##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549-1004
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 8, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to Commission file number 333-117263 VICORP RESTAURANTS, INC.  STATE OF COLORADO
(State or other jurisdiction of
incorporation or organization)
    
    84-0511072
(I.R.S. Employer
Identification No.)400 WEST 48TH AVENUE, DENVER, COLORADO
(Address of principal executive offices)
    
    80216
(Zip Code)
 Registrants telephone number, including area code: (303) 296-2121 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes o No þ Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No þ As of July 8, 2004, 1,421,800 shares of the registrants common stock (par
value $.01) were outstanding, excluding treasury shares.




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VICORP RESTAURANTS, INC.
July 8, 2004
INDEX PAGE NO.PART I  FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements (Unaudited)Consolidated Balance Sheets as of July 8, 2004 and October 26, 2003
    
    
    3Consolidated Statements of Operations for the 84 days ended July 8, 2004 and 61 days ended June 13, 2003, and the 256 days ended
July 8, 2004 and 229 days ended June 13, 2003
    
    
    5Consolidated Statements of Cash Flows for the 256 days ended July
8, 2004 and 229 days ended June 13, 2003
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    32PART II  OTHER INFORMATIONItem 5. Legal Proceedings
    
    
    33Item 6. Exhibits and Reports on Form 8-K
    
    
    33SIGNATURES
    
    
    35
 2




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##### 



PART I  FINANCIAL INFORMATION Item 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) VI Acquisition Corp.
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data) July 8,
    
    October 26,2004
    
    2003ASSETS
    

(Unaudited)
    
    (Note
1)Current assets:Cash and cash equivalents
    
    $
    5,295
    
    
    $
    460Receivables, net
    
    
    5,653
    
    
    
    5,224Inventories
    
    
    8,592
    
    
    
    11,767Deferred income taxes, short-term
    
    
    2,639
    
    
    
    2,164Prepaid expenses
    
    
    3,913
    
    
    
    2,563Income tax receivable
    
    
    145
    
    
    
    961Total current assets
    
    
    26,237
    
    
    
    23,139Property and equipment, net
    
    
    83,218
    
    
    
    85,479Deferred income taxes, long-term
    
    
    20,983
    
    
    
    20,329Long-term receivables, net
    
    
    94
    
    
    
    122Goodwill
    
    
    82,967
    
    
    
    82,835Franchise rights, net
    
    
    11,540
    
    
    
    11,949Trademarks and tradenames
    
    
    42,600
    
    
    
    42,600Other assets, net
    
    
    6,715
    
    
    
    6,022Total assets
    
    $
    274,354
    
    
    $
    272,475
 3




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##### 



VI Acquisition Corp.
Consolidated Balance Sheets (continued)
(In Thousands, Except Share and Per Share Data) July 8,
    
    October 26,2004
    
    2003(Unaudited)
    
    (Note 1)LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt and capitalized
lease obligations
    
    $
    260
    
    
    $
    9,326Accounts payable
    
    
    11,283
    
    
    
    12,705Accrued compensation
    
    
    6,971
    
    
    
    7,246Accrued taxes
    
    
    9,017
    
    
    
    6,885Other accrued expenses
    
    
    13,999
    
    
    
    13,926Total current liabilities
    
    
    41,530
    
    
    
    50,088Long-term debt
    
    
    140,052
    
    
    
    133,441Capitalized lease obligations
    
    
    3,587
    
    
    
    3,749Other noncurrent liabilities
    
    
    15,158
    
    
    
    13,455Total liabilities
    
    
    200,327
    
    
    
    200,733Stock subject to repurchase
    
    
    1,063
    
    
    
    1,063Stockholders equity:Preferred stock, $0.0001 par value:Series A, 200,000 shares authorized; 68,658.14 and
67,853.85 shares issued and outstanding at July 8,
2004 and October 26, 2003, respectively
    
    
    77,408
    
    
    
    71,405Unclassified preferred stock, 100,000 shares authorized;
no shares issued or outstanding at July 8, 2004 or
October 26, 2003
    
    
    
    
    
    
    Common stock, $0.0001 par value:Class A, 2,800,000 shares authorized; 1,386,552 and
1,298,649 shares issued and outstanding at July 8,
2004 and October 26, 2003, respectively
    
    
    
    
    
    
    Paid-in capital
    
    
    2,426
    
    
    
    2,332Treasury stock, at cost, consisting of 923.87 shares of preferred
stock at July 8, 2004 and October 26, 2003, respectively,
and 80,603 and 76,103 shares of common stock at
July 8, 2004 and October 26, 2003, respectively
    
    
    (1,004
    )
    
    
    (1,000
    )Accumulated deficit
    
    
    (5,866
    )
    
    
    (2,058
    )Total stockholders equity
    
    
    72,964
    
    
    
    70,679Total liabilities and stockholders equity
    
    $
    274,354
    
    
    $
    272,475
 See accompanying notes. 4




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##### 



VI Acquisition Corp.
Consolidated Statements of Operations
(In Thousands)
(Unaudited) VI Acquisition
    
    Midway
    
    VI Acquisition
    
    Midway84 days
    
    61 days
    
    256 days
    
    229 daysended
    
    ended
    
    ended
    
    endedJuly 8,
    
    June 13,
    
    July 8,
    
    June 13,2004
    
    2003
    
    2004
    
    2003RevenuesRestaurant operations
    
    $
    88,958
    
    
    $
    64,805
    
    
    $
    280,347
    
    
    $
    243,157Franchise operations
    
    
    1,204
    
    
    
    1,086
    
    
    
    3,660
    
    
    
    4,51390,162
    
    
    
    65,891
    
    
    
    284,007
    
    
    
    247,670Costs and expensesRestaurant operations:Food
    
    
    24,571
    
    
    
    17,490
    
    
    
    76,667
    
    
    
    66,186Labor
    
    
    28,827
    
    
    
    21,075
    
    
    
    89,125
    
    
    
    79,016Other operating expenses
    
    
    24,343
    
    
    
    17,174
    
    
    
    78,907
    
    
    
    65,629Franchise operating expenses
    
    
    592
    
    
    
    562
    
    
    
    1,893
    
    
    
    2,648General and administrative expenses
    
    
    5,602
    
    
    
    3,983
    
    
    
    17,524
    
    
    
    16,629Transaction expenses
    
    
    
    
    
    
    8,964
    
    
    
    45
    
    
    
    9,436Management fees
    
    
    196
    
    
    
    212
    
    
    
    897
    
    
    
    67484,131
    
    
    
    69,460
    
    
    
    265,058
    
    
    
    240,218Operating profit (loss)
    
    
    6,031
    
    
    
    (3,569
    )
    
    
    18,949
    
    
    
    7,452Interest expense
    
    
    (3,770
    )
    
    
    (1,455
    )
    
    
    (10,321
    )
    
    
    (5,550
    )Debt extinguishment costs
    
    
    
    
    
    
    (6,516
    )
    
    
    (6,856
    )
    
    
    (6,516
    )Other income, net
    
    
    111
    
    
    
    97
    
    
    
    160
    
    
    
    433Income (loss) before income taxes
    
    
    2,372
    
    
    
    (11,443
    )
    
    
    1,932
    
    
    
    (4,181
    )Provision for income taxes (benefit)
    
    
    674
    
    
    
    (4,528
    )
    
    
    541
    
    
    
    (1,986
    )Net income (loss)
    
    
    1,698
    
    
    
    (6,915
    )
    
    
    1,391
    
    
    
    (2,195
    )Preferred stock dividends and accretion
    
    
    (1,733
    )
    
    
    (755
    )
    
    
    (5,199
    )
    
    
    (2,260
    )Net loss attributable to common
stockholders
    
    $
    (35
    )
    
    
    (7,670
    )
    
    $
    (3,808
    )
    
    $
    (4,455
    )
 See accompanying notes. 5




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VI Acquisition Corp.
Consolidated Statements of Cash Flow
(In Thousands)
(Unaudited) VI Acquisition
    
    Midway256 days ended
    
    229 days endedJuly 8,
    
    June 13,2004
    
    2003Operating activities:Net income (loss)
    
    $
    1,391
    
    
    $
    (2,195
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    10,042
    
    
    
    8,948Amortization of financing costs and original issue discount
    
    
    671
    
    
    
    4,866Write-off of deferred financing costs
    
    
    4,288
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    2,212Warrants issued for antidilution
    
    
    
    
    
    
    129Loss on disposition of assets, net
    
    
    138
    
    
    
    237Deferred income tax expense
    
    
    (1,129
    )
    
    
    179Long term rent accruals
    
    
    1,521
    
    
    
    394Changes in operating assets and liabilities:Receivables
    
    
    (429
    )
    
    
    (467
    )Inventories
    
    
    3,175
    
    
    
    1,078Accounts payable
    
    
    (1,422
    )
    
    
    992Accrued compensation
    
    
    (275
    )
    
    
    (3,319
    )Other current assets and liabilities
    
    
    1,515
    
    
    
    (1,611
    )Other noncurrent assets and liabilities
    
    
    846
    
    
    
    594Cash provided by operating activities
    
    
    20,332
    
    
    
    12,037Investing activities:Acquisitions, net of cash acquired
    
    
    (132
    )
    
    
    (3,834
    )Purchase of property and equipment
    
    
    (8,851
    )
    
    
    (9,904
    )Disposal of property and equipment
    
    
    1,751
    
    
    
    2,669Collection of nontrade receivables
    
    
    28
    
    
    
    29Cash used in investing activities
    
    
    (7,204
    )
    
    
    (11,040
    )Financing activities:Payments on debt and capital lease obligations
    
    
    (164,969
    )
    
    
    (8,259
    )Proceeds from issuance of debt
    
    
    162,301
    
    
    
    Debt issuance costs
    
    
    (5,885
    )
    
    
    (72
    )Repurchase of common and preferred stock
    
    
    (4
    )
    
    
    Proceeds from issuance of preferred stock and common stock
    
    
    264
    
    
    
    349Cash used in financing activities
    
    
    (8,293
    )
    
    
    (7,982
    )Net increase in cash and cash equivalents
    
    
    4,835
    
    
    
    (6,985
    )Cash and cash equivalents at beginning of period
    
    
    460
    
    
    
    16,021Cash and cash equivalents at end of period
    
    $
    5,295
    
    
    $
    9,036Supplemental information:Cash paid during the period:Interest (net of capitalized interest of $55 and $92)
    
    $
    6,314
    
    
    $
    6,024Income taxes
    
    
    878
    
    
    
    1,878
 See accompanying notes. 6




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VI Acquisition Corp.
Notes to Consolidated Financial Statements
July 8, 2004
(Unaudited) 1. Description of the Business and Basis of Presentation Description of Business VI Acquisition Corp. (the Company or VI Acquisition), a Delaware
corporation, was organized by Wind Point Partners and other co-investors.
Founded in 1984, Wind Point Partners is a Chicago, Illinois and Southfield,
Michigan-based private equity investment firm that invests in middle market
companies with strong management teams and clear growth opportunities. On June 14, 2003, the Company acquired Midway Investors Holdings Inc., and its
wholly owned subsidiaries VICORP Restaurants, Inc. (VICORP) and Village Inn
Pancake House of Albuquerque, Inc. (collectively Midway or Predecessor) in
a stock purchase transaction accounted for under the purchase method of
accounting pursuant to Statement of Financial Accounting Standards (SFAS) No.
141, Business Combinations. The Midway legal entity was merged into the
Company on April 14, 2004 and no longer exists. The Company operates family style restaurants under the brand names Bakers
Square and Village Inn, and franchises restaurants under the Village Inn
brand name. At July 8, 2004, the Company operated 269 Company-owned
restaurants in 15 states. Of the Company-owned restaurants, 150 are Bakers
Square restaurants and 119 are Village Inn restaurants, with an additional 104
franchised Village Inn restaurants in 19 states. The Company-owned and
franchised restaurants are concentrated in Arizona, California, Florida, the
Rocky Mountain region, and the upper Midwest. In addition, the Company
operates three pie manufacturing facilities located in Santa Fe Springs,
California; Oak Forest, Illinois; and Chaska, Minnesota. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the financial statements
include all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation. However, operating results for the 84 and 256 day periods
ended July 8, 2004 are not necessarily indicative of the results that may be
expected for the fiscal year ending October 28, 2004. The consolidated balance
sheet at October 26, 2003 has been derived from the audited consolidated
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the audited
consolidated financial statements and footnotes thereto as of October 26, 2003. 7




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The accompanying consolidated financial statements of VI Acquisition as of July
8, 2004 and October 26, 2003 and the 84 day and 256 day periods ended July 8,
2004 include the accounts of the VI Acquisition, Midway and VICORP and its
wholly-owned subsidiaries (although the Midway legal entity was merged into the
Company on April 14, 2004 and no longer exists, as discussed above). The accompanying predecessor consolidated financial statements for the 61
and/or 229 days ended June 13, 2003 include the accounts of Midway and VICORP
and its wholly-owned subsidiaries. Due to the purchase of Midway by VI
Acquisition on June 14, 2003, operating results and cash flows of Midway for
the twelve and thirty-six weeks ended July 6, 2003 could not be presented.
Therefore, the following unaudited consolidated statement of operations shows
information for VI Acquisition for the 23 days ended July 6, 2003. VI Acquisition Corp.
Consolidated Statements of Operations
(Unaudited)(In thousands) VI Acquisition23 daysEndedJuly 6,2003Net RevenuesRestaurant operations
    
    $
    24,579Franchise operations
    
    
    33624,915Costs and expensesRestaurant operations:Food costs
    
    
    6,980Labor costs
    
    
    7,827Other operating expenses
    
    
    6,478Franchise operations
    
    
    179General and administrative
    
    
    1,729Transaction expenses
    
    
    82Management fees
    
    
    (45
    )23,230Operating profit
    
    
    1,685Interest expense
    
    
    (873
    )Debt extinguishment costs
    
    
    Other income, net
    
    
    22Income (loss) before income taxes
    
    
    834Provision for income taxes (benefit)
    
    
    (89
    )Net income (loss)
    
    
    923Preferred stock dividends and accretion
    
    
    (252
    )Net income (loss) attributable to common stockholders
    
    $
    671
 All intercompany accounts and balances have been eliminated. 8




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VI Acquisitions Purchase of Midway In connection with the June 14, 2003 purchase of Midway, the assets (including
specifically identifiable intangible assets) and liabilities of the acquired
company were recorded at the estimated fair value of $143.2 million with the
excess of the purchase price over these amounts being recorded as goodwill of
$82.8 million. Capitalization of the acquired company was funded by new senior
and subordinated debt under the terms of newly executed credit and investment
agreements dated as of June 13, 2003. In connection with the close of the
purchase and subject to the terms of the stock purchase agreement, the
following transactions occurred:  
    
    Fixed assets were adjusted to their fair market value, resulting in
an increase to the assets value of $6.2 million;
    
    Trademarks and trade names were recorded at an estimated fair value
of $42.6 million;
    
    Repayment of all indebtedness, including the prior Senior Terms A
and B loans, subordinated debt, mortgage loan obligations, and letters
of credit. Prepayment penalties of $1.3 million were paid in
association with the early repayment of this debt;
    
    Outstanding derivative instruments were settled for $1.9 million;
    
    Costs totaling $5.1 million associated with the acquisition of new
debt instruments were capitalized;
    
    A sale-leaseback transaction of ten properties was consummated by
the Company resulting in a decrease in fixed assets of $9.7 million;
    
    Rents payable under capital and operating leases were revalued to
their fair market value resulting in an additional obligation of $8.0
million;
    
    Midway redeemed all of its outstanding preferred stock for a total
of $42.4 million;
    
    Franchise rights were revalued resulting in a decrease of $3.7
million of this asset; and
    
    Compensation costs of $6.2 million were recorded as a result of the
repurchase of common stock issued from the exercise of stock options,
settlement of employment contracts and severance payments. The financial statements for Midway for the periods ended June 13, 2003
represent the operations of the Company prior to the June 14, 2003 purchase and
do not reflect the effects of the purchase accounting adjustments described
above. The consolidated financial statements and related notes as of October
26, 2003 and for the 84 and 256 day periods ended July 8, 2004 reflect the
purchase accounting adjustments for the June 14, 2003 transaction. Stock-Based Compensation SFAS No. 123, Accounting for Stock-Based Compensation, defines a fair value
method of accounting for employee stock compensation and encourages, but does
not require, all entities to adopt such method of accounting. The Company has
elected not to adopt the fair value method for employee stock options and
instead has elected to follow APB Opinion No. 25, Accounting for Stock Issued
to Employees,and related interpretations, in accounting such awards. Entities
electing not to adopt the fair value method of accounting must make pro forma
disclosures of net income as if the fair value method of accounting defined in
SFAS No. 123 had been applied to all awards. Primarily as a result of the
minimal number of 9




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##### 



employee stock options outstanding, the pro forma effect of recognizing the
grant date fair value of such awards over their vesting periods had an
immaterial effect on net income (loss). New Accounting Pronouncements In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure
Requirements for Guarantees. FIN 45 requires guarantors to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation it
has undertaken in issuing the guarantee. FIN 45 also requires guarantors to
disclose certain information for guarantees. The disclosure provisions of FIN
45 were effective immediately upon issuance in 2002. The Company adopted the
recognition and measurement provisions of FIN 45 on a prospective basis with
respect to guarantees issued or modified after December 31, 2002. The adoption
of the recognition and measurement provisions of FIN 45 had no effect on the
Companys consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 requires an investor with
a majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest entity
is an entity in which the equity investors do not have a controlling interest
or the equity investment at risk is insufficient to finance the entitys
activities without receiving additional subordinated financial support from the
other parties. The provisions of FIN 46 were effective for the Company no later
than April 15, 2004. The adoption of FIN 46 had no effect on the Companys
consolidated financial statements. In March 2003, the Emerging Issues Task Force (EITF) reached consensus on
EITF Issue No. 02-16, Accounting by a Customer for Certain Consideration
Received from a Vendor. EITF Issue No. 02-16 requires that certain cash
consideration (rebates) received by a customer from a vendor be classified in
the customers statements of operations as a reduction of cost of sales. The
consensus was required to be applied to new arrangements entered into after
December 31, 2002. VI Acquisition already accounts for rebates in cost of
sales. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133. SFAS No. 149 was effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have a material
impact on the consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
improves the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity and requires that those
instruments be classified as liabilities (or assets in certain circumstances)
in statements of financial position. SFAS No. 150 also requires disclosures
about alternative ways of settling the instruments and the capital structure of
entities whose shares are mandatorily redeemable. SFAS No. 150 is generally
effective for all financial 10




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##### 



instruments entered into or modified after May 31, 2003. The adoption of SFAS
No. 150 requires that certain financial instruments that the Company would have
otherwise classified as equity be reflected in the liability section of the
consolidated balance sheets. Therefore, the Company classified obligations
related to certain of its securities outside of stockholders equity in the
accompanying consolidated balance sheets as a result of applying the provisions
of SFAS No. 150. Reclassifications Certain prior year amounts in the accompanying consolidated financial
statements have been reclassified to conform to the presentation in 2004.
These reclassifications had no effect on the Companys consolidated net income. Fiscal Periods The Companys fiscal year, which historically ended on the last Sunday in
October, is comprised of 52 or 53 weeks divided into four fiscal quarters of 12
or 13, 12, 12, and 16 weeks. Beginning January 22, 2004, the Company changed
its fiscal year so that it ends on the Thursday nearest to October 31st of each
year. This increased the first quarter in fiscal 2004 by four days (88 days in
the first quarter of fiscal 2004 versus 84 days in the first fiscal quarter of
2003 and 256 days in the first thirty-six week period ended July 8, 2004
compared to 252 days in the thirty-six week period ended July 6, 2003). This
change was made to facilitate restaurant operations by moving the end of our
fiscal periods and weekly reporting and payroll periods away from weekends when
the Companys restaurants are busier. 2. Refinancing Transactions On April 14, 2004, VICORP completed a private placement of $126,530,000
aggregate principal amount of 10 1⁄2% 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.
The senior unsecured notes were issued by VICORP and are guaranteed by VI
Acquisition and Village Inn Pancake House of Albuquerque, Inc. In connection
with the issuance of the senior unsecured notes, VICORP agreed to file a
registration statement with the Securities and Exchange Commission (SEC) so
that the senior unsecured notes can be exchanged for registered notes having
substantially the same terms and evidencing the same indebtedness, and exchange
the related guarantees for registered guarantees having substantially the same
terms as the original guarantees. Concurrently with the issuance of the 101⁄2% senior unsecured notes, VICORP
entered into an amended and restated senior secured credit facility consisting
of 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 15, 2004, VICORP
issued letters of credit aggregating $10.5 million and had no borrowings
outstanding under the senior secured revolving credit facility. The senior
secured revolving credit facility permits borrowings equal to the lesser of (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 amount of
the new senior secured term loan. Under this formula, as of July 8, 2004,
VICORP had the ability to borrow the full $30 million, less the amount of
outstanding letters of credit, under the senior secured revolving credit
facility. 11




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##### 



Borrowings under both the revolving credit facility and the term loan bear
interest at floating rates tied to either the base rate of the agent bank under
the credit agreement or LIBOR rates for a period of one, two or three months,
in each case plus a margin that will adjust based on the ratio of our Adjusted
EBITDA to total indebtedness, as defined in the new senior secured credit
agreement. Both facilities are secured by a lien on all of the assets of VICORP
and guaranteed by VI Acquisition and Village Inn Pancake House of Albuquerque,
Inc. The guarantees are also secured by the pledge of all of the outstanding
capital stock of VICORP by VI Acquisition. The term loan does not require
periodic principal payments, but requires mandatory repayments under certain
events, including proceeds from sale of assets, issuance of equity, and
issuance of new indebtedness. Both facilities mature on April 14, 2009. The new senior secured credit facility and the indenture governing the senior
unsecured notes contain a number of covenants that, among other things,
restrict, subject to certain exceptions, VICORPs ability to sell assets, incur
additional indebtedness or issue preferred stock, repay other indebtedness, pay
dividends and distributions or repurchase our capital stock, create liens on
assets, make investments, loans or advances, make certain acquisitions, engage
in mergers or consolidations, enter into sale-leaseback transactions, engage in
certain transactions with affiliates, amend certain material agreements
governing our indebtedness, change the business conducted by us and our
subsidiaries and enter into hedging agreements. In addition, the new senior
secured credit facility requires VICORP to maintain or comply with a maximum
total leverage ratio, a minimum interest coverage ratio and a maximum capital
expenditures limitation. On July 8, 2004, VICORP was in compliance with these
requirements. The proceeds from these borrowings were used to repay the Companys existing
debt of $131.8 million and to pay transaction-related expenses of approximately
$8.2 million. 3. Inventories Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market and consist of food, paper products and supplies.
Inventories consisted of: July 8,
    
    October 26,2004
    
    2003(In Thousands)Inventories at pie production facilities
and third-party storage locations:Raw materials
    
    $
    3,618
    
    
    $
    3,851Finished goods
    
    
    1,654
    
    
    
    5,1085,272
    
    
    
    8,959Restaurant inventories
    
    
    3,320
    
    
    
    2,808$
    8,592
    
    
    $
    11,767
 12




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##### 



4. Comprehensive Loss Comprehensive loss consisted of (in thousands): VI Acquisition
    
    Midway
    
    VI Acquisition
    
    Midway84 days
    
    61 days
    
    256 days
    
    229 daysEnded
    
    Ended
    
    Ended
    
    EndedJuly 8,
    
    June 13,
    
    July 8,
    
    June 13,2004
    
    2003
    
    2004
    
    2003Net loss
attributable to
common stockholders
    
    $
    (35
    )
    
    $
    (7,670
    )
    
    $
    (3,808
    )
    
    $
    (4,455
    )Unrealized hedge
transaction gain
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    27Comprehensive loss
    
    $
    (35
    )
    
    $
    (7,643
    )
    
    $
    (3,808
    )
    
    $
    (4,428
    )
 5. Hedging Activities Effective October 27, 2003, the Company entered into an interest rate swap
agreement to manage its cash flows associated with the interest payable under
the variable component of the Companys prior senior secured credit agreement.
The swap agreement had an original notional amount of $35 million. The contract
was scheduled to expire October 27, 2006 and the interest rate was fixed at
2.686%. In connection with the debt refinancing transaction on April 14, 2004
(Note 2), the outstanding derivative obligations were settled for $0.2 million.
The Company held no derivative instruments as of July 8, 2004. Under SFAS No. 133, the Companys interest rate swap agreements were designated
as cash flow hedges and recorded at fair value. Changes in the value of such
contracts, net of income taxes, are reported in comprehensive income. For the
purpose of calculating income taxes related to comprehensive income, the
Company uses its combined statutory rate for federal and state income taxes.
The periodic net settlements made under the agreements are reflected in
operations in the period in which the settlement occurs. The net settlements
made under the variable to fixed interest rate swap agreements are reflected in
operations as an adjustment to interest expense over the term of the related
swap. The Companys accounting treatment of these transactions is consistent
with its tax treatment. 6. Contingencies The Company is party to lawsuits, revenue agent reviews by taxing authorities
and legal proceedings, of which the majority involve workers compensation,
employment practices liability and general liability claims arising in the
ordinary course of business. VICORP is currently a defendant in two purported
class action claims of this type in California. The first class action claim
was brought in October 2003 by two former employees and one current employee,
and the second class action claim was brought in May 2004 by two former
employees. The complaints allege that VICORP violated California law with
regard to rest and meal periods, bonus payment calculations (in the October
2003 complaint), overtime payments (in the May 2004 complaint) and California
law regarding unfair business practices. 13




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##### 



The classes and subclasses alleged in the actions have not been certified by
the respective courts at the current stages of the litigation, but generally
are claimed in the 2003 complaint to include persons who have been employed by
VICORP in California since October 17, 1999 in the positions of food server,
restaurant general manager and assistant restaurant manager, and generally are
claimed in the 2004 complaint to include persons who have been employed by us
in California since May 21, 2000 in the positions of restaurant general manager
and restaurant associate manager. No dollar amount in damages is requested in
either complaint, and the complaints seek statutory damages, compensatory
damages, interest and attorneys fees in unspecified amounts. The Company
believes that these matters, individually and in the aggregate, will not have a
significant adverse effect on its consolidated financial condition or results
of operations. 7. Related Party Transactions On June 14, 2003, the Company entered into a professional services agreement
with Wind Point Investors, IV, L.P. and Wind Point Investors V, L.P., whereby
certain management, financial and other consulting services would be provided
to the Company. Under the terms of the agreement, the Company pays an annual
fee to both partnerships in the aggregate amount of $850,000. Management fees
under this agreement totaled approximately $196,000 and $588,000 for the 84 and
256 day periods ended July 8, 2004, respectively. In connection with the April
14, 2004 debt refinancing (Note 2), the Company also paid an additional
$309,000 in fees to Wind Point Investors IV, L.P. and Wind Point Investors V,
L.P., which represented a deferral of a portion of the transaction fee payable
to Wind Point Investors IV, L.P. and Wind Point Investors V, L.P. in connection
with the June 2003 acquisition (Note 1). Total fees paid to Wind Point
Partners, IV, L.P. and Wind Point Investors V, L.P., totaled $196,000 and
$897,000 for the 84 and 256 day periods ended July 8, 2004, respectively. On May 14, 2001, Midway entered into management fee agreements with its
investors, Goldner, Hawn, Johnson & Morrison (Goldner Hawn) and Second
Capital Corporation of Boston (Second Capital), whereby certain management,
financial, and other consulting services were provided to Midway. Under the
terms of these agreements, Midway paid an annual fee of $500,000 to each of
Goldner Hawn and Second Capital. Management fees totaled approximately
$113,000 and $575,000 for the 61 and 252 day periods ended July 6, 2003,
respectively. These agreements terminated June 13, 2003 (Note 1). In November 2003, the Company issued an additional 257.503 shares of preferred
stock at $1,000 per share and an additional 5,583 shares of common stock at
$1.00 per share to certain of its employees, directors or existing stockholders
under subscription agreements dated November 19, 2003 for proceeds of $263,000. In February and March 2004, the Company issued an additional 34,020 shares of
common stock at $1.00 per share to certain of its employees, directors, or
existing stockholders for proceeds of $34,020. 14




---



##### 



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements included in Managements Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this report are, or may be
deemed to be, forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act). These forward-looking statements include all
matters that are not historical facts. By their nature, forward-looking
statements involve risks and uncertainties because they relate to events and
depend on circumstances that may or may not occur in the future. We caution
you that forward-looking statements are not guarantees of future performance
and that our actual results of operations, financial condition and liquidity,
and the development of the industry in which we operate may differ materially
from those made in or suggested by the forward-looking statements contained in
this information report. See the Risk Factors section of our registration
statement initially filed with the Securities and Exchange Commission on July 9,
2004, for a discussion of some of the factors that may affect the Company and
its operations. Such factors include the following: competitive pressures
within the restaurant industry; changes in consumer preferences; the level of
success of our operating strategy and growth initiatives; the level of our
indebtedness and the terms and availability of capital; fluctuations in
commodity prices; changes in economic conditions; government regulation;
litigation; and seasonality and weather conditions. In addition, even if our
results of operations, financial condition and liquidity, and the development
of the industry in which we operate are consistent with the forward-looking
statements contained in this announcement, those results or developments may
not be indicative of results or developments in subsequent periods. Any
forward-looking statements which we make in this report speak only as of the
date of such statement, and we undertake no obligation to update such
statements. Comparisons of results for current and any prior periods are not
intended to express any future trends or indications of future performance and
should 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 two
well-recognized brands, Village Inn and Bakers Square. Our company, founded in
1958, had, as of July 8, 2004, 373 restaurants in 25 states, consisting of 269
company-operated restaurants and 104 franchised restaurants. We also produce
premium pies that we serve in our restaurants or sell to third parties at three
strategically located facilities. 15




---



##### 



The following table sets forth the changes to the number of company-operated
and franchised restaurants for the periods presented below. 256 days
    
    229 daysEnded
    
    EndedJuly 8,
    
    June 13,(Units)
    
    2004
    
    2003Village Inn company-operated restaurants:Beginning of period
    
    
    118
    
    
    
    109Acquired from franchisee
    
    
    
    
    
    
    8Openings
    
    
    2
    
    
    
    1Closings
    
    
    (1
    )
    
    
    (1
    )End of period
    
    
    119
    
    
    
    117Bakers Square company-operated restaurants:Beginning of period
    
    
    149
    
    
    
    148Openings
    
    
    1
    
    
    
    2Closings
    
    
    
    
    
    
    (2
    )End of period
    
    
    150
    
    
    
    148Total company-operated restaurants
    
    
    269
    
    
    
    265Village Inn franchised restaurants:Beginning of period
    
    
    105
    
    
    
    115Openings
    
    
    
    
    
    
    2Acquired by our company
    
    
    
    
    
    
    (8
    )Closings
    
    
    (1
    )
    
    
    (3
    )End of period
    
    
    104
    
    
    
    106Total restaurants
    
    
    373
    
    
    
    371
 Management Overview Our restaurant revenues are affected by restaurant openings and closings and
same unit sales performance. Same unit sales is a measure of the percentage
increase or decrease of the sales of units open at least 18 months relative to
the same period in the prior year. We do not use new restaurants in our
calculation of same unit sales until they are open for 18 months in order to
allow a new restaurants operations and sales time to stabilize and provide
more meaningful results. Like much of the restaurant industry, we view same unit sales as a key
performance metric, at the individual unit level, within regions, across each
chain and throughout our company. With our field-level and corporate
information systems, we monitor same unit sales on a daily, weekly and
four-week period basis from the chain level down to the individual unit level.
The primary drivers of same unit sales performance are changes in the average
per-person check and changes in the number of customers, or customer count.
Average check performance is primarily affected by menu price increases and
changes in the purchasing habits of our customers. We also monitor entrée count
and sales of whole pies, which we believe is indicative of overall customer
traffic patterns. To increase average unit sales, we focus marketing and
promotional efforts on increasing customer visits and sales of particular
products. We also selectively increase prices, but are constrained by the price
sensitivity of 16




---



##### 



customers in our market segment and our desire to maintain an attractive
price-to-value relationship that is a fundamental characteristic of our
restaurant concepts. Same unit sales performance is also affected by other
factors, such as food quality, the level and consistency of service within our
restaurants, the attractiveness and physical condition of our restaurants and
local and national economic factors. We have 104 franchised Village Inn restaurants in 19 states operated by 26
franchisees who operate one to eleven restaurants each. Our revenue
attributable to our franchise operations, consisting primarily of royalty
income and revenues from sales of equipment to our franchisees, has typically
averaged approximately 2.0% of our total revenues. On February 24, 2003, we
acquired eight restaurants from a franchisee in Albuquerque, New Mexico for
$4.6 million, which subsequently reduced our franchise revenue and increased
our company-operated restaurant revenue. Although we may increase franchise
revenues by increasing the number of franchised Village Inn restaurants, we
expect that our franchise revenues will decline as a percentage of our total
revenue as we emphasize growth in the number of company-operated units. In addition to unit sales, the other major factor affecting the performance of
our restaurants is the cost associated with operating our restaurants. We
monitor and assess these costs principally as a percentage of a restaurants
revenues, or on a margin basis. The operating margin of a restaurant is the
profitability, expressed as a percentage of sales, of the restaurant after
accounting for all direct expenses of operating the restaurant. Another key
performance metric is the prime margin, which is the profitability, expressed
as a percentage of sales, of the restaurants after deducting the two most
significant costs, labor and food. Due to the importance of both labor cost and
food cost, we closely monitor prime margin from the chain level down to the
individual restaurant. We have systems in place at each restaurant to assist
restaurant managers in effectively managing these costs to improve prime
margin. Since we produce a majority of our pies for Village Inn and Bakers Square and
since our third-party pie sales historically have not had, and currently do not
have, a material impact on our operating profit, we include the net results of
our pie manufacturing operations as an offset to our food costs. As a result,
any profit (or loss) from third-party pie sales has the effect of reducing (or
increasing) our total food cost. As part of our overall effort to optimize
total company food cost, we have been focusing on various measures to improve
the net margins within our pie manufacturing operations, including increasing
third-party sales, renegotiating our distribution contracts and rebalancing the
production among our three plants to increase efficiency. Other operating expenses principally include occupancy costs, utility costs,
marketing expenses, insurance expenses and workers compensation costs.
Historically, these costs have increased over time and are not directly related
to the level of sales in our restaurants. In order to maintain our operating
performance levels, and to address expected cost increases, we will be required
to increase efficiency in restaurant operations and increase sales, although
there is no assurance that we will be able to offset future cost increases. 17




---



##### 



Critical Accounting Policies and Estimates In the ordinary course of business, our company has made a number of estimates
and assumptions related to the reporting of results of operations and financial
condition in the preparation of our consolidated financial statements in
conformity with accounting principles generally accepted in the United States.
Actual results could differ significantly from those estimates and assumptions.
We believe that the following discussion addresses our most critical accounting
policies, which are those that are most important to the portrayal of our
financial condition and results and require management judgment about the
effect of matters that are uncertain. On an ongoing basis, management evaluates its estimates and assumptions,
including those related to recoverability of long-lived assets, revenue
recognition and goodwill. Management bases its estimates and assumptions on
historical experience and on various other factors that are believed to be
reasonable at the time the estimates and assumptions are made. Actual results
may differ from these estimates and assumptions under different circumstances
or conditions. We have discussed the development and selection of critical accounting policies
and estimates with our audit committee. The following is a summary of our
critical accounting policies and estimates: Inventories Inventories are stated at the lower of cost or market value. Cost is
principally determined by the first-in, first-out method. The valuation of
inventory requires us to estimate obsolete or excess inventory as well as
inventory that is not of saleable quality. Both our manufactured pie
inventories and individual store food inventories are subject to spoilage. We
use estimates of future demand as well as historical trend information to
schedule manufacturing and ordering. If our demand forecast for specific
products is greater than actual demand, we could be required to record
additional inventory reserves or losses which would have a negative impact on
our gross margin. Property and equipment Property and equipment is recorded at cost and is depreciated on a
straight-line basis over the estimated useful lives of such assets. The useful
lives of assets range from 20 to 40 years for buildings and three to ten years
for equipment and improvements. Changes in circumstances such as the closing of
units within underproductive markets or changes in our capital structure could
result in the actual useful lives of these assets differing from our estimates. We review long-lived assets, including land, buildings and building
improvements, for impairments on a quarterly basis or whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Management evaluates groups of assets together, or
individual restaurants, which is considered to be the lowest level for which
there are identifiable cash flows. A specific restaurant is deemed to be
impaired if a forecast of undiscounted future operating cash flows directly
relating to that restaurant, including disposal value, if any, is less than the
carrying amount of that restaurant. If a restaurant is 18




---



##### 



determined to be impaired, the loss is measured as the amount by which the
carrying amount of the restaurant exceeds its fair value. Management determines
fair value based on quoted market prices in active markets, if available. If
quoted market prices are not available, management estimates the fair value of
a restaurant based on either the estimates provided by real estate
professionals and/or our past experience in disposing of restaurant properties.
Our estimates of undiscounted cash flows may differ from actual cash flows due
to economic conditions or changes in operating performance. Following the acquisition of us by VI Acquisition Corp. in June 2003, we
analyzed fixed assets and adjusted these assets to their fair market values as
of the date of the transaction. Asset fair market values were determined
through receipt of third party real-estate appraisals as well as the
application of management judgment for those properties for which external
valuations could not be obtained. These procedures resulted in our increasing
the value of property and equipment by approximately $6.2 million following the
June 2003 acquisition. We capitalize costs associated with customized software, including both
external and internal costs incurred during the application development stage.
Costs incurred during the preliminary project stage and the post-implementation
stage, and for training and application maintenance, are expensed as incurred.
Costs capitalized for software projects may not be fully recoverable due to
technological changes or changes in our business model. Capital and operating leases We are the prime lessee under various land, building and equipment leases for
company-operated and some franchisee-operated locations, pie manufacturing
facilities and other non-company-operated locations, which include warehouse
space and parking facilities. Actual cash rents are charged to the operating
units on a daily basis as incurred. Following the acquisition of us by VI Acquisition Corp., we analyzed all
capital and operating leases which had not been initiated or renewed in the
past 18 months to determine the fair market value of such agreements. Lease
fair market values were determined by obtaining comparable rents for select
locations through third-party advisors and reviewing sale-leaseback
transactions within the past 18 months to determine an average rent as a
percentage of unit sales. This average was applied to each location to
determine fair value rents. As a result, we booked an additional rent
obligation of $8.0 million in June 2003. These additional rents are amortized
over the remaining life of the underlying lease agreement. Insurance reserves We self-insure a significant portion of our employee medical insurance,
workers compensation and general liability insurance plans. For fiscal 2004,
our anticipated claim costs are $6.6 million for employee medical claims, $3.1
million for workers compensation and $0.8 million for general liability
claims. We have obtained stop-loss insurance policies to protect from
individual losses over specified dollar values ($175,000 for employee health
insurance claims, $250,000 workers compensation and $150,000 for general
liability for fiscal 2004). The full extent of certain claims, especially
workers compensation and general liability claims, may not become fully
determined for several years. We, therefore, estimate potential obligations for
liabilities that have been incurred but not yet reported based upon 19




---



##### 



historical data and experience. Although management believes that the amounts
accrued for these obligations are sufficient, any significant increase in the
number of claims or costs associated with claims made under these plans could
have a material adverse effect on our financial results. Income taxes Deferred income tax assets and liabilities are recognized for the expected
future income tax consequences of carryforwards and temporary differences
between the book and tax basis of assets and liabilities. Valuation allowances
are established for deferred tax assets that are deemed unrealizable. We must assess the likelihood that we will be able to recover our deferred tax
assets. If recovery is not likely, valuation allowances are established. The
valuation allowance is based on our estimates of taxable income by each
jurisdiction in which we operate, tax planning strategies and the period over
which our deferred tax assets will be recoverable. In the event that actual
results differ from these estimates, we are unable to implement certain tax
planning strategies, or we adjust these estimates in future periods, we may
need to establish an additional valuation allowance, which could have a
material negative impact on our statement of operations and our balance sheet. Significant judgment is required in determining our effective tax rate and in
evaluating our tax positions. We establish reserves when, despite our belief
that our tax return positions are supportable, we believe that certain
positions are likely to be successfully challenged. We adjust these reserves in
light of changing facts and circumstances, such as the progress of a tax audit.
Our effective tax rate includes the impact of reserve provisions and changes to
reserves that we consider appropriate. New Accounting Pronouncements In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure
Requirements for Guarantees. FIN 45 requires guarantors to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation it
has undertaken in issuing the guarantee. FIN 45 also requires guarantors to
disclose certain information for guarantees. The disclosure provisions of FIN
45 were effective immediately upon issuance in 2002. We adopted the recognition
and measurement provisions of FIN 45 on a prospective basis with respect to
guarantees issued or modified after December 31, 2002. The adoption of the
recognition and measurement provisions of FIN 45 had no effect on our
consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 requires an investor with a
majority of the variable interests in a variable interest entity to consolidate
the entity and also requires majority and significant variable interest
investors to provide certain disclosures. A variable interest entity is an
entity in which the equity investors do not have a controlling interest or the
equity investment at risk is insufficient to finance the entitys activities
without receiving additional subordinated financial support from the other
parties. The provisions of FIN 46 were effective for the
Company no later than April 15, 2004. The adoption of FIN 46 had no effect on
our consolidated financial statements. 20




---



##### 



In March 2003, the Emerging Issues Task Force (EITF) reached consensus on
EITF Issue No. 02-16, Accounting by a Customer for Certain Consideration
Received from a Vendor. EITF Issue No. 02-16 requires that certain cash
consideration (rebates) received by a customer from a vendor be classified in
the customers statements of operations as a reduction of cost of sales. The
consensus was required to be applied to new arrangements entered into after
December 31, 2002. We already account for rebates in cost of sales. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133. SFAS No. 149 was effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have a material
impact on our consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
improves the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity and requires that those
instruments be classified as liabilities (or assets in certain circumstances)
in statements of financial position. SFAS No. 150 also requires disclosures
about alternative ways of settling the instruments and the capital structure of
entities whose shares are mandatorily redeemable. SFAS No. 150 is generally
effective for all financial instruments entered into or modified after May 31,
2003. The adoption of SFAS No. 150 requires that certain financial instruments
that we would have otherwise classified as equity be reflected in the liability
section of the consolidated balance sheets. Therefore, we have classified
obligations related to certain of our securities outside of stockholders
equity in our accompanying consolidated balance sheets as a result of applying
the provisions of SFAS No. 150. Factors Affecting Comparability On June 14, 2003, VI Acquisition Corp., a newly created holding company,
purchased Midway Investors Holdings Inc. The holding company does not have
independent operations and consequently the consolidated statements are
substantially similar to those of VICORP Restaurants, Inc. As a result of
applying the required purchase accounting rules to the acquisition, our
financial statements for periods following the transaction were significantly
affected. The application of purchase accounting rules required us to revalue
our assets and liabilities at the acquisition date, which resulted in different
accounting bases being applied in different periods. In particular, occupancy
expense increased as existing rent escalator accruals were eliminated as part
of purchase accounting and the amount of future rent escalator accruals were
recalculated based upon the lease escalator provisions applicable over the
remaining life of the leases at the acquisition date. In addition, depreciation
expense increased as a result of the increase in the valuation of our assets,
which correspondingly increased our depreciable base. As a result, the
financial information for the periods from October 28, 2002 to June 13, 2003
and from October 27, 2003 through July 8, 2004 are not 21




---



##### 



comparable to one another in certain respects. The term predecessor refers to
Midway Investors Holdings Inc. On April 14, 2004, the Midway Investors
Holdings Inc. legal entity merged into VI Acquisition Corp. and no longer
exists. As a result of these changes, the historical financial information and related
discussion relate to the entity specified below for the following periods: 61 and 229 day periods ended June 13, 2003
    
    Midway Investors Holdings Inc.84 and 256 day periods ended July 8, 2004
    
    VI Acquisition Corp.61 day period ended June 13, 2003 for
Midway Investors Holdings Inc. and 23 day
period ended July 6, 2003 for VI
Acquisition Corp.
    
    Combined  84 day period ended
July 6, 2003229 day period ended June 13, 2003 for
Midway Investors Holdings Inc. and 23 day
period ended July 6, 2003 for VI
Acquisition Corp.
    
    Combined  252 day period
ended July 6, 2003
 At the time of the acquisition of Midway Investors Holdings Inc., we also sold
certain properties under sale-leaseback transactions to help finance the
acquisition. Specifically, we sold ten properties in June 2003 for an aggregate
of $13.9 million. As discussed below, the sale-leaseback transactions have
resulted in higher rent expense and lower depreciation expense subsequent to
the transaction. On February 24, 2003, we purchased one of our franchisees consisting of eight
Village Inn restaurants in the Albuquerque, New Mexico area for $4.6 million.
After the acquisition, revenue associated with these restaurants was included
in our restaurant revenues, and since the date of the acquisition we have not
earned franchise revenues from those units. Please refer to the table above for
information on unit openings during the relevant periods. Our fiscal year, which historically ended on the last Sunday in October, is
comprised of 52 or 53 weeks divided into four fiscal quarters of 12 or 13, 12,
12, and 16 weeks. Beginning January 22, 2004, we changed our fiscal year so
that it ends on the Thursday nearest to October 31st of each year. This
increased the first quarter in fiscal 2004 by an extra four days (88 days in
the first quarter of fiscal 2004 versus 84 days in the first quarter of fiscal
2003). This change was made to facilitate restaurant operations by moving the
end of our fiscal periods and weekly reporting and payroll periods away from
weekends when our restaurants are busier. 22




---



##### 



Results of Operations Midway and
    
    
    
    
    
    Midway andVI Acquisition
    
    
    
    
    
    VI AcquisitionVI Acquisition
    
    Combined
    
    VI Acquisition
    
    Combined84 days ended
    
    84 days ended
    
    256 days ended
    
    252 days endedJuly 8,
    
    July 6,
    
    July 8,
    
    July 6,(in Thousands)
    
    2004
    
    2003
    
    2004
    
    2003Revenues:Restaurant operations
    
    $
    88,958
    
    
    $
    89,384
    
    
    $
    280,347
    
    
    $
    267,736Franchise operations
    
    
    1,204
    
    
    
    1,422
    
    
    
    3,660
    
    
    
    4,84990,162
    
    
    
    90,806
    
    
    
    284,007
    
    
    
    272,585Costs and expenses:Restaurant costs:Food
    
    
    24,571
    
    
    
    24,470
    
    
    
    76,667
    
    
    
    73,166Labor
    
    
    28,827
    
    
    
    28,902
    
    
    
    89,125
    
    
    
    86,843Other operating expenses
    
    
    24,343
    
    
    
    23,652
    
    
    
    78,907
    
    
    
    72,107Franchise operating expenses
    
    
    592
    
    
    
    741
    
    
    
    1,893
    
    
    
    2,827General and administrative expenses
    
    
    5,602
    
    
    
    5,712
    
    
    
    17,524
    
    
    
    18,358Transaction expenses
    
    
    
    
    
    
    9,046
    
    
    
    45
    
    
    
    9,518Management fees
    
    
    196
    
    
    
    167
    
    
    
    897
    
    
    
    62984,131
    
    
    
    92,690
    
    
    
    265,058
    
    
    
    263,448Operating profit (loss)
    
    
    6,031
    
    
    
    (1,884
    )
    
    
    18,949
    
    
    
    9,137Interest expense
    
    
    (3,770
    )
    
    
    (2,328
    )
    
    
    (10,321
    )
    
    
    (6,423
    )Debt extinguishment costs
    
    
    
    
    
    
    (6,516
    )
    
    
    (6,856
    )
    
    
    (6,516
    )Other income, net
    
    
    111
    
    
    
    119
    
    
    
    160
    
    
    
    455Income (loss) before income taxes
    
    
    2,372
    
    
    
    (10,609
    )
    
    
    1,932
    
    
    
    (3,347
    )Provision for income taxes (benefit)
    
    
    674
    
    
    
    (4,617
    )
    
    
    541
    
    
    
    (2,075
    )Net income (loss)
    
    
    1,698
    
    
    
    (5,992
    )
    
    
    1,391
    
    
    
    (1,272
    )Preferred stock dividends and accretion
    
    
    (1,733
    )
    
    
    (1,007
    )
    
    
    (5,199
    )
    
    
    (2,512
    )Net income (loss) attributable to
common stockholders
    
    $
    (35
    )
    
    $
    (6,999
    )
    
    $
    (3,808
    )
    
    $
    (3,784
    )
 Midway and
    
    
    
    
    
    Midway andVI Acquisition
    
    
    
    
    
    VI AcquisitionVI Acquisition
    
    Combined
    
    VI Acquisition
    
    Combined84 days ended
    
    84 days ended
    
    256 days ended
    
    252 days endedJuly 8,
    
    July 6,
    
    July 8,
    
    July 6,2004
    
    2003
    
    2004
    
    2003Revenues:Restaurant operations
    
    
    98.7
    %
    
    
    98.4
    %
    
    
    98.7
    %
    
    
    98.2
    %Franchise operations
    
    
    1.3
    
    
    
    1.6
    
    
    
    1.3
    
    
    
    1.8100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Costs and expenses:Restaurant costs:Food
    
    
    27.2
    
    
    
    26.9
    
    
    
    27.0
    
    
    
    26.8Labor
    
    
    32.0
    
    
    
    31.8
    
    
    
    31.4
    
    
    
    31.9Other operating expenses
    
    
    27.0
    
    
    
    26.1
    
    
    
    27.8
    
    
    
    26.5Franchise operating expenses
    
    
    0.7
    
    
    
    0.8
    
    
    
    0.6
    
    
    
    1.0General and administrative expenses
    
    
    6.2
    
    
    
    6.3
    
    
    
    6.2
    
    
    
    6.7Transaction expenses
    
    
    0.0
    
    
    
    10.0
    
    
    
    0.0
    
    
    
    3.5Management fees
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.293.3
    
    
    
    102.1
    
    
    
    93.3
    
    
    
    96.6Operating profit (loss)
    
    
    6.7
    
    
    
    (2.1
    )
    
    
    6.7
    
    
    
    3.4Interest expense
    
    
    (4.2
    )
    
    
    (2.6
    )
    
    
    (3.6
    )
    
    
    (2.4
    )Debt extinguishment costs
    
    
    0.0
    
    
    
    (7.2
    )
    
    
    (2.4
    )
    
    
    (2.4
    )Other income, net
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.0
    
    
    
    0.2Income (loss) before income taxes
    
    
    2.6
    
    
    
    (11.7
    )
    
    
    0.7
    
    
    
    (1.2
    )Provision for income taxes (benefit)
    
    
    0.7
    
    
    
    (5.1
    )
    
    
    0.2
    
    
    
    (0.7
    )Net income (loss)
    
    
    1.9
    
    
    
    (6.6
    )
    
    
    0.5
    
    
    
    (0.5
    )Preferred stock dividends and accretion
    
    
    (1.9
    )
    
    
    (1.1
    )
    
    
    (1.8
    )
    
    
    (0.9
    )Net income (loss) attributable to
common stockholders
    
    
    0.0
    %
    
    
    (7.7
    )%
    
    
    (1.3
    )%
    
    
    (1.4
    )%
 23




---



##### 



Third Quarter of Fiscal 2004 (84 Day Period Ended July 8, 2004 of VI
Acquisition Corp.) Compared to Third Quarter of Fiscal 2003 (Combined 84 Day
Period Ended July 6, 2003 of Midway Investors Holdings Inc. and VI Acquisition
Corp.) Total revenuesdecreased by $0.6 million to $90.2 million in the third quarter
of fiscal 2004, from $90.8 million for the same quarter of fiscal 2003, which
represented a 0.7% decrease over the prior period. We experienced a 1.6% decrease in same unit sales for the third quarter
of fiscal 2004 over the third quarter of fiscal 2003. Village Inn same unit
sales for the third quarter of fiscal 2004 increased 1.5% over the third
quarter of fiscal 2003, and Bakers Square same unit sales decreased 3.9% over
the same periods. We experienced a 1.7% increase in average per-person check
amount and a 1.6% increase in the number of entrées sold (which is an
indication of traffic patterns) for our Village Inn restaurants in the third
quarter of fiscal 2004 as compared to the third quarter of fiscal 2003. We
experienced a 4.9% increase in average per-person check size and a 4.0%
decrease in entrée count (which is an indication of traffic patterns) for our
Bakers Square restaurants in the third quarter of fiscal 2004 as compared to
the third quarter of fiscal 2003. The net addition of five
restaurants since July 6, 2003 provided $1.0 million of
additional revenue during the third quarter of fiscal 2004. Food costsincreased by $0.1 million to $24.6 million in the third quarter of
fiscal 2004, from $24.5 million for the same quarter of fiscal 2003. Food costs
as a percentage of total revenues increased from 26.9% to 27.2% over these
periods. $0.3 million of the gross increase in food costs is the result of the
net addition of five operating units between the periods. We were also
affected by higher commodity prices, particularly the price of cream, butter,
eggs and cocoa. Higher menu prices and continued focus on reducing food waste
contributed to offsetting these higher food expenses. Labor costsdecreased by $0.1 million to $28.8 million in the third quarter of
fiscal 2004, from $28.9 million for the same quarter of fiscal 2003. Labor
costs as a percentage of total revenues increased from 31.8% to 32.0% over
these periods. The net addition
of five restaurants since July 6, 2003 increased labor costs
during the third quarter of fiscal 2004 by $0.3 million. Medical
insurance expenses in the third quarter of fiscal 2004 were
$0.3 million higher than in the third quarter of fiscal 2003. These labor expenses were partially offset by higher menu
prices as well improved hourly labor expenses and reduced overtime. Other operating expensesincreased by $0.6 million to $24.3 million in the
third quarter of fiscal 2004, from $23.7 million for the same quarter of fiscal
2003. Other operating expenses as a percentage of total revenues increased from
26.0% to 27.0% over these periods. This increase was primarily due to an
increase in occupancy costs of $1.1 million, an increase in workers
compensation expenses of $0.3 and an increase in utilities costs of $0.3
million over these periods. The increase in occupancy costs resulted primarily
from $0.2 million associated with the net addition of five new locations
between the periods, $0.3 million in additional rents resulting from the June
2003 sale-leaseback transaction and $0.2 million in fair market value
adjustments to operating and capital leases associated with the acquisition of
us by VI Acquisition Corp. in June 2003. Advertising expenses were $1.0
million less than the comparable period the prior year due to shifting heavier
media expenditures to the first half of 2004. 24




---



##### 



General and administrative expensesdecreased $0.1 million to $5.6 million in
the third quarter of fiscal 2004, from $5.7 million for the same quarter of
fiscal 2003. General and administrative expenses as a percentage of total
revenues decreased from 6.3% to 6.2% between the periods. Transaction expensesof $9.0 million were incurred in June 2003 related to the
purchase of Midway Investors Holdings Inc. by VI Acquisition Corp. We did not
have similar transaction expenses in the third quarter of fiscal 2004. Operating profitincreased by $7.9 million to $6.0 million in the third quarter
of fiscal 2004, from a loss of $1.9 million for the same period of fiscal 2003.
Operating profit as a percentage of total revenues increased from an operating
loss of 2.1% to an operating profit of 6.7% over the comparable period. This
increase in profit margin was primarily due to a decrease of $9.0 million in
transaction expenses, partially offset by higher other operating expenses as
discussed above. Interest expenseincreased by $1.5 million to $3.8 million in the third quarter
of fiscal 2004, from $2.3 million for the same quarter of fiscal 2003. Interest
expense as a percentage of total revenues increased from 2.6% to 4.2% over
these periods. This increase was due to larger outstanding debt balances during
the third quarter of fiscal 2004 ($140.1 million as of July 8, 2004 as compared
to $89.0 million as of June 13, 2003 prior to the purchase of us). The increase
in debt in 2004 is principally the result of borrowings in June 2003 to help
finance the acquisition of our company. Debt extinguishment costsduring the third quarter of 2003 were $6.5 million.
We incurred these costs in connection with the refinancing of our debt during
the June 13, 2003 acquisition of our company. These expenses included $1.3
million of prepayment penalties, write-off of deferred financing costs of $3.3
million associated with the previous debt obligations and settlement of
outstanding derivative obligations in the amount of $1.9 million. Provision for income taxes (benefit)for the third quarter of fiscal 2004 was a
provision of $0.7 million, which results in a year-to-date effective tax rate
of approximately 28%. For the third quarter of fiscal 2003, the benefit for
income taxes of $4.6 million reflects a tax provision rate of approximately
35%. The $5.3 million increase in income tax expense is primarily due to higher
income in 2004 as significant transaction costs were incurred in 2003. These
rates differ from our statutory rate of 39.9% due to general business credits
that we earn from FICA taxes paid on employee tips, partially offset by
nondeductible amortization expense related to franchise rights. Net income (loss)increased by $7.7 million to $1.7 million of net income in
the third quarter of fiscal 2004 from a loss of $6.0 million for the third
quarter of fiscal 2003. Net income as a percentage of total revenues increased
from (6.6)% to 1.9% over these periods. This increase in net income is
primarily the result of a $7.9 million increase in operating profit as
discussed above. Other factors effecting the change in net income were debt
extinguishment costs of $6.5 million incurred in the third quarter of 2003 and
a $5.3 million change to the provision for income taxes between the periods. 25




---



##### 



Preferred stock dividends and accretionincreased by $0.7 million to $1.7
million in the third quarter of fiscal 2004, from $1.0 million for the same
quarter in fiscal 2003. This increase resulted from the redemption of $36.5
million liquidation preference of preferred stock of Midway Investors Holdings
Inc. that accrued dividends at a rate of 8.94% per annum and the issuance of
$69.7 million liquidation preference of preferred stock of VI Acquisition Corp.
that accrue dividends at a rate of 10.0% per annum in connection with the June
2003 acquisition. Until the June 2003 acquisition, Midway Investors Holdings
Inc. had, and following the June 2003 acquisition VI Acquisition Corp. has,
outstanding preferred stock. Dividends on VI Acquisition Corp.s preferred
stock accumulate and compound but are not payable until dividends are declared
by us. Covenants contained in our new senior secured credit agreement and the
indenture governing our 101/2% notes will restrict our ability to declare
dividends on our preferred stock. 256 Day Period Ended July 8, 2004 of VI Acquisistion Corp. Compared to Combined
252 Day Period Ended July 6, 2003 of Midway Investors Holdings Inc. and VI
Acquisition Corp. Total revenuesincreased by $11.4 million to $284.0 million in the first 256
days of fiscal 2004, from $272.6 million for the 252 days of fiscal 2003, which
represented a 4.2% increase over the prior period. $4.4 million of this
increase was attributable to the net addition of five restaurants since July 6,
2003. We experienced a 0.8% increase in same unit sales for fiscal 2004 over
fiscal 2003. Village Inn same unit sales for the first 256 days of fiscal 2004
increased 2.4% over the first 252 days of fiscal 2003, and Bakers Square same
unit sales decreased 0.4% over the same period. We experienced a 1.2% increase
in average per-person check amount and a 7.8% increase in the number of entrées
sold (which is an indication of traffic patterns) for our Village Inn
restaurants in the first 256 days of fiscal 2004 as compared to the first 252
days of fiscal 2003. We also experienced a 4.6% increase in average per-person
check size and a 2.3% decrease in entrée count for our Bakers Square
restaurants (which is an indication of traffic patterns) in the first 256 days
of fiscal 2004 as compared to the first 252 days of fiscal 2003. Food costsincreased by $3.5 million to $76.7 million in the first 256 days of
fiscal 2004, from $73.2 million for first 252 days of fiscal 2003. Food costs
as a percentage of total revenues increased from 26.8% to 27.0% over these
periods. The gross increase in food costs is the result of both higher volume
sales due to our additional operating units, as well as increased prices for
certain commodities, particularly the price of eggs. Food costs as a
percentage of total sales have remained relatively consistent between the
periods, primarily as a result of improving margins, which have been achieved
through menu engineering and menu price increases, which offset generally
higher food costs. Labor costsincreased by $2.3 million to $89.1 million in the first 256 days of
fiscal 2004, from $86.8 million for the first 252 days of fiscal 2003. Labor
costs as a percentage of total revenues declined from 31.9% to 31.4% over these
periods. The gross increase was primarily due to the net addition of five
operating units between the periods, which was $1.6 million of the increase.
Labor costs as a percentage of total sales has decreased between the periods as
the result of an increase in menu prices as well as a decrease in management
bonuses paid as a result of the modification of the management incentive bonus
program and a reduction in
overtime expense resulting from the change in ending the workweek on Thursday
instead of Sunday. 26




---



##### 



Other operating expensesincreased by $6.8 million to $78.9 million in the
first 256 days of fiscal 2004, from $72.1 million for the first 252 days of
fiscal 2003. Other operating expenses as a percentage of total revenues
increased from 26.5% to 27.8% over these periods. This increase was primarily
due to an increase in occupancy costs of $4.0 million resulting from the sale
and leaseback transaction in June 2003 and the fair market value adjustments to
operating and capital leases associated with our June 2003 acquisition. Other
operating expenses also increased by $0.8 million due to an increase in utility
expense as a result of higher natural gas prices and $0.6 million due to an
increase in marketing costs for comparable periods due to shifting more media
advertising to the first half of fiscal 2004. General and administrative expensesdecreased $0.9 million from $18.4 million
in the first 252 days of fiscal 2003 to $17.5 million for the first 256 days of
fiscal 2004. Transaction Expensesof $9.5 million were incurred in first 252 days of fiscal
2003 related to the purchase of Midway Investors Holdings Inc. by VI
Acquisition Corp. For the comparable period in fiscal 2004, we incurred
$45,000 in transaction expenses, primarily related to the June 14, 2003
transaction. Operating profitincreased by $9.8 million to $18.9 million in the first 256
days of fiscal 2004, from $9.1 million for the first 252 days of fiscal 2003.
Operating profit as a percentage of total revenues for the first 256 days of
fiscal 2004 increased from 3.4% to 6.7% over the comparable period in fiscal
2003. This increase in profit margin was primarily due to $9.5 million in
transaction expenses in 2003. The improvements in labor margins during the
first three quarters of fiscal 2004 were partially offset by increases in other
operating expenses resulting from the June 2003 sale-leaseback transactions and
fair market value rent adjustments recorded as part of purchase accounting. We
also experienced increases of $0.6 million in advertising costs and $0.8
million in utility costs. Interest expenseincreased by $3.9 million to $10.3 million in the first 256
days of fiscal 2004, from $6.4 million for the first 252 days of fiscal 2003.
Interest expense as a percentage of total revenues increased from 2.4% to 3.6%
over these periods. This increase was due to larger outstanding debt balances
during the third quarter of fiscal 2004 ($140.1 million as of July 8, 2004 as
compared to $89.0 million as of June 13, 2003 prior to the purchase of us). The
increase in debt in 2004 is the result of the borrowings made in June 2003 to
help finance the acquisition of our company. Debt extinguishment costsduring the first 256 days of fiscal 2004 were $6.9
million resulting from the extinguishment of outstanding debt obligations
incurred in connection with the refinancing of our debt that closed April 14,
2004. These expenses included $2.3 million of prepayment penalties, a
write-off of deferred financing costs of $4.4 million associated with the
previous obligations and settlement of outstanding derivative obligations in
the amount of $0.2 million. During the third quarter of 2003, we incurred debt extinguishment costs of $6.5
million in connection with the refinancing of our debt during the June 13, 2003
acquisition of our 27




---



##### 



company. These expenses included $1.3 million of prepayment penalties,
write-off of deferred financing costs of $3.3 million associated with the
previous debt obligations and settlement of outstanding derivative obligations
in the amount of $1.9 million. Provision for income taxes (benefit)for the 256 days of fiscal 2004 was a
provision of $0.5 million, or an effective tax rate of approximately 28%. For
the first 252 days of fiscal 2003, the benefit for income taxes of $2.1 million
reflects a tax provision rate of approximately 35%. The $2.6 million increase
in income tax expense is primarily due to higher income in 2004 as significant
transaction costs were incurred in 2003. These rates differ from our statutory
rate of 39.9% due to general business credits that we earn from FICA taxes paid
on employee tips, partially offset by nondeductible amortization expense
related to franchise rights. Net income (loss)increased by $2.7 million to $1.4 million of net income in
the first 256 days of fiscal 2004, from a loss of $1.3 million for the first
252 days of fiscal 2003. Net income as a percentage of total revenues increased
from (0.5)% to 0.5% over these periods. This increase in net income is
primarily the result of the $9.8 million increase in operating profit discussed
above, which is partially offset by $0.4 million higher debt extinguishment
costs, $3.9 million in additional interest expense related to higher debt
balances after the June 2003 transaction and an increase of $2.1 million in
income tax expense. Preferred stock dividends and accretionincreased by $2.7 million to $5.2
million in the first 256 days of fiscal 2004, from $2.5 million for the first
252 days of fiscal 2003 as a result of the redemption of $36.5 million
liquidation preference of preferred stock of Midway Investors Holdings Inc.
that accrued dividends at a rate of 8.94% per annum and the issuance of $69.7
million liquidation preference of preferred stock of VI Acquisition Corp. that
accrue dividends at a rate of 10.0% per annum in connection with the June 2003
acquisition. Until the June 2003 acquisition, Midway Investors Holdings Inc.,
had and following the June 2003 acquisition VI Acquisition Corp. has,
outstanding preferred stock. Dividends on VI Acquisition Corp.s preferred
stock accumulate and compound but are not payable until dividends are declared
by us. Covenants contained in our new senior secured credit agreement and the
indenture governing our 10-1/2% notes will restrict our ability to declare
dividends on our preferred stock. Liquidity and Capital Resources Cash requirements Our principal liquidity requirements are to continue to finance our operations,
service our debt and fund capital expenditures for maintenance and expansion.
Cash flow from operations has historically been sufficient to finance
continuing operations and meet normal debt service requirements. Our ability
to repay borrowings at maturity is likely to depend in part on our ability to
refinance the debt when it matures, which will be contingent on our continued
successful operation of the business as well as other factors beyond our
control, including the debt and capital market conditions at that time. 28




---



##### 



During the remainder of fiscal 2004, we anticipate spending up to $4.0 million
for new restaurants, $4.2 million for the remodeling of existing restaurants
and $2.2 million on expenditures required to maintain our existing asset base. In connection with our new restaurant development program, we have entered into
development agreements whereby third parties will purchase property, fund the
costs to develop new restaurant properties for us and lease the properties to
us upon completion. Under these agreements, we generally are responsible for
the construction of the restaurant and remitting payments to the contractors on
the projects, which are subsequently reimbursed by the property owner. These
amounts advanced and subsequently reimbursed are not included in the
anticipated capital spending totals above. On July 8, 2004, we had outstanding
receivables of approximately $1.9 million relating to these types of
agreements. In certain of these agreements, we are obligated to purchase the
property in the event that we are unable to complete the construction within a
specified time frame, and are also responsible for cost overruns above
specified amounts. Debt and other obligations On April 14, 2004, we completed a private placement of $126.5 aggregate
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. The
senior unsecured notes were issued by VICORP Restaurants, Inc. and are
guaranteed by VI Acquisition Corp. and our subsidiary Village Inn Pancake House
of Albuquerque, Inc. In connection with the issuance of the senior unsecured
notes, we have agreed to file a registration statement with the SEC so that the
senior unsecured notes and guarantees can be exchanged for registered notes and
guarantees having substantially the same terms and evidencing the same
indebtedness. Concurrently with the issuance of the 101⁄2% senior unsecured notes, we
entered into an amended and restated senior secured credit facility consisting
of 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 July 8, 2004, we had
issued letters of credit aggregating $6.6 million and had nominal borrowings
outstanding under the senior secured revolving credit facility. The senior
secured revolving credit facility permits borrowings equal to the lesser of (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 amount of
the new senior secured term loan. Under this formula, as of July 8, 2004, we
had the ability to borrow the full $30 million, less the amount of outstanding
letters of credit, under the senior secured revolving credit facility.
Borrowings under both the revolving credit facility and the term loan bear
interest at floating rates tied to either the base rate of the agent bank under
the credit agreement or LIBOR rates for a period of one, two or three months,
in each case plus a margin that will adjust based on the ratio of our Adjusted
EBITDA to total indebtedness, as defined in the new senior secured credit
agreement. Both facilities are secured by a lien of all of the assets of VICORP
Restaurants, Inc., and guaranteed by VI Acquisition Corp. and our subsidiary
Village Inn Pancake House of Albuquerque, Inc., the guarantees also secured by
the pledge of all of the outstanding capital stock of VICORP Restaurants, Inc.
by VI Acquisition Corp. The term loan does not require periodic principal
payments, but requires mandatory repayments under certain events,
including proceeds from sale of assets, issuance of equity, and issuance of new
indebtedness. Both facilities mature on April 14, 2009. 29




---



##### 



Our new senior secured credit facility and the indenture governing the senior
unsecured notes contain a number of covenants that, among other things,
restrict, subject to certain exceptions, our ability and the ability of our
subsidiaries, to sell assets, incur additional indebtedness or issue preferred
stock, repay other indebtedness, pay dividends and distributions or repurchase
our capital stock, create liens on assets, make investments, loans or advances,
make certain acquisitions, engage in mergers or consolidations, enter into
sale-leaseback transactions, engage in certain transactions with affiliates,
amend certain material agreements governing our indebtedness, change the
business conducted by us and our subsidiaries and enter into hedging
agreements. In addition, our new senior secured credit facility requires us to
maintain or comply with a maximum total leverage ratio, a minimum interest
coverage ratio and a maximum capital expenditures limitation. On July 8, 2004,
we were in compliance with these requirements. We are subject to capital lease obligations related to ten of our leased
properties. The principal component of our capital lease obligations was $3.8
million as of July 8, 2004. These capital leases have expiration dates ranging
from September 2004 to May 2021. We are the prime lessee under various operating leases for land, building and
equipment for company-operated and franchised restaurants, pie production
facilities and locations subleased to non-affiliated third parties. These
leases have initial terms ranging from 15 to 35 years and, in most instances,
provide for renewal options ranging from five to 20 years. These leases expire
at various dates through September 2023. We have guaranteed certain leases for restaurant properties sold in 1986 and
restaurant leases of certain franchisees. Estimated minimum future rental
payments remaining under these leases were approximately $2.5 million as of
July 8, 2004. As of July 8, 2004, our commitments with respect to the above obligations were
as follows: (In Millions)
    
    2004(1)
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    TotalLong-term debt:Senior secured credit facility
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    15.0
    
    
    $
    15.010-1/2% senior unsecured notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126.5
    
    
    
    126.5Total notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    141.5
    
    
    
    141.5Capital lease obligations(2)
    
    
    0.3
    
    
    
    0.6
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    6.3
    
    
    
    8.7Subtotal
    
    
    0.3
    
    
    
    0.6
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    147.8
    
    
    
    150.2Operating lease obligations
    
    
    8.0
    
    
    
    25.1
    
    
    
    23.7
    
    
    
    21.5
    
    
    
    19.4
    
    
    
    175.6
    
    
    
    273.2Total
    
    $
    8.3
    
    
    $
    25.7
    
    
    $
    24.2
    
    
    $
    22.0
    
    
    $
    19.9
    
    
    $
    323.4
    
    
    $
    423.4
  (1)
    
    Represents amounts remaining to be paid during the period from July 9,
2004 through the end of our 2004 fiscal year.(2)
    
    Amounts payable under capital leases represent gross lease payments,
including both principal and interest components. 30




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Prior indebtedness Our previous credit facilities consisted of a $25.0 million revolving credit
facility, a term A loan, and a term B loan issued pursuant to a credit
agreement dated June 13, 2003. In addition, we had outstanding subordinated
indebtedness in the original principal amount of $45.0 million issued pursuant
to an investment agreement dated June 13, 2003. The existing term loans and
the existing subordinated debt were paid in full from a portion of the
proceeds. These proceeds were used to pay an early redemption premium of $2.3
million on the subordinated debt, and to pay $0.2 million to terminate an
interest rate swap agreement pursuant to which we agreed to make fixed rate
payments in exchange for receiving quarterly floating rate payments at the
three month LIBOR rate that applied to the borrowings under our previous senior
secured credit facility. In addition, in connection with the refinancing, we
wrote off $4.4 million of unamortized debt financing costs in the third fiscal
quarter of 2004 related to the prior debt. Sources and Uses of Cash Operating activities Cash flow from operating activities consists primarily of net income adjusted
for certain noncash expenses, changes in working capital items and changes in
certain long-term assets and liabilities. For the 256 day period ended July 8,
2004, cash flows from operating activities totaled $20.3 million, an increase
of $8.3 million over the 229 days ended June 13, 2003. Net income adjusted for
noncash expenses of $16.9 million increased by $2.2 million from the prior year
period, in part the result of the greater number of days in the current year
period. During the 256 day period ended on July 8, 2004, we generated cash
from changes in working capital of $2.6 million that consisted primarily of
seasonal reductions in trade receivables from outside pie sales and finished
goods pie inventory, offset by reductions in accounts payable and the increase
in receivables related to properties under development, along with favorable
timing differences in certain accrued expenses. Cash provided from changes in
other noncurrent assets and liabilities of $0.8 million results principally
from non-cash accruals for losses associated with our long term insurance
programs that are deducted in calculating net income. Investing activities Investing activities are primarily capital expenditures relating to maintenance
and remodeling of our existing restaurants and other facilities, and for new
restaurant development. During the 256 day period ended July 8, 2004, our
total capital expenditures of $8.9 million consisted of restaurant maintenance
and remodeling of $6.2 million, costs associated with new restaurants totaling
$1.5 million, and other corporate and VICOM expenditures of $1.2 million. Total
capital spending was $1.0 million less than in the prior comparable period as
increases in restaurant maintenance and remodel spending of $3.6 million were
offset by a decrease in new unit spending of $2.3 million and a decrease in
other spending of $2.4 million, principally related to the implementation of a
new point of sale system in fiscal 2003. 31




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Cash used in investing activities was $3.8 million less than the prior
comparable year to date period, primarily the result of the decrease in capital
spending and the acquisition in the prior year of eight previously franchised
Village Inn restaurants, partially offset by proceeds from a sale-leaseback
transaction in June 2003. Financing activities We used cash in financing activities of $8.3 million during the 256 day period
ended July 8, 2004. Proceeds of $125.0 million from our senior unsecured note
offering and $15.0 million from our new senior secured credit facility were
partially used to repay principal of $130.5 million on our previous senior and
subordinated debt facilities and $5.8 million of transaction fees associated
with our new debt. In addition, we made regular payments on our previous
senior debt prior to the refinancing of $2.1 million, payments on capital
leases of $0.3 million, and net reductions to our previous revolving credit
facility of $9.8 million. Item 3. Quantitative And Qualitative Disclosures About Market Risk Our risk related to the inherent risk in market-risk sensitive instruments and
positions relates primarily to potential losses arising from adverse changes in
interest rates. We are subject to changes in interest rates on borrowings under
our senior secured credit facility that bear interest at floating rates. As of July 8, 2004, $15.0 million, or 10.4% of our total debt and capital lease
obligations of $143.9 million, bear interest at a floating rate. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Within the 90-day period prior to the filing date of this report, our
management, under the supervision of our Chief Executive Officer and Chief
Financial Officer, carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures pursuant to Rules
13a-14 and 15d-14 under the Securities Exchange Act of 1934 (the Exchange
Act), as amended. Based upon their evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures are effective in alerting them timely to material information
required to be included in our Exchange Act filings. There have not been any
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of the evaluation. Limitations on the Effectiveness of Controls A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control systems objectives will
be met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the company have been
detected. These inherent 32




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limitations include the realities that judgments in decision-making can be
faulty, that breakdowns can occur because of simple error or mistake, and that
controls can be circumvented by the acts of individuals or groups. Because of
the inherent limitations in a cost-effective control system, misstatements due
to error or fraud may occur and not be detected. PART II  OTHER INFORMATION Item 5. Legal Proceedings We are parties to lawsuits, revenue agent reviews by taxing authorities and
legal proceedings, of which the majority involve workers compensation,
employment practices liability and general liability claims arising in the
ordinary course of business. We are currently defendants in two purported class
action claims of this type in California. The first class action claim was
brought in October 2003 by two of our former employees and one of our current
employees, and the second class action claim was brought in May 2004 by two of
our former employees. The complaints allege that we violated California law
with regard to rest and meal periods, bonus payment calculations (in the
October 2003 complaint), overtime payments (in the May 2004 complaint) and
California law regarding unfair business practices. The classes and subclasses
alleged in the actions have not been certified by the respective courts at the
current stages of the litigation, but generally are claimed in the 2003
complaint to include persons who have been employed by us in California since
October 17, 1999 in the positions of food server, restaurant general manager
and assistant restaurant manager, and generally are claimed in the 2004
complaint to include persons who have been employed by us in California since
May 21, 2000 in the positions of restaurant general manager and restaurant
associate manager. No dollar amount in damages is requested in either
complaint, and the complaints seek statutory damages, compensatory damages,
interest and attorneys fees in unspecified amounts. We believe that these
matters, individually and in the aggregate, will not have a significant adverse
effect on our financial condition. However, a significant increase in the
number of these claims or an increase in successful claims would materially
adversely affect our business, prospects, financial condition, operating
results or cash flows. Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits  4.1
    
    Indenture, dated as of April 14, 2004, by and among VICORP
Restaurants, Inc., as issuer, the Securities Guarantors, as defined
therein, and Wells Fargo Bank, National Association, as Trustee.*4.2
    
    Registration Rights Agreement, dated as of April 14, 2004, by
and among VICORP Restaurants, Inc., as issuer, VI Acquisition Corp.
and Village Inn Pancake House of Albuquerque, Inc., as guarantors,
and J.P. Morgan Securities Inc. and CIBC World Markets Corp., as
initial purchasers.*31.1
    
    Certification by our Chief Executive Officer with respect to
our Form 10-Q for the quarterly period ended July 8, 2004, pursuant
to Rule 13a-14 or 15d-14 of
the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. 33




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##### 



31.2
    
    Certification by our Chief Financial Officer with respect to
our Form 10-Q for the quarterly period ended July 8, 2004, pursuant
to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certifications by our Chief Executive Officer and Chief
Financial Officer with respect to our Form 10-Q for the quarterly
period ended July 8, 2004, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  *
    
    Incorporated by reference from the Companys Registration Statement on
Form S-4 as filed on July 9, 2004.(b)
    
    Reports on Form 8-KNone. 34




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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 the
undersigned thereunto duly authorized. Date: August 23, 2004
    VICORP Restaurants, Inc./s/  Debra KoenigDebra KoenigChief Executive Officer
(Principal Executive Officer) Date:  August 23, 2004
    /s/  Anthony CarrollAnthony CarrollChief Financial Officer
(Principal Financial and
Accounting Officer) 35