant general manager and restaurant associatemanager. No dollar amount in damages was requested in either complaint, and thecomplaints sought statutory damages, compensatory damages, interest andattorneys’ fees in unspecified amounts.

 

The parties have entered into a settlement agreement, which is subjectto the final approval of the court. Under the terms of the proposedsettlements, the Company has agreed to pay up to an aggregate of $6.55 millionfor the alleged claims and associated legal fees, subject to partialindemnification as noted below.

 

The Company filed a lawsuit on December 3, 2004 against the formershareholders of Midway (the former parent of VICORP) in the Circuit Court ofCook County, Illinois seeking indemnification for all of the damages related tosuch litigation under the purchase agreement dated June 14, 2003 pursuantto which VICORP was acquired, in addition to the assertion of otherclaims.  The former shareholders ofMidway filed a lawsuit on December 22, 2004 in Suffolk County SuperiorCourt in Massachusetts.  The formershareholders of Midway claim, among other allegations, that the Company hasimproperly sought indemnification and are denying liability for the portion ofthe damages in the previously mentioned class action lawsuits that arosefollowing the closing of the June 2003 acquisition, and for certainsettlements for which they claim they did not receive appropriate notice orapproval rights.

 

While the Company believes that its claims against the formershareholders of Midway Investors Holdings Inc. are meritorious and that it willprevail, in the event the Company does not fully prevail on its indemnificationclaims, management estimates that the Company’s maximum exposure under thesettlement agreements is $3.2 million. Therefore, during the fourth quarter offiscal 2004, the Company established a reserve of $3.2 million in connectionwith the proposed settlement of these class action lawsuits. A receivable of$3.4 million was recorded at both January 27, 2005 and October 28,2004 for the difference between the aggregate amount of the settlement and theCompany’s estimated exposure.

 

14

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***Guarantees and commitments***

 

VICORPguaranteed certain leases for restaurant properties sold in 1986 and restaurantleases of certain franchisees. Minimum future rental payments remaining underthese leases were approximately $2.6 million as of January 27, 2005.  Management believes the ultimate dispositionof these matters will not have a material adverse effect on the Company’sconsolidated financial position or results of operations.

 

Contractualobligations, primarily for restaurants under construction, amounted toapproximately $7.3 million as of January 27, 2005.

 

**6.  Related Party Transactions**

 

On June 14, 2003, the Company entered into a professional servicesagreement with Wind Point Investors, IV, L.P. and Wind Point Investors V, L.P.,whereby certain management, financial and other consulting services would beprovided to the Company.  Under the termsof the agreement, the Company pays an annual fee to both partnerships in theaggregate amount of $850,000.  Managementfees expensed under this agreement totaled approximately $196,000 during eachof the 91 day and 88 day periods ended January 27, 2005 and January 22,2004.  Management fees paid to Wind PointPartners, IV, L.P. and Wind Point Investors V, L.P. under this agreementtotaled $213,000 during each of the 91 day and 88 day periods ended January 27,2005 and January 22, 2004.

 

**7.  Comprehensive Income and Hedging Activities**

 

Comprehensive income consisted of the following (in thousands):

 

| ** **                         | ** ** | **91 Days Ended  January 27,  2005** | ** ** | **88 Days Ended  January 22,  2004** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | ** **                                | ** ** | **(As restated)**                         | ** ** |
|                               |       |                                      |       |                                      |       |   |   |
| Net income                         |       | $                                         | 2,269      |                                      | $          | 2,043 |   |
| Unrealized  hedge transaction loss |       | —                                    |       | (226                                      | )          |
| Comprehensive  income              |       | $                                         | 2,269      |                                      | $          | 1,817 |   |

 

Effective October 27, 2003, the Company entered into an interestrate swap agreement to manage its cash flows associated with the interestpayable under the variable component of the Company’s prior senior securedcredit agreement.  The swap agreement hadan original notional amount of $35 million. The contract was scheduled toexpire October 27, 2006 and the interest rate was fixed at 2.686%.  In connection with the Company’s debtrefinancing transaction on April 14, 2004 (Note 4), the outstandingderivative obligations were settled for $0.2 million.  The Company held no derivative instruments asof January 27, 2005 or October 28, 2004.

 

Under SFAS No. 133, the Company’s interest rate swap agreements weredesignated as cash flow hedges and recorded at fair value.  Changes in the value of such contracts, netof income taxes, were reported in comprehensive income.  For the purpose of calculating income taxesrelated to comprehensive income, the Company used its combined statutory ratefor federal and state income taxes.  Theperiodic net settlements made under the agreements are reflected in operationsin the 

 

15

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period in whichthe settlement occurs as an adjustment to interest expense.  The Company’s accounting treatment of thesetransactions is consistent with its tax treatment.

 

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**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

*Statements included in Management’sDiscussion and Analysis of Financial Condition and Results of Operations andelsewhere in this report are, or may be deemed to be, “forward-lookingstatements” within the meaning of Section 27A of the Securities Act and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements include allmatters that are not historical facts. By their nature, forward-looking statements involve risks anduncertainties because they relate to events and depend on circumstances thatmay or may not occur in the future.  Wecaution you that forward-looking statements are not guarantees of futureperformance and that our actual results of operations, financial condition andliquidity, and the development of the industry in which we operate may differmaterially from those made in or suggested by the forward-looking statementscontained in this information report. See the “Risk Factors” section of our Annual Report on Form 10-Kfor the year ended October 28, 2004, for a discussion of some of thefactors that may affect the Company and its operations.  Such factors include the following:competitive pressures within the restaurant industry; changes in consumerpreferences; 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.  In addition, even if our results ofoperations, financial condition and liquidity, and the development of theindustry in which we operate are consistent with the forward-looking statementscontained in this announcement, those results or developments may not beindicative of results or developments in subsequent periods.  Any forward-looking statements which we makein this report speak only as of the date of such statement, and we undertake noobligation to update such statements. 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.*

 

**Company Profile**

 

VI Acquisition Corp. and its subsidiaries (referred to herein as the “Company”or “we”, “us” and “our”) operate family-dining restaurants under twowell-recognized brands, Village Inn and Bakers Square. Our Company, founded in1958, had 376 restaurants in 25 states as of January 27, 2005, consisting of 273Company-operated restaurants and 103 franchised restaurants. We also producepremium pies that we serve in our restaurants or sell to third parties at threestrategically located facilities.

 

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The following table sets forth the changes to the number ofcompany-operated and franchised restaurants for the periods presented below.

 
| **(Units)**                                  | ** ** | **91 Days Ended  January 27,  2005** | ** ** | **88 Days Ended  January 22,  2004** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| Village Inn  company-operated restaurants:   |       |                                      |       |                                      |       |
| Beginning of  period                         |       | 121                                       |       | 118                                       |       |
| Openings                                     |       | 3                                         |       | 2                                         |       |
| Closings                                     |       | —                                    |       | (1                                        | )          |
| End of  period                               |       | 124                                       |       | 119                                       |       |
| Bakers  Square company-operated restaurants: |       |                                      |       |                                      |       |
| Beginning of  period                         |       | 150                                       |       | 149                                       |       |
| Openings                                     |       | —                                    |       | 1                                         |       |
| Closings                                     |       | (1                                        | )          | —                                    |       |
| End of  period                               |       | 149                                       |       | 150                                       |       |
| Total  company-operated restaurants          |       | 273                                       |       | 269                                       |       |
| Village Inn  franchised restaurants:         |       |                                      |       |                                      |       |
| Beginning of  period                         |       | 103                                       |       | 105                                       |       |
| Closings                                     |       | —                                    |       | (1                                        | )          |
| End of  period                               |       | 103                                       |       | 104                                       |       |
| Total  restaurants                           |       | 376                                       |       | 373                                       |       |

 

**Management Overview**

 

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

 

We have notsubstantially increased the number of restaurants within both the Village Innand Bakers Square concepts for a number of years.  However, with our new strategic focus, weintend to increase the number of company-operated Village Inn and Bakers Squarerestaurants more significantly over the next several years.  We currently expect to open an estimated 23 to27 new restaurants in fiscal 2005 with most of the openings occurring in thelatter half of the fiscal year.

 

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Like much ofthe restaurant industry, we view same unit sales as a key performance metric,at the individual unit level, within regions, across each chain and throughoutour company. With our field-level and corporate information systems, we monitorsame unit sales on a daily, weekly and four-week period basis from the chainlevel down to the individual unit level. The primary drivers of same unit salesperformance are changes in the average per-person check and changes in thenumber of customers, or customer count. Average check performance is primarilyaffected by menu price increases and changes in the purchasing habits of ourcustomers. We also monitor entrée count, exclusive of take-out business, andsales of whole pies, which we believe is indicative of overall customer trafficpatterns. To increase average unit sales, we focus marketing and promotionalefforts on increasing customer visits and sales of particular products. We alsoselectively increase prices, but are constrained by the price sensitivity ofcustomers in our market segment and our desire to maintain an attractiveprice-to-value relationship that is a fundamental characteristic of ourconcepts. We generally have increased prices in line with increases in theconsumer price index, and expect to continue to do so in the future. Same unitsales performance is also affected by other factors, such as food quality, thelevel and consistency of service within our restaurants, the attractiveness andphysical condition of our restaurants, as well as local and national economicfactors.

 

As of January 27,2005, we had 103 franchised Village Inn restaurants in nineteen states, operatedby 25 franchisees which operate one to eleven restaurants each.  Although we may increase franchise revenuesby increasing the number of franchised Village Inn restaurants, we expect thatour franchise revenues will decline as a percentage of our total revenue as weemphasize growth in the number of Company-operated units.

 

In addition tounit sales, the other major factor affecting the performance of our restaurantsis the cost associated with operating our restaurants. We monitor and assessthese costs principally as a percentage of a restaurant’s revenues, or on amargin basis. The operating margin of a restaurant is the profitability,expressed as a percentage of sales, of the restaurant after accounting for alldirect expenses of operating the restaurant. Another key performance metric isthe prime margin, which is the profitability, expressed as a percentage ofsales, of the restaurants after deducting the two most significant costs, laborand food. Due to the importance of both labor cost and food cost, we closelymonitor prime margin from the chain level down to the individual restaurant. Wehave systems in place at each restaurant to assist restaurant managers ineffectively managing these costs to improve prime margin.

 

Labor is ourlargest cost element. The principal drivers of labor cost are wage rates,particularly for the significant number of hourly employees in our restaurants,and the number of labor hours utilized in serving our customers and operatingour restaurants, as well as health insurance costs for our employees. Wagerates are largely market driven, with increases to minimum wage rates causingcorresponding increases in our pay scales. Differences in minimum wage lawsamong the various states impact the relative profitability of the restaurantsin those states. In both January 2004 and 2005, the minimum wage rate forthe state of Illinois increased.  Thestate of Florida’s minimum wage is scheduled to increase in June 2005.

 

While the wagerates are largely externally determined, labor utilization within ourrestaurants is more subject to our control and is closely monitored. We seek tostaff each restaurant to provide a high level of service to our customers,without incurring more labor cost than is needed. We have included laborscheduling tools in each of our company-operated restaurants’ back officesystems to 

 

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assistour managers in improving labor utilization. We monitor labor hours actuallyincurred in relation to sales and customer count on a restaurant- by-restaurantbasis throughout each week.

 

In managingprime margin, we also focus on percentage food cost, which is food costexpressed as a percentage of total revenues. Our food cost is affected byseveral factors, including market prices for the food ingredients, oureffectiveness at controlling waste and proper portioning, and shifts in ourcustomers’ buying habits between low-food-cost and high-food-cost menu items.Our food cost management system within each restaurant measures actualingredient costs and actual customer product purchases against an “ideal” foodcost standard. Ideal food cost is calculated within each restaurant based onthe cost of ingredients used, assuming proper portion size, adherence torecipes, limited waste and similar factors. We trackvariances from ideal food cost within each restaurant and seek to address thecauses of such variances, to the extent they arewithin our control, in order to improve our percentage food cost. In addition,our centralized purchasing department buys a majority of the products used inboth Village Inn and Bakers Square (as well as our pie production operations),leveraging the purchasing volumes of our restaurants and our franchisees toobtain favorable prices. We attempt to stabilize potentially volatile pricesfor certain high-cost ingredients such as chicken, beef, coffee and dairyproducts for three to twelve month periods by entering into purchase contractswhen we believe that this will improve our food cost. We also use “menuengineering” to promote menu items which have a lower percentage food cost.However, we are vulnerable to fluctuations in food costs. Given our customers’sensitivity to price increases and since we only reprint our full menus everysix months, our ability to adjust prices and featured menu items in response torapidly changing commodity prices is limited.

 

Since weproduce a majority of our pies for Village Inn and Bakers Square and since ourthird-party pie sales historically have not had, and currently do not have, amaterial impact on our operating profit, we include the net results of our piemanufacturing operations as an offset to our food costs. As a result, anyprofit (or loss) from third-party pie sales has the effect of reducing (orincreasing) our total food cost. As part of our overall effort to optimizetotal company food cost, we have been focusing on various measures to improvethe net margins within our pie manufacturing operations, including increasingthird-party sales, renegotiating our distribution contracts and rebalancing theproduction among our three plants to increase efficiency.

 

Otheroperating expenses principally include occupancy costs, depreciation, supplies,repairs and maintenance, utility costs, marketing expenses, insurance expensesand workers’ compensation costs. Historically, these costs have increased overtime and many are not directly related to the level of sales in ourrestaurants. We have experienced increases in many of these items throughoutthe last three fiscal years, particularly utility costs and insurance expenses.In order to maintain our operating performance levels, and to address expectedcost increases, we will be required to increase efficiency in restaurantoperations and increase sales, although there is no assurance that we will beable to offset future cost increases.

 

Our 2005 firstquarter financial results included:

 

•                              Growthof revenues in the first quarter by 5.2% to $105.8 million from 2004 to 2005,reflecting the net addition of six company-operated restaurants over the pasttwo years (including the net addition of two restaurants during 2005’s firstquarter) and the three extra operating days. Same store sales decreased by 1.2% from 2004 to 2005.

•                              Improvementin operating income to $10.2 million from $9.0 million in 2004 (as restated).

 

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•                              Netincome improved to $2.3 million in the first quarter of fiscal 2005 from $2.0million (as restated) in the first quarter of fiscal 2004.  Interest expense increased $0.8 million inthe first quarter of fiscal 2005 due to greater debt outstanding throughout thefirst quarter of 2005 and a higher average interest rate, both a result of thehigh-yield financing consummated at the end of the second quarter of 2004.

 

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**Restatement of Previously Reported FinancialStatements**

 

We have restated ourfinancial statements for periods spanning from fiscal 2000 through fiscal 2004to correct the following accounting errors as a result of a review of our leaseaccounting policies and practices prompted by the views expressed by the Officeof the Chief Accountant of the SEC on February 7, 2005 in a letter to theAmerican Institute of Certified Public Accountants and other recentinterpretations regarding certain operating lease issues and their applicationunder GAAP:

 

*(i)**                                 **Accounting for Real EstateTransactions*

 

Historically, we haveaccounted for certain of our real estate transactions of restaurant propertiesas sale-leaseback transactions.  We haverestated our financial statements to now report these transactions as financingtransactions under Financial Accounting Standards Board (“FASB”) Statement ofFinancial Accounting Standards (“SFAS”) No. 98, “Accounting for Leases,” ratherthan as sale-leaseback transactions as previously reported due to adetermination that certain lease agreement provisions reflect continuinginvolvement with the buyer-lessor. Our continuing involvement for most of ourleases now accounted for under the financing method results from our ability tocontrol the property with pre-determined rental payments through at least 90percent of the economic life of the property, even though lease renewals wouldneed to be exercised by us to effectuate such control.  These “perpetual fixed-price renewal options”are considered continuing involvement because the seller-lessee is deemed tobenefit from future appreciation in the underlying property in a manner similarto a fixed-price purchase option.  Suchcontinuing involvement precludes the use of sale-leaseback accounting untilsuch time that the continuing involvement no longer exists.  The affected real estate transactions relatedto an aggregate of 79 existing restaurants in 1999, 2001 and 2003 and nine newrestaurant locations opened in 2003 and 2004.

 

The impact of therestatement was to record on our consolidated balance sheets the assets of therestaurants subject to these transactions as if they had not been sold andrecord the proceeds from these transactions (including any gains previouslydeferred) as liabilities under the caption “Deemed landlord financing liability”.  Operating results were restated to recognizedepreciation expense associated with the assets subject to these transactionsand re-characterize the lease payments previously reported as rent expense asprincipal repayments and imputed interest expense.  The rent expense reversal associated withthese transactions included the reversal of previously recorded expenses forstraight-line rents and rent reductions for certain purchase accounting adjustmentsmade to account for the leases at fair market value.  In addition, the capital lease classificationfor three leased properties was re-characterized as deemed landlord financingassets and liabilities.

 

The net pre-tax impactto correctly classify the aforementioned leases as financing transactionstotaled $1,054,000 for the 88-day period ended January 22, 2004.  The correcting entries consisted of a$1,725,000 decrease in other operating expenses, a $41,000 decrease infranchise operating expenses and a $2,820,000 increase in interest expense.

 

*(ii)**                             **Understated Straight-Line RentExpense*

 

GAAP requires thatleases for which there are scheduled rent increases over the term of the leasebe accounted for at the average rent payment, or on a straight-line basis, overthe applicable term with the differences being recorded on the balance sheet asa deferred rent liability.  We did notappropriately straight-line our rents for certain locations.  The pre-tax impact to correctly straight-linerents was a $131,000 increase in rent expense for the 88-day period ended January 22,2004.

 

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*(iii)**                         **Understated Depreciation andAmortization Expense*

 

We generally havehistorically depreciated our buildings and leasehold improvements over thelesser of the asset’s useful life or the initial term of the associated leaseunless an economic penalty would occur from not exercising renewal options, inwhich case, the assets are depreciated over the lesser of the asset’s usefullife or the reasonably assured lease term. However, in performing a detailed review of our depreciable assets, wedetermined that buildings and leasehold improvements for approximately 31restaurant properties had incorrect depreciable lives resulting in anunderstatement of depreciation expense, predominantly in earlier periods.  The pre-tax impact of the correction of ourleasehold improvement depreciable lives was a $19,000 increase in depreciationexpense for the 88-day period ended January 22, 2004.

 

*(iv)**                           **Understated**Interest Expense on PreferredStock Warrant Accretion*

 

We also determined it was appropriate to record additional adjustmentswhich were previously deemed immaterial. The adjustments related to interest expense and preferred dividendsimputed from the accretion of preferred stock warrants with anti-dilutiveprovisions issued originally to certain debt holders at the time of our June 2003purchase.  For the 88-day period ended January 22,2004, an additional $44,000 of interest expense was recorded as a result of thecorrection of this error.

 

We will restate our annual consolidated financial statements andcertain other interim period consolidated financial statements with the filingof an amended Annual Report on Form 10-K with the SEC for our fiscal year endedOctober 28, 2004.

 

See Note 2 to the Consolidated Financial Statements for furtherdiscussion of the restatement.  Allpreviously reported amounts affected by the restatement that appear in thisQuarterly Report on Form 10-Q have been restated.

 

**Critical Accounting Policies and Estimates**

 

In the ordinary course of business, our company makes a number ofestimates and assumptions relating to the reporting of results of operationsand financial condition in the preparation of our consolidated financialstatements in conformity with U.S. generally accepted accounting principles.Actual results could differ significantly from those estimates and assumptions.We believe that the following discussion addresses our most critical accountingpolicies, which are those that are most important to the portrayal of ourfinancial condition and results of operations and require management judgmentabout the effect of matters that are uncertain.

 

On an ongoing basis, management evaluates its estimates andassumptions, including those related to recoverability of long-lived assets,revenue recognition and goodwill. Management bases its estimates andassumptions on historical experience and on various other factors that arebelieved to be reasonable at the time the estimates and assumptions are made.Actual results may differ from these estimates and assumptions under differentcircumstances or conditions.

 

We have discussed the development and selection of critical accountingpolicies and estimates with our audit committee.  The following is a summary of our criticalaccounting policies and estimates:

 

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***Inventories***

 

Inventories are stated at the lower of cost or market value. Cost isprincipally determined by the first-in, first-out method. The valuation ofinventory requires us to estimate obsolete or excess inventory as well asinventory that is not of saleable quality. Both ourmanufactured pie inventories and individual store food inventories are subjectto spoilage. We use estimates of future demand as well as historical trendinformation to schedule manufacturing and ordering. If our demand forecastfor specific products is greater than actual demand, we could be required torecord additional inventory reserves or losses which would have a negativeimpact on our gross margin.

 

***Property andequipment, build-to-suits and assets under deemed landlord financing liability***

 

Property and equipment is recorded at cost and is depreciated on thestraight-line basis over the estimated useful lives of such assets or throughthe applicable lease expiration, if shorter. Leasehold improvements added subsequentto the inception of a lease are amortized over the shorter of the useful lifeof the assets or a term that includes lease renewals, if such renewals areconsidered reasonably assured.  Theuseful lives of assets typically range from 20 to 40 years for buildings andthree to ten years for equipment and improvements. Changes in circumstancessuch as the closing of units in underproductive markets or changes in ourcapital structure could result in the actual useful lives of these assetsdiffering from our estimates.

 

For many of our build-to-suit projects, we are considered the owner ofthe project during the construction period in accordance with Emerging IssuesTask Force (“EITF”) Issue No. 97-10, “The Effect of Lessee Involvement in AssetConstruction,” because we are deemed to have substantially all of theconstruction period risk.  At the end ofthese construction projects, a sale-leaseback could be deemed to occur incertain situations and the seller-lessee would record the sale, remove allproperty and related liabilities from its balance sheet and recognize gain orloss from the sale, which is generally deferred and amortized as an adjustmentto rent expense over the term of the lease. However, many of our real estate transactions and build-to-suit projectshave not qualified for sales-leaseback accounting because of our deemedcontinuing involvement with the buyer-lessor, which results in the transactionbeing recorded under the financing method. Under the financing method, the assets remain on the consolidatedbalance sheet and are depreciated over their useful life, and the proceeds fromthe transaction are recorded as a financing liability.  A portion of lease payments are applied aspayments of deemed principal and imputed interest.

 

We review long-lived assets, including land, buildings, buildingimprovements and assets under deemed landlord financing liability, forimpairments on a quarterly basis or whenever events or changes in circumstancesindicate that the carrying amount of such assets may not be recoverable.Management evaluates individual restaurants, which are considered to be thelowest level for which there are identifiable cash flows for impairment. Aspecific restaurant is deemed to be impaired if a forecast of undiscountedfuture operating cash flows directly relating to that restaurant, includingdisposal value, if any, is less than the carrying amount of that restaurant. Ifa restaurant is determined to be impaired, the loss is measured as the amountby which the carrying amount of the restaurant exceeds its fair value.Management determines fair value based on quoted market prices in activemarkets, if available. If quoted market prices are not available, managementestimates the fair value of a restaurant based on either the estimates providedby real estate professionals and/or our past experience in disposing ofrestaurant properties. Our estimates of undiscounted cash flows may differ 

 

24

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from actual cashflows due to economic conditions or changes in operating performance.  During fiscal 2004, we concluded that impairmentcharges of $1.1 million (as restated) were necessary.

 

25

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***Leases***

 

We lease a substantial amount of our restaurant properties and one ofour pie production plants.  We accountfor our leases under the provisions of Statement of Financial AccountingStandards No. 13, “Accounting for Leases,” and subsequent amendments, whichrequire leases to be evaluated and classified as operating or capitalizedleases for financial reporting purposes. In addition, the Company records the total rent payable during the operatinglease term on a straight-line basis over the term of the lease and records thedifference between the rent paid and the straight-line rent as a deferred rentliability. Incentive payments received from landlords are recorded as deferredrent liabilities and are amortized on a straight-line basis over the lease termas a reduction of rent.  Certain of ourleases are accounted for under the financing method as discussed above.  Future authoritative changes to the methodsof accounting for leases could have a material impact on the Company’s reportedresults of operations and financial position.

 

***Insurance reserves***

 

We self-insure a significant portion of our employee medical insurance,workers’ compensation and general liability insurance plans. As of January 27,2005, we had recorded an insurance reserve liability of $9.5 million.  For fiscal 2005, our anticipated claim costsare $10.1 million for employee medical/dental claims, $3.4 million for workers’compensation and $1.0 million for general liability claims. We have obtainedstop-loss insurance policies to protect from individual losses over specifieddollar values ($175,000 for employee health insurance claims, $250,000 workers’compensation and $150,000 for general liability for fiscal 2005). The fullextent of certain claims, especially workers’ compensation and generalliability claims, may not become fully determined forseveral years. Therefore, we estimate potential obligations for liabilitiesthat have been incurred but not yet reported based upon historical data andexperience. Although management believes that the amounts accrued for theseobligations are sufficient, any significant increase in the number of claims orcosts associated with claims made under these plans could have a materialadverse effect on our financial results.

 

***Loss contingencies***

 

We maintain accrued liabilities and reserves relating to the resolutionof certain contingent obligations. Significant contingencies include those related to litigation.  We account for contingent obligations inaccordance with SFAS No. 5, “Accounting for Contingencies,” as interpreted byFASB Interpretation No. 14 which requires that we assess each contingency todetermine estimates of the degree of probability and range of possiblesettlement.  Contingencies which aredeemed to be probable and where the amount of such settlement is reasonablyestimable are accrued in our financial statements.  If only a range of loss can be determined, weaccrue to the best estimate within that range; if none of the estimates withinthat range is better than another, we accrue to the low end of the range.  During the fourth quarter of fiscal 2004, we accrued$3.2 million in connection with our agreement in principle to settle two classaction lawsuits (Note 5 to our audited consolidated financial statements andPart II Item 1. Legal Proceedings).

 

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

 

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***Income taxes***

 

Deferred income tax assets and liabilities are recognized for theexpected future income tax consequences of carryforwards and temporarydifferences between the book and tax bases of assets and liabilities. Valuationallowances are established for deferred tax assets that are deemedunrealizable.  As of January 27,2005, we had net deferred tax assets of $22.9 million, which included $11.5million of FICA tip credit carryforwards, expiring at various dates through2025.  Approximately $9.6 million of theFICA tip credit carryforwards were generated prior to our acquisition in June 2003and are subject to an annual use limitation of $0.7 million.

 

We must assess the likelihood that we will be able to recover ourdeferred tax assets. If recovery is not likely, valuation allowances areestablished. The valuation allowance is based on our estimates of futuretaxable income by each jurisdiction in which we operate, tax planningstrategies and the period over which our deferred tax assets will berecoverable. In the event that actual results differ from these estimates, weare unable to implement certain tax planning strategies or we adjust theseestimates in future periods, we may need to establish an additional valuationallowance which could have a material negative impact on our results ofoperations or financial position.

 

Significant judgment is required in determining our effective tax rateand in evaluating our tax positions. We establish reserves when, despite ourbelief that our tax return positions are supportable, we believe that certainpositions are likely to be successfully challenged. We adjust these reserves inlight of changing facts and circumstances, such as the progress of a tax audit.Our effective tax rate includes the impact of reserve provisions and changes toreserves that we consider appropriate.

 

**New Accounting Pronouncements**

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs,an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies the accounting for abnormal amounts of idlefacility expense, freight, handling costs, and wasted material, and requiresthat such items be recognized as current-period charges regardless of whetherthey meet the “so abnormal” criterion outlined in ARB No. 43.  SFAS No. 151 also introduces the concept of “normalcapacity” and requires the allocation of fixed production overheads toinventory based on the normal capacity of the production facilities.  Unallocated overheads must be recognized asan expense in the period incurred.  SFASNo. 151 is effective for inventory costs incurred during fiscal years beginningafter June 15, 2005.  While we arestill evaluating the impact of this statement, we do not currently believe itwill have a material impact on our consolidated financial statements.

 

In December 2004, the FASB issued SFAS No. 123R which replaces theprior SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedesAPB Opinion No. 25, “Accounting for Stock Issued to Employees.”  SFAS 123R requires compensation costs relatedto share-based payment transactions to be recognized in the financialstatements.  With limited exceptions, theamount of compensation cost will be measured based on the grant-date fair valueof the equity or liability instruments issued. In addition, liability awards will be re-measured each reportingperiod.  Compensation cost will berecognized over the period that an employee provides services in exchange forthe award.  This new standard will becomeeffective for us on November 4, 2005, (the first quarter of our fiscal 2006)and while we are still evaluating the impact of adopting SFAS No. 123R, we donot believe such adoption will have a material impact on our consolidatedfinancial statements because of the minimal number of stock optionsoutstanding.

 

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**Factors Affecting Comparability**

 

Our fiscal year is comprised of 52 or 53 weeks divided into four fiscalquarters of 12 or 13, 12, 12, and 16 weeks. The first quarter of fiscal 2005 ended January 27,2005 consisted of 13 weeks, or 91 days, and fiscal 2005 will consist of 53weeks, or 371 days.  Beginning January 22,2004, we changed our fiscal year so that it ends on the Thursday nearest to October 31stof each year. This increased the first quarter in fiscal 2004 by an extra fourdays to 88 days. This change was made to facilitate restaurant operations bymoving the end of our fiscal periods and weekly reporting and payroll periodsaway from weekends when our restaurants are busier.  Fiscal 2004 consisted of 52 weeks and fourdays, or 368 total days.

 

**Seasonality**

 

Our sales fluctuate seasonally and as mentioned previously our quartersdo not all have the same time duration. Specifically, our fourth quarter generally has an extra three to fourweeks compared to our other quarters of the fiscal year.  Also, based on fiscal 2003 and 2004, our averagedaily sales were highest in our first quarter (November through January)as a result of holiday pie sales while our fourth quarter (mid-July throughOctober) recorded our lowest average daily sales.  Therefore, our quarterly results are notnecessarily indicative of results that may be achieved for the full fiscalyear.  Factors influencing relative salesvariability in addition to those noted above include the frequency andpopularity of advertising and promotions, the relative sales level of new andclosed locations, holidays and weather.

 

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**Results of Operations**

 

| **(in Thousands)**                              | ** ** | **91 Days Ended  January 27,  2005** | ** ** | **88 Days Ended  January 22,  2004** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | ** **                                | ** ** | **(As restated)**                         | ** ** |
| Revenues:                                       |       |                                      |       |                                      |       |
| Restaurant  operations                          |       | $                                         | 104,523    |                                      | $          | 99,426 |   |
| Franchise  operations                           |       | 1,229                                     |       | 1,168                                     |       |
|                                            |       | 105,752                                   |       | 100,594                                   |       |
| Costs and  expenses:                            |       |                                      |       |                                      |       |
| Restaurant  costs:                              |       |                                      |       |                                      |       |
| Food                                            |       | 28,211                                    |       | 27,297                                    |       |
| Labor                                           |       | 32,240                                    |       | 30,807                                    |       |
| Other  operating expenses                       |       | 27,766                                    |       | 26,535                                    |       |
| Franchise  operating expenses                   |       | 511                                       |       | 552                                       |       |
| General and  administrative expenses            |       | 6,607                                     |       | 6,201                                     |       |
| Transaction  expenses                           |       | 15                                        |       | 22                                        |       |
| Management  fees                                |       | 196                                       |       | 196                                       |       |
|                                            |       | 95,546                                    |       | 91,610                                    |       |
| Operating  profit                               |       | 10,206                                    |       | 8,984                                     |       |
| Interest  expense                               |       | (6,978                                    | )          | (6,206                                    | )          |
| Other  income, net                              |       | 88                                        |       | 23                                        |       |
| Income  before income taxes                     |       | 3,316                                     |       | 2,801                                     |       |
| Provision  for income taxes                     |       | 1,047                                     |       | 758                                       |       |
| Net income                                      |       | 2,269                                     |       | 2,043                                     |       |
| Preferred  stock dividends and accretion        |       | (2,047                                    | )          | (1,755                                    | )          |
| Net income  attributable to common stockholders |       | $                                         | 222        |                                      | $          | 288 |   |

 

| ** **                                      | ** ** | **91 Days Ended  January 27,  2005** | ** ** | **88 Days Ended  January 22,  2004** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | ** **                                | ** ** | **(As restated)**                         | ** ** |
| Revenues:                                       |       |                                      |       |                                      |       |
| Restaurant  operations                          |       | 98.8                                      | %          | 98.8                                      | %          |
| Franchise  operations                           |       | 1.2                                       |       | 1.2                                       |       |
|                                            |       | 100.0                                     |       | 100.0                                     |       |
| Costs and  expenses:                            |       |                                      |       |                                      |       |
| Restaurant  costs:                              |       |                                      |       |                                      |       |
| Food                                            |       | 26.7                                      |       | 27.1                                      |       |
| Labor                                           |       | 30.5                                      |       | 30.6                                      |       |
| Other  operating expenses                       |       | 26.2                                      |       | 26.4                                      |       |
| Franchise  operating expenses                   |       | 0.5                                       |       | 0.5                                       |       |
| General and  administrative expenses            |       | 6.2                                       |       | 6.2                                       |       |
| Transaction  expenses                           |       | 0.0                                       |       | 0.0                                       |       |
| Management  fees                                |       | 0.2                                       |       | 0.2                                       |       |
|                                            |       | 90.3                                      |       | 91.0                                      |       |
| Operating  profit                               |       | 9.7                                       |       | 9.0                                       |       |
| Interest  expense                               |       | (6.6                                      | )          | (6.2                                      | )          |
| Other  income, net                              |       | 0.1                                       |       | 0.0                                       |       |
| Income  before income taxes                     |       | 3.2                                       |       | 2.8                                       |       |
| Provision  for income taxes                     |       | 1.1                                       |       | 0.8                                       |       |
| Net income                                      |       | 2.1                                       |       | 2.0                                       |       |
| Preferred  stock dividends and accretion        |       | (1.9                                      | )          | (1.7                                      | )          |
| Net income  attributable to common stockholders |       | 0.2                                       | %          | 0.3                                       | %          |

 

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**First Quarter of Fiscal 2005 Compared to FirstQuarter of Fiscal 2004**

 

***Total revenues***increased by $5.2 million, or 5.2%, to $105.8 million in fiscal 2005’s firstquarter, from $100.6 million for the same period fiscal 2004.  The increase was partly due to operating approximatelyfive more locations on average during the first quarter of fiscal 2005 comparedto the first quarter of fiscal 2004 and the three extra operating days in thefirst quarter of fiscal 2005.  Weexperienced a 1.2% decrease in same unit sales for the first quarter of fiscal2005 over the first quarter of fiscal 2004. Village Inn same unit sales for thefirst quarter of fiscal 2005 increased 2.3% over the first quarter of fiscal2004, and Bakers Square same unit sales decreased 3.7% over the same period.Average guest spending, increased 3.0% at Village Inn and 2.3% at Bakers Squarein the first quarter of fiscal 2005 compared to the first quarter of fiscal2004.

 

***Food costs***increased by $0.9 million, or 3.3%, to $28.2 million in the first quarter of fiscal2005, from $27.3 million for the first quarter of fiscal 2004.  Food costs as a percentage of total revenuesdecreased to 26.7% for the first quarter of fiscal 2005 from 27.1% in the firstquarter of fiscal 2004.  The first half offiscal 2004 experienced a spike in commodity prices, especially dairy.

 

***Labor costs***increased by $1.4 million, or 4.5%, to $32.2 million in the first quarter of fiscal2005, from $30.8 million for the first quarter of fiscal 2004, but as apercentage of total revenues declined modestly to 30.5% from 30.6% over theseperiods.

 

***Other operatingexpenses*** increased by $1.3 million, or 4.9%, to $27.8million in the first quarter of fiscal 2005 from $26.5 million for the firstquarter of fiscal 2004, as restated. Other operating expenses as a percentageof total revenues slightly decreased to 26.2% from 26.4% over these periods.This decrease was primarily due to a decrease in advertising expenses partiallyoffset by higher utility costs. Advertising costs decreased as a result of the decision in fiscal 2005to spread our advertising expenditures more evenly over the fiscal year ascompared to fiscal 2004 where advertising spending was more heavily weighted inthe first quarter to support holiday pie sales. Utility costs increased predominantly due to higher rates and higherusage from colder weather.

 

***General andadministrative expenses*** increased $0.4 million, or6.5%, to $6.6 million for the first quarter of fiscal 2005 from $6.2 millionfor the first quarter of fiscal 2004. The increase resulted from higher supportwages, legal fees and settlements, and professional fees partially offset bylower direct construction oversight and support expenses due to increasedcapitalization of such costs as we emphasize growth in the number ofCompany-operated units.  As a percentageof revenues, general and administrative expenses were 6.2% in both the firstquarter of fiscal 2005 and the first quarter of fiscal 2004.

 

***Operating profit***increased by $1.2 million, or 13.3%, to $10.2 million in the first quarter of fiscal2005, from $9.0 million for the first quarter of fiscal 2004, as restated.Operating profit as a percentage of total revenues for the first quarter offiscal 2005 increased to 9.7% from 9.0% over the first quarter of fiscal 2004. Theimprovement was due largely to the increased restaurant sales and restaurantoperating efficiencies.

 

***Interest expense***increased by $0.8 million, or 12.9%, to $7.0 million in the first quarter offiscal 2005, from $6.2 million for the first quarter of fiscal 2004, asrestated. Interest expense as a percentage of total revenues increased to 6.6% from6.2% over these periods. This increase was due primarily to higher average debtbalances and interest rates on debt refinanced in April 2004.

 

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***Provision for incometaxes***for the first quarter of fiscal 2005 was $1.0million, compared to $0.8 million for the first quarter of fiscal 2004, asrestated.  The effective tax rate was 31.6%for the first quarter of fiscal 2005 compared to 27.1% in fiscal 2004’s firstquarter, as restated.  The provisionsdiffer from our statutory rate of 39.9% due to general business credits that weearn from FICA taxes paid on employee tips, partially offset by nondeductibleamortization related to franchise rights.

 

***Net income***increasedby $0.3 million to $2.3 million in the first quarter of fiscal 2005, from $2.0million in the first quarter of fiscal 2004, as restated.  Net income as a percentage of total revenuesincreased to 2.1% from 2.0% over these periods.

 

***Preferred stockdividends and accretion*** increased by $0.2 millionto $2.0 million in fiscal 2005 from $1.8 million for fiscal 2004 as a result ofthe compounding effect of unpaid preferred stock dividends.

 

**Liquidity and Capital Resources**

 

***Cash requirements***

 

Our principal liquidity requirements are to continue to finance ouroperations, service our debt and fund capital expenditures for maintenance andexpansion.  Cash flow from operations hashistorically been sufficient to finance continuing operations and meet normaldebt service requirements.  However, weare highly leveraged and our ability to repay our debt borrowings at maturityis likely to depend in part on our ability to refinance the debt when itmatures, which will be contingent on our continued successful operation of thebusiness as well as other factors beyond our control, including the debt andcapital market conditions at that time.

 

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

 

For the balance of fiscal 2005, we anticipate capital expendituresbefore build-to-suit construction (as discussed below) of approximately $23million, reflecting an acceleration of our unit growth.  Of this amount, $11 million is expected to bespent on new store construction, $5 million for remodels and the remainder oncapital maintenance and other support related projects.   We may also have capital expenditures infiscal 2005 related to our Bakers Square brand repositioning, although atpresent such plans have not been finalized. We currently expect to open an estimated 23 to 27 new stores in fiscal2005, including the three we opened in the first quarter.

 

We may also be required to make cash payments associated with certain litigationsettlements (Note 5 to our unaudited consolidated financial statements and PartII Item 1. Legal Proceedings).  We expect our maximum net cash outlay for theselitigation settlements to be $3.2 million reflecting indemnification ofpre-acquisition activities by our predecessor for the balance of the $6.55million proposed settlements.  Timing mayrequire that the settlement be paid out in advance of receipt of theindemnification proceeds.

 

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In connection with our new restaurant development program, we haveentered into build-to-suit development agreements whereby third parties will purchaseproperty, fund the costs to develop new restaurant properties for us and leasethe properties to us upon completion. Under these agreements, we generally are responsible for theconstruction of the restaurant and remitting payments to the contractors on theprojects, which are subsequently reimbursed by the property owner.  These amounts advanced and subsequentlyreimbursed are not included in the anticipated capital spending totals above.  On January 27, 2005, we had outstandingreceivables of $3.6 million relating to these types of agreements.  In certain of these agreements, we areobligated to purchase the property in the event that we are unable to completethe construction within a specified time frame, and are also responsible forcost overruns above specified amounts.

 

***Debt and other obligations and liabilities***

 

On April 14, 2004, we completed a private placement of $126.5aggregate principal amount of 101⁄2% senior unsecured notes maturing on April 15,2011.  The notes were issued at adiscounted price of 98.791% of face value, resulting in net proceeds beforetransaction expenses of $125.0 million. The senior unsecured notes were issued by VICORP Restaurants, Inc. andare guaranteed by VI Acquisition Corp. and our subsidiary Village Inn PancakeHouse of Albuquerque, Inc.

 

Concurrently with the issuance of the 101⁄2% senior unsecured notes, weentered into an amended and restated senior secured credit facility consistingof a $15.0 million term loan and a $30.0 million revolving credit facility, witha $15.0 million sublimit for letters of credit. On January 27, 2005, wehad issued letters of credit aggregating $6.6 million and had no borrowingsoutstanding under the senior secured revolving credit facility.  The senior secured revolving credit facilitypermits borrowings equal to the lesser of (a) $30.0 million and (b) 1.2 timestrailing twelve months Adjusted EBITDA (as defined in the senior secured creditagreement) minus the original amount of the new senior secured term loan.  Under this formula, as of January 27,2005, we had the ability to borrow the full $30 million, less the amount ofoutstanding letters of credit, under the senior secured revolving creditfacility, or $23.4 million.

 

Borrowings under both the revolving credit facility and the term loanbear interest at floating rates tied to either the base rate of the agent bankunder the credit agreement or LIBOR rates for a period of one, two or threemonths, in each case plus a margin that will adjust based on the ratio of ourAdjusted EBITDA to total indebtedness, as defined in the new senior securedcredit agreement. Both facilities are secured by a lien on all of the assets ofVICORP Restaurants, Inc., and guaranteed by VI Acquisition Corp. and oursubsidiary Village Inn Pancake House of Albuquerque, Inc., the guarantees alsosecured by the pledge of all of the outstanding capital stock of VICORPRestaurants, Inc. by VI Acquisition Corp. The term loan does not requireperiodic principal payments, but requires mandatory repayments under certainevents, including proceeds from sale of assets, issuance of equity and issuanceof new indebtedness.  Both facilitiesmature on April 14, 2009.

 

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Our senior secured credit facility and the indenture governing thesenior unsecured notes contain a number of covenants that, among other things,restrict, subject to certain exceptions, our ability and the ability of oursubsidiaries, to sell assets, incur additional indebtedness, as defined, orissue preferred stock, repay other indebtedness, pay dividends anddistributions or repurchase our capital stock, create liens on assets, makeinvestments, loans or advances, make certain acquisitions, engage in mergers orconsolidations, enter into sale-leaseback transactions, engage in certaintransactions with affiliates, amend certain material agreements governing ourindebtedness, change the business conducted by us and our subsidiaries andenter into hedging agreements. In addition, our new senior secured creditfacility requires us to maintain or comply with a maximum total leverage ratio,a minimum interest coverage ratio and a maximum capital expenditureslimitation.  On January 27, 2005, wewere in compliance with these requirements.

 

We delayed filing our quarterly report on Form l0-Q for thequarterly period ended January 27, 2005 beyond the extended filingdeadline with the Securities and Exchange Commission of March 21, 2005 dueto the length of time needed to examine certain aspects of our lease accounting(Note 2 to our unaudited consolidated financial statements). The lendersparticipating in our Amended and Restated Senior Secured Credit Facility agreedto extend thc time period for the Company to deliverrequired financial information until April 15, 2005. We filed our Form 10-Qon April 15, 2005.

 

We are subject to capital lease obligations related to five of ourleased properties. The principal component of our capital lease obligations was$0.4 million as of January 27, 2005. These capital leases have expirationdates ranging from October 2005 to June 2011.

 

We are the prime lessee under various operating leases for land,building and equipment for company-operated and franchised restaurants, pieproduction facilities and locations subleased to non-affiliated first parties.These leases have initial terms ranging from 15 to 35 years and, in mostinstances, provide for renewal options ranging from five to 20 years. Theseleases expire at various dates through September 2025.

 

We have guaranteed certain leases for restaurant properties sold in1986 and restaurant leases of certain franchisees. Estimated minimum futurerental payments remaining under these leases were approximately $2.6 million asof January 27, 2005.

 

As of January 27, 2005, our commitments with respect to the aboveobligations were as follows (in millions):

 

**Paymentsdue by periods**

 
| ** **                                              | ** ** | **Total** | ** ** | **Less than  one year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **More than 5  years** | ** ** |
|---------------------------------------------------------|------------|-----------|------------|-------------------------|------------|----------------|------------|----------------|------------|------------------------|------------|
| Senior  secured credit facility                         |       | $         | 15.0       |                    | $          | —         |       | $              | —     |                   | $          | 15.0 |   | $ | — |   |
| 10-1/2%  senior unsecured notes                         |       | 126.5     |       | —                  |       | —         |       | —         |       | 126.5                  |       |
| Total notes  payable                                    |       | 141.5     |       | —                  |       | —         |       | 15.0           |       | 126.5                  |       |
| Capital  lease obligations(1)  (2)                 |       | 0.5       |       | 0.2                     |       | 0.1            |       | 0.1            |       | 0.1                    |       |
| Operating  lease obligations(2)                         |       | 114.1     |       | 16.3                    |       | 27.1           |       | 19.6           |       | 51.1                   |       |
| Deemed  landlord financing liability (1)  (2) |       | 302.5     |       | 12.3                    |       | 24.8           |       | 25.3           |       | 240.1                  |       |
| Letters of  credit (3)                                  |       | 6.6       |       | 6.6                     |       | —         |       | —         |       | —                 |       |
| Purchase  commitments(4)                                |       | 7.3       |       | 7.3                     |       | —         |       | —         |       | —                 |       |
| Total                                                   |       | $         | 572.5      |                    | $          | 42.7           |       | $              | 52.0       |                   | $          | 60.0 |   | $ | 417.8 |   |
|                                                         |            |           |            |                         |            |                |            |                |            |                        |            |  |  |  |  |  |  |

 

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

(2)          Many of our leases and financing obligations containprovisions that require additional rent payments contingent on salesperformance and the payment of common area maintenance charges and real estatetaxes.  Amounts in this table do notreflect any of these additional amounts.

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

 

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(4)          We have commitments under contracts for thepurchase of property and equipment. Portions of such contracts not completed at January 27, 2005 as notedin the table above were not reflected as assets or liabilities in ourconsolidated financial statements.

 

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**Sourcesand uses of cash**

 

The following table presents a summary of our cash flows fromoperating, investing and financing activities for the periods indicated (inmillions):

 
| ** **                                            | ** ** | **91 Days  Ended  January 27,  2005** | ** ** | **88 Days  Ended  January 22,  2004** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | ** **                                 | ** ** | **(As restated)**                          | ** ** |
| Net cash  provided by operating activities            |       | $                                          | 12.8       |                                       | $          | 10.2 |   |
| Net cash  used in investing activities                |       | (4.9                                       | )          | (3.8                                       | )          |
| Net cash  used in financing activities                |       | (0.8                                       | )          | (9.7                                       | )          |
| Net increase  (decrease) in cash and cash equivalents |       | 7.1                                        |       | (3.3                                       | )          |
|                                                       |            |                                            |            |                                            |            |  |  |

 

***Operating activities***

 

For the first quarter of fiscal 2005, cash flows from operatingactivities increased $2.6 million compared to the first quarter of fiscal 2004.  The increase resulted primarily from increasedcollections on receivables of $3.0 million and lower interest payments of $2.6million due to the timing of the semi-annual interest payments on the seniorunsecured notes, partially offset by additional payments of $2.8 million infiscal 2005 to reduce accounts payable balances.

 

***Investing activities***

 

Our capital expenditures, excluding amounts related to assets underfinancing obligations, for the first quarters of fiscal 2005 and 2004 werecomprised of the following (in millions):

 
| ** **                                   | ** ** | **91 days  Ended  January 27,  2005** | ** ** | **88 days  Ended  January 22,  2004** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | ** **                                 | ** ** | **(As restated)**                          | ** ** |
| New store  construction                      |       | $                                          | 0.8        |                                       | $          | 1.5 |   |
| Existing store remodel and refurbishment     | ** ** | 0.6                                        | ** ** | 0.8                                        | ** ** |
| Store  capital maintenance                   |       | 1.0                                        |       | 0.9                                        |       |
| Pie production  facility capital maintenance |       | 0.2                                        |       | —                                     |       |
| Corporate  related                           |       | 0.2                                        |       | 0.2                                        |       |
| Purchase of  property and equipment          |       | $                                          | 2.8        |                                       | $          | 3.4 |   |

 

In addition tothe capital expenditures noted above, we spent $2.1 million for assets under deemedfinance liability during the first quarter of fiscal 2005 compared to $0.4million in the first quarter of fiscal 2004.   We opened three new restaurants in both the first quarter of fiscal 2005and fiscal 2004. However, we also had an additional four locations underconstruction at the end of the first quarter of fiscal 2005.

 

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***Financing activities***

 

We used cash in financing activities of $0.8 million during the firstquarter of fiscal 2005, consisting principally of the repayment of all $1.4million of outstanding borrowings under our revolving line of credit at October 28,2004, partially offset by $0.6 million of proceeds from deemed landlord financingtransactions.

 

During thefirst quarter of fiscal 2004, we used cash in financing activities of $9.7million, consisting primarily of repayments of $8.3 million to reduce theamount of borrowings under our credit facility and $2.1 million of repaymentsunder our term loans.

 

**Cashmanagement**

 

We havehistorically funded the majority of our capital expenditures with cash providedby operating activities. We have on occasion obtained, and may in the futureobtain, capitalized lease financing for certain expenditures related toequipment. Our investment requirements for new restaurant development includerequirements for acquisition of land, building and equipment.  Historically we have either acquired all ofthese assets for cash, or purchased building and equipment assets for cash andacquired a leasehold interest in land. We have entered into sale-leasebackarrangements for many of the land and building assets that we have purchased inthe 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, we intend to focus on leasingsites for future growth so that we only have to fund the equipment portion ofour new restaurant capital costs from our cash flows. We believe that this willreduce our upfront cash requirements associated with new restaurant growth andenable us to increase our return on these investments, although it will resultin significant long term obligations under either operating or capital leases.

 

### **Item3.** Quantitative And Qualitative Disclosures AboutMarket Risk

### ** **

We are exposed to market risk primarily from changes in interest ratesand changes in food commodity prices.

 

We are subjectto changes in interest rates on borrowings under our senior secured creditfacility that bear interest at floating rates. As of January 27, 2005, $15.0 million, or 10.7% of our total debtand capitalized lease obligations of $140.6****million,bears interest at a floating rate.  Ahypothetical one hundred basis point increase in interest rates for ourvariable rate borrowings as of January 27, 2005, would increase our futureinterest expense by approximately $0.2 million per year.   This sensitivity analysis does not factor inpotential changes in the level of our variable interest rate borrowings, or anyactions that we might take to mitigate our exposure to changes in interestrates.

 

Many of the ingredients purchased for use in the products sold to ourguests are subject to unpredictable price volatility outside of ourcontrol.  We try to manage this risk byentering into selective short-term agreements for the products we use mostextensively.  Also, we believe that ourcommodity cost risk is diversified as many of our food ingredients areavailable from several sources and we have the ability to modify recipes orvary our menu items offered. Historically, we have also been able to increase certain menu prices inresponse to food commodity price increases and believe the opportunity mayexist in the future.  To compensate for ahypothetical price increase of 10% for food ingredients, we would need toincrease prices charged to our guests by an average of 

 

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approximately2.7%.  We have not historically usedfinancial instruments to hedge our commodity ingredient prices.

 

### **Item4.** Controls and Procedures

 

### **Evaluation of Disclosure Controls and Procedures**

### ** **

Within the 90-day period prior to the filing date of this report, ourmanagement, under the supervision of our Chief Executive Officer and ChiefFinancial Officer, carried out an evaluation of the effectiveness of the designand operation of our disclosure controls and procedures pursuant to Rules13a-14 and 15d-14 under the Securities Exchange Act of 1934 (the “Exchange Act”),as amended.  

Based on that evaluation, our CEO and CFO concluded that our disclosurecontrols and procedures were not effective as of January 27, 2005, for thefollowing reason:  On March 21, 2005,we announced that our financial statements were likely to be restated, relatingto certain lease accounting and leasehold improvement depreciation accountingpractices, consistent with similar adjustments made by many other retailers andother publicly traded companies concerning these practices.  This restatement is described elsewhere inthis Quarterly Report on Form 10-Q. Our conclusion to change our accounting policies and restate was made,among other things, in consideration of the views of the Office of the ChiefAccountant of the SEC expressed in its letter related to these matters dated February 7,2005.  Accordingly, we concluded that ourcontrols over the selection of appropriate assumptions and factors affectinglease accounting practices were not effective as of January 27, 2005,which we believe represents a material weakness in internal control overfinancial reporting.  There have not beenany significant changes in our internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of the evaluation,except as described in the following paragraph.

 

We have enhanced ourinternal controls to require an evaluation of the applicable lease provisionsthat could affect, in the context of current interpretive guidance pertainingto the application of GAAP for lease accounting, the classification andaccounting for such transactions.

 

**Limitations on the Effectiveness of Controls**

 

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

 

### **PART II – OTHERINFORMATION**

 

**Item 1.****  Legal Proceedings**

 

From time-to-time, we have been involved in various lawsuits and claimsarising from the conduct of our business. Such lawsuits typically involveclaims from customers and others related to operational issues and complaintsand allegations from former and current employees. These matters are believedto be common for restaurant businesses.  Webelieve the ultimate disposition of these matters will not have a materialadverse effect on our consolidated financial position or results of operations.

 

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

 

The parties have entered into a settlement agreement, which is subjectto the final approval of the court. Under the terms of the proposedsettlements, we have agreed to pay up to an aggregate of $6.55 million for thealleged claims and associated legal fees, subject to partial indemnification asnoted below.

 

We filed a lawsuit on December 3, 2004 against the formershareholders of Midway (the former parent of VICORP) in the Circuit Court ofCook County, Illinois seeking indemnification for all of the damages related tosuch litigation under the purchase agreement dated June 14, 2003 pursuantto which VICORP was acquired, in addition to the assertion of otherclaims.  The former shareholders ofMidway filed a lawsuit on December 22, 2004 in Suffolk County SuperiorCourt in Massachusetts.  The formershareholders of Midway claim, among other allegations, that we improperlysought indemnification and are denying liability for the portion of the damagesin the previously mentioned class action lawsuits that arose following theclosing of the June 2003 acquisition, and for certain settlements forwhich they claim they did not receive appropriate notice or approval rights.

 

While we believe that our claims against the former shareholders ofMidway Investors Holdings Inc. are meritorious and that we will prevail, in theevent we do not fully prevail on our indemnification claims, we estimate that ourmaximum exposure under the settlement agreements is $3.2 million. Therefore,during the fourth quarter of fiscal 2004, we established a reserve of $3.2million in connection with the proposed settlement of these class actionlawsuits.  A receivable of $3.4 millionwas recorded at both January 27, 2005 and October 28, 2004 for thedifference between the aggregate amount of the settlement and our estimatedexposure.

 

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

 

Not applicable.

 

**Item 3.****  Defaults Upon Senior Securities**

 

Not applicable.

 

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

 

Not applicable.

 

**Item 5.****  Other Information**

 

Not applicable

 

**Item 6.****  Exhibits**

 

**(a)****                                  Exhibits**

 

10.24                     Agreement ofSettlement of Class Actions, dated February 28, 2005, by and among theplaintiffs, as defined therein, and VICORP Restaurants, Inc., as defendant.

 

31.1                           Certificationby our Chief Executive Officer with respect to our Form 10-Q for the quarterlyperiod ended January 27, 2005, pursuant to Rule 13a-14 or 15d-14 of theSecurities Exchange Act of 1934, as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

31.2                           Certificationby our Chief Financial Officer with respect to our Form 10-Q for the quarterlyperiod ended January 27, 2005, pursuant to Rule 13a-14 or 15d-14 of theSecurities Exchange Act of 1934, as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

32.1                           Certificationsby our Chief Executive Officer and Chief Financial Officer with respect to ourForm 10-Q for the quarterly period ended January 27, 2005, pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002.

 

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

 

### **During the first quarter of fiscal 2005 ended January 27,2005, we filed the following reports on Form 8-K:**

 

### **Current report on Form 8-K on December 22, 2004,announcing the fourth quarter and year end results of fiscal 2004 ended October 28,2004.**

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                      | VICORP Restaurants, Inc.                      |
|---------------------------|-----------------------------------------------|
|                      |                                          |
|                      |                                          |
| Date: April 15, 2005 |                                          |
|                      |                                          |
|                      | /s/ Debra Koenig                              |   |
|                      | Debra Koenig                                  |
|                      | Chief Executive Officer                       |
|                      | (Principal Executive Officer)                 |
|                      |                                          |
| Date: April 15, 2005 |                                          |
|                      |                                          |
|                      | /s/ Anthony Carroll                           |   |
|                      | Anthony Carroll                               |
|                      | Chief Financial Officer                       |
|                      | (Principal Financial and Accounting  Officer) |

 

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