Business

Our company

We operate family-dining restaurants under two proven and well-recognized brands, Village Inn and Bakers Square. As of June 1, 2004, our company, which was founded in 1958, had 373 restaurants in 25 states, consisting of 269 company-operated restaurants and 104 franchised restaurants. Our restaurant locations are concentrated in particular regions in order to maximize operating efficiencies, including regional management, purchasing and advertising penetration. In addition to our restaurants, we operate three strategically located pie production facilities that produce premium pies that are offered in our restaurants and sold to third-party customers. With established brands and strong operational execution, we have delivered consistent financial performance. Our revenues increased from $359.3 million in 1999 to $389.2 million in 2003, while same unit sales increased an average of 0.3% per year during that same period. Both of our restaurant concepts operate in the stable family-dining segment of the restaurant industry. Over our 45-year history, we have concentrated on providing our customers great-tasting, high-quality food at reasonable prices with fast and friendly service. Our commitment to an attractive price-to-value relationship has enabled us to develop a stable base of repeat customers.

We continually seek to increase the efficiency of our operations, increase customer visits and sales per customer, provide new menu options for our guests and increase sales of higher margin items. Significant investments in our brands and operational improvements, including an investment of approximately $6.0 million to upgrade our information and restaurant point-of-sale (“POS”) systems in 2003, ongoing remodeling of our restaurants and reductions in purchasing and manufacturing costs have enabled us to improve our prime margin, which is our profitability expressed as a percentage of restaurant sales after deducting our two most significant costs, food and labor. Prime margin improved from 37.8% in 1999 to 41.4% in 2003. In addition, we have increased our margins by providing our managers with extensive training and the tools necessary to effectively operate our business, such as on-line ordering and bill processing and real-time information on key business metrics. We continually engage in selective menu engineering and the development of new menu items for our restaurants such as our signature oven-roasted focaccia sandwiches in our Village Inn restaurants, seasonal offerings such as artisan-style bread bowls filled with hearty soups and stews in our Bakers Square restaurants and a “Carb Counter” menu in our Village Inn restaurants. Our other efforts to drive sales growth include creative marketing programs, such as our successful new electronic gift card program, and expansion of our third-party customer base for our pies, which includes new accounts such as Albertsons and Darden Restaurants.

Village Inn

We opened our first Village Inn restaurant in 1958, and as of June 1, 2004 we had 223 locations, 119 of which were operated by our company and 104 of which we franchised. Our Village Inn restaurants are located in 21 states throughout the United States, primarily in the Rocky Mountain region, the Midwest, the Northwest and Florida, including attractive markets such as Denver (26 units), Phoenix (17 units), Omaha (13 units) and Salt Lake City (11 units). Village Inn is focused on family dining and appeals to a large segment of the population, and we believe it has a strong reputation for fast and friendly service, fresh food and reasonable prices. We are known for serving fresh breakfast items throughout the day, including our Ultimate Skillet meals, Pecan Roll French Toast, made-from-scratch buttermilk pancakes and fluffy three-egg omelets. Breakfast items accounted for 48% of Village Inn sales in 2003. We have also successfully leveraged our strong breakfast heritage to establish a well-developed brand platform encompassing a broad selection of traditional American fare for lunch and dinner, at price points that position us in the mid-range of the family-dining segment. Signature items on our lunch and dinner menus include our Portabella Chicken Skillet and our All-World Double Cheeseburger®. We frequently review and update our menus with the assistance of our team of in-house research and development chefs to enhance the attractiveness of our menu offerings to our customers. Customer loyalty is one of Village Inn’s

66

Table of Contents

Our Village Inn restaurants are free-standing units which average approximately 5,000 square feet in size and can seat between 120 and 180 people. We are typically open from 6 a.m. to 12 a.m., allowing us to effectively generate revenue in all three dayparts. Our typical entrée prices range from $4.19 to $9.59 for breakfast items and from $4.69 to $10.49 for lunch and dinner items, with an average per-person check of $7.50 overall in 2003. In order to improve our efficiency and purchasing power, our menus are standardized throughout the United States, with some variations driven by regional preferences. In 2003, Village Inn’s average unit sales were $1.5 million, and corresponding average restaurant operating cash flow was $271,000, representing an 18.6% margin.

Bakers Square

The Bakers Square concept began in 1983 when we acquired 59 Poppin Fresh Pies restaurants from the Pillsbury Restaurant Group. Since then, we have grown Bakers Square to 150 company-operated restaurants as of June 1, 2004. Our Bakers Square restaurants are located in eight states, including California (53 units), Illinois (43 units) and Minnesota (25 units). The foundation of the Bakers Square concept is our signature freshly-baked pies, which accounted for 25% of Bakers Square’s sales in 2003. Building upon our reputation for quality pies, we have extended our offerings to include popular traditional American fare for breakfast, lunch and dinner. Bakers Square offers dozens of varieties of multi-layer specialty pies made from premium ingredients, which differentiates the concept from our family-dining competitors. Many of our customers complement their lunch or dinner with a serving of pie, while others purchase whole pies for at-home consumption throughout the year, particularly around the holidays. As with Village Inn, we use our team of in-house research and development chefs to regularly update the Bakers Square menu offerings to attract a wider demographic range of diners and increase repeat business from existing customers. For example, we have successfully promoted our artisan-style bread bowls filled with hearty soups and stews, along with popular menu favorites like our Stir-Fry Chicken Pita, Slow-Roasted Turkey Focaccia, Honey Mustard Chicken and Portabella Pot Roast.

Our Bakers Square restaurants are free-standing units which average approximately 4,500 square feet in size and can seat between 120 and 160 people. We are typically open from 7 a.m. to 11 p.m., with our highest traffic generated at lunch and dinner. Our typical entrée prices range from $3.79 to $8.99 for breakfast items and from $4.69 to $8.99 for lunch and dinner items, with an average per-person check of $8.32 overall in 2003. As with Village Inn, our menus are standardized across the United States, with some variations driven by regional preferences. In 2003, Bakers Square’s average unit sales were $1.5 million, and corresponding average restaurant operating cash flow was $184,000, representing a 12.6% margin.

Pie production operations

Complementing our restaurant operations, we produce premium pies for the Bakers Square and Village Inn restaurants and for sale to select third-party customers such as Bob Evans Farms, Market Day and Albertsons. In 2003, we produced 18 million premium pies. By producing pies at our three strategically located facilities, we are able to control the quality, consistency and freshness of our pies and enhance our distribution capabilities. We differentiate ourselves from other pie manufacturers by producing multi-layer pies, using premium ingredients such as whole cream, fresh fruits and high quality pie crusts, and maintaining a strict shelf life policy of no more than three days for the pies in our restaurants. At the 2003 National Pie Championships, we won 21 blue-ribbon awards, which was more than any other competitor.

We have recently improved the efficiency of our pie production operations and increased sales of our pies to third parties, including the addition of several new accounts such as Albertsons and Darden Restaurants. We have used our enterprise resource planning system to manage inventory and costs, concentrated our frozen pie production in our high volume Chaska, Minnesota facility to achieve economies of scale and restructured our delivery arrangements to obtain substantial savings.

67

Table of Contents

Industry overview

The restaurant industry is a significant contributor to the U.S. economy, with total 2002 sales of $279 billion, the eleventh consecutive year of real growth. We believe this growth can be attributed to several key lifestyle and demographic trends, including the continued increase in spending on food consumed away from home and restaurant dining, and the continued growth in disposable incomes and key age groups of the population. The restaurant industry can be divided into two primary operating segments: full service restaurants (“FSR”) and limited service restaurants (“LSR”). Restaurants operating in the FSR segment present broad menu choices that are served to patrons by a waitstaff, while restaurants operating in the LSR segment serve customers at a counter or through a drive-thru window.

Our Village Inn and Bakers Square concepts operate in the “family-dining” category of the FSR segment. The family-dining category is the largest category in the FSR segment, with approximately $32 billion in sales in 2002. Family-dining sales grew at a compound annual growth rate of 1.6% from 1997 to 2002 and are projected to grow at a 1.0% compound annual growth rate for the period from 2002 to 2007, according to Technomic, Inc. The family-dining category is relatively fragmented, with the top 100 chains representing approximately 33% of total category sales in 2002. While not exhibiting the higher growth of certain other segments, we believe the family-dining category has a loyal customer base and stable characteristics. We believe that family-dining restaurants offer consumers a consistent dining experience with quality food at a lower cost per check than other FSR dining options.

Competitive strengths

Strong, well-operated base of restaurants. We are committed to consistently serving high-quality food while operating our restaurants efficiently. In focusing on the efficient operation of our restaurants, we pay strict attention to food costs, labor utilization and use of advanced technology. From 1999 to 2003, these efforts contributed to a reduction of our food costs (including the effects of increases in menu prices and third-party pie sales) as a percentage of revenue from 29.8% to 26.6% and a reduction of our labor costs as a percentage of revenue from 32.4% to 32.0% over that same period. Consistent with our commitment to maximize efficiency, over the last five years we have invested approximately $15.5 million in our SAP enterprise resource planning system, ReMACS information system and POS system. In addition, the geographic diversification of our restaurants mitigates our exposure to regional economic downturns. Despite a challenging economic environment, our revenues and Adjusted EBITDA increased from $382.1 million and $38.9 million in 2001, respectively, to $389.2 million and $39.3 million in 2003, respectively, while average unit sales were stable at $1.5 million during that same period.

Proven, well-recognized brands with a loyal customer base. We believe our customers are attracted to our consistently high level of food quality and our attractive price-to-value relationship, which are key attributes of our brands. With an average per-person check between $6 and $9, we are positioned between the limited service and casual dining restaurant segments and attract customers that are seeking consistent quality and variety at reasonable prices. The great-tasting food, excellent service and affordable prices at our Village Inn restaurants have helped us establish and maintain a loyal customer base, a significant number of whom are long-term patrons who visit our restaurants three or more times per month. Bakers Square is distinguished by its selection of award-winning, freshly-baked premium pies that reflect the slogan “The Best Pie in America®.” Bakers Square has strong customer awareness as a destination for freshly baked pies, which accounted for 25% of its sales in 2003, and also offers a wide selection of breakfast, lunch and dinner specialties.

Attractive new store growth opportunity. We believe that our existing markets provide an opportunity to leverage the regional strength of the Village Inn and Bakers Square brands to generate efficient, low-risk growth. Within our existing markets we believe we can increase market share by adding new restaurants and gain operational efficiencies by clustering them with our already established restaurants. We believe that opening new restaurants in our existing markets enables us to reduce the risks associated with growth because of our familiarity with competitive conditions, consumer tastes and demographics in existing markets. Our new restaurant openings have demonstrated significant return on investment, with restaurant

68

Table of Contents

Significant investment in infrastructure and brands. We invest a significant amount of capital to implement up-to-date technology, and we are focusing on remodeling our restaurant base on average every seven years. We recently created new exterior and interior restaurant designs for Village Inn and Bakers Square that we intend to utilize at selected sites. In 2004, we plan to spend approximately $11.2 million on the maintenance and remodeling of our existing restaurants. We also have invested $15.5 million in technology over the last five years to increase our efficiency. At the unit level, we implemented a ReMACS information system for managing our back office operations, which provides managers with enhanced electronic food ordering, inventory, ideal and actual food cost reporting, cash control and labor management tools. In 2003, we invested approximately $6.0 million to implement an improved POS system and related hardware upgrades in all our restaurants. Our POS system enhances our ability to track sales, product mix, labor dollars and hours, and payment information for each of our restaurants on a daily basis. In addition, we have invested capital to upgrade the quality and cost effectiveness of our pie production operations. We have also implemented an SAP enterprise resource planning system in all of our pie production plants which allows us to measure and reduce waste, labor costs and inventory levels.

Proprietary, high quality pie manufacturing capability. Premium pie production is a core competency and key point of differentiation for us. We use quality ingredients to produce multi-layer pies for our Bakers Square and Village Inn restaurants, and we also sell pies to third parties such as Market Day and Bob Evans Farms. By producing our award-winning pies at company-operated baking facilities, we are able to control the quality and consistency of our pies and retain greater control over delivery. Our current pie manufacturing facilities can support additional growth, which will support increased sales internally to our restaurants as well as to third parties. We have recently realigned our frozen pie manufacturing operations to gain economies of scale from our highly-automated Chaska, Minnesota facility, positioning ourselves to increase sales to third parties.

Experienced management team. Our executive management team has extensive restaurant industry experience. Debra Koenig, our Chief Executive Officer, joined us in June 2003 after a 25-year career with McDonald’s Corporation. As President of the Southeast region, she was responsible for McDonald’s largest U.S. division, with approximately $4 billion in annual sales, consisting of approximately 2,675 franchised restaurants and 290 owned restaurants. The balance of the senior management team consists of career restaurant executives who have an average of 27 years experience in the industry. We believe that we have a well-trained and experienced waitstaff in our restaurants, which has been a key factor in maintaining a loyal customer base over the years, as many relationships have been created between our restaurant staff and regular customers.

Competitive strategy

Increase same unit sales growth. We have recently undertaken various initiatives to increase same unit sales in our existing restaurants, including menu engineering and targeted marketing programs. We intend to grow sales by increasing the frequency of seasonal, regional and other menu features such as our successful new artisan-style bread bowl soup specials at Bakers Square, skillet meals such as the Carnitas Skillet at Village Inn and our “Carb Counter” menu at Village Inn. In addition, we are placing greater emphasis on food and menu promotion in our marketing and advertising, which we believe will be more effective in generating additional sales. Our other marketing initiatives include the introduction of new customer loyalty programs, such as our successful electronic gift card program introduced in 2003, and increasing the use of traffic building promotions. Additionally, from time to time, we raise menu prices while being careful to maintain an attractive price-to-value relationship.

69

Table of Contents

We also intend to increase sales growth through our remodeling program, in which we seek to modernize our existing units on average every seven years. From 2001 to 2003, we remodeled 53 of our company-operated restaurants at a total cost of $6.4 million. We have designed and are implementing an updated exterior design for our Village Inn and Bakers Square concepts to heighten exterior curb appeal and provide for more visually attractive restaurants. Our remodeling efforts, such as the recent addition of outdoor patios to several of our restaurants in Florida, are intended to increase our appeal with existing customers and also attract new customers.

Continue improving operating margins. While we believe we currently have strong operating margins, continued implementation of best practices in food cost management and labor efficiency can help enhance our margins. For example, we modified our internal processes to give our restaurant managers greater control over employee utilization and overtime, which has reduced our overtime costs by 40.4% from 2001 to 2003. We have also focused on menu engineering by increasing the prominence of higher margin items on our menus and increasing the frequency of specials, many of which have higher margins. In addition, the expansion of our restaurant base and increased third-party sales will result in greater absorption of fixed costs and therefore increase margins in our pie production operations. We have successfully instituted cost controls in our pie production and delivery processes and are expanding our third-party customer base.

Maintain an attractive price-to-value relationship. We believe one of the hallmarks of our Village Inn and Bakers Square restaurants is the attractive value we provide our customers. Our broad offering of appetizing and affordable breakfast, lunch, dinner and dessert items is designed to appeal to a demographically diverse customer base, including families, senior citizens and other value-oriented diners. In order to maintain our relatively low average per-person check while providing high quality food, we must operate our restaurants in a very efficient manner. Some recent examples of our continuing efforts to increase our efficiency include upgrades to our information and restaurant POS systems, reductions in purchasing and manufacturing costs, daily monitoring of the performance of each of our restaurants and extensive employee training. We believe our efficient operations and value focus enable us to provide high quality food at reasonable prices, giving us a competitive advantage in attracting new diners and maintaining our loyal customer base.

Continue disciplined expansion. We plan to continue our expansion in a disciplined manner by strategically adding restaurants in both of our concepts within existing and contiguous markets. By clustering restaurants, we spread costs and leverage our regional management, marketing, purchasing and hiring capabilities. We have a team of dedicated in-house professionals focused on site selection, design and construction of new restaurants in a timely and cost-effective manner. While we presently intend to focus our expansion efforts on company-operated restaurants, we may also pursue selected franchise opportunities.

Opportunistically pursue competitors’ units for conversion and acquire franchise restaurant territories. We believe that acquiring selected competitors’ units for conversion is an effective way to economically add new restaurants. These units can often be acquired and converted at substantially lower costs and opened more quickly than newly constructed restaurants. They also provide an opportunity to expand in markets where attractive open sites are not available. We rigorously assess potential conversions against our pre-established criteria to reduce the risks associated with opening restaurants at these sites.

In addition, we believe that acquisitions of current Village Inn franchises are an attractive avenue for growth. Acquisition opportunities arise as franchisees retire or seek liquidity. For example, in 2003, we acquired a Village Inn franchise territory in the Albuquerque, New Mexico area encompassing eight restaurants.

Our background

We opened our first restaurant under the name “Village Inn Pancake House” in Denver, Colorado in 1958. Due to the success of the Village Inn concept, we began franchising the brand, and our first franchise restaurant opened in 1961. We introduced the Bakers Square concept in 1983 when we acquired

70

Table of Contents

We completed an initial public offering in 1982 and changed our name from Village Inn Pancake House, Inc. to VICORP Restaurants, Inc. Following our initial public offering, we were publicly traded until we were acquired in a going-private transaction led by the private equity firms Goldner Hawn Johnson & Morrison and BancBoston Capital in May 2001. In June 2003, we were acquired in a transaction led by the private equity firm Wind Point Partners.

Our sponsor

Wind Point Partners is a private equity investment firm that manages over $1 billion in commitments from pension funds and has invested in more than 75 companies since its founding in 1983. Wind Point’s strategy is to partner with top caliber CEOs and to align its economic interests closely with those of company management teams through significant equity participation. Wind Point typically invests between $20 million and $70 million in transactions such as leveraged buyouts, recapitalizations, industry consolidations and expansion capital transactions involving companies with revenue between $50 million and $500 million.

Operations and controls

To maintain a consistently high level of food quality and service in our restaurants, we have established uniform operational standards relating to the quality of ingredients, preparation of food, menu selection, maintenance of premises and employee conduct. We require each of our restaurants to operate in accordance with these rigorous standards, and our managers are responsible for implementing these standards.

To reduce costs and improve the management of our restaurant and pie production operations, we have recently updated our information systems, including our ReMACS back-office system, our POS system and our enterprise resource planning system. Our ReMACS information system provides our restaurant managers with improved electronic food ordering, inventory, ideal and actual food cost reporting, cash control and labor management tools. By using our recently upgraded POS system in our restaurants, we are able to track sales, product mix, labor dollars and hours, and credit card and cash deposit information for each of our restaurants on a daily basis. We use an SAP enterprise resource planning system in our pie production facilities to measure and reduce waste, labor costs and inventory levels. In addition, to enable us to better understand and manage our operations, we maintain a central database of information and data relating to decisions support, cash and sales, enterprise resource planning and our vital systems.

Site development and expansion

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

71

Table of Contents

We use our in-house development team, including real estate, design and legal professionals, to find, evaluate and negotiate new sites for our restaurants. We evaluate potential sites based on a number of criteria, including surrounding population density, demographic information, median household income and size, location, area restaurant competition, traffic, access, visibility, potential restaurant size, parking and signage capability. We also selectively use outside consultants who specialize in site evaluation to provide independent validation of our sales potential estimates for new sites. Since January 2003, we have opened two newly constructed restaurants.

We may also purchase our competitors’ sites and convert them to our restaurant concepts. We evaluate each potential conversion site using the same criteria that we use to evaluate new restaurant sites. We believe that conversion can be a cost-effective method for adding new restaurants. Since January 2003, we have converted five of our competitors’ restaurants to our concepts.

We also may grow by purchasing franchised Village Inn restaurants from our franchisees. These opportunities may arise as our franchisees retire or seek liquidity for their investment. For example, in 2003 we acquired eight franchised Village Inn restaurants located in the Albuquerque, New Mexico area.

Restaurant staffing and training

Attraction and retention of quality employees, continuous employee development, regular communication of expectations and regular performance feedback are critical factors that help us achieve customer satisfaction. We believe we distinguish ourselves by the quality of personnel and longevity of service among our Regional Managers, restaurant general managers and hourly staff. We attribute much of our success in retaining our management and employees to our extensive training programs, attractive cash incentive compensation program and competitive benefit programs.

Each of our restaurants is typically managed by one general manager, one associate manager and one assistant manager. On average, general managers possess over eight years of experience with us. Each of our general managers has primary responsibility for day-to-day operations in one of our restaurants, including hiring/firing, scheduling, cleanliness of the restaurant and restaurant cash flows. The restaurant managers are supported by Regional Managers, Regional Vice Presidents (or District Managers in California) and our corporate office. As of June 1, 2004, we had 32 Regional Managers, each of whom is responsible for managing approximately nine restaurants in a designated geographic region in a manner consistent with our strategies, policies and standards of quality. The Regional Managers report to one of three Regional Vice Presidents of Operations or two District Managers (in California). Our Regional Vice Presidents of Operations participate in every aspect of our restaurant operations, from organizing quality management teams for the restaurants to routine visits to each location.

Our training programs are designed to equip our employees and franchisees with the skills necessary to help us achieve our objectives. We focus on outcome-based training, emphasizing the acquisition of basic skills and behavior that result in desired performance for specific positions. The average time in training for a manager new to our company is eight to ten weeks. At the successful completion of training they are placed in a restaurant as an assistant manager. At this point the manager continues to be trained and developed, utilizing a program called Management Development Criteria. This ongoing training challenges the new manager to thoroughly understand and demonstrate proficiency in all facets of management of our restaurants. Upon completion, the manager is eligible to participate in our bonus program. In addition to these programs, we conduct field training for our restaurant managers covering a variety of topics such as new products, food safety and management development. For each of our franchised restaurants, we require that a minimum of two managers receive certification through our management training program. Additionally, we require our franchisees to successfully complete our management training program prior to the scheduled opening of any of our franchised restaurants.

72

Table of Contents

Marketing, advertising and menu development

The family-dining segment in which our restaurant concepts operate attracts customers seeking quality, consistency, variety and value, with an average per-person check between $6 and $9. Our mid-range price positioning in the family-dining segment provides the competitive advantage of flexibility in menu choices by offering higher or lower priced items based on customer preferences. We use various marketing techniques, such as television and radio (in geographic markets where we have sufficient market penetration), newspaper, direct mail and point-of-purchase materials to promote our restaurant concepts and gain market share. Other marketing initiatives include our successful electronic gift card program. We have sold $2.2 million worth of gift cards from the introduction of this program in November 2003 through June 1, 2003. We produce our advertising in-house, which we believe allows us to present advertising and marketing materials that are consistent with the characteristics of our Village Inn and Bakers Square concepts in a cost-effective manner.

In our ongoing effort to maximize our sales and profitability, we engage in careful menu engineering and the development of new menu items. We maintain a modern test kitchen at our headquarters staffed by highly qualified food professionals who create new menu offerings as well as new pie recipes. Before new items are introduced, a program of testing is undertaken to assess customer acceptance and implementation considerations. In preparing menu items, we emphasize quality and freshness, as well as trends in the family-dining segment as illustrated by our introduction of “Carb Counter” menu items in our Village Inn restaurants. New items may be offered on a promotional or seasonal basis, serve as special items to provide variety to our regular menus, or become a permanent part of our offerings.

Purchasing and distribution

Our ability to maintain consistent quality throughout our restaurants depends in large part upon our ability to acquire food products and related items from reliable sources in accordance with our specifications. We make centralized, national purchasing decisions for most menu ingredients to gain favorable prices and maintain quality and freshness levels. We negotiate directly with our major suppliers to obtain competitive prices and use purchase agreements in an effort to stabilize the potentially volatile pricing associated with certain commodities. We also routinely negotiate with prospective suppliers in an effort to obtain competitive pricing. We believe that we have good relationships with our suppliers and that alternative supply sources are readily available if necessary.

We depend on multiple third parties, including traditional food distributors such as Sysco, to deliver our pies from our three pie manufacturing facilities to all of our restaurants and to our third-party customers in refrigerated trucks to ensure quality and freshness. We recently restructured our delivery and distribution arrangements to obtain substantial savings.

Franchise program

We established our first Village Inn franchise in 1961. As of June 1, 2004 we had a total of 104 franchised Village Inn restaurants, operated by 26 franchisees, each with one to eleven restaurants. We believe that we currently enjoy solid working relationships with our franchisees. We presently intend to focus our expansion efforts on company-operated restaurants but may pursue selected franchising opportunities.

We generally seek franchisees that have related business experience and access to capital to build out and support the Village Inn concept. We also provide our franchisees with access to training, marketing, quality control, purchasing/distribution and operations assistance. A franchisee is required to pay an initial franchise fee for a 15 year franchise term. Until the end of their first year of operation, our franchisees also pay us a royalty fee of $1,154 a week and a marketing fee of $577 a week. A franchisee is also typically obligated to pay a fee for renewal of a franchise agreement beyond the initial term. After the first year of operation, our franchisees are required to pay royalty fees of 4% of gross sales as well as marketing fees of 2% of gross sales. Our standard franchise agreement gives our franchisees the right to use our trademarks, service marks, trade dress and our recipes, systems, manuals, processes and related items. Our

73

Table of Contents