**UNITED STATES 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  April 20, 2006**                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                   |                                                                                 |
| **OR**                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                   |                                                                                 |
| **o**                                                                                                                                                                                                                                                                                  | **TRANSITION REPORT PURSUANT TO  SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                   |                                                                                 |
| **For the  transition period  from                    to                    ** |

 

**Commission file number333-117263**

 

**VICORP RESTAURANTS, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

**(303) 296-2121**(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section12(b) of the Act:**None**

 

Securities registered pursuant to Section12(g) of the Act:**None**

 

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

 

Indicate by check mark if the registrant isnot required to file reports pursuant to Section 13 or Section 15(d) of theExchange Act.

YES  ý   NO  o

 

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

 

Indicate by check mark if disclosure ofdelinquent filers, pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of the registrant’s knowledge,in definitive proxy or information statements incorporated by reference in Part IIIof the Form 10-K or any amendment to this form 10-K:  ý

 

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

| Large accelerated filer  o |   | Accelerated  filer  o  Non-accelerated  filer  ý |   |
|--------------------------------------|--------|-------------------------------------------------------------------------------------|--------|

 

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

 

Number of shares of Common Stock, $.0001par value, outstanding at May 26th, 2006: 1,370,616, excluding treasury shares.

 

 

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**VICORP RESTAURANTS, INC.****Form 10-Q****April 20, 2006****INDEX**

 
| **PART I - FINANCIAL INFORMATION** |       |
|------------------------------------|------------|
| ** **                         | ** ** |   |   |
|                               | Item 1.    |   | Unaudited Consolidated  Financial Statements |   |
|                               |       |   |   |   |
|                               |       |   | Unaudited Consolidated Balance Sheets as of April 20,  2006 and November 3, 2005 |   |
|                               |       |   |   |   |
|                               |       |   | Unaudited Consolidated Statements of Operations for the  84 days ended April 20, 2006 and April 21, 2005 and the 168 days ended April  20, 2006 and the 175 days ended April 21, 2005 |   |
|                               |       |   |   |   |
|                               |       |   | Unaudited Consolidated Statements of Cash Flows for the  168 days ended April 20, 2006 and the 175 days ended April 21, 2005 |   |
|                               |       |   |   |   |
|                               |       |   | Notes to Unaudited 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. CONSOLIDATEDFINANCIAL STATEMENTS**

 

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

 
| ** **                                                                                                                                                                                                                          | ** ** | **April 20, 2006** | ** ** | **November 3, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                                                                          | ** ** | ** **                   | ** ** | ** **                     | ** ** |
| **Assets**                                                                                                                                                                                                                          |       |                         |       |                           |       |
| Current assets:                                                                                                                                                                                                                     |       |                         |       |                           |       |
| Cash and cash equivalents                                                                                                                                                                                                           |       | $                            | 1,954      |                           | $          | 2,099 |   |
| Receivables, net                                                                                                                                                                                                                    |       | 9,953                        |       | 15,756                         |       |
| Inventories                                                                                                                                                                                                                         |       | 10,973                       |       | 12,425                         |       |
| Deferred income taxes, short-term                                                                                                                                                                                                   |       | 2,317                        |       | 1,431                          |       |
| Prepaid expenses and other current assets                                                                                                                                                                                           |       | 2,513                        |       | 3,175                          |       |
| Prepaid rent                                                                                                                                                                                                                        |       | 737                          |       | 2,172                          |       |
| Income tax receivable                                                                                                                                                                                                               |       | 3,288                        |       | 733                            |       |
| Total current assets                                                                                                                                                                                                                |       | 31,735                       |       | 37,791                         |       |
| Property and equipment, net                                                                                                                                                                                                         |       | 91,562                       |       | 86,459                         |       |
| Assets under deemed landlord financing  liability, net                                                                                                                                                                              |       | 133,416                      |       | 126,146                        |       |
| Goodwill                                                                                                                                                                                                                            |       | 91,881                       |       | 91,881                         |       |
| Trademarks and tradenames                                                                                                                                                                                                           |       | 42,600                       |       | 42,600                         |       |
| Franchise rights, net                                                                                                                                                                                                               |       | 10,445                       |       | 10,765                         |       |
| Deferred income taxes                                                                                                                                                                                                               |       | 1,542                        |       | 3,010                          |       |
| Other assets, net                                                                                                                                                                                                                   |       | 12,002                       |       | 13,613                         |       |
| Total assets                                                                                                                                                                                                                        |       | $                            | 415,183    |                           | $          | 412,265 |   |
| ** **                                                                                                                                                                                                                          |       |                         |       |                           |       |
| **Liabilities and stockholders’ equity**                                                                                                                                                                                       |       |                         |       |                           |       |
| Current liabilities:                                                                                                                                                                                                                |       |                         |       |                           |       |
| Current maturities of long-term debt and  capitalized lease obligations                                                                                                                                                             |       | $                            | 48         |                           | $          | 63 |   |
| Cash overdraft                                                                                                                                                                                                                      |       | 3,005                        |       | 6,341                          |       |
| Accounts payable                                                                                                                                                                                                                    |       | 12,171                       |       | 13,291                         |       |
| Accrued compensation                                                                                                                                                                                                                |       | 8,437                        |       | 8,066                          |       |
| Accrued taxes                                                                                                                                                                                                                       |       | 9,606                        |       | 7,746                          |       |
| Other accrued expenses                                                                                                                                                                                                              |       | 13,594                       |       | 12,992                         |       |
| Total current liabilities                                                                                                                                                                                                           |       | 46,861                       |       | 48,499                         |       |
| Long-term debt                                                                                                                                                                                                                      |       | 146,239                      |       | 147,013                        |       |
| Capitalized lease obligations                                                                                                                                                                                                       |       | 173                          |       | 185                            |       |
| Deemed landlord financing liability                                                                                                                                                                                                 |       | 138,943                      |       | 132,038                        |       |
| Other noncurrent liabilities                                                                                                                                                                                                        |       | 12,003                       |       | 11,596                         |       |
| Total liabilities                                                                                                                                                                                                                   |       | 344,219                      |       | 339,331                        |       |
|                                                                                                                                                                                                                                |       |                         |       |                           |       |
| Commitments and contingencies                                                                                                                                                                                                       |       |                         |       |                           |       |
|                                                                                                                                                                                                                                |       |                         |       |                           |       |
| Stock subject to repurchase                                                                                                                                                                                                         |       | 1,055                        |       | 1,063                          |       |
|                                                                                                                                                                                                                                |       |                         |       |                           |       |
| Stockholders’ equity:                                                                                                                                                                                                          |       |                         |       |                           |       |
| Preferred stock, $0.0001 par value:                                                                                                                                                                                                 |       |                         |       |                           |       |
| Series A, 100,000 shares authorized, 68,942  shares issued and outstanding at April 20, 2006 and 68,944 shares issued and  outstanding at November 3, 2005 (aggregate liquidation preference of $92,630  and $88,178, respectively) |       | 93,133                       |       | 89,287                         |       |
| Unclassified preferred stock, 100,000  shares authorized, no shares issued or outstanding                                                                                                                                           |       | —                       |       | —                         |       |
| Common stock $0.0001 par value:                                                                                                                                                                                                     |       |                         |       |                           |       |
| Class A, 2,800,000 shares authorized,  1,343,163 shares issued and outstanding at April 20, 2006 and 1,395,255  shares issued and outstanding at November 3, 2005                                                                   |       | —                       |       | —                         |       |
| Paid-in capital                                                                                                                                                                                                                     |       | 2,362                        |       | 2,465                          |       |
| Treasury stock, at cost, 1,371.11 shares of  preferred stock and 132,695 shares of common stock at April 20, 2006 and  923.87 shares of preferred stock and 80,603 shares of common stock at  November 3, 2005                      |       | (1,057                       | )          | (1,004                         | )          |
| Accumulated deficit                                                                                                                                                                                                                 |       | (24,529                      | )          | (18,877                        | )          |
| Total stockholders’ equity                                                                                                                                                                                                     |       | 69,909                       |       | 71,871                         |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                     |       | $                            | 415,183    |                           | $          | 412,265 |   |

 

*See accompanying notes to consolidated financial statements.*

 

3

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**VIAcquisition Corp.****Consolidated Statements of Operations(In Thousands)****(Unaudited)**

 
| ** **                                    | ** ** | **84 Days Ended** | ** ** | **84 Days Ended** | ** ** | **168 Days Ended** | ** ** | **175 Days Ended** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **April 20,**          | ** ** | **April 21,**          | ** ** | **April 20,**           | ** ** | **April 21,**           | ** ** |
| ** **                                    | ** ** | **2006**                    | ** ** | **2005**                    | ** ** | **2006**                     | ** ** | **2005**                     | ** ** |
| ** **                                    | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| **Revenues:**                                 |       |                        |       |                        |       |                         |       |                         |       |
| Restaurant operations                         |       | $                           | 98,116     |                        | $          | 92,339                       |       | $                            | 202,242    |   | $ | 196,862 |   |
| Franchise operations                          |       | 1,165                       |       | 1,191                       |       | 2,331                        |       | 2,420                        |       |
| Manufacturing operations                      |       | 6,978                       |       | 4,017                       |       | 13,990                       |       | 13,600                       |       |
|                                          |       | 106,259                     |       | 97,547                      |       | 218,563                      |       | 212,882                      |       |
| **Costs and expenses:**                       |       |                        |       |                        |       |                         |       |                         |       |
| Restaurant costs:                             |       |                        |       |                        |       |                         |       |                         |       |
|  Food                                    |       | 24,719                      |       | 24,086                      |       | 53,036                       |       | 52,629                       |       |
|  Labor                                   |       | 33,333                      |       | 30,042                      |       | 66,274                       |       | 62,282                       |       |
| Other operating expenses                      |       | 28,545                      |       | 25,336                      |       | 58,672                       |       | 53,102                       |       |
| Franchise operating expenses                  |       | 503                         |       | 521                         |       | 986                          |       | 1,032                        |       |
| Manufacturing operating expenses              |       | 7,565                       |       | 4,325                       |       | 15,078                       |       | 13,576                       |       |
| General and administrative expenses           |       | 6,084                       |       | 6,271                       |       | 11,905                       |       | 12,878                       |       |
| Transaction expenses                          |       | —                      |       | —                      |       | —                       |       | 15                           |       |
| Management fees                               |       | 196                         |       | 196                         |       | 392                          |       | 392                          |       |
| Asset impairment                              |       | 513                         |       | —                      |       | 821                          |       | —                       |       |
|                                          |       | 101,458                     |       | 90,777                      |       | 207,164                      |       | 195,906                      |       |
| Operating profit                              |       | 4,801                       |       | 6,770                       |       | 11,399                       |       | 16,976                       |       |
| Interest expense                              |       | (7,090                      | )          | (6,476                      | )          | (14,029                      | )          | (13,454                      | )          |
| Other income, net                             |       | 113                         |       | 138                         |       | 284                          |       | 226                          |       |
| Income (loss) before income taxes             |       | (2,176                      | )          | 432                         |       | (2,346                       | )          | 3,748                        |       |
| Provision for income taxes (benefit)          |       | (886                        | )          | (24                         | )          | (1,121                       | )          | 1,023                        |       |
| Net income (loss)                             |       | (1,290                      | )          | 456                         |       | (1,225                       | )          | 2,725                        |       |
| Preferred stock dividends and accretion       |       | (2,242                      | )          | (1,928                      | )          | (4,427                       | )          | (3,975                       | )          |
| Net loss attributable to common  stockholders |       | $                           | (3,532     | )                           | $          | (1,472                       | )          | $                            | (5,652     | ) | $ | (1,250 | ) |

 

*See accompanying notes to consolidated financial statements.*

 

4

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**VI Acquisition Corp.****Consolidated Statements of Cash Flow****(In Thousands)****(Unaudited)**

 
| ** **                                                                                      | ** ** | **168 Days Ended** | ** ** | **175 Days Ended** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                      | ** ** | **April 20,**           | ** ** | **April 21,**           | ** ** |
| ** **                                                                                      | ** ** | **2006**                     | ** ** | **2005**                     | ** ** |
| ** **                                                                                      | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| **Operating activities:**                                                                       |       |                         |       |                         |       |
| Net (loss) income                                                                               |       | $                            | (1,225     | )                            | $          | 2,725 |   |
| Reconciliation of net (loss) income to net  cash provided by operating activities:              |       |                         |       |                         |       |
| Depreciation and amortization                                                                   |       | 10,340                       |       | 9,000                        |       |
| Asset impairments                                                                               |       | 821                          |       | —                       |       |
| Amortization of financing costs and  original issue discounts                                   |       | 577                          |       | 579                          |       |
| Loss on disposition of assets                                                                   |       | 177                          |       | 22                           |       |
| Deferred income tax expense                                                                     |       | 582                          |       | (1,045                       | )          |
| Accretion of interest on deemed landlord  financing obligations                                 |       | 281                          |       | 198                          |       |
| Changes in operating assets and  liabilities:                                                   |       |                         |       |                         |       |
| Receivables, net                                                                                |       | 1,151                        |       | 1,125                        |       |
| Inventories                                                                                     |       | 1,452                        |       | 2,950                        |       |
| Cash overdraft                                                                                  |       | (3,336                       | )          | (3,190                       | )          |
| Accounts payable, trade                                                                         |       | (1,120                       | )          | (2,068                       | )          |
| Accrued compensation                                                                            |       | 371                          |       | (92                          | )          |
| Other current assets and liabilities                                                            |       | 4,565                        |       | 2,166                        |       |
| Other noncurrent assets and liabilities                                                         |       | 1,353                        |       | 2,256                        |       |
| Net cash provided by operating activities                                                       |       | 15,989                       |       | 14,626                       |       |
| **Investing activities:**                                                                       | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Acquisition of franchisee restaurants                                                           |       | (650                         | )          | —                       |       |
| Purchase of property and equipment                                                              |       | (11,356                      | )          | (5,856                       | )          |
| Purchase of assets under deemed landlord  financing liability                                   |       | (7,310                       | )          | (2,977                       | )          |
| Proceeds from disposition of property                                                           |       | —                       |       | 58                           |       |
| Collection of notes receivable                                                                  |       | —                       |       | 196                          |       |
| Net cash used in investing activities                                                           |       | (19,316                      | )          | (8,579                       | )          |
| **Financing activities:**                                                                       |       |                         |       |                         |       |
| Payments of debt, capital lease obligations  and deemed landlord financing obligations          |       | (23,143                      | )          | (9,131                       | )          |
| Proceeds from issuance of debt                                                                  |       | 22,150                       |       | 7,600                        |       |
| Proceeds from deemed landlord financing                                                         |       | 4,920                        |       | 3,082                        |       |
| Payments for repurchase of stock                                                                |       | (745                         | )          | —                       |       |
| Net cash provided by financing activities                                                       |       | 3,182                        |       | 1,551                        |       |
| (Decrease) increase in cash and cash  equivalents                                               |       | (145                         | )          | 7,598                        |       |
| Cash and cash equivalents at beginning of  period                                               |       | 2,099                        |       | 1,332                        |       |
| Cash and cash equivalents at end of period                                                      |       | $                            | 1,954      |                         | $          | 8,930 |   |
|                                                                                            |       |                         |       |                         |       |
| **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) |       | $                            | 14,255     |                         | $          | 13,303 |   |
| Income taxes                                                                                    |       | 846                          |       | 2,076                        |       |
|                                                                                            |       |                         |       |                         |       |
| **Supplemental disclosures of non-cash  investing and financing activities:**                   |       |                         |       |                         |       |
|                                                                                            |       |                         |       |                         |       |
| Build-to-suit reimbursements not yet  received                                                  |       | $                            | 4,933      |                         | $          | 2,758 |   |
| Deemed landlord financing—third party  direct pays                                         |       | 3,892                        |       | —                       |       |
|                                                                                            |       |                         |       |                         |       |
| Dividends                                                                                       |       | $                            | 4,427      |                         | $          | 3,975 |   |

 

*See accompanying notes to consolidated financial statements.*

 

5

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**VI Acquisition Corp.****Notes to Consolidated Financial StatementsApril 20, 2006(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-ownedby VI Acquisition Corp. As a holding company, VI Acquisition Corp. does not haveany independent operations and, consequently, its consolidated statements ofoperations are substantially equivalent to those of VICORP.

 

The Company operates family style restaurants under the brand names “BakersSquare” and “Village Inn,” and franchises restaurants under the Village Innbrand name. At April 20, 2006, the Company operated 300 Company-ownedrestaurants in 17 states. Of the Company-owned restaurants, 150 are BakersSquare restaurants and 150 are Village Inn restaurants, with an additional 96franchised Village Inn restaurants in 19 states. The Company-owned andfranchised restaurants are concentrated in Arizona, California, Florida, theRocky Mountain region, and the upper Midwest. In addition, the Company operatesthree pie manufacturing facilities located in Santa Fe Springs, California; OakForest, 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 andArticle 10 of Regulation S-X. Accordingly, they do not include all of theinformation and footnotes required by GAAP for complete financial statements. Inthe opinion of management, the financial statements include all adjustments, consistingof normal recurring adjustments, necessary for a fair presentation. However,operating results for the 168-day period ended April 20, 2006 are notnecessarily indicative of the results that may be expected for the fiscal yearending November 2, 2006. The consolidated balance sheet at November 3, 2005 hasbeen derived from the audited consolidated financial statements at that datebut does not include all of the information and footnotes required by GAAP forcomplete financial statements. For further information, refer to the auditedconsolidated financial statements and footnotes thereto for the year ended November3, 2005 included in our Annual Report on Form 10-K.

 

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 November 2004, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards (“SFAS”) No. 151, “Inventory Costs, an amendment of ARBNo. 43, Chapter 4.”  SFASNo. 151 clarifies the accounting for abnormal amounts of idle facilityexpense, freight, handling costs and wasted material and requires that suchitems be recognized as current-period charges regardless of whether they meetthe “so abnormal” criterion outlined in ARB No. 43.  SFASNo. 151 also introduces the concept of “normal capacity” and requires theallocation of fixed production overheads to inventory based on the normalcapacity of the production facilities.  Unallocated overheads must berecognized as an expense in the period incurred.  SFAS No. 151 iseffective for inventory costs incurred during fiscal years beginning afterJune 15, 2005.  The Company implemented SFAS No. 151 and becausewe did not have abnormal costs, the implementation did not have a materialimpact on our financial position, results of operations or cash flows duringthe quarter or year to date period ended April 20, 2006.

 

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

 

7

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SFAS 123(R) permits public companies toadopt its requirements using one of two methods:

 

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

 

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

 

The Company will use the modified prospectivemethod when it adopts SFAS 123(R).  SFAS 123(R) is effective fornon-public filers, with the first annual reporting period that begins afterDecember 15, 2005. For purposes of this Statement, the Company is considereda non-public filer because it is an entity that has only debt securitiestrading in a public market. As permitted by SFAS 123, the Company hadaccounted for share-based payments to employees using APB Opinion 25’sintrinsic value method and, as such, generally recognizes no compensation costfor employee stock options. Simultaneously with the closing of the Company’ssale transaction in June 2003, all options became immediately vested, thusthe Company did not recognize any compensation expense. Consequently, theadoption of SFAS 123(R) will only impact the Company’s results ofoperations if the Company grants share-based payments subsequent toNovember 2, 2006, the beginning of the Company’s 2007 fiscal year.

 

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

 

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In October 2005, the FASB issued FSPNo. FAS 13-1, “Accounting for Rental Costs Incurred during a ConstructionPeriod.” FSP No. FAS 13-1 requires rental costs associated with operatingleases that are incurred during a construction period to be recognized asrental expense. FSP No. FAS 13-1 is effective for reporting periodsbeginning after December 15, 2005. The transition provisions of FSPNo. FAS 13-1 permit early adoption and retrospective application of theguidance. The Company historically capitalized rental costs incurred during aconstruction period.  The Company implemented FSP No. FAS 13-1 duringthe first quarter of fiscal 2006 and it did not have a material impact upon theCompany’s financial position, results of operations or cash flows. The Companycapitalized $0.1 million and $0.2 million in the 84 days and year to dateperiod ended April 21, 2005, respectively. The Company expensed $0.2 millionand $0.3 million in the 84 days and year to date periods ended April 20, 2006,respectively.

 

**Reclassifications**

 

Certain prior period amounts in the accompanying consolidated financialstatements have been reclassified to conform to the presentation in fiscal 2006.These reclassifications had no effect on the Company’s consolidated net income.

 

**Fiscal Periods**

 

The Company’s fiscal year is comprised of 52 or 53 weeks divided intofour fiscal quarters of 12 or 13, 12, 12, and 16 weeks. The first two quartersof fiscal 2006 and fiscal 2005 consisted of 168 and 175 days, respectively,reflecting the difference in duration of the first quarter of those years. Thesecond, third and fourth quarters of fiscal 2006 and fiscal 2005 are the samein duration, 84 days. Fiscal 2006 will consist of 52 weeks, or 364 total days,while fiscal 2005 consisted of 53 weeks, or 371 total days.

 

**2. Inventories**

 

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

 
| ** **                                                                   | ** ** | **April 20,** | ** ** | **November 3,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                                                   | ** ** | **2006**           | ** ** | **2005**             | ** ** |
| Inventories at pie production facilities  and third-party storage locations: |       |               |       |                 |       |
| Raw materials                                                                |       | $                  | 5,157      |                 | $          | 4,408 |   |
| Finished goods                                                               |       | 2,502              |       | 5,059                |       |
|                                                                         |       | 7,659              |       | 9,467                |       |
| Restaurant inventories                                                       |       | 3,314              |       | 2,958                |       |
|                                                                         |       | $                  | 10,973     |                 | $          | 12,425 |   |

 

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**3. Receivables,net**

 

Receivables,net consisted of the following:

 
| **(In thousands)**         | ** ** | **April 20,  2006** | ** ** | **November 3,  2005** | ** ** |
|---------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | ** **               | ** ** | ** **                 | ** ** |
| Trade receivables               |       | $                        | 4,836      |                       | $          | 5,799 |   |
| Construction receivables        |       | 4,933                    |       | 7,030                      |       |
| Indemnification receivable      |       | —                   |       | 2,557                      |       |
| Other receivables               |       | 456                      |       | 721                        |       |
| Notes receivable                |       | 7                        |       | 7                          |       |
| Allowance for doubtful accounts |       | (279                     | )          | (358                       | )          |
| Receivables, net                |       | $                        | 9,953      |                       | $          | 15,756 |   |

 

**4.****              Debt**

 

On April 14, 2004, the Company completed a private placement of $126.5million aggregate principal amount of 101⁄2% senior unsecured notes maturing onApril 15, 2011. The notes were issued at a discounted price of 98.791% of facevalue, resulting in net proceeds before transaction expenses of $125.0 million.The senior unsecured notes were issued by VICORP Restaurants, Inc. and areguaranteed by VI Acquisition Corp. and Village Inn Pancake House ofAlbuquerque, 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 same indebtedness.Interest is payable semi-annually on April 15 and October 15 until maturity.

 

The Company entered into an Amended and Restated Senior Secured CreditFacility on April 14, 2004 consisting of a $15.0 million term loan and a $30.0million revolving credit facility, with a $15.0 million sub-limit for lettersof credit. As of April 20, 2006, the Company had issued letters of creditaggregating $7.2 million and had $5.8 million outstanding under the seniorsecured revolving credit facility. Interest on both the term loan and revolvingcredit facility are payable on the first of each month. The senior securedrevolving credit facility permits borrowings equal to the lesser of (a) $30.0million and (b) 1.2 times trailing twelve months Adjusted EBITDA (as defined inthe senior secured credit agreement) minus the original amount of the newsenior secured term loan. Under this formula, as of April 20, 2006, the Companyhad the ability to borrow the full $30.0 million, less the amount ofoutstanding letters of credit and borrowings under the senior secured revolvingcredit facility, or $17.0 million.

 

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 amargin that will adjust based on the ratio of the Company’s Adjusted EBITDA tototal indebtedness, as defined in the agreement. At April 20, 2006, theinterest rate was 8.0% for term loan borrowings. Both facilities are secured bya lien on all of the assets of VICORP Restaurants, Inc., and guaranteed by VIAcquisition Corp. In addition, the guarantees also are secured by the pledge ofall of the outstanding capital stock of VICORP Restaurants, Inc. by VIAcquisition Corp. The term loan does not require periodic principal payments,but requires mandatory repayments under certain events,

 

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including proceeds from sale ofassets, issuance of equity and issuance of new indebtedness. Both facilitiesmature 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 certainexceptions,  the Company’s ability andthe ability of its subsidiaries, to sell assets, incur additional indebtedness,as defined, or issue preferred stock, repay other indebtedness, pay dividendsand distributions or repurchase our capital stock, create liens on assets, makeinvestments, loans or advances, make certain acquisitions, engage in mergers orconsolidations, enter into sale-leaseback transactions, engage in certaintransactions with affiliates, amend certain material agreements governing ourindebtedness, change the business conducted by us and our subsidiaries andenter into hedging agreements. In addition, the Company’s Amended and RestatedSenior Secured Credit Facility requires us to maintain or comply with a maximumtotal leverage ratio, a minimum interest coverage ratio and a maximum capitalexpenditures limitation. As of April 20, 2006, the Company was in compliancewith these requirements.

 

**5. Commitments and Contingencies**

 

***Insurance reserves***

 

The Companyretains a significant portion of certain insurable risks primarily in themedical, dental, workers’ compensation, general liability and property areas.Traditional insurance coverage is obtained for catastrophic losses. Provisionsfor losses expected under these programs are recorded based upon the Company’sestimates of liabilities for claims incurred, including those not yet reported.Such estimates utilize prior Company history and actuarial assumptions followedin the insurance industry. As of April 20, 2006, the Company had placed lettersof credit totaling approximately $7.1 million associated with its insuranceprograms.

 

***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 believes the ultimate disposition of thesematters will not have a material adverse effect on the Company’s consolidatedfinancial position or results of operations.

 

During the quarter, the Company was served with two class actionlawsuits in California. The first complaint asserts a series of claims whichallege that the Company misclassified California Bakers Square managers asexempt from overtime compensation from February 1, 2005, through the present. Thesecond complaint asserts a series of claims which alleges that the Company’svacation policy violated California law. The putative class in the secondcomplaint includes all former and current California Bakers Square employeesfrom April 11, 2002, through the present. Both complaints seek monetarydamages, interest, and attorneys’ fees in unspecified amounts. Companymanagement believes that these cases, individually and in the aggregate, willnot have a significant adverse effect on the Company’s financial condition.

 

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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 $2.1 million as of April 20, 2006. The Companyhas not made any payments due to default under these agreements, and managementbelieves the guarantee has no fair value. Management believes the ultimatedisposition of these matters will not have a material adverse effect on theCompany’s consolidated financial position or results of operations.

 

Contractualobligations, primarily for restaurants under construction, amounted toapproximately $7.5 million as of April 20, 2006.

 

***Indemnifications***

 

In the normalcourse of business, the Company is party to a variety of agreements under whichit may be obligated to indemnify the other party for certain matters. Theseobligations typically arise in contracts where the Company customarily agree tohold the other party harmless against losses arising from a breach of representationsor covenants for certain matters such as title to assets. The Company also hasindemnification obligations to its officers and directors. The duration ofthese indemnifications varies, and in certain cases, is indefinite. In each ofthese circumstances, payment by the Company depends upon the other party makingan adverse claim according to the procedures outlined in the particularagreement, which procedures generally allow the Company to challenge the otherparty’s claims. In certain instances, the Company may have recourse againstthird parties for payments that we make.

 

The Company isunable to reasonably estimate the maximum potential amount of future paymentsunder these or similar agreements due to the unique facts and circumstances ofeach agreement and the fact that certain indemnifications provide for nolimitation to the maximum potential future payments under the indemnification.The Company has not recorded any liability for these indemnifications in theaccompanying consolidated balance sheets; however, the Company does accruelosses for any known contingent liability, including those that may arise fromindemnification provisions, when the obligation is both probable and reasonablyestimable.

 

**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 terms of the agreement, the Company pays anannual fee to both partnerships in the aggregate amount of $850,000. Managementfees expensed under this agreement totaled approximately $196,000 during the 84day periods ended April 20, 2006 and April 21, 2005, and $392,000 during boththe 168 day and 175 day periods ended April 20, 2006 and April 21, 2005.Management fees paid to Wind Point Partners, IV, L.P. and Wind Point InvestorsV, L.P. under this agreement totaled $213,000 during the 84 day periods endedApril 20, 2006 and April 21, 2005, and $213,000 and $426,000 during the 168 dayand 175 day periods ended April 20, 2006 and April 21, 2005, respectively.

 

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**7.****            ****Asset impairments, assetdisposals and related costs**

 

In accordance with Statement of Financial Accounting Standard No. 144,Accounting for the Impairment or Disposal of Long Lived Assets, impairmentlosses are recorded on long-lived assets on a restaurant-by-restaurant basiswhenever impairment indicators are determined to be present. We consider ahistory of cash flow losses to be the primary indicator of potential impairmentfor individual restaurant locations. We determine whether a restaurant locationis impaired based on expected undiscounted future cash flows, consideringlocation, local competition, current store management performance, existingpricing structure and alternatives available for the site. If impairmentexists, the amount of impairment is measured as the excess of the carryingamount of the asset over its fair value.

 

During the quarter ended April 20, 2006, the Company recorded a $0.5million pretax impairment charge related to the writedown of assets for sixrestaurant locations. The Company recorded a $0.8 million pretax impairment forthe year to date period ended April 20 2006 related to 11 restaurant locations.There were no impairment charges for the quarter or year to date periods endedApril 21, 2005.

 

As of April 20, 2006 and November 3, 2005, the Company had recordedreserves for closed/subleased restaurant locations of approximately $0.8million and $1.0 million, respectively, primarily representing estimated futureminimum lease payments related to the restaurant facilities, net of expectedsublease income. Of the five restaurant locations to which this reserverelates, four of such locations were subleased as of April 20, 2006.

 

**8.****             Deemedlandlord financing liability**

 

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 inAsset Construction,” because we are deemed to have substantially all of theconstruction period risk.  At the end of these construction projects, a sale-leasebackcould be deemed to occur in certain situations and the seller-lessee wouldrecord the sale, remove all property and related liabilities from its balancesheet and recognize gain or loss from the sale, which is generally deferred andamortized as an adjustment to rent expense over the term of the lease. However, many of our real estate transactions and build-to-suit projects havenot qualified for sale-leaseback accounting because of our deemed continuinginvolvement with the buyer-lessor, which results in the transaction beingrecorded under the financing method.  Under the financing method, theassets remain on the consolidated balance sheet and are depreciated over theiruseful life, and the proceeds from the transaction are recorded as a financingliability.  A portion of lease payments are applied as payments of deemedprincipal and imputed interest.

 

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

 

**9.****             Acquisitions**

 

The Companypurchased four restaurants during the first quarter of 2006 and purchased anadditional restaurant in the third quarter of 2006 from a franchisee inOklahoma for $650,000.

 

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**10.****          StockRepurchase**

 

In January2006, the Company agreed to repurchase shares of its common stock and preferredstock that had been previously acquired by former officers. The aggregatepurchase price paid to the former officers was approximately $745,000.

 

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**Item 2.****    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Statements included in Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and elsewhere in this report are,or may be deemed to be, “forward-looking statements” within the meaning ofSection 27A of the Securities Act and Section 21E of the Securities ExchangeAct of 1934, as amended (the “Exchange Act”). These forward-looking statementsinclude all matters that are not historical facts. By their nature,forward-looking statements involve risks and uncertainties because they relateto events and depend on circumstances that may 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 AnnualReport on Form 10-K for the year ended November 3, 2005 for a discussion ofsome of the factors that may affect the Company and its operations. Suchfactors include the following: competitive pressures within the restaurantindustry; changes in consumer preferences; the level of success of ouroperating strategy and growth initiatives; the level of our indebtedness andthe terms and availability of capital; fluctuations in commodity prices;changes in economic conditions; government regulation; litigation; andseasonality 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. Anyforward-looking statements which we make in this report speak only as of thedate of such statement, and we undertake no obligation to update suchstatements. Comparisons of results for current and any prior periods are notintended to express any future trends or indications of future performance andshould only be viewed as historical data.*

 

**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 396 restaurants in 26 states as of April 20, 2006, consisting of 300 Company-operatedrestaurants and 96 franchised restaurants. We also produce premium pies that weserve in our restaurants or sell to third parties at three strategicallylocated facilities.

 

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The following table sets forth the changes to the number of Company-operatedand franchised restaurants for the periods presented below.

 
| ** **                                  | ** ** | **168 Days Ended** | ** ** | **175 Days Ended** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **(Units)**                                 | ** ** | **April 20,  2006**     | ** ** | **April 21,  2005**     | ** ** |
| Village Inn Company-operated restaurants:   |       |                         |       |                         |       |
| Beginning of period                         |       | 135                          |       | 121                          |       |
| Openings/acquisitions                       |       | 16                           |       | 5                            |       |
| Closings                                    |       | (1                           | )          | —                       |       |
| End of period                               |       | 150                          |       | 126                          |       |
| Bakers Square Company-operated restaurants: |       |                         |       |                         |       |
| Beginning of period                         |       | 152                          |       | 150                          |       |
| Openings                                    |       | —                       |       | —                       |       |
| Closings                                    |       | (2                           | )          | (2                           | )          |
| End of period                               |       | 150                          |       | 148                          |       |
| Total Company-operated restaurants          |       | 300                          |       | 274                          |       |
| Village Inn franchised restaurants:         |       |                         |       |                         |       |
| Beginning of period                         |       | 100                          |       | 103                          |       |
| Closings/sold                               |       | (4                           | )          | —                       |       |
| End of period                               |       | 96                           |       | 103                          |       |
| Total restaurants                           |       | 396                          |       | 377                          |       |

 

**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 or decreaseof the sales of units open at least 18 months relative to the same period inthe prior year. We do not use new restaurants in our calculation of same unitsales until they are open for 18 months in order to allow a new restaurant’soperations and sales time to stabilize and provide more meaningful results. Sameunit sales is an important indicator within the restaurant industry becausesmall changes in same unit sales can have a proportionally higher impact onoperating margins because of the high degree of fixed costs associated withoperating restaurants.

 

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.

 

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As of April20, 2006, we had 96 franchised Village Inn restaurants in 19 states, operatedby 25 franchisees which operate one to 11 restaurants each. Although we mayincrease franchise revenues by increasing the number of franchised Village Innrestaurants, we expect that our franchise revenues will decline as a percentageof our total revenue as we emphasize growth in the number of company-operatedunits.

 

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 May 2005 and again on January 1, 2006, theminimum wage rate for the state of Florida increased.  The state of Oregon’sminimum wage increased in both 2005 and 2006 and the states of Minnesota andWisconsin increased their minimum wage during the first quarter of 2006.

 

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 assist our managers in improving labor utilization. We monitor laborhours actually incurred in relation to sales and customer count on arestaurant- by-restaurant basis throughout each week.

 

In managingprime margin, we also focus on percentage food cost, which is food costexpressed as a percentage of total restaurant revenues. Our food cost isaffected by several factors, including market prices for the food ingredients,our effectiveness 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 track variances from ideal foodcost within each restaurant and seek to address the causes of such variances,to the extent they are within our control, in order to improve our percentagefood cost. In addition, our centralized purchasing department buys a majorityof the products used in both Village Inn and Bakers Square (as well as our pieproduction operations), leveraging the purchasing volumes of our restaurantsand our franchisees to obtain favorable prices. We attempt to stabilizepotentially volatile prices for certain high-cost ingredients such as chicken,beef, coffee and dairy products for three to twelve month periods by enteringinto purchase contracts

 

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when we believe that this will improve ourfood cost. We also use “menu engineering” to promote menu items which have alower percentage food cost. However, we are vulnerable to fluctuations in foodcosts. Given our customers’ sensitivity to price increases and since we onlyreprint our full menus every six months, our ability to adjust prices andfeatured menu items in response to rapidly changing commodity prices islimited.

 

Although amajority of the pies we produce at our VICOM manufacturing facilities are forVillage Inn and Bakers Square, our third-party pie sales have increased overtime. The overall results of operations of our pie manufacturing historicallyhave not had, and currently do not have, a material impact on our operatingprofit. We show the results of operations associated with our VICOM third partysales separately on our income statement. In order to determine the operatingprofit for our third party sales, we allocate both variable and fixed costs. Asexternal sales increase, the allocation method may cause a decrease in theoperating profit due to the higher allocation of fixed costs to the externalsales. The net costs associated with internal “sales” to our restaurants areincluded with restaurant 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 2006 secondquarter financial results included:

 

•            Growth of revenues inthe second quarter by 9.0% to $106.3 million from 2005 to 2006, reflecting thenet addition or acquisition of thirty-one company-operated restaurants over thepast two years. Same store sales decreased by 2.2% from 2005 to 2006.

•            Operating profit decreasedto $4.8 million from $6.8 million in 2005.

Net income decreasedto a net loss of $1.3 million in the second quarter of fiscal 2006 from net incomeof $0.5 million in the second quarter of fiscal 2005. Interest expenseincreased $0.6 million in the second quarter of fiscal 2006 primarily due to anincreased number of new units accounted for using the financing method.

 

**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.

 

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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 ofour critical accounting policies and estimates:

 

**Inventories**

 

Inventories are stated at the lower of costor market value. Cost is principally determined by the first-in, first-outmethod. The valuation of inventory requires us to estimate obsolete or excessinventory as well as inventory 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 and equipment, build-to-suit projects and assets under deemedlandlord financing liability**

 

Property and equipment is recorded at costand is depreciated on the straight-line basis over the estimated useful livesof such assets or through the applicable lease expiration, if shorter. Leasehold improvements added subsequent to the inception of a lease areamortized over the shorter of the useful life of the assets or the lease termthat includes lease renewals, if such renewals are considered reasonablyassured.  The useful lives of assets range from 20 to 30 years forbuildings and three to ten years for equipment and improvements. Changes incircumstances such as the closing of units within underproductive markets orchanges in our capital structure could result in the actual useful lives ofthese assets differing from our estimates.

 

For many of our build-to-suit projects, weare considered the owner of the project during the construction period inaccordance with Emerging Issues Task Force (“EITF”) Issue No. 97-10, “TheEffect of Lessee Involvement in Asset Construction,” because we are deemed tohave substantially all of the construction 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 realestate transactions and build-to-suit projects have not qualified forsale-leaseback accounting because of our deemed continuing involvement with thebuyer-lessor, which results in the transaction being recorded under thefinancing method.  Under the financing method, the assets remain on theconsolidated balance sheet and are depreciated over their useful life, and theproceeds from the transaction are recorded as a financing liability.  Aportion of lease payments are applied as payments of deemed principal andimputed interest. The Company is currently exploring options that wouldeliminate the deemed continuing involvement for the majority of our units accountedfor under the financing method. If the Company determines that it no longer hascontinuing involvement in a particular lease, the effect on the financialstatements would be to remove both the assets under deemed landlord financing liabilityand the deemed landlord financing

 

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liabilityfor that lease. Any gain or loss recognized on the transaction would then beamortized, as rent expense, over the remaining reasonably assured lease term.

 

We review long-lived assets, including land,buildings and building improvements, for impairments on a quarterly basis orwhenever events or changes in circumstances indicate that the carrying amountof such assets may not be recoverable. Management evaluates individualrestaurants, which are considered to be the lowest level for which there areidentifiable cash flows for impairment. A specific restaurant is deemed to beimpaired if a forecast of undiscounted future operating cash flows directlyrelating to that restaurant, including disposal value, if any, is less than thecarrying amount of that restaurant. If a restaurant is determined to beimpaired, the loss is measured as the amount by which the carrying amount ofthe restaurant exceeds its fair value. Management determines fair value basedon quoted market prices in active markets, if available. If quoted marketprices are not available, management estimates the fair value of a restaurantbased on either the estimates provided by real estate professionals and/or ourpast experience in disposing of restaurant properties. Our estimates ofundiscounted cash flows may differ from actual cash flows due to economicconditions or changes in operating performance.  During the quarter endedApril 20, 2006, the Company recorded a $0.5 million pretax impairment chargerelated to the writedown of assets for six restaurant locations. The Companyrecorded a $0.8 million pretax impairment for the year to date period endedApril 20, 2006 related to 11 restaurant locations. There were no impairmentcharges for the quarter or year to date periods ended April 21, 2005.

 

**Leases**

 

We lease a substantial amount of ourrestaurant properties and one of our pie production plants.  We accountfor our leases under the provisions of Statement of Financial AccountingStandards No. 13, “Accounting for Leases,” and subsequent amendments,which require leases to be evaluated and classified as operating or capitalizedleases for financial reporting purposes.  We record the difference betweenthe cash rent paid and the straight-line rent as a deferred rent liability.Incentive payments received from landlords are recorded as deferred rentliabilities and are amortized on a straight-line basis over the lease term as areduction of rent.  Certain of our leases are accounted for under thefinancing method as discussed above.  Future authoritative changes to themethods of accounting for leases could have a material impact on our reportedresults of operations and financial position.

 

Following the June 2003 acquisition, weanalyzed all capital and operating leases which had not been initiated orrenewed in the past 18 months to determine the fair market value of theseagreements. Lease fair market values were determined by obtaining comparable rentsfor select locations through third-party advisors and reviewing sale-leasebacktransactions within the past 18 months to determine an average rent as apercentage of unit sales. This average was applied to each location todetermine fair value rents. These additional rents are amortized over theremaining life of the underlying lease agreements. The amounts were classifiedas either assets or liability based on the analysis. At April 20, 2006 theasset balance was $5.9 million and the liability balance was $2.4 million. AtNovember 3, 2005 the asset balance was $6.6 million and the liability balancewas $2.5 million.

 

In October 2005, the FASB issued FSPNo. FAS 13-1, “Accounting for Rental Costs Incurred during a ConstructionPeriod.” FSP No. FAS 13-1 requires rental costs associated with operatingleases that are incurred during a construction period to be recognized asrental expense. FSP No. FAS 13-1 is effective for reporting periodsbeginning after December 15, 2005. The transition provisions of FSP

 

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No. FAS13-1 permit early adoption and retrospective application of the guidance. TheCompany historically capitalized rental costs incurred during a constructionperiod.  We implemented FSP No. FAS 13-1 during the first quarter offiscal 2006 and it did not have a material impact upon the Company’s financialposition, results of operations or cash flows. The Company capitalized $0.1million and $0.2 million in the quarter and year to date period ended April 21,2005, respectively. The company expensed $0.2 million and $0.3 million in thequarter and year to date periods ended April 20, 2006, respectively.

 

**Insurance reserves**

 

We self-insure a significant portion of ouremployee medical insurance, workers’ compensation and general liabilityinsurance plans.  We had an insurance reserve liability of $9.8 millionand $9.3 million recorded as of April 20, 2006 and November 3, 2005,respectively.  We have obtained stop-loss insurance policies to protectfrom individual losses over specified dollar values ($175,000 for employeehealth insurance claims, $250,000 workers’ compensation and $150,000 forgeneral liability for fiscal 2005 and 2006). The full extent of certain claims,especially workers’ compensation and general liability claims, may not becomefully determined for several years. Therefore, we estimate potentialobligations for liabilities that have been incurred but not yet reported basedupon historical data, experience, and use of outside consultants. Althoughmanagement believes that the amounts accrued for these obligations arereasonably estimated, any significant increase in the number of claims or costsassociated with claims made under these plans could have a material adverseeffect on our financial results.

 

Favorable workers’ compensation claimsexperience related to recent years has permitted a reduction in workers’compensation expense accruals in both fiscal 2005 and 2006 versus previousyears.  We recorded a reduction to our workers’ compensation reserve of$0.8 million during the quarter ended April 20, 2006. No reduction was takenduring the quarter ended April 21, 2005. Should the current claims experiencetrends continue, it is likely further expense reductions will be made.

 

**Loss contingencies**

 

We maintain accrued liabilities and reservesrelating to the resolution of certain contingent obligations.  Significantcontingencies include those related to litigation.  We account forcontingent obligations in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 5, “Accounting for Contingencies,” as interpretedby FASB Interpretation No. 14 which requires that we assess eachcontingency to determine estimates of the degree of probability and range ofpossible settlement.  Contingencies which are deemed to be probable andwhere the amount of such settlement is reasonably estimable are accrued in ourfinancial statements.  If only a range of loss can be determined, weaccrue to the best estimate within that range; if none of the estimates withinthat range is better than another, we accrue to the low end of the range.

 

The assessment of loss contingencies is ahighly subjective process that requires judgments about future events. Contingencies are reviewed at least quarterly to determine the adequacy of theaccruals and related financial statement disclosure.  The ultimatesettlement of loss contingencies may differ significantly from amounts we haveaccrued in our financial statements.

 

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**Income taxes**

 

 Deferred income tax assets and liabilities arerecognized for the expected future income tax consequences of carryforwards andtemporary differences between the book and tax basis of assets and liabilities.Valuation allowances are established for deferred tax assets that are deemedunrealizable.  As of April 20, 2006, we had gross deferred tax assetswhich included $15.0 million of FICA tip credit carryforwards, expiring atvarious dates through 2026.  Approximately $9.5 million of the FICA tipcredit 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 beable to recover our deferred tax assets. If recovery is not likely, valuationallowances are established. The valuation allowance is based on our estimatesof future taxable 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. The Company has established a valuationallowance of $2.8 million for the portion of its deferred tax asset related toan investment for which it is more likely than not that a tax benefit will notbe realized.

 

Significant judgment is required indetermining our effective tax rate and in evaluating our tax positions. Weestablish reserves when, despite our belief that our tax return positions aresupportable, we believe that certain positions are likely to be successfullychallenged. We adjust these reserves in light of changing facts andcircumstances, such as the progress of a tax audit. Our effective tax rateincludes the impact of reserve provisions and changes to reserves that weconsider appropriate.

 

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**New Accounting Pronouncements**

 

In November 2004, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “InventoryCosts, an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies the accounting for abnormal amounts of idlefacility expense, freight, handling costs and wasted material and requires thatsuch items be recognized as current-period charges regardless of whether theymeet the “so abnormal” criterion outlined in ARB No. 43. SFAS No. 151 alsointroduces the concept of “normal capacity” and requires the allocation offixed production overheads to inventory based on the normal capacity of theproduction facilities. Unallocated overheads must be recognized as an expensein the period incurred. SFAS No. 151 is effective for inventory costs incurredduring fiscal years beginning after June 15, 2005. We implemented SFAS No. 151during the first quarter of fiscal 2006. We determined that we did not haveabnormal costs during the period and thus had no impact from theimplementation.

 

On December 16, 2004, the FASB issued SFAS No. 123 (revised2004), *Share-Based Payment*, which is a revisionof SFAS No. 123. SFAS 123(R) supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and amends SFASNo. 95, *Statement of Cash Flows*. Generally, the approach in SFAS 123(R) issimilar to the approach described in SFAS 123. However, SFAS 123(R)requires all share-based payments to employees, including grants of employeestock options, to be recognized in the income statement based on their fairvalues. Pro forma disclosure is no longer an alternative.

 

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

 

1. A *“**modified prospective”*method in which compensation cost is recognized beginning with the effectivedate (a) based on the requirements of SFAS 123(R) for all share-basedpayments granted after the effective date and (b) based on the requirementsof SFAS 123 for all awards granted to employees prior to the effectivedate of SFAS 123(R) that remain unvested on the effective date, afterestimating forfeitures.

 

2. A *“**modified retrospective”*method which includes the requirements of the modified prospective methoddescribed above, but also permits entities to restate based on the amountspreviously recognized under SFAS 123 for purposes of pro forma disclosuresfor either (a) all prior periods presented or (b) prior interimperiods of the year of adoption.

 

We will use the modified prospective method when we adoptSFAS 123(R). SFAS 123(R) is effective for non-public filers with thefirst annual reporting period that begins after December 15, 2005. For purposesof this Statement, we are considered a non-public filer because we are anentity that has only debt securities trading in a public market. As permittedby SFAS 123, we had accounted for share-based payments to employees usingAPB Opinion 25’s intrinsic value method and, as such, generally recognize nocompensation cost for employee stock options. Simultaneously with the closingof our sales transaction in June 2003, all options became immediately vested,thus we would not have recognized compensation expense. Consequently, theadoption of SFAS 123(R) will only impact our results of operations if wegrant share-based payments subsequent to November 2, 2006, the beginning of our2007 fiscal year.

 

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

 

**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 half of fiscal 2006consisted of 24 weeks, or 168 days and fiscal 2006 will consist of 52 weeks or364 total days. The first half of fiscal 2005 consisted of 25 weeks, or 175 days,and fiscal 2005 consisted of 53 weeks, or 371 days. The additional week infiscal 2005 coincides with one of the Company’s higher volume sales weeks forboth store level and manufacturing operations.

 

**Seasonality**

 

Our sales fluctuate seasonally and as mentioned previously our quartersdo not all have the same time duration. Specifically, our fourth quartergenerally has an extra three to four weeks compared to our other quarters ofthe fiscal year. Historically, our average daily sales are highest in our firstquarter (November through January) as a result of holiday pie sales while ourfourth quarter (mid-July through October) recorded our lowest average dailysales. Therefore, our quarterly results are not necessarily indicative ofresults that may be achieved for the full fiscal year. Factors influencingrelative sales variability in addition to those noted above include thefrequency and popularity of advertising and promotions, the relative saleslevel of new and closed locations, holidays and weather.

 

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**Results of Operations**

 
| ** **                                    | ** ** | **84 Days Ended** | ** ** | **84 Days Ended** | ** ** | **168 Days Ended** | ** ** | **172 Days Ended** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|------------------------------|------------|------------------------------|------------|
| **(in Thousands)**                       | ** ** | **April 20,  2006**    | ** ** | **April 21,  2005**    | ** ** | **April 20,  2006**     | ** ** | **April 21,  2005**     | ** ** |
| ** **                                    | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Revenues:                                     |       |                        |       |                        |       |                         |       |                         |       |
| Restaurant operations                         |       | $                           | 98,116     |                        | $          | 92,339                       |       | $                            | 202,242    |   | $ | 196,862 |   |
| Franchise operations                          |       | 1,165                       |       | 1,191                       |       | 2,331                        |       | 2,420                        |       |
| Manufacturing operations                      |       | 6,978                       |       | 4,017                       |       | 13,990                       |       | 13,600                       |       |
|                                          |       | 106,259                     |       | 97,547                      |       | 218,563                      |       | 212,882                      |       |
| Costs and expenses:                           |       |                        |       |                        |       |                         |       |                         |       |
| Restaurant costs:                             |       |                        |       |                        |       |                         |       |                         |       |
| Food                                          |       | 24,719                      |       | 24,086                      |       | 53,036                       |       | 52,629                       |       |
| Labor                                         |       | 33,333                      |       | 30,042                      |       | 66,274                       |       | 62,282                       |       |
| Other operating expenses                      |       | 28,545                      |       | 25,336                      |       | 58,672                       |       | 53,102                       |       |
| Franchise operating expenses                  |       | 503                         |       | 521                         |       | 986                          |       | 1,032                        |       |
| Manufacturing operating expenses              |       | 7,565                       |       | 4,325                       |       | 15,078                       |       | 13,576                       |       |
| General and administrative expenses           |       | 6,084                       |       | 6,271                       |       | 11,905                       |       | 12,878                       |       |
| Transaction expenses                          |       | —                      |       | —                      |       | —                       |       | 15                           |       |
| Management fees                               |       | 196                         |       | 196                         |       | 392                          |       | 392                          |       |
| Impairment of assets                          |       | 513                         |       | —                      |       | 821                          |       | —                       |       |
|                                          |       | 101,458                     |       | 90,777                      |       | 207,164                      |       | 195,906                      |       |
| Operating profit                              |       | 4,801                       |       | 6,770                       |       | 11,399                       |       | 16,976                       |       |
| Interest expense                              |       | (7,090                      | )          | (6,476                      | )          | (14,029                      | )          | (13,454                      | )          |
| Other income, net                             |       | 113                         |       | 138                         |       | 284                          |       | 226                          |       |
| Income (loss) before income taxes             |       | (2,176                      | )          | 432                         |       | (2,346                       | )          | 3,748                        |       |
| Provision for income taxes (benefit)          |       | (886                        | )          | (24                         | )          | (1,121                       | )          | 1,023                        |       |
| Net income (loss)                             |       | (1,290                      | )          | 456                         |       | (1,225                       | )          | 2,725                        |       |
| Preferred stock dividends and accretion       |       | (2,242                      | )          | (1,928                      | )          | (4,427                       | )          | (3,975                       | )          |
| Net loss attributable to common  stockholders |       | $                           | (3,532     | )                           | $          | (1,472                       | )          | $                            | (5,652     | ) | $ | (1,250 | ) |

 
| ** **                                    | ** ** | **84 Days Ended** | ** ** | **84 Days Ended** | ** ** | **168 Days Ended** | ** ** | **175 Days Ended** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **April 20,  2006**    | ** ** | **April 21,  2005**    | ** ** | **April 20,  2006**     | ** ** | **April 21,  2005**     | ** ** |
| ** **                                    | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Revenues:                                     |       |                        |       |                        |       |                         |       |                         |       |
| Restaurant operations                         |       | 92.3                        | %          | 94.7                        | %          | 92.5                         | %          | 92.5                         | %          |
| Franchise operations                          |       | 1.1                         |       | 1.2                         |       | 1.1                          |       | 1.1                          |       |
| Manufacturing operations                      |       | 6.6                         |       | 4.1                         |       | 6.4                          |       | 6.4                          |       |
|                                          |       | 100.0                       |       | 100.0                       |       | 100.0                        |       | 100.0                        |       |
| Costs and expenses:                           |       |                        |       |                        |       |                         |       |                         |       |
| Restaurant costs:                             |       |                        |       |                        |       |                         |       |                         |       |
| Food                                          |       | 23.2                        |       | 24.7                        |       | 24.3                         |       | 24.7                         |       |
| Labor                                         |       | 31.4                        |       | 30.8                        |       | 30.3                         |       | 29.3                         |       |
| Other operating expenses                      |       | 26.9                        |       | 26.1                        |       | 26.8                         |       | 24.9                         |       |
| Franchise operating expenses                  |       | 0.5                         |       | 0.5                         |       | 0.5                          |       | 0.5                          |       |
| Manufacturing operating expenses              |       | 7.1                         |       | 4.4                         |       | 6.9                          |       | 6.4                          |       |
| General and administrative expenses           |       | 5.7                         |       | 6.4                         |       | 5.4                          |       | 6.0                          |       |
| Transaction expenses                          |       | 0.0                         |       | 0.0                         |       | 0.0                          |       | 0.0                          |       |
| Management fees                               |       | 0.2                         |       | 0.2                         |       | 0.2                          |       | 0.2                          |       |
|  Impairment of assets                    |       | 0.5                         |       | —                      |       | 0.4                          |       | —                       |       |
|                                          |       | 95.5                        |       | 93.1                        |       | 94.8                         |       | 92.0                         |       |
| Operating profit                              |       | 4.5                         |       | 6.9                         |       | 5.2                          |       | 8.0                          |       |
| Interest expense                              |       | (6.6                        | )          | (6.6                        | )          | (6.4                         | )          | (6.3                         | )          |
| Other income, net                             |       | 0.1                         |       | 0.1                         |       | 0.1                          |       | 0.1                          |       |
| Income (loss) before income taxes             |       | (2.0                        | )          | 0.4                         |       | (1.1                         | )          | 1.8                          |       |
| Provision for income taxes (benefit)          |       | (0.8                        | )          | (0.1                        | )          | (0.5                         | )          | 0.5                          |       |
| Net income (loss)                             |       | (1.2                        | )          | 0.5                         |       | (0.6                         | )          | 1.3                          |       |
| Preferred stock dividends and accretion       |       | (2.1                        | )          | (2.0                        | )          | (2.0                         | )          | (1.9                         | )          |
| Net loss attributable to common  stockholders |       | (3.3                        | )%         | (1.5                        | )%         | (2.6                         | )%         | (0.6                         | )%         |

 

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**84 Days Ended April 20, 2006 (“Second Quarter of Fiscal 2006”) Comparedto 84 Days Ended April 21, 2005 (“Second Quarter of Fiscal 2005”)**

 

***Total revenues***increased by $8.8 million, or 9.0%, to $106.3 million in fiscal 2006’s secondquarter, from $97.5 million for the same quarter in fiscal 2005. The increasewas due largely to operating twenty-three more locations on average during thesecond quarter of fiscal 2006 compared to the second quarter of fiscal 2005.However, we experienced a net 2.2% decrease in same unit sales for the secondquarter of fiscal 2006 over the second quarter of fiscal 2005. Village Inn sameunit sales for the second quarter of fiscal 2006 decreased 2.6% over the secondquarter of fiscal 2005, and Bakers Square same unit sales decreased 1.7% overthe same period. Average guest spending increased 2.9% at Village Inn and 3.9%at Bakers Square in the second quarter of fiscal 2006 compared to the secondquarter of fiscal 2005. Third party pie sales increased $3.0 million, or 75.0%,to $7.0 million due to the addition of a large customer at the end of the firstquarter of 2006.

 

***Food costs***increased by $0.6 million, or 2.5%, to $24.7 million in the second quarter offiscal 2006, from $24.1 million for the second quarter of fiscal 2005. Foodcosts as a percentage of restaurant revenues decreased to 25.2% for the secondquarter of fiscal 2006 from 26.1% in the second quarter of fiscal 2005. Thedecrease was driven primarily by menu price increases exceeding commodity priceincreases.

 

***Labor costs***increased by $3.3 million, or 11.0%, to $33.3 million in the second quarter offiscal 2006, from $30.0 million for the second quarter of fiscal 2005 and as apercentage of restaurant revenues increased to 34.0% from 32.5% over theseperiods. The relative increase in labor costs was due to lower operatingefficiency, increased average wage due to minimum wage increases, negativeleverage associated with the same store sales decline and labor inefficienciesat the new restaurants in start up mode.

 

***Other operatingexpenses*** increased by $3.2 million, or 12.6%, to$28.5 million in the second quarter of fiscal 2006 from $25.3 million for thesecond quarter of fiscal 2005. Other operating expenses as a percentage ofrestaurant revenues increased to 29.1% from 27.4% over these periods. Thisincrease was primarily due to higher occupancy costs ($1.7 million), increasedutility costs ($0.7 million) and increased costs associated with new storegrowth, partially offset by lower workers’ compensation costs ($0.8 million).

 

***General andadministrative expenses*** decreased $0.2 million, or3.2%, to $6.1 million for the second quarter of fiscal 2006 from $6.3 millionfor the second quarter of fiscal 2005. The decrease resulted primarily from areduction in legal fees and settlements. As a percentage of total revenues,general and administrative expenses were 5.7% in the second quarter of fiscal2006 and 6.4% in the second quarter of fiscal 2005.

 

***Operating profit***decreased by $2.0 million, or 29.4%, to $4.8 million in the second quarter offiscal 2006, from $6.8 million for the second quarter of fiscal 2005. Operatingprofit as a percentage of total revenues for the second quarter of fiscal 2006decreased to 4.5% from 6.9% in the second quarter of fiscal 2005. The decreasewas due largely to the decline in our same unit sales, its effect on labor, aswell as increases in other operating expenses.

 

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***Interest expense***increased by $0.6 million, or 9.2%, to $7.1 million in the second quarter offiscal 2006, from $6.5 million for the second quarter of fiscal 2005. Thisincrease was due primarily to an increased number of new leased units accountedfor using the financing method versus the operating lease treatment had salelease back accounting been permitted.

 

***Provision for incometaxes (benefit)***for the second quarter of fiscal2006 was a $0.9 million benefit, compared to $24,000 benefit for the secondquarter of fiscal 2005. The effective tax rate for the second quarter of fiscal2006 was 40.7% but was not significant for the second quarter of fiscal 2005.The provisions differ from our statutory rate of 39.9% due to general businesscredits that we earn from FICA taxes paid on employee tips.

 

***Net income (loss)***decreasedby $1.8 million to a $1.3 million loss in the second quarter of fiscal 2006from income of $0.5 million in the second quarter of fiscal 2005. Net income(loss) as a percentage of total revenues decreased to a negative 1.2% from apositive 0.5% over these periods.

 

***Preferred stockdividends and accretion*** increased by $0.3 millionto $2.2 million in the second quarter of fiscal 2006 from $1.9 million for thesecond quarter of fiscal 2005 as a result of the compounding effect of unpaidpreferred stock dividends.

 

**168 Days Ended April 20, 2006 (“First Two Quarters of Fiscal 2006”)Compared to 175 days Ended April 21, 2005 (“First Two Quarters of Fiscal 2005”)**

 

***Total revenues***increased by $5.7 million, or 2.7%, to $218.6 million in the first two quartersof fiscal 2006, from $212.9 million for the first two quarters of fiscal 2005.The increase was partly due to operating twenty-one more locations on averageduring the first two quarters of fiscal 2006, offset by an additional week inthe first half of fiscal 2005. We experienced a net 1.1% decrease in same unitsales for the first two quarters of fiscal 2006 over the same quarters offiscal 2005, with Village Inn same unit sales decreasing 1.2% and Bakers Squaresame unit sales decreasing 1.0% over the same period. Average guest spendingincreased 3.0% at Village Inn and 4.8% at Bakers Square in the first twoquarters of fiscal 2006 compared to the same quarters in fiscal 2005.

 

***Food costs***increased by $0.4 million, or 0.8%, to $53.0 million in the first two quartersof fiscal 2006, from $52.6 million for the same quarters of fiscal 2005. Foodcosts as a percentage of restaurant revenues decreased to 26.2% for the firsttwo quarters of fiscal 2006 from 26.7% in the same quarters of fiscal 2005. Thedecrease was driven primarily by menu price increases exceeding commodity priceincreases.

 

***Labor costs***increased by $4.0 million, or 6.4%, to $66.3 million in the first two quartersof fiscal 2006, from $62.3 million for the same quarter of fiscal 2005, and asa percentage of restaurant revenues increased to 32.8% from 31.6% over theseperiods. The increase in labor costs was due to lower operating efficiency,increased average wage due to minimum wage increases, negative leverageassociated with the same store sales decline and labor inefficiencies at thenew restaurants in start up mode.

 

***Other operatingexpenses*** increased by $5.6 million, or 10.5%, to$58.7 million in the first two quarters of fiscal 2006 from $53.1 million forthe same quarters of fiscal 2005 and other operating expense as a percentage ofrestaurant revenues increased to 29.0% for the first two quarters of fiscal2006 from 27.0% in the same quarters of fiscal 2005. This increase wasprimarily due to higher

 

27

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occupancy costs ($2.6 million),increased utility costs ($1.3 million) and increased costs associated with newstore growth, partially offset by lower workers’ compensation costs ($0.8million).

 

***General andadministrative expenses*** decreased $1.0 million, or7.8%, to $11.9 million for the first two quarters of fiscal 2006 from $12.9million for the first two quarters of fiscal 2005. The decrease was drivenprimarily by a reduction in legal fees and settlements. As a percentage oftotal revenues, general and administrative expenses decreased to 5.4% in thefirst two quarters of fiscal 2006 from 6.0% in the same quarters of fiscal2005.

 

***Operating profit***decreased $5.6 million, or 32.9%, to $11.4 million in the first two quarters offiscal 2006, from $17.0 million for the same quarters of fiscal 2005. Operatingprofit as a percentage of total revenues was 5.2% and 8.0% for the first twoquarters of fiscal 2006 and fiscal 2005, respectively. The decrease wasprimarily due to increased other operating expenses and increased losses fromthe pie manufacturing business.

 

***Interest expense***increased by $0.5 million, or 3.7%, to $14.0 million in the first two quartersof fiscal 2006, from $13.5 million for the same quarters of fiscal 2005. Theincrease was driven by new leased unit growth accounted for using the financingmethod versus the operating lease treatment had sale lease back accounting beenpermitted, offset by lower debt balances.

 

***Provision for incometaxes***for the first two quarters of fiscal 2006was a $1.1 million benefit, compared to a provision of $1.0 million for thesame quarters of fiscal 2005. The effective tax rate was 47.8% for the firsttwo quarters of fiscal 2006 compared to 27.3% in fiscal 2005’s first twoquarters. The provisions differ from our statutory rate of 39.9% due to generalbusiness credits that we earn from FICA taxes paid on employee tips.

 

***Net income (loss)***decreasedby $3.9 million to a $1.2 million loss in the first two quarters of fiscal 2006from income of $2.7 million in the same quarters of fiscal 2005. Net income(loss) as a percentage of total revenues decreased to negative 0.6% from apositive 1.3% over these periods.

 

***Preferred stockdividends and accretion*** increased by $0.4 millionto $4.4 million in first two quarters of fiscal 2006 from $4.0 million forfirst two quarters of fiscal 2005 as a result of the compounding effect ofunpaid preferred stock dividends.

 

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**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 has historically been sufficient tofinance continuing operations and meet normal debt service requirements.However, we are highly leveraged and our ability to repay our borrowings atmaturity is likely to depend in part on our ability to refinance the debt whenit matures, which will be contingent on our continued successful operation ofthe business as well as other factors beyond our control, including the debtand capital market conditions at that time.

 

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

 

For the balance of fiscal 2006, we anticipate capital expendituresbefore build-to-suit construction (as discussed below) of approximately $14.2million, reflecting an acceleration of our unit growth. Of this amount, $6.2million is expected to be spent on new restaurant construction, $4.2 millionfor remodels and the remainder on capital maintenance and other support relatedprojects. We currently expect to open or acquire an estimated 29 to 34 newrestaurants in fiscal 2006, including the 16 we opened or acquired through thesecond quarter.

 

In connection with our new restaurant development program, we haveentered into build-to-suit development agreements whereby third parties willpurchase property, fund the costs to develop new restaurant properties for usand lease the properties to us upon completion. Under these agreements, we generallyare responsible for the construction of the restaurant and remitting paymentsto the contractors on the projects, which are subsequently reimbursed by theproperty owner. These amounts advanced and subsequently reimbursed are notincluded in the anticipated capital spending totals above. On April 20, 2006,we had outstanding receivables of $4.9 million relating to these types ofagreements. In certain of these agreements, we are obligated to purchase theproperty in the event that we are unable to complete the construction within aspecified time frame, and are also responsible for cost overruns abovespecified amounts.

 

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

 

On April 14, 2004, we completed a private placement of $126.5 millionaggregate principal amount of 101⁄2% senior unsecured notes maturing on April 15,2011. The notes were issued at a discounted price of 98.791% of face value,resulting in net proceeds before transaction expenses of $125.0 million. Thesenior unsecured notes were issued by VICORP Restaurants, Inc. and areguaranteed by VI Acquisition Corp. and our subsidiary Village Inn Pancake Houseof 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,with a $15.0 million sublimit for letters of credit. On April 20, 2006, we hadissued letters of credit aggregating $7.2 million and had $5.8 million inborrowings outstanding under the senior secured revolving credit facility. Thesenior secured revolving credit facility permits borrowings equal to the lesserof (a) $30.0 million and (b) 1.2 times trailing twelve months Adjusted EBITDA(as defined in the senior secured credit agreement) minus the original amountof the senior secured term loan. Under this formula, as of April 20, 2006, wehad the ability to borrow the full $30 million, less the amount of outstandingletters of credit, under the senior secured revolving credit facility, or $17.0million.

 

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 senior secured creditagreement. At April 20, 2006, the interest rates were 8.0% for term loanborrowings. 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 facilities mature on April 14, 2009.

 

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 or issue preferredstock, repay other indebtedness, pay dividends and distributions or repurchaseour capital stock, create liens on assets, make investments, loans or advances,make certain acquisitions, engage in mergers or consolidations, enter intosale-leaseback transactions, engage in certain transactions with affiliates,amend certain material agreements governing our indebtedness, change thebusiness conducted by us and our subsidiaries and enter into hedgingagreements. In addition, our senior secured credit facility requires us tomaintain or comply with a maximum total leverage ratio, a minimum interestcoverage ratio and a maximum capital expenditures limitation. On April 20,2006, we were in compliance with these requirements.

 

We are subject to capital lease obligations related to two of ourleased properties. The principal component of our capital lease obligations was$0.2 million as of April 20, 2006. These capital leases have expiration datesranging from November 2008 to June 2011.

 

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We are the prime lessee under various operating leases or agreementsunder deemed landlord financing liability transactions for land, building andequipment for company-operated and franchised restaurants, pie productionfacilities and locations subleased to non-affiliated third parties. Theseleases and agreements have initial terms ranging from 15 to 30 years and, inmost instances, provide for renewal options ranging from five to 20 years.These leases and agreements expire at various dates through November 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 $2.1 million asof April 20, 2006.

 

As of April 20, 2006, our commitments with respect to the aboveobligations were as follows (in millions):

 

**Payments due by periods**

 
| ** **                                   | ** ** | **Total** | ** ** | **Less than  one year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **More than 5  years** | ** ** |
|----------------------------------------------|------------|-----------|------------|-----------------------------------|------------|----------------|------------|----------------|------------|-----------------------------|------------|
| Senior secured credit facility               |       | $         | 20.8       |                              | $          | —         |       | $              | —     |                        | $          | 20.8 |   | $ | — |   |
| 10-1/2% senior unsecured notes               |       | 126.5     |       | —                            |       | —         |       | —         |       | 126.5                       |       |
| Total notes payable                          |       | 147.3     |       | —                            |       | —         |       | 20.8           |       | 126.5                       |       |
| Capital lease obligations(1)  (2)       |       | 0.3       |       | 0.1                               |       | 0.1            |       | 0.1            |       | —                      |       |
| Operating lease obligations(2)               |       | 205.3     |       | 20.0                              |       | 36.0           |       | 29.4           |       | 119.9                       |       |
| Deemed landlord financing liability (1)  (2) |       | 358.3     |       | 14.8                              |       | 29.9           |       | 30.9           |       | 282.7                       |       |
| Letters of credit (3)                        |       | 7.2       |       | 7.2                               |       | —         |       | —         |       | —                      |       |
| Purchase commitments(4)                      |       | 7.5       |       | 7.5                               |       | —         |       | —         |       | —                      |       |
| Total                                        |       | $         | 725.9      |                              | $          | 49.6           |       | $              | 66.0       |                        | $          | 81.2 |   | $ | 529.1 |   |

 

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

 

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

 

(3)          Wehave letters of credit outstanding primarily to guarantee performance underinsurance contracts. The letters of credit are irrevocable and have one-yearrenewable terms.

 

(4)          Wehave commitments under contracts for the purchase of property and equipment.Portions of such contracts not completed at April 20, 2006 as noted in thetable above were not reflected as assets or liabilities in our consolidatedfinancial statements.

 

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**Sources and uses ofcash**

 

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

 
| ** **                                            | ** ** | **168 Days  Ended** | ** ** | **175 Days  Ended** | ** ** |
|-------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                            | ** ** | **April 20,  2006** | ** ** | **April 21,  2005** | ** ** |
|                                                  |       |                     |       |                     |       |
| Net cash provided by operating activities             |       | $                        | 16.0       |                     | $          | 14.6 |   |
| Net cash used in investing activities                 |       | (19.3                    | )          | (8.6                     | )          |
| Net cash provided by (used in) financing  activities  |       | 3.2                      |       | 1.6                      |       |
| Net increase (decrease) in cash and cash  equivalents |       | $                        | (0.1       | )                        | $          | 7.6 |   |

 

***Operating activities***

 

For the first two quarters of fiscal 2006, cash flows from operatingactivities increased $1.4 million compared to the same quarters of fiscal 2005.The increase resulted primarily from decreased prepaid expenses of $1.9million, partially offset by a decrease in accrued expenses of $0.7 million.

 

***Investing activities***

 

Net cash used in our investing activities in the first two quarters offiscal 2006 and 2005 consisted primarily of capital expenditures. Our capitalexpenditures for property and equipment in the first two quarters of fiscal2006 and 2005 were comprised of the following (in millions):

 
| ** **                               | ** ** | **April 20,  2006** | ** ** | **April 21,  2005** | ** ** |
|------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
|                                     |       |                     |       |                     |       |
| New store construction                   |       | $                        | 5.1        |                     | $          | 1.8 |   |
| Existing store remodel and refurbishment |       | 2.9                      |       | 1.3                      |       |
| Capital replacements                     |       | 3.3                      |       | 2.5                      |       |
| Corporate related                        |       | 0.1                      |       | 0.3                      |       |
| Purchase of property and equipment       |       | $                        | 11.4       |                     | $          | 5.9 |   |

 

In addition tothe capital expenditures noted above, we spent $7.3 million for assets underdeemed landlord finance liability during the first two quarters of fiscal 2006compared to $3.0 million in the same quarters of fiscal 2005. We opened 16 newrestaurants in the first two quarters of fiscal 2006 and five restaurants inthe same quarters of fiscal 2005. Also, we had an additional 13 locations underconstruction at the end of the second quarter of fiscal 2006.

 

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***Financing activities***

 

Our financing activities provided cash of $3.2 million during the firsttwo quarters of fiscal 2006, consisting primarily of $4.9 million of proceedsfrom deemed landlord financing transactions associated with our new restaurantconstruction, $5.8 million in borrowings under our revolving line of credit,and payments for the repurchase of stock of $0.7 million, partially offset bythe repayment of all $6.7 million of outstanding borrowings under our revolvingline of credit at November 3, 2005.

 

Our financing activities provided cash of $1.6 million during the firsttwo quarters of fiscal 2005, consisting principally of $3.1 million of proceedsfrom deemed landlord financing transactions associated with our new restaurantconstruction, partially offset by the repayment of all $1.4 million ofoutstanding borrowings under our revolving line of credit at October 28,2004.

 

**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 wehave either acquired all of these assets for cash, or purchased building andequipment assets for cash and acquired a leasehold interest in land. We haveentered into sale-leaseback arrangements for many of the land and building assetsthat we have purchased in the past, many of which have been accounted for asfinancing transactions. Since the initial net cash investment required forleased units is significantly lower than for owned properties, we intend tofocus on leasing sites for future growth so that we only have to fund theequipment portion of our new restaurant capital costs from our cash flows. Webelieve that this will reduce our upfront cash requirements associated with newrestaurant growth and enable us to increase our return on these investments,although it will result in significant long term obligations under eitheroperating or capital leases.

 

### **Item3. Quantitative and Qualitative Disclosures About Market 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 April 20, 2006, $20.8million, or 14.2% of our total debt and capitalized lease obligations of $146.5****million, bears interest at a floatingrate. A hypothetical one hundred basis point increase in interest rates for ourvariable rate borrowings as of April 20, 2006, would increase our futureinterest expense by approximately $0.2 million per year. This sensitivityanalysis does not factor in potential changes in the level of our variableinterest rate borrowings, or any actions that we might take to mitigate ourexposure to changes in interest rates.

 

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Many of the ingredients purchased for use in the products sold to ourguests are subject to unpredictable price volatility outside of our control. Wetry to manage this risk by entering into selective short-term agreements forthe products we use most extensively. Also, we believe that our commodity costrisk is diversified as many of our food ingredients are available from severalsources and we have the ability to modify recipes or vary our menu itemsoffered. Historically, we have also been able to increase certain menu pricesin response to food commodity price increases and believe the opportunity mayexist in the future. To compensate for a hypothetical price increase of 10% forfood ingredients, we would need to increase prices charged to our guests by anaverage of approximately 2.3%. We have not historically used financialinstruments to hedge our commodity ingredient prices.

 

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

 

### **Evaluation ofDisclosure Controls and Procedures**

 

Within the 84-day period prior tothe filing date of this report, our management, under the supervision of ourChief Executive Officer and Chief Financial Officer, carried out an evaluationof the effectiveness of the design and operation of our disclosure controls andprocedures pursuant to Rules 13a-14 and 15d-14 under the Securities ExchangeAct of 1934 (the “Exchange Act”), as amended. Based upon their evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures are effective in alerting them timely tomaterial information required to be included in our Exchange Act filings. Therehave not been any significant changes in our internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof the evaluation.

 

**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 a control system must reflect the fact thatthere are resource constraints, and the benefits of controls must be consideredrelative to their costs. Because of the inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, with the Company have beendetected. These inherent limitations include the realities that judgments indecision-making can be faulty, that breakdowns can occur because of simpleerrors or mistakes, and that controls can be circumvented by the acts ofindividuals or groups. Because of the inherent limitations in a cost-effectivecontrol system, misstatements due to error or fraud may occur and not be detected.

 

### **PARTII – OTHER INFORMATION**

 

**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. We believe the ultimate disposition ofthese matters will not have a material adverse effect on our consolidatedfinancial position or results of operations.

 

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During the quarter, the Company was served with two class actionlawsuits in California. The first complaint asserts a series of claims whichallege that the Company misclassified California Bakers Square managers asexempt from overtime compensation from February 1, 2005, through the present.The second complaint asserts a series of claims which alleges that theCompany’s vacation policy violated California law. The putative class in thesecond complaint includes all former and current California Bakers Squareemployees from April 11, 2002, through the present. Both complaints seekmonetary damages, interest, and attorneys’ fees in unspecified amounts. Companymanagement believes that these cases, individually and in the aggregate, willnot have a significant adverse effect on the Company’s financial condition.

 

**Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds**

 

Not applicable.

 

**Item 3. Defaults Upon Senior Securities**

 

Not applicable.

 

**Item 4. Submission of Matters to a Vote ofSecurity Holders**

 

Not applicable.

 

**Item 5. Other Information**

 

Not applicable.

 

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**Item 6. Exhibits**

 

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

 

31.1                           Certification by our ChiefExecutive Officer with respect to our Form 10-Q for the quarterly period endedApril 20, 2006, pursuant to Rule 13a-14 or 15d-14 of the Securities ExchangeAct of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

31.2                           Certification by our ChiefFinancial Officer with respect to our Form 10-Q for the quarterly period endedApril 20, 2006, pursuant to Rule 13a-14 or 15d-14 of the Securities ExchangeAct of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

32.1                           Certifications by our ChiefExecutive Officer and Chief Financial Officer with respect to our Form 10-Q forthe quarterly period ended April 20, 2006, pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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

 

### **Duringthe second quarter of fiscal 2006 ended April 20, 2006, we filed the followingreports on Form 8-K:**

 

### **Currentreport on Form 8-K on January 27, 2006, announcing financial results for ourfiscal year 2005 ended November 3, 2005.**

 

### **Currentreport on Form 8-K on March 13, 2006, announcing financial results for ourfirst quarter ended January 26, 2006.**

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|               | VICORP Restaurants, Inc.                                  |
|--------------------|-----------------------------------------------------------|
|               |                                                      |
|               |                                                      |
| Date: June 5, 2006 |                                                      |
|               |                                                      |
|               |                                                      |
|               | /s/ Debra Koenig                                          |   |
|               | Debra Koenig                                              |
|               | Chief Executive Officer                                   |
|               | (Principal Executive Officer)                             |
|               |                                                      |
|               |                                                      |
| Date: June 5, 2006 |                                                      |
|               |                                                      |
|               |                                                      |
|               | /s/ Anthony Carroll                                       |   |
|               | Anthony Carroll                                           |
|               | Chief Financial Officer and Chief  Administrative Officer |
|               | (Principal Financial and Accounting Officer)              |

 

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