Edgar Filing: NEW WORLD RESTAURANT GROUP INC

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended January 1, 2002

/_/ TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

Commission File Number 0-27148
NEW WORLD RESTAURANT GROUP, INC.
(Name of Registrant as Specified in its Charter)

DELAWARE 13-3690261
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)

246 INDUSTRIAL WAY WEST, EATONTOWN, NJ 07724
(Address of Principal Executive Offices) (Zip Code)

(732) 544-0155
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value

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 X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments of this Form 10-K. /_/

The aggregate market value of the Common Stock held by non-affiliates of
the registrant computed by reference to the closing sale price as reported on
the Over-the-Counter Bulletin Board on May 14, 2002 was $4,512,666.

As of May 14, 2002, 17,481,394 shares of Common Stock of the registrant
were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

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NEW WORLD RESTAURANT GROUP, INC.

FORM 10-K

INDEX

PART I.......................................................................1

ITEM 1. BUSINESS............................................................1

ITEM 2. PROPERTIES..........................................................8

ITEM 3. LEGAL PROCEEDINGS...................................................9

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................9

PART II.....................................................................10

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS............................................................10

ITEM 6. SELECTED FINANCIAL DATA............................................11

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..............................................11

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........20

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................20

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES..............................................21

PART III....................................................................21

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................21

ITEM 11. EXECUTIVE COMPENSATION.............................................23

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....27

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................29

PART IV.....................................................................31

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K....31

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Annual Report on Form 10-K
contains "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
The words "forecast", "estimate", "project", "intend" "expect", "should",
"believe" and similar expressions are intended to identify forward-looking
statements. These forward-looking statements involve known and unknown risks,
uncertainties, assumptions and other factors, including those discussed in
"Business-Risk Factors Relating to the Operation of our Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Risk Factors Relating to our Financial Condition", which may cause
our actual results, performance or achievements to be materially different from
any future results, performance or achievements, expressed or implied by such
forward-looking statements. Except as may be required by law, we do not
undertake, and specifically disclaim any obligation, to publicly update any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.

PART 1

ITEM 1. BUSINESS

GENERAL

We are a leader in the quick casual segment of the restaurant industry and
the largest operator of bagel bakeries in the United States. With 761 locations
in 34 states, we operate and license locations primarily under the Einstein
Bros. and Noah's New York Bagels ("Noah's") brand names and franchise locations
primarily under the Manhattan Bagel ("Manhattan") and Chesapeake Bagel Bakery
("Chesapeake") brand names. Our locations specialize in high-quality foods for
breakfast and lunch, including fresh baked goods, made-to-order sandwiches on a
variety of breads and bagels, soups, salads, desserts, premium coffees and other
cafe beverages, and offer a cafe experience with a neighborhood emphasis. As of
May 14, 2002, our retail system consisted of 468 company-operated locations and
293 franchised and licensed locations. We also operate three dough production
facilities and one coffee roasting facility.

The first company-operated New World Coffee store opened in 1993 and the
first franchised New World Coffee store opened in 1997. On November 24, 1998, we
acquired the stock of Manhattan Bagel Company, Inc. On August 31, 1999, we
acquired the assets of Chesapeake Bagel Bakery. On June 19, 2001, we acquired
the assets of Einstein/Noah Bagel Corp. and its majority-owned subsidiary,
Einstein Noah Bagel Partners, L.P. (collectively, "Einstein").

We are a Delaware corporation and were organized in November 1992.

INDUSTRY OVERVIEW

The U.S. market for the daytime restaurant business is currently estimated
at approximately $200 billion, according to industry research. This market is
growing as the changing dynamics in consumer demand have driven an increase in
the percentage of food eaten away from home from 25% in 1955 to 44% in 1996.
This percentage is expected to grow to 53% by 2010. Industry sources estimate
that the quick casual segment of the market is currently approximately $5.7
billion.

We believe that quick casual is one of the most rapidly growing segments
of the restaurant industry. We believe the growth in this segment is driven by
the aging baby boomer population, which has resulted in a more sophisticated,
more demanding customer base willing to pay for (i) higher quality, fresh,
made-to-order foods, (ii) a pleasant environment serving as a neighborhood
gathering place and (iii) higher quality, speedy service in a convenient
location.

The bagel bakery market has evolved in recent years through (i) a
consolidation of the major chains and (ii) a repositioning of the successful
chains from a limited focus on the breakfast daypart to a much broader
positioning as casual breakfast and lunch providers. These chains have expanded
their menu offerings to include sandwiches on a variety of breads, salads,
soups, and premium coffees and other cafe beverages and desserts. This

repositioning has enabled the chains to leverage their physical facilities as
well as their existing base of customers and has resulted in a more profitable,
growth-oriented model. Our Einstein Bros. brand has been in the forefront of
this industry repositioning.

BUSINESS STRATEGY

IMPLEMENT COST-SAVINGS PROGRAMS. Currently, we are implementing certain
programs relating to the acquisition of the assets of Einstein that are expected
to result in cost savings through integration of production, distribution,
purchasing and general and administrative expenses. We expect to recognize the
full benefit of these savings during fiscal 2002. In addition, we intend to
increase sales through the expansion of our lunch daypart and new location
growth, primarily through franchising and licensing.

INCREASE SALES THROUGH DAYPART EXPANSION. We intend to grow our business
by continuing to focus on expanding our dayparts. We believe we have an
attractive opportunity to grow our lunch daypart to take advantage of the
largest segment of the restaurant industry. Specifically, we plan to launch
product initiatives to expand our selection of gourmet sandwiches, introduce hot
lunch offerings and broaden our selection of desserts and premium beverages. We
plan to launch additional service initiatives to improve location-level
through-put and speed of service. We plan to introduce marketing initiatives to
increase frequency, build check average and enhance reach.

PURSUE DISCIPLINED PORTFOLIO GROWTH. We added one new Einstein Bros.
company-operated location during the first quarter of 2002, and plan to add an
additional nine in the second half of 2002. We have a strong platform for growth
through franchising and licensing as a result of our strong unit economics and
solid positioning within the quick casual restaurant segment. We plan to launch
a franchise program for our Einstein Bros. brand at the end of the second
quarter of 2002, and we anticipate attracting two large area development
franchise partners during the second half of 2002. We expect to grow our
licensed locations to 30 by the end of 2002 (of which 14 are currently
operational). By growing our portfolio with experienced, well capitalized
operators, we expect to continue to build our leadership position in the quick
casual segment of the restaurant industry.

RESTAURANT OPERATIONS

We operate, franchise or license 761 locations under our Einstein Bros.,
Noah's, Manhattan, Chesapeake, New World Coffee and Willoughby's Coffee & Tea
brands. We expect to grow our restaurant operations primarily through our
Einstein Bros. brand.

EINSTEIN BROS. There are presently 369 company-operated and 12 licensed
Einstein Bros. locations in 39 Designated Marketing Areas ("DMAs") nationwide.
The average Einstein Bros. location is approximately 2,200 to 2,500 square feet
in size with over 40 seats and is located in a neighborhood or regional shopping
center. We use sophisticated fixtures and materials in the brand's design to
create a store environment that is consumer friendly, inviting and reflective of
the brand's personality and strong neighborhood identity, and which visually
reinforces the distinctive difference between the brand's quick casual
positioning and that of quick service restaurants. Einstein's menu specializes
in high-quality foods for breakfast and lunch, including fresh baked goods,
made-to-order sandwiches on breads such as challah, hearty soups, innovative
salads, desserts, five fresh-brewed premium coffees daily and other cafe
beverages.

NOAH'S NEW YORK BAGELS. There are presently 83 company-operated and two
licensed Noah's locations in six DMAs on the West Coast. The average Noah's
location is approximately 1,400 to 1,800 square feet in size with over 20 seats,
and is located in urban neighborhoods or regional shopping centers. We use
elaborate tile work and wood accents in the brand's design to create an
environment whimsically reminiscent of a Lower East Side New York deli, which
reinforces the brand's urban focus with an emphasis on the authenticity of a New
York deli experience. Noah's menu specializes in high-quality foods for
breakfast and lunch, including fresh baked goods, made to order deli style
sandwiches, including such favorites as pastrami, corned beef and roast beef
piled high on fresh breads baked on location daily, hearty soups, innovative
salads, desserts, five fresh-brewed premium coffees daily and other cafe
beverages.

MANHATTAN BAGEL/CHESAPEAKE BAGEL BAKERY. There are presently 221 Manhattan
locations in 68 DMAs nationwide and 53 Chesapeake locations most of which are in
five DMAs on the East Coast. The average Manhattan and Chesapeake location is
approximately 1,500 to 1,800 square feet with 20 to 40 seats and is primarily

located in urban neighborhoods or regional shopping centers. Manhattan and
Chesapeake stores are designed to combine the authentic atmosphere of a bagel
bakery with the comfortable setting of a neighborhood meeting place. The
locations offer up to 23 varieties of fresh baked bagels, as well as bagel
sticks and bialys and up to 15 flavors of cream cheese, an extensive variety of
breakfast and lunch sandwiches, salads, soups, coffees and cafe beverages, soft
drinks and desserts.

NEW WORLD COFFEE/WILLOUGHBY'S COFFEE & TEA. There are presently 21 New
World Coffee and Willoughby's Coffee & Tea locations in five DMAs in the
northeastern United States. The locations are designed using natural materials
and warm lighting to create the comfortable atmosphere of an inviting
neighborhood cafe. The locations offer up to 30 varieties and blends of fresh
roasted coffee, in brewed and whole bean format, a broad range of Italian-style
beverages, such as espresso, cappuccino, cafe latte, cafe mocha and espresso
machiato, along with an extensive variety of primarily breakfast and dessert
items meant to complement the beverage offerings.

SOURCING, MANUFACTURING & DISTRIBUTION

We believe that controlling the manufacture and distribution of our key
products is an important element in ensuring both quality and profitability. To
support this strategy, we have developed proprietary formulations, invested in
processing technology and manufacturing capacity, and aligned ourselves with
strategic suppliers.

DOUGH PRODUCTION. We have significant know-how and technical expertise for
manufacturing and freezing mass quantities of raw dough to produce a
high-quality product more commonly associated with smaller bakeries. We believe
this system enables locations to provide consumers with a variety of consistent,
superior products. We currently operate dough manufacturing facilities in
Eatontown, NJ, Whittier, CA, and Los Angeles, CA and have a supply contract with
Harlan Bakery in Avon, IN that produces dough to our specifications for part of
the Einstein Bros. brand. We have recently increased the production of our
Whittier facility and now supply our Fort Worth and Denver hubs, which were
previously supplied by Harlan. We are in the process of expanding the Whittier
facility, which will enable us to supply our West Coast Manhattan locations and
to close our duplicative Los Angeles facility. In addition, we are currently
considering consolidating Harlan and Eatontown into one production facility.

COFFEE PRODUCTION. We purchase only the highest quality grades of Arabica
coffee available from the best crops and make purchase commitments on the basis
of quality, taste and availability. We have long-standing relationships with
coffee brokers, allowing us access to the world's best green coffees. Our
roasting processes vary based upon the variety, origin and physical
characteristics of the coffee and are designed to develop the optimal flavor and
aromatics of each coffee.

DISTRIBUTION. We currently utilize a single national distributor to
distribute frozen dough and other materials to our locations. Our current
agreement with our national distributor expires August 2, 2002, and we are in
the process of contracting with large regional custom distributors for
distribution thereafter. By contracting with distributors, we are able to
eliminate investment in distribution systems and to focus our managerial and
financial resources on cost savings, quality control and production
efficiencies. The distributors pick up frozen dough throughout the week from the
plants and deliver to our locations. Virtually all other supplies for retail
operations, including cream cheese, paper goods, meats and smallwares, are
contracted for by us and delivered by the vendors to our distributors for
delivery to the locations. The individual locations order directly from the
distributors two to three times per week.

MARKETING

Our marketing programs generally target specific markets and regions,
making extensive use of local promotional media. Local marketing efforts may
include print advertising and radio and television promotions.

Company-operated and franchised locations are generally required to
purchase local advertising and to contribute to the respective brand's marketing
fund, which provides the locations with marketing support, including in-store
point of purchase and promotional materials. Print and other mass media
advertising is utilized to increase consumer interest and build sales.

FRANCHISE AND LICENSING PROGRAMS

We began our licensing program for our Einstein Bros. brand in April 2001.
We have since entered into licensing agreements with Aramark and Sodexho to
develop university and college campus locations and other locations. We have 14
licensed locations open currently and expect to have 30 licensed locations by
the end of 2002. We have also entered into a license agreement with Concessions,
Inc. to develop our brand at airport locations. Our first location under such
agreement opened at Detroit Metro Airport in the first quarter of 2002. The
licensing program typically requires the payment of an upfront license fee of
$12,500 and continuing royalties of 7.0% of sales from each location. The
licensees are required to buy all their proprietary products from sources
approved by us.

We have a substantial franchise base primarily in our Manhattan and
Chesapeake brands that generates a recurring revenue stream through fee and
royalty payments. Our franchise base provides us with the ability to grow our
brands with a minimal commitment of capital by us, and creates a built-in
customer base for our manufacturing operations. We intend to launch a
broad-based franchising program for the Einstein Bros. brand at the end of the
second quarter of 2002. Our strategy is to seek a limited number of experienced,
well capitalized franchise partners who would pay a non-refundable fee and
commit to develop a substantial number of locations on an agreed upon
development schedule, which would allow for growth in a controlled and
disciplined manner. In the event the development schedule is not adhered to, the
franchise partner will lose development exclusivity in the territory. We may,
from time to time, sell company-operated locations to franchisees to seed
franchise territories.

MANAGEMENT INFORMATION SYSTEMS

Each company-operated location has computerized cash registers to collect
point-of-sale transaction data, which is used to generate pertinent marketing
information, including product mix and average check. All product prices are
programmed into the system from our corporate office.

Our in-store personal computer-based management support system is designed
to assist in labor scheduling and food cost management, to provide corporate and
retail operations management quick access to retail data and to reduce store
managers' administrative time. The system supplies sales, bank deposit and
variance data to our accounting department on a daily basis. We use this data to
generate daily sales information and weekly consolidated reports regarding sales
and other key measures, as well as preliminary weekly detailed profit and loss
statements for each location with final reports following the end of each fiscal
period.

TRADEMARKS AND SERVICE MARKS

Our rights in our trademarks and service marks ("Marks") are a significant
part of our business. We are the owners of the federal registration of the
"Einstein Bros.," "Noah's New York Bagels," "Manhattan Bagel," "Chesapeake Bagel
Bakery," "New World Coffee" and "Willoughby's Coffee & Tea" Marks. Some of our
Marks are also registered in several foreign countries. We are aware of a number
of companies that use various combinations of words in our Marks, some of which
may have senior rights to ours for such use, but none of which, either
individually or in the aggregate, are considered to materially impair the use of
our Marks. It is our policy to defend our Marks and the associated goodwill from
encroachment by others. The Marks listed above represent the brands of the
retail outlets that we own. We also own numerous other Marks related to our
business.

COMPETITION

The restaurant industry is intensely competitive, and there are many well
established competitors with substantially greater financial and other
resources. We currently compete in the quick casual segment with Panera Bread
Company, and to a lesser extent with smaller regional chains such as Corner
Bakery. We also compete within each market with other national and regional
chains as well as locally owned restaurants, not only for consumers, but also
for management and hourly personnel, suitable real estate sites and qualified
franchisees. In addition to our current competitors, one or more new major
competitors with substantially greater financial, marketing and operating
resources could enter the markets in which we currently operate or intend to
expand at any time and compete directly against us. We believe that our
consumers choose among restaurants primarily on the basis of product quality,
service and convenience and, to a lesser extent, on price.

GOVERNMENT REGULATION

Each of our locations is subject to licensing and regulation by a number
of governmental authorities, which include health, safety, sanitation, building
and fire agencies in the state or municipality in which the store is located. A
failure to comply with one or more regulations could result in the imposition of
sanctions, including the closing of locations for an indeterminate period of
time or third-party litigation. Our manufacturing, commissary and distribution
facilities are licensed and subject to regulation by state and local health and
fire codes, and the operation of our trucks is subject to Department of
Transportation regulations. We are also subject to federal and state
environmental regulations.

In addition, our franchise operations are subject to Federal Trade
Commission regulation and various state laws, which regulate the offer and sale
of franchises. Several state laws also regulate substantive aspects of the
franchisor-franchisee relationship. The FTC requires us to furnish to
prospective franchisees a franchise offering circular containing prescribed
information. A number of states in which we might consider franchising also
regulate the sale of franchises and require registration of the franchise
offering circular with state authorities.

EMPLOYEES

As of May 14, 2002, we had 7,966 employees, of whom 7,616 were store
personnel, 148 were plant and support services personnel, and 202 were corporate
personnel. Most store personnel work part-time and are paid on an hourly basis.
We have never experienced a work stoppage and our employees are not represented
by a labor organization. We believe that our employee relations are good.

RISK FACTORS RELATING TO THE OPERATION OF OUR BUSINESS

WE FACE POTENTIAL REGULATORY SANCTIONS AND CIVIL AND CRIMINAL PENALTIES
AND CLAIMS FOR MONETARY DAMAGES AND OTHER RELIEF.

The Securities and Exchange Commission has initiated an informal
investigation relating to the reasons for our delay in filing this Form 10-K and
the resignation of our former Chairman, R. Ramin Kamfar, and the termination for
cause of our former Chief Financial Officer, Jerold E. Novack. We are
cooperating fully with the Commission's informal investigation. We are also
cooperating fully with a recent Department of Justice inquiry relating to the
above-referenced issues.

We have been notified by Special Situations Fund, L.P., Special Situations
Cayman Fund, L.P. and Special Situations Private Equity Fund, L.P., holders of
our Series F Preferred Stock, that they believe that material misrepresentations
were made to them in June 2001 in connection with their purchase of our stock.
Although the Special Situations Funds have not initiated any legal proceedings
against us, they may do so.

Given the early stage of these matters, we cannot predict their outcome.
However, we cannot assure you that we will not be subject to regulatory
sanctions, civil penalties and/or claims for monetary damages and other relief
that may have a material adverse effect on our business, prospects and financial
condition.

WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE THE EINSTEIN BROS. BUSINESS
AND NEW WORLD.

The acquisition of the assets of Einstein has placed and continues to
place a significant demand on our management team and on our operating systems
and resources. In order to manage the integration of the Einstein Bros.
business, we must continue to develop, implement and improve our operational
systems, procedures and controls on a timely basis. There is no guaranty we will
be successful in such efforts. In addition, there can be no guarantee that the
acquisition and integration will result in the anticipated cost savings. There
may be significant costs associated with our integration efforts.

WE ARE VULNERABLE TO FLUCTUATIONS IN THE COST, AVAILABILITY AND QUALITY OF
OUR INGREDIENTS.

The cost, availability and quality of the ingredients we use to prepare
our food are subject to a range of factors, many of which are beyond our
control. Fluctuations in economic and political conditions, weather and demand
could adversely affect the cost of our ingredients. We have no control over
fluctuations in the price of

commodities, and no assurance can be given that we will be able to pass through
any cost increases to our customers. We are dependent on frequent deliveries of
fresh ingredients, thereby subjecting us to the risk of shortages or
interruptions in supply. All of these factors could adversely affect our
business and financial results.

WE HEAVILY DEPEND ON OUR SUPPLIERS AND DISTRIBUTORS.

We currently purchase our raw materials from various suppliers. Though to
date we have not experienced any difficulties with our suppliers, our reliance
on our suppliers subjects us to a number of risks, including possible delays or
interruption in supplies, diminished control over quality and a potential lack
of adequate raw material capacity. Any disruption in the supply of or
degradation in the quality of the raw materials provided by our suppliers could
have a material adverse effect on our business, operating results and financial
condition. In addition, such disruptions in supply or degradations in quality
could have a long-term detrimental impact on our efforts to develop a strong
brand identity and a loyal consumer base.

We currently utilize a single national distributor to distribute frozen
dough and other materials to our locations. Our current agreement with that
distributor expires August 2, 2002, and we are obligated to pay the distributor
in respect of a portion of the unamortized $5 million investment made by the
distributor at the inception of our original agreement and a reduced amount of
outstanding trade payables and other previously accrued charges, the aggregate
sum of $12 million, $3.9 million of which has already been paid and $8.1 million
of which is payable in installments through March 2003. We are in the process of
contracting with large regional custom distributors to replace our current
national distributor. Our failure to engage the services of new distributors
prior to August 2, 2002 would result in a significant disruption in our
operations and could have a material adverse effect on our business, financial
condition and results of operations.

WE FACE THE RISK OF INCREASING LABOR COSTS THAT COULD ADVERSELY AFFECT OUR
PROFITABILITY.

We are dependent upon an available labor pool of unskilled employees, many
of whom are hourly employees whose wages may be impacted by an increase in the
federal or state minimum wage. Numerous proposals have been made on state and
federal levels to increase minimum wage levels. Although few, if any, of our
employees are paid at the minimum wage level, an increase in the minimum wage
may create pressure to increase the pay scale for our employees, which would
increase our labor costs and those of our franchisees and licensees. A shortage
in the labor pool or other general inflationary pressures or changes could also
increase labor costs. An increase in labor costs could have a material adverse
effect on our income from operations and decrease our profitability and cash
available to service our debt obligations if we are unable to recover these
increases by raising the prices we charge our consumers.

WE ARE VULNERABLE TO CHANGES IN CONSUMER PREFERENCES AND ECONOMIC
CONDITIONS THAT COULD HARM OUR FINANCIAL RESULTS.

Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions and demographic trends. Factors
such as traffic patterns, local demographics and the type, number and location
of competing restaurants may adversely affect the performance of individual
locations. In addition, inflation and increased food and energy costs may harm
the restaurant industry in general and our locations in particular. Adverse
changes in any of these factors could reduce consumer traffic or impose
practical limits on pricing, which could harm our business, prospects, financial
condition, operating results or cash flow. Our continued success will depend in
part on our ability to anticipate, identify and respond to changing consumer
preferences and economic conditions.

THERE IS INTENSE COMPETITION IN THE RESTAURANT INDUSTRY.

Our industry is intensely competitive and there are many well established
competitors with substantially greater financial and other resources. In
addition to current competitors, one or more new major competitors with
substantially greater financial, marketing and operating resources could enter
the market at any time and compete directly against us. In addition, in
virtually every major metropolitan area in which we operate or expect to enter,
local or regional competitors already exist.

WE FACE THE RISK OF ADVERSE PUBLICITY AND LITIGATION IN CONNECTION WITH
OUR OPERATIONS.

We are from time to time the subject of complaints or litigation from our
consumers alleging illness, injury or other food quality, health or operational
concerns. Adverse publicity resulting from these allegations may materially
adversely affect us, regardless of whether the allegations are valid or whether
we are liable. In addition, employee claims against us based on, among other
things, discrimination, harassment or wrongful termination may divert our
financial and management resources that would otherwise be used to benefit the
future performance of our operations. We have been subject to claims from time
to time, and although these claims have not historically had a material impact
on our operations, a significant increase in the number of these claims or an
increase in the number of successful claims could materially adversely affect
our business, prospects, financial condition, operating results or cash flows.

WE RELY IN PART ON OUR FRANCHISEES.

We rely in part on our franchisees and the manner in which they operate
their locations to develop and promote our business. Although we have developed
criteria to evaluate and screen prospective franchisees, there can be no
assurance that franchisees will have the business acumen or financial resources
necessary to operate successful franchises in their franchise areas. The failure
of franchisees to operate franchises successfully could have a material adverse
effect on us, our reputation, our brands and our ability to attract prospective
franchisees.

WE FACE RISKS ASSOCIATED WITH GOVERNMENT REGULATION.

Each of our locations is subject to licensing and regulation by the
health, sanitation, safety, building and fire agencies of the respective states
and municipalities in which it is located. A failure to comply with one or more
regulations could result in the imposition of sanctions, including the closing
of facilities for an indeterminate period of time, or third-party litigation,
any of which could have a material adverse effect on us and the results of our
operations.

In addition, our franchise operations are subject to regulation by the
Federal Trade Commission. Our franchisees and we must also comply with state
franchising laws and a wide range of other state and local rules and regulations
applicable to our business. The failure to comply with federal, state and local
rules and regulations would have an adverse effect on our franchisees and us.

Under various federal, state and local laws, an owner or operator of real
estate may be liable for the costs of removal or remediation of certain
hazardous or toxic substances on or in such property. Such liability may be
imposed without regard to whether the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. Although we
are not aware of any environmental conditions that require remediation by us
under federal, state or local law at our properties, we have not conducted a
comprehensive environmental review of our properties or operations and no
assurance can be given that we have identified all of the potential
environmental liabilities at our properties or that such liabilities would not
have a material adverse effect on our financial condition.

WE MAY NOT BE ABLE TO PROTECT OUR TRADEMARKS AND OTHER PROPRIETARY RIGHTS.

We believe that our trademarks and other proprietary rights are important
to our success and our competitive position. Accordingly, we devote substantial
resources to the establishment and protection of our trademarks and proprietary
rights. However, the actions taken by us may be inadequate to prevent imitation
of our products and concepts by others or to prevent others from claiming
violations of their trademarks and proprietary rights by us. In addition, others
may assert rights in our trademarks and other proprietary rights.

ITEM 2. PROPERTIES

As of May 14, 2002, we and our franchisees and licensees operated 761
locations as follows:

STATE COMPANY-OPERATED FRANCHISED/LICENSED TOTAL
----- ---------------- ------------------- -----

Alabama........................ - 2 2
Arizona........................ 20 1 21
California..................... 89 24 113
Colorado....................... 27 2 29
Connecticut.................... 5 5 10
Delaware....................... 2 4 6
District of Columbia........... 1 5 6
Florida........................ 46 26 72
Georgia........................ 14 8 22
Illinois....................... 35 1 36
Indiana........................ 11 - 11
Kansas......................... 11 - 11
Maryland....................... 13 14 27
Massachusetts.................. 4 2 6
Michigan....................... 19 3 22
Minnesota...................... 10 1 11
Missouri....................... 17 1 18
Nevada......................... 9 2 11
New Hampshire.................. 1 - 1
New Jersey..................... 5 49 54
New Mexico..................... 5 - 5
New York....................... 5 30 35
North Carolina................. 2 13 15
Ohio........................... 13 4 17
Oklahoma....................... 8 - 8
Oregon......................... 6 - 6
Pennsylvania................... 15 54 69
South Carolina................. - 4 4
Texas.......................... 23 5 28
Utah........................... 21 - 21
Virginia....................... 14 30 44
Washington..................... 5 -- 5
West Virginia.................. - 1 1
Wisconsin...................... 14 2 12
----- ----- -----
Total.................... 468 293 761

Information with respect to our headquarters, training and production
facilities as of May 14, 2002 is presented below:

LOCATION FACILITY SIZE
-------- -------- ----

Eatontown, NJ(1)....... Headquarters, Support/Training Center, 101,000 sq. ft.
Production Facility
Golden, CO(2).......... Headquarters, Support Center, Test Bakery 46,400 sq. ft.
Whittier, CA(3)........ Production Facility 56,640 sq. ft.
Los Angeles, CA(4)..... Production Facility 24,000 sq. ft.
Greenville, SC(5)...... Production Facility 12,500 sq. ft.

----------
(1) This facility is leased. Lease term ends January 31, 2005 and is subject to
two five-year extension options.
(2) This facility is leased through May 31, 2007.

(3) This facility is leased with an initial lease term through November 30,
2005 with two five-year extension options.
(4) This facility is leased, with an initial lease term through April 30, 2007
and two five-year extension options.
(5) This facility is located on a 1.45 acre parcel of land owned by us. This
facility is not currently in operation.

ITEM 3. LEGAL PROCEEDINGS

We are subject to claims and legal actions in the ordinary course of our
business, including claims by our franchisees. We do not believe that an adverse
outcome in any currently pending or threatened matter, other than described
below, would have a material adverse effect on our business, results of
operations or financial condition.

On April 3, 2002, we were notified by the Securities and Exchange
Commission that the Commission is conducting an informal investigation into the
resignation of our former Chairman, R. Ramin Kamfar, the termination for cause
of our former Chief Financial Officer, Jerold Novack, and the delay in filing
this Form 10-K. We are cooperating fully with the investigation. We are also
cooperating fully with a recent Department of Justice inquiry relating to these
issues.

We have also been notified by Special Situations Fund, L.P., Special
Situations Cayman Fund, L.P. and Special Situations Private Equity Fund, L.P.,
holders of our Series F Preferred Stock, that they believe that material
misrepresentations were made to them in June 2001 in connection with their
purchase of our stock. Although the Special Situations Funds have not initiated
any legal proceedings against us, they may do so.

On February 23, 2000, New World Coffee of Forest Hills, Inc., one of our
franchisees, filed a demand for arbitration with the American Arbitration
Association (AMERICAN ARBITRATION ASSOCIATION, NEW YORK, NEW YORK, CASE NO.
13-114-237-00) against us alleging fraudulent inducement and violations of New
York General Business Law Article 33. The franchisee seeks damages in the amount
of $750,000. We have asserted a counterclaim in the arbitration seeking amounts
owed under the franchisee's franchise agreement and monies owed for goods
purchased by the franchisee in the amount of $200,000. An arbitrator has been
selected and document exchange is complete. Hearings were scheduled for June
2002, but have been postponed by order of the arbitrator.

On April 5, 2000, Benjamin A. Allen and Allen Foods, Inc., one of our
franchisees, filed a complaint against us in the U.S. District Court for the
Southern District of New York (UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT
OF NEW YORK, CASE NO. 00 CIV. 2310) alleging RICO violations and fraudulent
inducement. The franchisee sought monetary damages in the amount of $1,000,000
and injunctive and declaratory relief. We moved to dismiss the RICO claims. The
RICO claims were dismissed, but the franchisee was given the opportunity to file
an amended complaint. The franchisee filed an amended complaint that seeks
damages in an unspecified amount along with injunctive and declaratory relief
based on allegations of RICO violations and fraudulent inducement. We have moved
to dismiss all of the claims in the amended complaint, which motion is pending.
No discovery has been conducted.

On December 28, 2001, Robert Higgs, one of our franchisees, filed a
complaint against us and our officers and agents in New Jersey (SUPERIOR COURT
OF NEW JERSEY, CASE NO. OCN-L-2153-99) alleging breach of contract, breach of
fiduciary duties and tortious interference with contract and business
opportunities. The franchisee seeks damages in an unspecified amount, punitive
damages, costs and attorneys' fees.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On December 19, 2001, at our annual stockholders' meeting, our
stockholders (i) elected Keith Barket (11,601,368 shares in favor and 157,968
shares against) and Edward McCabe (11,601,368 shares in favor and 157,968 shares
against) as Class II directors to serve until the 2004 annual meeting of
stockholders and until their successors are duly elected and qualified and (ii)
ratified the appointment of Arthur Andersen, LLP as our

independent auditors for the fiscal year ending January 1, 2002 (11,625,153
shares in favor, 112,495 shares against and 21,688 abstained).

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Common Stock is currently trading in the "pink sheets." On May 22, our
Common Stock was removed from the eligible list on the OTC Bulletin Board for a
failure to comply with NASD Rule 6530, which resulted from our failure to timely
file this Form 10-K. Prior to May 22, 2002, our Common Stock was quoted on the
OTC Bulletin Board under the symbol "NWCI.OB". We plan to pursue reinstatement
on the OTC Bulletin Board, although we cannot assure you that we will be
reinstated. Prior to November 27, 2001, our Common Stock was quoted on the
Nasdaq National Market under the symbol "NWCI".

Effective November 27, 2001, our Common Stock was delisted from the Nasdaq
National Market. We received a Nasdaq Staff Determination on September 7, 2001
asserting violations of two rules relating to stockholder approval for equity
issuances and that our Common Stock was subject to delisting. We appealed the
Staff Determination at a hearing before the Nasdaq Listings Qualifications Panel
on October 18, 2001. The Panel issued a ruling on October 30, 2001 that cited
conditions for maintaining our listing and provided us with an extension of time
until November 19, 2001 to attempt to satisfy them. We timely appealed the
October 30, 2001 ruling, while simultaneously endeavoring to satisfy the
conditions imposed by the Panel. We were not able to satisfy all of the
conditions prior to the November 19, 2001 deadline and sought additional time to
attempt to satisfy them, a request that the Panel denied. The Panel subsequently
informed us by letter that, effective November 27, 2001, our stock would be
delisted. The Panel cited both corporate governance violations and public
interest concerns as separate and independent bases for its ultimate
determination.

The following table sets forth the range of high and low closing sale
prices (as quoted on the OTC Bulletin Board or Nasdaq National Market, as
applicable) for our Common Stock for each fiscal quarter during the periods
indicated.

FISCAL 2001 HIGH LOW
----------- ---- ---

First Quarter (From January 1, 2001 to April 1, 2001) $2.31 $1.00
Second Quarter (From April 2, 2001 to July 3, 2001) $1.60 $0.88
Third Quarter (From July 4, 2001 to October 2, 2001) $1.22 $0.50
Fourth Quarter (From October 3, 2001 to January 1, 2002) $0.51 $0.20

FISCAL 2000 HIGH LOW
----------- ---- ---

First Quarter (From December 27, 1999 to March 26, 2000) $3.81 $1.97
Second Quarter (From March 27, 2000 to June 25, 2000) $3.38 $1.81
Third Quarter (From June 26, 2000 to September 24, 2000) $2.13 $1.66
Fourth Quarter (From September 25, 2000 to December 31, 2000) $1.69 $0.88

On May 14, 2002, the closing price for our Common Stock as reported by the
OTC was $0.30 per share.

As of May 14, 2002, there were approximately 370 holders of record of our
Common Stock. This number does not include individual stockholders who own
Common Stock registered in the name of a nominee under nominee security
listings.

We have not declared or paid any cash dividends since our inception. We do
not intend to pay any cash dividends in the foreseeable future and we are
precluded from paying cash dividends on our Common Stock under our financing
agreements.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected historical financial and operating
data on a consolidated basis at December 28, 1997, December 27, 1998, December
26, 1999, December 31, 2000 and January 1, 2002 and for the fiscal years then
ended. The information contained in this table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our historical consolidated financial statements, including the
notes thereto, included elsewhere in this Form 10-K.

FISCAL YEAR ENDED
---------------------------------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 26, DECEMBER 31, JANUARY 1,
1997 1998 1999 2000 2002
------------ ------------ ------------ ------------ ----------
(Dollars in thousands, except per share amounts)

INCOME STATEMENT DATA:
Revenues ..................... $ 15,868 $ 17,283 $ 39,925 $ 45,723 $ 236,020
Cost of sales ................ 13,139 12,464 27,948 31,045 190,530
General and administrative
expenses ..................... 2,979 3,462 6,137 6,694 25,386
Depreciation and amortization 2,281 1,464 2,249 2,774 13,442
Provision for store closings
and reorganization costs ..... 300 2,224 -- -- 4,391
Noncash charge in connection
with the realization of
assets .................... 3,481 4,235 -- -- 2,800
Operating income (loss) . (6,312) (6,566) 3,591 5,210 (529)
Net interest expense ......... 425 926 1,407 1,960 28,490(1)
Gain (loss) on sale of
investments .................. -- -- -- (339) 241
Permanent impairment in the
value of investments ......... -- -- -- -- 5,806
Income before income taxes and
minority interest ............ (6,737) (7,492) 2,184 2,911 (34,584)
Provision for income taxes ... -- -- -- (3,100) 167
Minority interest ............ -- -- -- -- 1,578
Extraordinary item ........... -- -- (240) -- --
Net income (loss) ....... $ (6,737) $ (7,492) $ 2,424 $ 6,011 $ (36,329)
========= ========= ========= ========= =========
Net income (loss) per
share-basic .................. $ (1.60) $ (1.09) $ 0.24 $ 0.32 $ (3.24)
Net income (loss) per
share-diluted ................ (1.60) (1.09) 0.23 0.29 (3.24)

OTHER FINANCIAL DATA:
EBITDA(2) .................... $ (250) $ 1,357 $ 5,840 $ 7,984 $ 20,105
Depreciation and amortization 2,281 1,464 2,249 2,774 13,442
Capital expenditures ......... 2,140 836 1,432 335 2,670

BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents .... $ 1,149 $ 5,270 $ 2,880 $ 2,271 $ 14,238
Net property, plant and
equipment .................... 6,687 6,890 7,018 6,970 115,362
Total assets ................. 13,976 38,093 44,025 65,699 305,858
Long-term debt ............... 2,408 13,531 15,557 13,690 120,536
Total shareholders' equity ... 7,906 8,943 12,372 26,733 26,934

--------------
(1) Interest expense for fiscal 2001 is comprised of approximately $12.7
million of interest paid or payable in cash and noncash interest expense
of approximately $15.8 million resulting from the amortization of debt
discount, debt issuance costs and the amortization of warrants issued in
connection with debt financings.
(2) EBITDA is defined as income (loss) from operations before restructuring
and non-recurring charges plus depreciation and amortization. EBITDA
should not be considered as an alternative to, or more meaningful than,
earnings from operations or other traditional indicators of operating
performance, such as cash flow from operating activities.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

beverages, and offer a cafe experience with a neighborhood emphasis. As of May
14, 2002, our retail system consisted of 468 company-operated locations and 293
franchised and licensed locations. We also operate three dough production
facilities and one coffee roasting facility.

On June 19, 2001, we purchased (the "Einstein Acquisition") substantially
all of the assets of Einstein/Noah Bagel Corp. and its majority-owned
subsidiary, Einstein/Noah Bagel Partners, L.P. (collectively, "Einstein").
Einstein was the largest bagel bakery chain in the United States, with 463
stores, nearly all of which are company-operated. The Einstein Acquisition was
made pursuant to an asset purchase agreement entered into by us as the
successful bidder at an auction conducted by the United States Bankruptcy Court,
District of Arizona, on June 1, 2001, in the Einstein bankruptcy case. The
purchase price was $160 million in cash plus the assumption of certain
liabilities, subject to adjustment in the event that assumed current liabilities
(as defined under the asset purchase agreement) exceed $30 million. The
acquisition was accounted for using the purchase method of accounting.

In January and March 2001, we issued Series F Preferred Stock and warrants
to purchase our Common Stock and equity in a newly formed affiliate, Greenlight
New World, L.L.C. The aggregate net proceeds of those financings of
approximately $32.9 million were used to purchase Einstein bonds and pay related
costs. In June 2001, we issued additional Series F Preferred Stock and warrants
to purchase our Common Stock for aggregate net proceeds of $23.8 million, which
were used to fund a portion of the purchase price of the Einstein Acquisition.
In June 2001, we issued $140 million of Senior Increasing Rate Notes due 2003
(the "Notes") and warrants to purchase our Common Stock. The net proceeds of
approximately $122.4 million were used to fund a portion of the purchase price
of the Einstein Acquisition, to repay then-outstanding bank debt and for general
working capital purposes. Also in June 2001, we obtained a $35 million
asset-backed loan to a non-restricted subsidiary, EnbcDeb Corp., for net
proceeds of $32.3 million, which were used to fund a portion of the purchase
price of the Einstein Acquisition.

As a result of the Einstein Acquisition and the related financing
transactions, management believes that period-to-period comparisons of our
operating results are not necessarily indicative of, and should not be relied
upon as an indication of, future performance.

In connection with the Einstein Acquisition, unauthorized bonus payments
in the aggregate amount of $3.5 million were made to certain former executive
officers and former employees. A portion of those payments (approximately $1.0
million) was made in the third quarter of our fiscal year ended January 1, 2002
("fiscal 2001") and the balance (approximately $2.5 million) in the first
quarter ended April 2, 2002 ("Q1 2002"). All of these payments were originally
recorded in our financial statements in the second and third quarters of fiscal
2001 as part of the acquisition costs associated with the Einstein Acquisition
and as a restructuring charge. We have revised the results for those quarters so
as to reverse that treatment. The aggregate of such payments (including $1.0
million in the third quarter of fiscal 2001 and $2.5 million in Q1 2002) has
been or will be, as the case may be, recorded as general and administrative
expense in the respective quarters. Subsequent to the dates of such payments, an
aggregate of $2.5 million of such payments was offset against payments to be
made in connection with the separation of certain officers and employees from
our company. With respect to that portion of the unauthorized bonus payments
that has not been repaid or offset plus certain other unauthorized payments that
have not been recovered of $0.2 million, or an aggregate of $1.2 million, we
have recorded a receivable from the former officer. Based on our evaluation of
the collectability of this receivable amount, we have recorded an allowance for
uncollectable receivable with a corresponding charge to bad debt expense in the
quarters in which the payments occurred.

An additional aggregate amount of $3.4 million, primarily relating to
operating and financing related expenses, was originally recorded in our
financial statements in the second and third quarters of fiscal 2001 as a part
of the acquisition costs associated with the Einstein Acquisition and as
restructuring charges. We have revised our results for the first, second and
third quarters of fiscal 2001 to appropriately record such items in the
respective quarters in which they were incurred.

We originally reported EBITDA for the first, second and third quarters of
fiscal 2001 of $1.4 million, $2.6 million and $10.2 million, respectively. As a
result of the above-described adjustments, we have revised our results for these
quarters and EBITDA as revised is $0.9 million, $0.7 million and $7.9 million,
respectively. EBITDA for the fourth quarter of fiscal 2001 was $10.7 million.

Currently, we are implementing certain programs relating to the Einstein
Acquisition that are expected to result in cost savings through integration of
production, distribution, purchasing and general and administrative expenses. We
expect to recognize the full benefit of these savings during fiscal 2002. In
addition, we intend to increase sales through the expansion of our lunch day
part and new location growth, primarily through franchising and licensing.

RESULTS OF OPERATIONS

YEAR ENDED JANUARY 1, 2002 (FISCAL 2001) COMPARED TO YEAR ENDED DECEMBER
31, 2000 (FISCAL 2000)

REVENUES. Total revenues increased to $236.0 million for fiscal 2001 from
$45.7 million for fiscal 2000. The increase in revenues was primarily
attributable to additional retail sales from the Einstein Bros. and Noah's NY
Bagel brands acquired in June 2001. Retail sales increased to $206.2 million or
87.4% of total revenues for fiscal 2001 from $12.0 million or 26.2% of total
revenues for fiscal 2000. The increase was attributable to the addition of 458
company-operated stores that were acquired as the result of the Einstein
Acquisition in June 2001. Manufacturing revenues decreased 7.8% to $24.0 million
or 10.2% of total revenues for fiscal 2001 from $26.0 million or 56.9% of total
revenues for fiscal 2000. The decrease in manufacturing revenues was primarily
the result of our decision to outsource our low-margin distribution business,
which had been included in manufacturing revenues in fiscal 2000. Franchise
related revenues decreased 24.0% to $5.9 million or 2.5% of total revenues for
fiscal 2001 from $7.7 million or 16.9% of total revenues for fiscal 2000. The
decrease reflects a lower average franchise store base in fiscal 2001, in part,
resulting from management's decision to terminate certain franchisees whose
operations did not comply with the our policies.

COSTS AND EXPENSES. Cost of sales is comprised of all store-level
operating expenses other than depreciation, amortization and taxes. Cost of
sales as a percentage of related manufacturing and retail sales increased to
82.8% for fiscal 2001 from 81.7% for fiscal 2000. The increase primarily
resulted from a shift in sales mix towards retail store revenues.

General and administrative expenses increased to $25.4 million for fiscal
2001 from $6.7 million for fiscal 2000. The increase was primarily the result of
the assumption of certain costs resulting from the Einstein Acquisition. General
and administrative expenses expressed as a percentage of total revenues declined
to 10.8% of total revenues for fiscal 2001 from 14.6% of total revenues for
fiscal 2000. The decline is the result of the higher revenue base during fiscal
2001.

Depreciation and amortization expenses increased to $13.4 million or 5.7%
of total revenues for fiscal 2001 from $2.8 million or 6.1% of total revenues
for fiscal 2000. The increase was primarily attributable to depreciation on
company-operated stores acquired during 2000 and depreciation on assets acquired
in the Einstein Acquisition.

Provision for integration and reorganization costs was $4.4 million or
1.9% of total revenues for fiscal 2001. There was no such charge for fiscal
2000. The charge in 2001 reflects expenses related to the reorganization and
integration of existing facilities and operations with those acquired in the
Einstein Acquisition.

Noncash charge in connection with the realization of assets was $2.8
million or 1.2% of total revenues for fiscal 2001. There was no such charge for
fiscal 2000. The charge resulted from management's evaluation of long lived
assets in accordance with SFAS 121.

INCOME (LOSS) FROM OPERATIONS. Net loss from operations for fiscal 2001
was $0.5 million compared to net income from operations of $5.2 million for
fiscal 2000. The decrease in net income from operations is primarily a result of
store closing and reorganization costs and the non-cash charge in connection
with the realization of assets. These charges were offset, in part, by operating
income derived from the Einstein operations which were included in our results
since the date of the Einstein Acquisition (June 19, 2001).

Interest expense, net for fiscal 2001 increased to $28.5 million, or 12.1%
of total revenues from $2.0 million or 4.3% of total revenues for fiscal 2000.
The increase was primarily the result of interest and related costs incurred on
debt incurred to finance the Einstein Acquisition. Interest expense for fiscal
2001 was comprised of approximately $12.7 million of interest paid or payable in
cash and noncash interest expense of approximately $15.8

million resulting from the amortization of debt discount, debt issuance costs
and the amortization of warrants issued in connection with debt financings.

Permanent impairment in the value of investments was $5.8 million, or 2.5%
of total revenues for fiscal 2001. There was no such charge in fiscal 2000. The
charge is based on management's estimate of the proceeds we will receive from
the bankruptcy estate of Einstein Noah Bagel Corp. on account of our investment
in certain Einstein bonds.

Provision for income taxes increased to $0.2 million or 0.1% of total
revenues for fiscal 2001 from a income tax benefit of $3.1 million for fiscal
2000. The increase in tax expense was attributable to certain deferred tax
benefits recognized for the fiscal 2000 period.

Minority interest was $1.6 million or 0.7% of total revenues for fiscal
2001. This charge is attributable to accretion of the value assigned to warrants
and the investment return to investors in Greenlight New World, L.L.C.

NET INCOME (LOSS). Net loss for fiscal 2001 was $36.3 million compared to
net income of $6.0 million for fiscal 2000. The decrease in net income is
primarily a result of interest expense incurred in fiscal 2001 on debt incurred
to finance the Einstein Acquisition and, to a lesser extent, the noncash charges
for impairment in the value of investments, store closing and reorganization
costs and the noncash charge in connection with the realization of assets as
well as the allocation of earnings to the minority interest.

SUPPLEMENTAL UNAUDITED PRO FORMA ANALYSIS OF FISCAL 2001 COMPARED TO FISCAL 2000

The following unaudited pro forma financial data for the years ended
January 1, 2002 and December 31, 2000 gives effect to the Einstein Acquisition
as if it had occurred as of the beginning of each period reported. All of the
following unaudited pro forma financial data gives effect to purchase accounting
adjustments necessary to reflect the Einstein Acquisition. These pro forma
results have been prepared for the purpose of supplementary analysis only in
order to assist in the evaluation of changes and trends in our business and do
not purport to be indicative of what operating results would have been had the
acquisition actually taken place as of the beginning of each period reported,
and may not be indicative of future operating results.

FISCAL YEAR ENDED
-------------------------
JANUARY 1, DECEMBER 31,
2002 2000
----------- ------------
(DOLLARS IN THOUSANDS)

STATEMENT OF OPERATIONS DATA
Revenues:
Einstein .......................................... $ 365,619 $ 375,703
New World ......................................... 40,003 45,723
--------- ---------
Total revenues .................................... 405,622 421,426
Cost of sales ..................................... 334,676 347,326
General and administrative expense ................ 39,252 38,423
--------- ---------
EBITDA ............................................ 31,694 35,677
========= =========

OTHER INFORMATION
Number of operating days included in fiscal period:
Einstein .......................................... 365 374
New World ......................................... 367 372

STORE COUNTS
EINSTEIN AND NOAH BRANDS:
Company-operated stores:
Store count - beginning of period ................. 458 539
Opened during the period .......................... 3 3
Closed during the period .......................... (8) (84)
--- ----
Store count - end of period ....................... 453 458
=== ====
14

FISCAL YEAR ENDED
-------------------------
JANUARY 1, DECEMBER 31,
2002 2000
----------- ------------

Licensed stores:
Store count - beginning of period ................. 5 2
Opened during the period .......................... 4 3
Closed during the period .......................... -- --
---- ----
Store count - end of period ....................... 9 5
==== ====
NEW WORLD BRANDS:
Company-operated stores:
Store count - beginning of period ................. 44 14
Opened during the period .......................... -- 30
Closed during the period .......................... (14) --
----- ----
Store count - end of period ....................... 30 44
===== ====

Franchised stores:
Store count - beginning of period ................. 307 363
Opened during the period .......................... 18 10
Closed during the period .......................... (47) (66)
---- ----
Store count - end of period ....................... 278 307
==== ====

REVENUES. Total pro forma revenues declined 3.8 % to $405.6 million in
fiscal 2001 from $421.4 million in fiscal 2000. The decline is primarily
attributable to declines in pro forma store base as well as differences in the
fiscal calendar between the periods presented as discussed below.

REVENUES - EINSTEIN. Pro forma revenues for Einstein decreased 2.7% to
$365.6 million in fiscal 2001 from $375.7 million in fiscal 2000. The decline is
the result of sales associated with 74 under-performing stores that were closed
in the fourth quarter of fiscal 2000. Sales associated with these stores
accounted for approximately $10.2 million of retail sales in fiscal 2000. In
addition, the fiscal 2000 accounting period for Einstein included nine
additional days of operations compared to fiscal 2001. This was the result of
fiscal 2000 being a 53 week year under the fiscal year convention followed by
Einstein and the addition of two operating days due to a change in Einstein's
fiscal year end date from Sunday to Tuesday for fiscal 2000. Einstein sales
normalized for the above-noted items would have been approximately $365.6
million for fiscal 2001 as compared to $356.7 million for fiscal 2000, which
represents a 2.5% increase.

REVENUES - NEW WORLD. Pro forma revenues for New World decreased 12.5% to
$40.0 million in fiscal 2001 from $45.7 million in fiscal 2000. The decrease is
in part the result of differences in the fiscal accounting calendar that
provided five additional days of operations in fiscal 2000. In addition,
declines in New World's franchised and company-operated store base as well as
management's decision to outsource New World's low-margin distribution
operations in fiscal 2000 contributed to the decrease in revenues.

COST OF SALES. Pro forma cost of sales expressed as a percentage of the
related retail and manufacturing sales decreased to 83.7% for fiscal 2001 from
84% for fiscal 2000. The decrease is the result of management's decision to
close under-performing Einstein company-operated stores as well as the
outsourcing of low-margin distribution operations that had previously been
included in fiscal 2000 results.

GENERAL AND ADMINISTRATIVE EXPENSES. Pro forma general and administrative
expenses increased 2.2% to $39.3 million in fiscal 2001 from $38.4 million in
fiscal 2000. General and administrative expenses for fiscal 2001 include charges
of approximately $1.3 million relating to unauthorized bonus payments made to
former officers and employees of New World which were offset against payments to
be made in connection with the separation of certain officers and employees from
our company. In addition, certain retention bonus payments relating to Einstein
executive management of approximately $.9 million are included as general and
administrative expense in addition to normal annual bonus payments. Exclusive of
these one-time charges and payments, pro forma general and administrative
expenses in fiscal 2001 would have decreased $1.3 million or 3.3% from fiscal
2000.

EBITDA. Pro forma EBITDA decreased 11.2% to $32.0 million for fiscal 2001
from $35.7 million for fiscal 2000. The decrease was the result of the sales
decline and the increase in general and administrative expenses discussed above.

YEAR ENDED DECEMBER 31, 2000 (FISCAL 2000) COMPARED TO YEAR ENDED DECEMBER
26, 1999 (FISCAL 1999)

REVENUES. Total revenues increased 14.5% to $45,722,881 for fiscal 2000
from $39,925,398 for fiscal 1999. Manufacturing revenues increased to
$26,011,188 or 56.9% of revenues for fiscal 2000 from $25,105,635 or 62.9% of
revenues for fiscal 1999. Royalties and franchise related revenues increased to
$7,714,511 or 16.9% of total revenues for fiscal 2000 from $6,171,413 or 15.5%
of total revenues for fiscal 1999. Retail sales increased to $11,997,182 or
26.2% of revenues for fiscal 2000 from $8,649,350 or 21.7% of revenues for
fiscal 1999, primarily due to the acquisition of additional company-operated
stores.

COSTS AND EXPENSES. Cost of sales as a percentage of related manufacturing
and retail sales decreased to 81.7% in fiscal 2000 from 82.8% in fiscal 1999.
The reduction in costs was attributable to improved manufacturing margins as we
were able to leverage existing plant capacity on higher manufacturing sales
volumes.

General and administrative expenses increased to $ 6,694,107 or 14.6% of
revenues for fiscal 2000 from $6,136,510 or 15.4% of revenues for fiscal 1999.
General and administrative expenses expressed as a percentage of total revenues
decreased to 14.6% in fiscal 2000 from 15.4% in fiscal 1999. The increase in
dollars spent is primarily attributable to additional administrative costs
associated with recently acquired company-operated stores.

Depreciation and amortization expense increased to $2,774,033 or 6.1% of
revenues for fiscal 2000 from $2,249,340 or 5.6% of revenues for fiscal 1999.
The increase was primarily attributable to depreciation on company-operated
stores acquired during fiscal 2000.

INCOME FROM OPERATIONS. Income from operations increased to $5,209,777 or
11.4% of revenues for fiscal 2000 from $3,591,093 or 9.0% of revenues for fiscal
1999. The increase is primarily attributable to increased sales for 2000 and
improved margins.

Interest expense, net for fiscal 2000 increased to $1,960,103 or 4.3% of
revenues from $1,407,018 or 3.5% of revenues for fiscal 1999. The increase in
interest expense is primarily attributable to debt incurred in connection with
the Chesapeake Bagel Bakery acquisition during the 3rd quarter of 1999.

Loss on the sale of investments increased to $338,926 for fiscal 2000 from
$0 for fiscal 1999. The loss in 2000 was attributable to our trading activities
in marketable equity and debt securities.

EXTRAORDINARY ITEM. Gain from the early extinguishment of debt, net,
decreased to $0 for fiscal 2000 from $240,023 in fiscal 1999. The gain
represents a discount earned for the prepayment of the Manhattan Bagel Unsecured
Creditors' Trust Note, which was partially offset by the costs associated with
obtaining such discount.

NET INCOME. Net income for fiscal 2000 increased to $6,010,926 or 13.1% of
revenues from $2,424,098 or 6.1% of revenues in fiscal 1999. The primary reasons
for the increase in net income were the increased revenue base for fiscal 2000,
and the realization of certain income tax benefits.

INCOME TAXES

The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 ("SFAS 109"). Realization of deferred taxes is
dependent on future events and earnings, if any, the timing and extent of which
are uncertain. During 1999, MBC contributed substantially all of our
profitability and accordingly, the valuation allowance relating to such deferred
tax assets was reversed in that year. The offsetting benefit was reflected as a
reduction of the goodwill recorded in connection with the acquisition of MBC.
During 2000, we evaluated our tax loss carryforwards and related deferred tax
asset resulting in the recognition of a deferred income tax benefit of
approximately $3,100,000. No further benefit for the current year's taxable loss
has been recorded based on management's evaluation of the likelihood of future
realizability. No adjustment to the realizable value of the deferred tax asset
previously recorded was deemed to be necessary. At January 1, 2002, we had net
operating loss carryforwards of approximately $59,300,000 available to offset
future federal taxable income. These amounts

expire at various times through 2021. As a result of ownership changes arising
from sales of equity securities and the acquisitions of MBC and Einstein, our
ability to use the loss carryforwards is subject to limitations under Section
382 of the Internal Revenue Code of 1986, as amended.

LIQUIDITY AND CAPITAL RESOURCES

In January and March 2001, we issued 25,000 shares of newly authorized
Series F Preferred Stock and warrants to purchase Common Stock as well as equity
in a newly formed affiliate, Greenlight New World, L.L.C. The proceeds, net of
related offering expenses, were $32.9 million. The proceeds from these equity
sales were utilized to purchase Einstein bonds and pay related costs.

In June 2001, we issued 25,000 shares of Series F Preferred Stock and
warrants to purchase Common Stock. The proceeds, net of related offering
expenses, were $23.8 million. The proceeds from this stock sale were utilized as
a part of the purchase price for the Einstein Acquisition.

On June 19, 2001, we consummated a private placement of 140,000 units
consisting of $140 million of Senior Increasing Rate Notes due 2003 with
detachable warrants for the purchase of 13.7 million shares of our Common Stock,
exercisable at $.01 per share. The proceeds, net of discount and related
offering expenses, were $122.4 million. The proceeds were utilized to fund a
portion of the purchase price for the Einstein Acquisition, to repay our
then-existing bank debt and for general working capital purposes. The Notes
currently bear interest at 16% per annum. In addition, since we have not
completed a registered exchange offer for the Notes, we began paying additional
interest on the Notes on November 17, 2001 at the rate of .25% per annum
increasing by .25% each 90 days that such default continues up to a maximum rate
of additional interest of 1% per annum.

On June 19, 2001, we obtained a $35 million asset-backed secured loan to
our wholly owned non-restricted subsidiary, EnbcDeb Corp. The proceeds, net of
discount and related offering expenses, were $32.3 million. The proceeds were
utilized to fund a portion of the purchase price for the Einstein Acquisition.
The asset-backed loan, for which EnbcDeb Corp. issued increasing rate notes (the
"EnbcDeb Notes"), is secured by Einstein bonds owned by EnbcDeb Corp. Interest
on the EnbcDeb Notes initially accrues at the rate of 14% per annum, increasing
by .35% on the fifteenth day of each month following issuance. Interest is
payable on the fifteenth day of every month and may be paid in kind at our
option. As of January 1, 2002, an aggregate of $37.6 million principal amount of
EnbcDeb Notes was outstanding. We must apply all proceeds relating to the
Einstein bonds to the repayment of the EnbcDeb Notes. We anticipate that
approximately $34.2 million aggregate principal amount of the EnbcDeb Notes
outstanding will be repaid from the proceeds of the Einstein bonds distributed
in the Einstein bankruptcy case ($24.2 million of which has already been
distributed and applied to redeem a portion of the outstanding EnbcDeb Notes).
To the extent that the proceeds received are insufficient to repay the EnbcDeb
Notes in full, the holders of the EnbcDeb Notes will have the option to require
us to issue them preferred stock ("Series G Preferred Stock") having a
redemption value equal to the deficiency. If the amount of such deficiency is
less than $5.0 million, then the Series G Preferred Stock will be entitled to an
annual cash dividend equal to 17% per annum, increasing 100 basis points per
month until the Series G Preferred Stock is redeemed, and we will be required to
issue warrants to purchase 5% of our fully diluted Common Stock. If the amount
of the deficiency is $5.0 million or greater, then the Series G Preferred Stock
will be entitled to an annual cash dividend equal to 18% per annum, increasing
100 basis points per month until the Series G Preferred Stock is redeemed, and
we will be required to issue warrants to purchase 10% of our fully diluted
Common Stock.

Pursuant to the asset purchase agreement entered into in connection with
Einstein Acquisition, we are entitled to a reduction in the purchase price to
the extent that assumed current liabilities (as defined in the agreement) exceed
$30 million as of the acquisition date. As of January 1, 2002, we estimate that
$3.9 million is due to us from the Einstein bankruptcy estate. This amount is
based on the final determination of assumed current liabilities by the
independent arbitrator as of the acquisition date, net of certain payments
received from the Einstein bankruptcy estate.

At January 1, 2002, we had a working capital deficit of $20.2 million
compared to a working capital surplus of $16.5 million at December 31, 2000. The
decline in working capital was primarily the result of the working capital
deficit associated with the acquired assets of Einstein (a working capital
deficit of approximately $25.0 million at the date of acquisition), the accrual
and payment of costs associated with integration and reorganization
(approximately $4.4 million), the accrual of interest in connection with the $35
million asset-backed

loan utilized to finance the Einstein Acquisition (approximately $2.7 million)
and funds expended for legal and other services in connection with the Einstein
Acquisition (approximately $13.6 million).

We had net cash provided by operating activities of $6.5 million for the
year ended January 1, 2002 compared with net cash provided by operating
activities of $2.1 million for the year ended December 31, 2000. The increase in
cash provided by operating activities was attributable to [changes in operating
assets and liabilities, which were related to the Einstein Acquisition.

We had net cash used in investing activities of $189.4 million for the
year ended January 1, 2002 compared with net cash used in investing activities
of $19.1 million for the year ended December 31, 2000. The increase in cash used
in investing activities was attributable to our investment in debt securities
and the Einstein Acquisition.

We had net cash provided by financing activities of $194.9 million for the
year ended January 1, 2002 compared with net cash provided by investing
activities of $16.4 million for the year ended December 31, 2000. The increase
in cash provided by financing activities relates to the issuance of Series F
Preferred Stock, proceeds from the sale of an interest in Greenlight New World,
L.L.C. and proceeds from the Notes and EnbcDeb Notes issued in connection with
the Einstein Acquisition.

On May 30, 2002, we entered into a Loan and Security Agreement with BET
Associates, L.P., one of our principal stockholders, which provides for a $7.5
million revolving loan facility. The facility will be secured by substantially
all of our assets. Borrowings under the facility will bear interest at the rate
of 11% per annum. The facility will expire on March 31, 2003. In connection with
obtaining the facility, we paid MYFM Capital LLC a fee of $75,000. Leonard
Tannenbaum, one of our directors, is the Managing Director of MYFM Capital and
is a partner at BET Associates, L.P. At the time that we entered into this
facility, we terminated our prior revolving loan facility with Foothill Capital.

We plan to satisfy our capital requirements for the balance of fiscal 2002
through cash flow from operations and borrowings under our revolving loan
facility. However, the Notes mature in June 2003 and the revolving loan facility
expires in March 2003. Accordingly, we intend to pursue refinancing the Notes
and replacing the revolving loan facility, although we can give you no assurance
that we will be able to do so on satisfactory terms and conditions, or at all.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, Business Combinations ("SFAS 141"), and No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"). SFAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
Under SFAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually (or more frequently if impairment
indicators arise) for impairment. Separable intangible assets that are not
deemed to have indefinite lives will continue to be amortized over their useful
lives (but with no maximum life). The amortization provisions of SFAS 142 apply
to goodwill and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, we are required
to adopt SFAS 142 effective January 1, 2002. We are currently evaluating the
effect the adoption of the provisions of SFAS 142, which are effective January
1, 2002, will have on our results of operations and financial position. In this
connection, we are in the process of assessing our reporting units. Once the
reporting units have been established, we will use the two-step approach to
assess our goodwill and intangible assets. In the first step, we will compare
the estimated fair value of each reporting unit that houses goodwill to the
carrying amount of the unit's assets and liabilities, including its goodwill and
intangible assets. If the fair value of the reporting unit is below its carrying
amount, then the second step of the impairment test is performed, in which the
current fair value of the unit's assets and liabilities will determine the
current implied fair value of the unit's goodwill and intangible assets. In
addition, we will reassess the classifications of our intangible assets,
including goodwill, previously recorded in connection with earlier purchase
acquisitions, as well as their useful lives. We expect that the discontinuation
of amortization of the remaining goodwill and intangible assets with indefinite
lives of approximately $105,423,000 at January 1, 2002 will reduce operating
expenses by approximately $883,000 per quarter in 2002, or approximately
$3,532,000 for the year ending December 31, 2002. The adoption of SFAS No. 141
had no impact on our results of operations.

GENERAL ECONOMIC TRENDS AND SEASONALITY

We anticipate that our business will be affected by general economic
trends that affect retailers overall. While we have not operated during a period
of high inflation, we believe based on industry experience that we would
generally be able to pass on increased costs resulting from inflation to our
consumers. Our business may be affected by other factors, including increases in
the commodity prices of green coffee and/or flour, acquisitions by us of
existing stores, existing and additional competition, marketing programs,
weather and variations in the number of location openings. Although few, if any,
of our employees are paid at the minimum wage, an increase in the minimum wage
may create pressure to increase the pay scale for our employees, which would
increase our labor costs and those of our franchisees. Our business is subject
to seasonal trends. Generally, our revenues in the first fiscal quarter are
somewhat lower than in the other three fiscal quarters.

RISK FACTORS RELATING TO OUR FINANCIAL CONDITION

In addition to the risk factors relating to our operations disclosed under
the caption "Business" in this Form 10-K, each of which may adversely affect our
results of operations and financial condition, we face the following additional
significant risks relating to our results of operations and financial condition.

WE HAVE $140 MILLION AGGREGATE PRINCIPAL AMOUNT OF NOTES OUTSTANDING THAT
MATURE ON JUNE 15, 2003, AND WE MUST RAISE ADDITIONAL CAPITAL TO REFINANCE THESE
NOTES AND FOR OTHER GENERAL CORPORATE PURPOSES.

We must raise significant additional capital before June 15, 2003 to
refinance the Notes and for other general corporate purposes. We cannot assure
you that we will be able to raise such capital on satisfactory terms and
conditions, if at all. In addition, our existing revolving loan facility expires
on March 31, 2003. We intend to pursue refinancing the Notes and replacing the
revolving loan facility through the issuance of debt or equity or a combination
thereof and obtaining additional bank financing, but we currently have no
commitments with respect to any refinancing. We currently have outstanding
warrants to purchase 61,687,867 shares of our Common Stock, which may adversely
affect our ability to raise additional equity financing in the future.

WE HAVE AND EXPECT TO CONTINUE TO HAVE A SUBSTANTIAL AMOUNT OF DEBT.

We have a high level of debt and are highly leveraged. In addition, we
may, subject to certain restrictions, incur substantial additional indebtedness
in the future. Our high level of debt could:

o make it difficult for us to satisfy our obligations under our
indebtedness;

o limit our ability to obtain additional financing for working
capital, capital expenditures, acquisitions and general corporate
purposes;

o increase our vulnerability to downturns in our business or the
economy generally;

o limit our ability to withstand competitive pressures from our less
leveraged competitors; and

o harm us if we fail to comply with the covenants in the instruments
and agreements governing our indebtedness, because a failure could
result in an event of default that, if not cured or waived, could
result in all of our indebtedness becoming immediately due and
payable, which could render us insolvent.

WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW TO MAKE PAYMENTS UNDER
OUR INDEBTEDNESS DUE TO EVENTS THAT ARE BEYOND OUR CONTROL.

Economic, financial, competitive, legislative and other factors beyond our
control may affect our ability to generate cash flow from operations to make
payments on our indebtedness and to fund necessary working capital. A
significant reduction in operating cash flow would likely increase the need for
alternative sources of liquidity. If we are unable to generate sufficient cash
flow to make payments on our debt, we will have to pursue one or more
alternatives, such as reducing or delaying capital expenditures, refinancing our
debt, selling assets or raising equity.

We cannot assure you that any of these alternatives could be accomplished on
satisfactory terms, if at all, or that they would yield sufficient funds to
retire our debt.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our debt at January 1, 2002 is principally comprised of the Notes and the
EnbcDeb Notes. A 100 basis point increase in market interest rates would have no
effect on our borrowing costs, as interest is paid at rates defined under the
respective agreements. However, an increase in prevailing market interest rates
could negatively affect the market value of our Senior Increasing Rate Notes.

We are obligated under a mortgage payable in the principal amount of
approximately $208,000 which bears interest at the prime rate plus 1.25%. We do
not believe that a 100 basis point increase in the prime rate would have a
material effect on our borrowing costs relating to this mortgage.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Information in response to this Item is set forth in the Financial
Statements beginning on page F-1 of this Form 10-K.

SELECTED QUARTERLY FINANCIAL DATA

In connection with the Einstein Acquisition, unauthorized bonus payments
in the aggregate amount of $3.5 million were made to certain former executive
officers and former employees. A portion of those payments (approximately $1.0
million) was made in the third quarter of our fiscal 2001 and the balance
(approximately $2.5 million) in Q1 2002. All of these payments were originally
recorded in our financial statements in the second and third quarters of fiscal
2001 as part of the acquisition costs associated with the Einstein Acquisition
and as a restructuring charge. We have revised the results for those quarters so
as to reverse that treatment. The aggregate of such payments (including $1.0
million in the third quarter of fiscal 2001 and $2.5 million in Q1 2002) has
been or will be, as the case may be, recorded as general and administrative
expense. An aggregate of $2.5 million of such payments was offset against
payments to be made in connection with the separation of certain officers and
employees from our company. With respect to that portion of the unauthorized
bonus payments that has not been repaid or offset plus certain other
unauthorized payments of $0.2 million that have not been recovered, or an
aggregate of $1.2 million, we have recorded a receivable from the former
officer. Based on our evaluation of the collectability of this amount, we have
recorded an allowance for uncollectable receivable with a corresponding charge
to bad debt expense in the quarters in which the payments occurred.

An additional aggregate amount of $3.4 million, primarily relating to
operating and financing related expenses, was also originally recorded in our
financial statements in the second and third quarters of fiscal 2001 as a part
of the acquisition costs associated with the Einstein Acquisition and as
restructuring charges. We have restated our results for the first, second and
third quarters of fiscal 2001 to appropriately record such items.

The following table shows quarterly unaudited financial results for fiscal
2001 and fiscal 2000, giving effect to the restatements discussed above.
Effective for the quarter ended July 3, 2001 and as a result of the Einstein
Acquisition, we elected to change our fiscal year end to the Tuesday closest to
December 31. The fiscal year end dates for 2000 and 2001 are December 31, 2000
and January 1, 2002 resulting in years containing 53 and 52 weeks, respectively.
The year ended January 1, 2002 includes two extra days of operations as a result
of this change.

First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share data)

2001:
Revenues.................... $ 10,475 $ 25,232 $ 100,448 $ 99,865
Income from operations...... 113 (8,045) 2,231 5,172
Net income (loss)........... (980) (17,817) (9,892) (7,640)
Basic loss per share........ (0.27) (1.29) (0.93) (0.81)
Diluted loss per share...... (0.27) (1.29) (0.93) (0.81)

2000:

Revenues.................... $ 9,146 $ 10,168 $ 13,562 $ 12,847
Income from operations...... 1,129 1,232 1,611 1,238
Net income (loss)........... 651 771 3,129 1,460
Basic income per share...... 0.06 0.07 0.12 0.07
Diluted income per share.... 0.06 0.06 0.12 0.08

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is information with respect to our directors, executive
officers and key employees:

NAME AGE POSITION
---- --- --------

Anthony D. Wedo................ 43 Chairman, Chief Executive Officer
and Director
William Rianhard *............. 43 President and Chief Operating
Officer-Manhattan/Chesapeake
Paul J. B. Murphy III.......... 47 Chief Operating Officer-Einstein
Bros./Noah's
Charles Gibson................. 40 Chief Development Officer
Edward McPherson............... 48 Chief Marketing Officer
Karen Hogan (1)(2)(3)**........ 41 Director
Edward McCabe (1)(2)(3) **..... 63 Director
William Nimmo.................. 48 Director
Leonard Tannenbaum............. 30 Director
Eve Trkla...................... 39 Director

----------
* Effective May 31, 2002, Mr. Rianhard has resigned.
** Effective May 31, 2002, each of Ms. Hogan and Mr. McCabe has resigned.
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Compliance Committee

ANTHONY D. WEDO. Mr. Wedo joined us as Chief Executive Officer in July
2001 and was appointed a director in August 2001. Mr. Wedo was appointed
Chairman in April 2002. From 1998 to July 2001, Mr. Wedo served as the Chief
Executive Officer and Managing Partner of Atlantic Restaurant Group, a venture
group focused on acquiring high-growth restaurant concepts. From 1994 through
1997, he served as President and Chief Executive Officer of Mid-Atlantic
Restaurant Systems, a Boston Market franchisee. From 1987 through 1993, Mr. Wedo
was employed by Pepsico Inc.'s KFC division, most recently as a Divisional Vice
President in charge of a 1,200 store territory. Mr. Wedo has a B.S. degree in
Marketing and Finance from Pennsylvania State University.

WILLIAM RIANHARD. Mr. Rianhard joined us as our President and Chief
Operating Officer-Manhattan/ Chesapeake in May 2000. From October 1995 to April
2000, Mr. Rianhard was employed by Sara Lee Corporation as the President and
Chief Operating Officer of Quikava, Inc., Chock Full o' Nuts Cafe franchising
network. From 1976 to October 1995, Mr. Rianhard was employed by Allied Domecq
U.S. Retailing, the parent company of Dunkin' Donuts, in various operations and
development positions, serving the last four years as the Director of Concept
Development.

PAUL J.B. MURPHY III. Mr. Murphy joined us in December 1997 as Senior Vice
President-Operations and has served as Executive Vice President-Operations since
March 1998. From July 1996 until December 1997, Mr. Murphy was Chief Operating
Officer of one of our former area developers. From August 1992 until July 1996,
Mr. Murphy was Director of Operations of R&A Foods, L.L.C., an area developer of
Boston Chicken. Mr. Murphy has a B.A. degree from Washington and Lee University.

CHARLES GIBSON. Mr. Gibson joined us in September 2000, as Chief
Development Officer. From August 1997 to September 2000, Mr. Gibson served as
Vice President Real Estate/Market Planning for CSK Auto, Inc., an after-market
auto parts dealer. From 1988 through 1997, Mr. Gibson was with PepsiCo Inc.,
most recently as Senior Director of Development supporting Pizza Hut, Inc. in
real estate and construction management. Mr. Gibson received his undergraduate
degree in Accounting from Eastern Kentucky University and has an M.B.A. from the
University of North Texas.

EDWARD MCPHERSON. Mr. McPherson joined us as Chief Marketing Officer in
September 2001. From September 2000 until September 2001, Mr. McPherson was
President of iDd Media, a media and distribution company. From February 2000
until September 2000, Mr. McPherson was Senior Vice President and Chief
Marketing Officer of Tacticity.com, a start-up retail/e-commerce technology
firm. From September 1998 until February 2000, Mr. McPherson was Vice
President-Marketing of Gateway, a computer company. From March 1989 until
September 1998, Mr. McPherson held various positions with Pepsico Inc.'s KFC
division, later Tri-Con Global's KFC division, a restaurant service company,
most recently as a Vice President-Marketing. Mr. McPherson has a B.S. degree and
an M.B.A. degree from Old Dominion University.

KAREN HOGAN. Ms. Hogan has served as our director since December 1997.
Since 1997, Ms. Hogan has been a private investor. From 1992 to 1997, Ms. Hogan
served as Senior Vice President, Preferred Stock Product Management at Lehman
Brothers, Inc. From 1985 to 1992, Ms. Hogan served as Vice President, New
Product Development Group at Lehman Brothers, Inc. Ms. Hogan has a B.S. degree
from the State University of New York at Albany and an M.B.A. degree in Finance
and Economics from Princeton University.

EDWARD MCCABE. Mr. McCabe has served as our director since February 1997.
Mr. McCabe has served as a marketing and investment banking consultant since
1998. From 1991 to 1998, Mr. McCabe was Chief Executive Officer of McCabe &
Company, an advertising and communications company.

WILLIAM NIMMO. Mr. Nimmo has served as our director since January 2001 and
is a partner at Halpern, Denny & Co., a private equity investment firm. From
1989 to 1997, Mr. Nimmo was a partner at Cornerstone Equity Investors, Inc.
Prior to 1989, Mr. Nimmo spent ten years with J.P. Morgan & Company. Mr. Nimmo
is a graduate of Dartmouth College and received an M.B.A. from the Amos Tuck
School of Business Administration at Dartmouth. Mr. Nimmo serves on the boards
of a number of private companies.

LEONARD TANNENBAUM. Leonard Tannenbaum, C.F.A., has served as our director
since March 1999 and is the Managing Partner at MYFM Capital LLC, a boutique
investment banking firm, and a partner at BET Associates, L.P., a capital fund.
From 1997 until 1999, Mr. Tannenbaum was a partner at LAR Management, a hedge
fund. From 1996 until 1997, Mr. Tannenbaum was an assistant portfolio manager at
Pilgrim Baxter and Co. From 1994

until 1996, Mr. Tannenbaum was Assistant Vice President in the small company
group of Merrill Lynch. Mr. Tannenbaum currently serves on the board of
directors of Corteq Inc., a biopharmaceutical company, General Devices Inc., a
company that provides contract technical services, and Assisted Living Concepts,
Inc., a company that owns and operates assisted living residences. Mr.
Tannenbaum has an M.B.A in Finance and Bachelors of Science in Management from
The Wharton School at the University of Pennsylvania.

EVE TRKLA. Ms. Trkla has served as our director since August 2000 and is a
controlling person of Brookwood Financial Partners, L.P., an affiliate of
Brookwood New World Investors, LLC. Ms. Trkla has been, since May 1993, the
Chief Financial Officer of Brookwood Financial Partners, L.P. Ms. Trkla's prior
experience in the financial services field includes eight years as a lender at
The First National Bank of Boston and one year as the Senior Credit Officer at
The First National Bank of Ipswich. Ms. Trkla also serves as a director of
UbiquiTel, Inc., a Sprint PCS affiliate. Ms. Trkla is a cum laude graduate of
Princeton University.

Our by-laws provide that our board of directors is divided into three
classes, designated Class I, Class II and Class III. Each director is appointed
for a three-year term. Karen Hogan is a Class I director. Edward McCabe is a
Class II director. Anthony D. Wedo and Leonard Tannenbaum are Class III
directors.

We are a party to a stockholders agreement (the "Stockholders Agreement")
dated January 18, 2001, as amended March 29, 2001, June 19, 2001 and July 9,
2001, with BET Associates, L.P. ("BET"), Brookwood New World Investors, LLC
("Brookwood"), Halpern Denny III, L.P. ("Halpern Denny"), Greenlight Capital,
L.L.C. ("Greenlight Capital") and certain of its affiliates and Special
Situations Fund III, L.P. ("Special Situations Fund") and certain of its
affiliates. Pursuant to the terms of the Stockholders Agreement, BET and
Brookwood are each entitled to designate one member to our board of directors,
and Halpern Denny is entitled to designate two members to our board of
directors. See "Certain Relationships and Related Transactions." Halpern Denny
has only designated one director at this time. Pursuant to the Stockholders
Agreement, William Nimmo, Leonard Tannenbaum and Eve Trkla have been designated
as directors. Mr. Tannenbaum was also elected to our board of directors by our
common stockholders.

Effective May 15, 2002, Keith Barket resigned as a director of our
company. Effective May 31, 2002, each of Edward McCabe and Karen Hogan has
resigned as a director of our company. We are presently seeking to fill these
vacancies with new directors who are not affiliated with our company.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth the total compensation awarded to, earned
by or paid during our last three fiscal years to our Chief Executive Officer, to
our other two executive officers and to two former executive officers during the
year ended January 1, 2002 ("Named Executive Officers").

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------- -------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING
BONUS COMPENSATION AWARDS OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR SALARY($) ($) ($) ($) (#)
--------------------------- ---- --------- ----- ------------ ------ ------------

Anthony D. Wedo(1) 2001 $ 183,077 $ 187,516 $ 8,308(3) -- 3,077,035
Chairman and Chief
Executive Officer

William Rianhard(2) 2001 $ 160,000 $ 40,000 $ 12,000(3) --
President and Chief 2000 $ 98,923 $ 25,000 $ 12,000(3) -- 60,000
Operating
Officer-Manhattan/Chesapeake

Paul J.B. Murphy III(4) 2001 $ 161,538 $ 150,000 $ -- -- --
Chief Operating
Officer-Einstein
Bros./Noah's

R. Ramin Kamfar(5) 2001 $ 300,000 $ 300,000 $ 24,000(3)(6) -- --
Former Chairman 2000 $ 300,000 $ 305,000 $ 24,000(3)(6) 250,000 250,000
1999 $ 175,000 $ 87,500 $ 24,000(3)(6) -- 250,000

Jerold E. Novack(7) 2001 $ 230,000 $ 150,000 $ 12,000(3)(8) 118,816 1,143,635
Former Executive 2000 $ 154,808 $ 77,500 $ 12,000(3)(8) 100,000 200,000
Vice President and Chief 1999 $ 150,000 $ 37,500 $ 12,000(3)(8) -- 125,000
Financial Officer

----------
(1) We hired Mr. Wedo in July 2001.
(2) We hired Mr. Rianhard in April 2000.
(3) Represents a car allowance for the respective individuals.
(4) Mr. Murphy became an officer in connection with the Einstein Acquisition.
(5) Effective April 1, 2002, Mr. Kamfar resigned as an officer and director.
In connection with his departure from our company, we permitted Mr. Kamfar
to retain $1,445,000 previously paid to him, which amount is not included
in the amounts set forth in the table. In addition, one-half of Mr.
Kamfar's options were cancelled when his employment with us ended and the
remainder terminate 90 days thereafter pursuant to their terms.
(6) In addition to his car allowance, Mr. Kamfar had the use of a car paid for
by us (in 2001, beginning in August, Mr. Kamfar had the use of a second
car paid for by us, the cost of which was reimbursed to us in 2002) and we
reimbursed Mr. Kamfar for his garage expenses, tolls and car repairs. The
cost of the cars and such reimbursed expenses are not included in the
amounts set forth in the table.
(7) Effective April 2, 2002, we terminated Mr. Novack for cause. Certain
unauthorized payments made to Mr. Novack are not included in the amounts
set forth in the table. All of Mr. Novack's options expire, pursuant to
their terms, 90 days after the termination of his employment.
(8) In addition to his car allowance, Mr. Novack had the use of a car paid for
by us and, beginning in August, 2001, the use of a second car paid for by
us and we reimbursed Mr. Novack for tolls and car repairs. The cost of the
cars and such reimbursed expenses are not included in the amounts set
forth in the table.

STOCK OPTION GRANTS IN LAST FISCAL YEAR

Set forth below is information on grants of stock options for the Named
Executive Officers for the year ended January 1, 2002. In addition, as required
by Securities and Exchange Commission rules, the table sets forth hypothetical
gains that would exist for the shares subject to such options based on assumed
annual compounded rates of stock price appreciation during the option term.

OPTION GRANTS IN FISCAL 2001

PERCENTAGE OF
NUMBER OF TOTAL OPTIONS POTENTIAL REALIZABLE
SECURITIES GRANTED TO EXERCISE VALUE AT ASSUMED
UNDERLYING EMPLOYEES PRICE ANNUAL RATES OF STOCK
OPTION IN ($ PER PRICE APPRECIATION FOR
GRANTED FISCAL YEAR SHARE) EXPIRATION DATE OPTION TERM(1)
------- ----------- ----- --------------- --------------
5%(2) 10%(3)
----- ------

Anthony D. Wedo.... 3,077,035 72.9% $1.15 July 14, 2011 $2,225,401 $5,639,602
Jerold Novack(4)... 1,143,635 27.1% $0.53 September 19, 2011 $1,629,306 $2,953,427

----------
(1) The potential realizable value illustrates value that might be realized
upon exercise of the options immediately prior to the expiration of their
terms, assuming the specified compounded rates of appreciation of the
market price per share from the date of grant to the end of the option
term. Actual gains, if any, on stock option exercise are dependent upon a
number of factors, including the future performance of the Common Stock
and the timing of option exercises, as well as the optionee's continued
employment through the vesting period. The gains shown are net of the
option exercise price, but do not include deductions for taxes and other
expenses payable upon exercise of the option or for the sale of underlying
shares of Common Stock. There can be no assurance that the amounts
reflected in this table will be achieved.
(2) Assumes 5% compounded rate of appreciation in the market price per share
from the date of grant to the end of the option term.
(3) Assumes 10% compounded rate of appreciation in the market price per share
from the date of grant to the end of the option term.
(4) Mr. Novack's options will terminate, pursuant to their terms, 90 days
after the termination of his employment.

FISCAL YEAR END OPTION VALUES

During the fiscal year ended January 1, 2002, none of the Named Executive
Officers exercised any stock options. Set forth below is information on the
number of stock options held by the Named Executive Officers as of January 1,
2002. None of such stock options was in-the-money as of January 1, 2002.

FISCAL YEAR END OPTION VALUES

NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT FISCAL YEAR END (#)
------------------------------
EXERCISABLE UNEXERCISABLE
----------- -------------

Anthony D. Wedo............................ 0 3,077,035
William Rianhard........................... 30,000 30,000
Paul J.B. Murphy........................... 0 0
R. Ramin Kamfar(1)......................... 684,367 0
Jerold Novack(2)........................... 802,874 762,423

----------
(1) Effective April 1, 2002, Mr. Kamfar resigned as an officer and director.
In connection with his departure from our company, one-half of Mr.
Kamfar's options were cancelled. The remainder of his options terminate 90
days thereafter pursuant to their terms.
(2) Effective April 2, 2002, we terminated Mr. Novack for cause. All of Mr.
Novack's options expire, pursuant to their terms, 90 days thereafter.

DIRECTORS' COMPENSATION

Each of our non-employee directors is paid $2,000 for each of the
quarterly board meetings of each calendar year, $1,000 for each additional board
meeting held in the same calendar year and $500 for each committee

meeting. Such payments are made in shares of our Common Stock. Employee
directors are not compensated for service provided as directors. Additionally,
each non-employee director receives stock options to purchase 10,000 shares of
our Common Stock on the date on which such person first becomes a director, and
on October 1 of each year if, on such date, he or she shall have served on our
board of directors for at least six months. The exercise price of such options
is equal to the market value of the shares of Common Stock on the date of grant.
All directors are reimbursed for out-of-pocket expenses incurred by them in
connection with attendance of board meetings and committee meetings.

EMPLOYMENT CONTRACTS

ANTHONY WEDO. In July 2001, we entered into an employment agreement with
Mr. Wedo, our Chief Executive Officer. The agreement expires on July 31, 2003,
but is automatically renewed for additional one-year periods commencing each
July 31, unless either party gives written notice of its desire not to renew
such term at least 90 days prior to the end of the term or any such renewal
term. The agreement provides for base salary of $425,000 per year, and an annual
performance bonus of up to 88.25% of Mr. Wedo's base salary for such year. The
amount of the bonus will be determined by the Board of Directors after review by
the Compensation Committee and is based upon the achievement of predetermined
company goals during such period. For the period July 16, 2001 to July 31, 2002,
Mr. Wedo will receive a guaranteed bonus of $187,500 payable in the amount of
$46,875 on each of October 31, 2001, January 31, 2002, April 30, 2002 and July
31, 2003, which is considered a prepayment of the annual performance bonus
described above.

Mr. Wedo also was granted an option to purchase 3% of our outstanding
Common Stock (including Common Stock issuable upon exercise of outstanding
options and warrants, having an exercise price of $3.00 per share or less) (the
"Fully Diluted Common Stock") at a price per share of $1.15, which option will
vest as to 50% of the amount thereof at the end of each 12-month period during
the initial term of the employment agreement. Mr. Wedo was also granted an
option to purchase an additional 1% of our Fully Diluted Common Stock at a price
per share of $1.15, which option shall vest at the end of the first one-year
extension of the initial term of the agreement (provided the term is thus
extended pursuant to the agreement). In the event that we terminate Mr. Wedo's
employment upon a change in control or other than for cause, he will be paid
severance compensation equal to one time his annual base salary.

WILLIAM RIANHARD. In April 2000, we entered into an employment agreement
with Mr. Rianhard with a term beginning May 15, 2000 and ending May 15, 2002,
which term is automatically renewed from year to year unless either party gives
notice to the contrary not less than 90 days prior to the commencement of any
one-year extension period. The agreement was not renewed at the end of the
initial two-year term. The agreement provides for base salary of $160,000 plus
such increases as the Board of Directors may approve. The agreement also
provides for an annual service bonus equal to 25% of Mr. Rianhard's base salary
and an annual performance bonus of up to 25% of Mr. Rianhard's base
compensation, as determined by the Board of Directors. The agreement also
provides for an option to purchase 60,000 shares of common stock at $2.63, a
$12,000 annual automobile allowance, a $12,000 annual rent allowance and a
moving allowance.

If there is a change in control, Mr. Rianhard would be entitled to a bonus
equal to 50% of his base compensation for the year in which the same occurs, and
if he is terminated within six months after the change of control, Mr. Rianhard
would be entitled to receive 12 months' base compensation, one year's bonus and
12 months' automobile allowance and would be entitled to fully exercise his
options. For a period of one year following Mr. Rianhard's voluntary termination
or termination for cause, Mr. Rianhard cannot perform services for, have an
equity interest (except for an interest of 5% or less in an entity whose
securities are listed on a national securities exchange) in any business (other
than us) or participate in the financing, operation, management or control of,
any firm, corporation or business (other than us) that engages in the marketing
or sale of specialty coffee or bagels as its principal business.

Effective May 31, 2002, Mr. Rianhard resigned.

RAMIN KAMFAR. In September 2000, we entered into an employment agreement
with Mr. Kamfar, then our Chairman and Chief Executive Officer. The agreement
expired on December 31, 2001 but automatically renews for additional one-year
periods commencing each January 1 unless either party gives written notice to
the other of its desire not to renew such term, which notice must be given no
later than 90 days prior to the end of each term on any

such renewal. The agreement provides for base salary of $300,000 per year, and
an annual performance bonus of between 35% and 100% of Mr. Kamfar's base salary
for calendar year 2000 and any subsequent calendar year. Each bonus is based on
the attainment of certain corporate and individual goals. In the event that we
terminate Mr. Kamfar's employment upon a change in control or other than for
cause, he will be paid severance compensation equal to three times his annual
base salary (at the rate payable at the time of such termination) plus an amount
equal to the greater of three times the amount of his bonus for the calendar
year preceding such termination or 35% of his base salary.

Effective April 1, 2002, Mr. Kamfar resigned as an officer of our company
and from his seat on our board of directors. In connection with his departure,
we permitted Mr. Kamfar to retain $1,445,000 previously paid to him.

JEROLD E. NOVACK. In September 2001, we entered into a new employment
agreement with Mr. Novack, then our Executive Vice President, Chief Financial
Officer and Secretary. The agreement expires on June 30, 2002. The agreement
provides for base salary of $300,000 per year, and an annual performance bonus
of 30% to 100% of Mr. Novack's base salary based on Mr. Novack's and our
performance.

Mr. Novack was granted an option to purchase 1.5% of the then outstanding
Common Stock (including the Common Stock issuable under outstanding options and
warrants) at a price per share of $.53, which option vested as to one-third of
the amount thereof on July 1, 2001.

For a period of one year following Mr. Novack's voluntary termination or
termination for cause, Mr. Novack cannot engage anywhere in the Northeastern
United States, have an equity interest (except for an interest of 10% or less in
an entity whose securities are listed on a national securities exchange) in any
business (other than us) or participate in the financing, operation, management
or control of, any firm, corporation or business (other than us) that engages in
the marketing or sale of specialty coffee or bagels as its principal business.

Effective April 2, 2002, we terminated Mr. Novack for cause.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who own more than ten percent of our Common Stock, to
file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the
Securities and Exchange Commission. Officers, directors and greater than ten
percent shareholders are required by Securities and Exchange Commission
regulations to furnish us with copies of all Section 16(a) forms they file. To
our knowledge, based solely on our review of the copies of such forms received
by us, we believe that all Section 16(a) filing requirements applicable to our
officers, directors and greater than ten percent beneficial owners have been
complied with for the fiscal year ended January 1, 2002, except for each of our
executive officers and non-employee directors who failed to file a report on
Form 5 to report exempt grants of stock and options.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding beneficial
ownership of our Common Stock as of May 14, 2002 (i) by each person (or group of
affiliated persons) who is known by us to own beneficially more than 5% of our
Common Stock, (ii) by each of the Named Executive Officers, (iii) by each of our
directors, and (iv) by all directors and executive officers as a group.

AMOUNT AND NATURE
OF BENEFICIAL
BENEFICIAL OWNER** OWNERSHIP PERCENTAGE
---------------- --------- ----------

Halpern Denny III, L.P. .................... 18,464,274 (1) 51.4%
Greenlight Capital, L.L.C. ................. 16,289,023 (2) 48.2%
Brookwood New World Investors, LLC.......... 4,194,351 (3) 19.4%
BET Associates, L.P. ....................... 5,011,601 (4) 22.5%
Special Situations Fund III, L.P............ 4,419,987 (5) 20.4%
Frank and Lydia LaGalia..................... 1,500,000 (6) 8.6%

AMOUNT AND NATURE
OF BENEFICIAL
BENEFICIAL OWNER** OWNERSHIP PERCENTAGE
---------------- --------- ----------

Anthony D. Wedo............................. 0 (7) *
William Rianhard............................ 30,000 (8) *
Paul J.B. Murphy III........................ 0 *
Karen Hogan................................. 69,089 (9) *
Edward McCabe............................... 71,682 (10) *
William Nimmo............................... 33,047 (11) *
Leonard Tannenbaum.......................... 134,660 (12) *
Eve Trkla................................... 34,438 (13) *
R. Ramin Kamfar............................. 1,012,282 (14) 5.6%
Jerold E. Novack............................ 1,005,683 (15) 5.5%
All directors and executive officers as a 12.4%
group (8 persons)......................... 2,390,881 (16)

-----------
* Less than one percent (1%).
** Address for each officer and director is our principal office located at
246 Industrial Way West, Eatontown, New Jersey 07724.
(1) Based upon an amendment to a Schedule 13D filed with the Securities and
Exchange Commission on June 25, 2001. The Schedule 13D was filed by
Halpern Denny and Halpern Denny & Company V, L.L.C., a Delaware limited
liability company ("HD&C"). HD&C is the sole general partner of Halpern
Denny. Consists of Common Stock that may be purchased upon the exercise of
warrants.
(2) Based on an amendment to a Schedule 13D filed with the Securities and
Exchange Commission on June 19, 2001. The Schedule 13D was filed on behalf
of Greenlight, Greenlight Capital, L.P., of which Greenlight is the
general partner, Greenlight Capital Offshore, Ltd., for whom Greenlight
Capital acts as investment advisor, Greenlight Capital Qualified, L.P., of
which Greenlight Capital is the general partner, and David Einhorn and
Jeffrey A. Keswin, the principals of Greenlight Capital. Consists of
Common Stock that may be purchased upon the exercise of warrants.
(3) Based upon an amendment to a Schedule 13D filed with the Securities and
Exchange Commission on January 22, 2001. The Schedule 13D was filed by
Brookwood and Brookwood New World Co., LLC, a Delaware limited liability
company ("BNW"). BNW is the sole managing member of Brookwood. Consists of
Common Stock that may be purchased upon the exercise of warrants.
(4) Based upon an amendment to a Schedule 13D filed with the Securities and
Exchange Commission on March 14, 2001. Includes 4,792,351 shares of Common
Stock that may be purchased upon the exercise of warrants by BET
Associates. Bruce E. Toll is the sole member of BRU LLC, a Delaware
limited liability company, which is the sole general partner of BET
Associates. Mr. Toll also owns 219,250 shares of Common Stock.
(5) Based upon a Schedule 13D filed with the Securities and Exchange
Commission on March 4, 2002. The Schedule 13D was filed by Special
Situations Funds III, L.P., Special Situations Private Equity Fund, L.P.,
Special Situations Cayman Fund, L.P., MGO Advisors Limited Partnership, MG
Advisors, L.L.C., AWM Investment Company, Inc., Austin W. Marxe and David
Greenhouse. The principal business address for each of the foregoing,
other than Special Situations Cayman Fund, L.P., is 153 East 53rd Street,
New York, New York 10022. The principal business address for Special
Situations Cayman Fund is c/o CIBC Bank and Trust Company (Cayman)
Limited, CIBC Bank Building, P.O. Box 694 Grand Cayman, Cayman Islands,
British West Indies. Includes (i) 181,200 shares of Common Stock and
2,411,548 shares, that may be purchased upon the exercise of warrants held
by Special Situations Funds III, L.P., (ii) 803,850 shares of Common Stock
that may be purchased upon the exercise of warrants held by Special
Situations Private Equity Fund, L.P. and (iii) 8,000 shares of Common
Stock and 1,015,389 shares of Common Stock that may be purchased upon the
exercise of warrants held by Special Situations Cayman Fund, L.P.
(6) Based upon an amendment filed to a Schedule 13G filed with the Securities
and Exchange Commission on December 31, 2001. Includes 210,000 shares of
Common Stock owned of record by Frank LaGalia. Includes 10,500 shares of
Common Stock owned of record by Lydia LaGalia. Includes 1,029,000 shares
owned of record jointly by Mr. and Mrs. LaGalia. Includes 26,500 shares
owned of record jointly by Frank LaGalia and his father. Includes 170,000
shares of Common Stock that are owned of record by Mr. LaGalia's father.
Includes 46,000 shares owned of record by Carmela LaGalia's Individual
Retirement Account.

Carmela LaGalia is Frank LaGalia's aunt. Includes 8,000 shares owned by
Mr. and Mrs. LaGalia's minor son. The address for Frank and Lydia LaGalia
is 2050 Center Avenue, Suite 200, Fort Lee, NJ 07024.
(7) Does not include options to purchase 3,077,035 shares of Common Stock
granted in connection with Mr. Wedo's employment agreement, which options
are not exercisable within 60 days.
(8) Includes 30,000 shares, which may be acquired upon the exercise of
presently exercisable options.
(9) Includes 30,000 shares, which may be acquired upon the exercise of
presently exercisable options.
(10) Includes 35,000 shares, which may be acquired upon the exercise of
presently exercisable options.
(11) Includes 10,000 shares, which may be acquired upon the exercise of
presently exercisable options. Does not include 10,605,140 shares owned
beneficially by Halpern Denny in which Mr. Nimmo is a partner. Mr. Nimmo
disclaims a beneficial interest in the Common Stock beneficially owned by
Halpern Denny.
(12) Includes options to purchase 20,000 shares of Common Stock and warrants to
purchase 70,000 shares of Common Stock. Does not include 5,011,601 shares
owned beneficially by BET Associates, of which Mr. Tannenbaum is a limited
partner, and of which shares Mr. Tannenbaum disclaims beneficial
ownership.
(13) Includes 10,000 shares, which may be acquired upon the exercise of
presently exercisable options. Ms. Trkla is a controlling person of
Brookwood Financial Partner, L.P., an affiliate of Brookwood. Ms. Trkla
disclaims a beneficial interest in the Common Stock beneficially owned by
Brookwood, except to the extent that Thomas N. Trkla, her spouse, has a
direct or indirect pecuniary interest therein.
(14) Includes 684,367 shares, which may be acquired upon the exercise of
presently exercisable options. Effective April 1, 2002, options to
purchase 342,184 shares were cancelled, and the balance expire 90 days
thereafter.
(15) Includes 802,874 shares of Common Stock that may be acquired upon the
exercise of options, including options to purchase 381,212 shares of
Common Stock granted in connection with Mr. Novack's employment agreement.
Does not include options to purchase 762,423 shares of Common Stock, which
are not exercisable within 60 days. All of Mr. Novack's options terminate,
pursuant to their terms, 90 days after the termination of his employment.
(16) Includes 1,729,241 shares, which may be acquired upon the exercise of
presently exercisable options.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Leonard Tannenbaum, a director, is a limited partner and 10% owner in BET.
On August 11, 2000, BET purchased approximately 8,108 shares of our Series D
Preferred Stock for a sum of $7.5 million. In a related transaction on August
18, 2000, Brookwood purchased approximately 8,108 shares of our Series D
Preferred Stock for a sum of $7.5 million (collectively, the "Series D
Financing"). Each of BET and Brookwood received a warrant to purchase 1,196,909
shares of our Common Stock at a price of $.01 per share. In connection with the
Series D Financing, MYFM Capital LLC, of which Mr. Tannenbaum is the Managing
Director, received a fee of $225,000 and a warrant to purchase 70,000 shares of
our Common Stock at its closing price on August 18, 2000. In addition, Mr.
Tannenbaum was designated by BET as a director to serve for the period specified
in the Stockholders Agreement.

Eve Trkla, a director of our company, is the Chief Financial Officer of
Brookwood Financial Partners, L.P., an affiliate of Brookwood. Ms. Trkla was
designated by Brookwood as a director to serve for the period specified in the
Stockholders Agreement.

On January 22, 2001, we consummated a sale of 20,000 shares of our
authorized but unissued Series F Preferred Stock to Halpern Denny in exchange
for the sum of $20 million. At such time we entered into a Series F Preferred
Stock and Warrant Purchase Agreement with Halpern Denny. Pursuant to the Series
F Preferred Stock and Warrant Agreement, Halpern Denny was paid a transaction
fee of $500,000. William Nimmo, a director, is a partner in Halpern Denny and
Co., an affiliate of Halpern Denny. Mr. Nimmo was designated by Halpern Denny as
a director of our company. In connection with the Series F Preferred Stock and
Warrant Purchase Agreement, we issued Halpern Denny a warrant to purchase
8,484,112 shares of our Common Stock at an exercise price of $0.01 per share.

August 2000 investment by BET and Brookwood. Accordingly, we, BET and Brookwood
entered into an Exchange Agreement on January 22, 2001, whereby we exchanged all
of our outstanding Series D Preferred Stock, including accrued but unpaid
dividends (all of which were retired), for a total of 16,398.33 shares of Series
F Preferred Stock. BET and Brookwood also exchanged the warrants received by
them in August 2000 for warrants to purchase an aggregate of 6,526,356 shares of
our Common Stock. On May 30, 2001, we issued 25,000 shares of Common Stock to
Mr. Tannenbaum in connection with the exchange of all of the outstanding shares
of Series D Preferred Stock for shares of Series F Preferred Stock. In
connection with the January 2001 Series F Preferred Stock financing, Bruce Toll,
an affiliate of BET, was issued 200,000 shares of Common Stock.

On March 29, 2001, we consummated a sale of 5,000 additional shares of our
Series F Preferred Stock to Halpern Denny in exchange for the sum of $5 million.
Pursuant to the terms of the Second Series F Preferred Stock and Warrant
Purchase Agreement (the "Second Purchase Agreement") with Halpern Denny, we also
sold Halpern Denny warrants to purchase 2,121,028 shares of our Common Stock at
a price per share of $.01 (subject to adjustment as provided in the form of
warrant). Pursuant to the Second Purchase Agreement, Halpern Denny was paid a
transaction fee of $200,000.

In connection with the Einstein Acquisition, on June 7 and June 19, 2001,
Halpern Denny purchased an additional 7,500 shares of Series F Preferred Stock
for the sum of $7.5 million and warrants to purchase 2,961,551 shares of our
Common Stock at a price per share of $.01 (subject to adjustment as provided in
the form of warrant) pursuant to the Series F Preferred Stock Purchase
Agreement. In addition, on June 19, 2001, Greenlight Capital and certain of its
affiliates purchased 12,500 shares of Series F Preferred Stock and warrants to
purchase 10,576,967 shares of our Common Stock at a price per share of $.01
(subject to adjustment as provided in the form of warrant) pursuant to the Third
Series F Preferred Stock and Warrant Purchase Agreement (the "Third Purchase
Agreement"). Pursuant to the Third Purchase Agreement, Halpern Denny was paid a
transaction fee of $250,000 and Greenlight Capital was paid a transaction fee of
$250,000.

Commencing in 2002, the holders of the Series F Preferred Stock are
entitled to receive additional warrants. See Note 10 of Notes to Consolidated
Financial Statements included elsewhere in this Form 10-K.

On January 17, 2001, we entered into a Bond Purchase Agreement with
Greenlight Capital. Pursuant to the agreement, Greenlight Capital formed a
limited liability company, Greenlight New World, L.L.C. ("GNW"), and contributed
$10 million to GNW to purchase Einstein bonds. We are the exclusive manager of
GNW. The agreement provided Greenlight Capital with a secure interest in GNW and
a right to receive the return of its original contribution plus a guaranteed
accretion of 15% per year, increasing to 17% on January 16, 2002 and by an
additional 2% each six months thereafter (the "Guaranteed Return"). In
connection with the agreement, we issued Greenlight Capital warrants to purchase
an aggregate of 4,242,056 shares of our Common Stock at $0.01 per share. On June
19, 2001, we, GNW and Greenlight Capital entered into a letter agreement,
pursuant to which, among other things, Greenlight Capital consented to the
pledge of the Einstein bonds owned by GNW to secure the EnbcDeb Notes. We are
required to apply all proceeds received with respect to the Einstein bonds to
repay the EnbcDeb Notes. To the extent that there are any excess proceeds, we
are required to pay them to Greenlight Capital. If Greenlight Capital does not
receive a return equal to its Guaranteed Return, we are obligated to issue
Greenlight Capital Series F Preferred Stock with a face amount equal to the
deficiency and warrant coverage equal to 1.5% of our fully diluted Common Stock
for each $1 million of deficiency.

We, BET, Brookwood, Halpern Denny, Greenlight Capital and Special
Situations entered into a Stockholders Agreement, which relates principally to
the composition of our Board of Directors. Pursuant to the terms of the
Stockholders Agreement, as amended, the authorized number of directors shall be
ten members. BET and Brookwood are each entitled to designate one member of the
Board of Directors until such time as its Series F Preferred Stock, including
any notes issued upon redemption thereof, have been redeemed and paid in full.
Halpern Denny is entitled to designate two members to the Board of Directors
(and has designated one, Mr. Nimmo, as of this time) until such time as its
Series F Preferred Stock, including any notes issued upon redemption thereof,
have been redeemed and paid in full, at which time it shall be allowed to
designate one director, which right will continue until such time as it owns
less than 2% of our outstanding Common Stock. The Stockholders Agreement
provides that should Halpern Denny designate a second member to the Board of
Directors, a majority of directors who are not designees of BET, Brookwood or
Halpern Denny may designate an additional member to the Board of Directors
bringing the total membership of the Board of Directors to ten persons. In
addition, pursuant to the terms of the Certificate of Designation for the Series
F Preferred Stock, in the event that any dividends on the Series F Preferred

Stock are in arrears, the holders of the Series F Preferred Stock will have the
right to designate not less than 50% of the members of the Board of Directors.

On May 30, 2002, we entered into a Loan and Security Agreement with BET,
which provides for a $7.5 million revolving loan facility. The facility will be
secured by substantially all of our assets. Borrowings under the facility will
bear interest at the rate of 11% per annum. The facility will expire on March
31, 2003. In connection with obtaining the facility, we paid MYFM Capital LLC a
fee of $75,000. Leonard Tannenbaum is the Managing Director of MYFM Capital and
is a partner at BET.

In June 1999, we entered into a franchise agreement for a New World
location with NW Coffee, Inc., pursuant to which NW Coffee, Inc. paid us an
initial franchise fee of $25,000 for the franchise. In addition, the franchise
agreement provides for royalty payments equal to 5.0% of gross sales, due and
payable monthly. In connection with the franchise agreement we also entered into
an asset purchase agreement with NW Coffee, Inc. pursuant to which NW Coffee,
Inc. purchased the assets of the New World location from us for $250,000. In
connection with the asset purchase agreement, NW Coffee, Inc. delivered to us a
promissory note in the amount of $225,000, which bears interest at 8% and is
payable in installments commencing in June 2002. The note is secured by the
assets of NW Coffee, Inc. used in the operation of the franchise. Mr. Kamfar's
uncle owns NW Coffee, Inc. and Mr. Kamfar's parents are officers of NW Coffee,
Inc. In periods prior to April 2001, we purchased goods for the franchise and
paid for all of the expenses of the franchise other than payroll (other than the
salary of the general manager), which generated receivables for us. From time to
time, NW Coffee, Inc. and Mr. Kamfar made payments to us to reduce the
outstanding receivables. As of May 14, 2002, the outstanding receivable of NW
Coffee, Inc. was $267,314. Until April 2002, we also provided payroll,
accounting and other services to NW Coffee, Inc. for no charge.

In August 1997, we entered into a franchise for a New World location with
723 Food Corp., pursuant to which 723 Food Corp. paid us an initial franchise
fee of $25,000 for the franchise. In addition, the franchise agreement provides
for royalty payments equal to 5.0% of gross sales, due and payable monthly. In
connection with the franchise agreement, 723 Food Corp. purchased the assets of
the New World location from us for $275,000. 723 Food Corp. delivered to us a
promissory note in the amount of $125,000, which bears interest at 6% and is
payable on August 30, 2002 and a promissory note in the amount of $100,000,
which bears interest at 6% and is payable on November 30, 2002. The notes are
secured by the assets of 723 Food Corp. and 200,000 shares of Common Stock of
New World. In addition, Mr. Novack guaranteed the obligations of 723 Food Corp.
The guarantee is no longer in effect. Until August 17, 2000, Mr. Novack owned
50% of the capital stock of 723 Food Corp. and was an officer and director of
723 Food Corp. As of May 14, 2002, the outstanding receivable of 723 Food Corp.
was $11,530. In addition, we issued a warrant to 723 Food Corp. to purchase
100,000 shares of Common Stock for $1.25 per share.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Financial Statements

See the Index to Consolidated Financial Statements included on Page F-1
for a list of the financial statements included in this Form 10-K.

See Page S-1 for Schedule II - Valuation and Qualifying Accounts. All
other financial statement schedules of the Company are omitted because they are
not required or are not applicable.

(b) Reports on Form 8-K filed during the fourth quarter of the period covered
by this report:

Current Report on Form 8-K filed with the SEC on October 17, 2001,
announcing the appointment of directors to the Audit Committee and the
Compensation Committee and that the Company changed its name from New World
Coffee-Manhattan Bagel, Inc. to New World Restaurant Group, Inc.

Current Report on Form 8-K filed with the SEC on November 13, 2001,
announcing conditions set by the Nasdaq Listing Qualifications Panel to maintain
the Company's listing on the Nasdaq National Market.

Current Report on Form 8-K filed with the SEC on November 29, 2001,
announcing that the Company had been delisted from the Nasdaq National Market
and that the Company's shares would trade on the "Pink Sheets" under the symbol
"NWCI".

Current Report on Form 8-K filed with the SEC on December 20, 2001,
announcing the Company's report to its shareholders at its annual meeting.

3.1 Articles of incorporation (1)
3.2 Restated Certificate of Incorporation (6)
3.3 By-laws (2)
3.4 Amendments to Bylaws (9)
4.1 Specimen Common Stock Certificate of Registrant (2)
4.2 Form of Representatives' Warrant Agreement, including Form of
Representatives' Warrant (2)
4.3 Certificate of Designation of Series B Preferred Stock (3)
4.4 Certificate of Designation, Preferences and Rights of Series F
Preferred Stock as filed with the Delaware Secretary of State on
January 18, 2001(8)
4.5 Amended Certificate of Designation, Preferences and Rights of Series F
Preferred Stock as filed with the Delaware Secretary of State on March
29, 2001(9)
4.6 Amended Certificate of Designation, Preferences and Rights of Series F
Preferred Stock as filed with the Delaware Secretary of State June 19,
2001(11)
10.1 1994 Stock Plan (2)
10.2 Investor Rights Agreement (2)
10.3 Directors' Option Plan (2)
10.4 Form of Franchise Agreement (4)
10.5 Form of Store Franchise Sale Agreement (4)
10.6 Manhattan Bagel Company, Inc. - DIP Amended Acquisition Agreement and
Exhibits (5)
10.7 Manhattan Bagel Company, Inc. - Debtor in Possession First Amended
Joint Plan of Reorganization (5)
10.8 Manhattan Bagel Company, Inc. - Debtor in Possession Confirmation
Order (5)
10.9 Employment Agreement with Anthony D. Wedo (12)
10.10 Employment Agreement with William Rianhard (10)
10.11 Employment Agreement with R. Ramin Kamfar (10)
10.12 Employment Agreement with Jerold E. Novack (13)
10.13 Rights Agreement between New World Coffee-Manhattan Bagel, Inc. and
American Stock Transfer & Trust Company, as Rights Agent, dated as of
June 7, 1999 (7)
10.14 Series F Preferred Stock and Warrant Purchase Agreement dated as of
January 18, 2001, by and among the Company, Halpern Denny, BET and
Brookwood (8)
10.15 Form of Note issuable to Halpern Denny, BET and Brookwood (8)
10.16 Form of Common Stock Purchase Warrant issued to Halpern Denny, BET and
Brookwood (8)
10.17 Amended and Restated Registration Rights Agreement dated as of January
18, 2001, by and among the Company, Halpern Denny, BET and Brookwood
(8)
10.18 Stockholders Agreement dated as of January 18, 2001, by and among the
Company, Halpern Denny, BET and Brookwood (8)
10.19 Exchange Agreement dated as of January 18, 2001, by and among the
Company, BET and Brookwood (8)
10.20 Bond Purchase Agreement dated as of January 17, 2001, by and among the
Company, Greenlight Capital, L.P., Greenlight Capital Qualified, L.P.
and Greenlight Capital Offshore, Ltd. (8)
10.21 Form of Certificate of Designation, Preferences and Rights of Series E
Preferred Stock (8)
10.22 Form of Common Stock Purchase Warrant issued to the Greenlight
Entities (8)
10.23 Registration Rights Agreement dated as of January 17, 2001, by and
among the Company, Greenlight Capital, L.P., Greenlight Capital
Qualified, L.P. and Greenlight Capital Offshore, Ltd. (8)
10.24 Second Series F Preferred Stock and Warrant Purchase Agreement dated as
of March 29, 2001, by and between the Company and Halpern Denny (9)
10.25 Form of Common Stock Purchase Warrant issued to Halpern Denny (9)
10.26 Form of Note issuable to Halpern Denny, BET and Brookwood (9)

10.27 Amendment No. 1 to Exchange Agreement dated as of January 18, 2001, by
and among the Company, BET and Brookwood (9)
10.28 Amendment No. 1 to Series F Preferred Stock and Warrant Purchase
Agreement dated as of January 18, 2001, by and between the Company and
Halpern Denny (9)
10.29 Amendment No. 1 to Stockholders Agreement dated as of January 18,
2001, by and among the Company, Halpern Denny, BET and Brookwood (9)
10.30 Amendment No. 1 to Amended and Restated Registration Rights Agreement
dated as of January 18, 2001, by and among the Company, Halpern Denny,
BET and Brookwood (9)
10.31 Series F Preferred Stock Purchase Agreement dated June 7, 2001, by and
between the Company and Halpern Denny (11)
10.32 Third Series F Preferred Stock and Warrant Purchase Agreement dated as
of June 19, 2001, by and among the Company, Halpern Denny, Greenlight
and Special Situations (11)
10.33 Amendment No. 2 to Registration Rights Agreement dated as of June 19,
2001, by and among the Company, Halpern Denny, BET and Brookwood (11)
10.34 Amendment No. 2 to Stockholders Agreement dated June 19, 2001, by and
between the Company, Halpern Denny, BET and Brookwood (11)
10.35 Letter Agreement dated as of June 19, 2001, by and between the Company,
BET, Brookwood and Halpern Denny (13)
10.36 Amendment No. 1 to First Series F Preferred Stock Purchase Agreement
dated as of June 19, 2001, by and among the Company, Halpern Denny,
BET and Brookwood (11)
10.37 Form of Note issuable to Halpern Denny, Greenlight, BET, Brookwood and
Special Situations (11)
10.38 Form of Common Stock Purchase Warrant issued to Halpern Denny,
Greenlight and Special Situations (11)
10.39 Indenture Agreement dated as of June 19, 2001, by and among the
Company, certain subsidiaries of the Company and United States Trust
Company of New York (11)
10.40 Purchase Agreement dated as of June 19, 2001, by and between the
Company and Jefferies & Co. (11)
10.41 Pledge and Security Agreement dated as of June 19, 2001, by and among
the Company, certain subsidiaries of the Company and United States
Trust Company of New York (11)
10.42 Warrant Agreement dated as of June 19, 2001, by and among the Company,
Jefferies & Co. and United States Trust Company of New York (11)
10.43 Registration Rights Agreement dated as of June 19, 2001, by and
between the Company and Jefferies & Co. (11)
10.44 Note Purchase and Security Agreement dated as of June 19, 2001, by and
among the Company, New World ENBCDEB Corp. and Jefferies & Co. (11)
10.45 Form of Note issuable under the Note Purchase and Security Agreement
(11)
10.46 Account Control Agreement dated as of June 19, 2001, by and between
the Company, New World ENBCDEB Corp. and Jefferies & Co. (11)
10.47 Asset Purchase Agreement dated as of June 1, 2001, by and between
Einstein Acquisition Corp., Greenlight New World, L.L.C., ENBC and
ENBP (11)
10.48 Transition Services Agreement dated as of June 19, 2001, by and
between Einstein Acquisition Corp. and ENBC and ENBP (11)
10.49 Order of the United States Bankruptcy Court for the District of Arizona
dated June 1, 2001 approving the Asset Purchase Agreement (11)
10.50* Letter Agreement dated as of June 19, 2001, by and among the Company,
Greenlight New World, L.L.C. and Greenlight Capital, L.L.C.
10.51* Loan and Security Agreement dated as of May 30, 2002, between BET
Associates, L.P. and the Company
21.1* List of Subsidiaries
23.1* Consent of Arthur Andersen LLP
99.1* Letter to the Securities and Exchange Commission regarding Arthur
Andersen LLP

------------------
* Filed herewith.
(1) Incorporated by reference to Exhibit 3.2 from the Registrant's Registration
Statement on Form SB-2 (33-95764).
(2) Incorporated by reference from the Registrant's Registration Statement on
Form SB-2 (33-95764).

(3) Incorporated by reference from the Registrant's Annual Report on Form
10-KSB, for the Fiscal Year Ended December 29, 1996.
(4) Incorporated by reference from the Registrant's Annual Report on Form
10-KSB, for the Fiscal Year Ended December 28, 1997.
(5) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated November 24, 1998.
(6) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated September 7, 1999.
(7) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated October 13, 1999.
(8) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated January 17, 2001.
(9) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated March 29, 2001.
(10) Incorporated by reference from the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 2000.
(11) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated June 19, 2001.
(12) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarter ended July 3, 2001.
(13) Incorporated by reference from the Registrant's Registration Statement on
Form S-4 dated November 19, 2001.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

New World Restaurant Group, Inc.

By: /s/ Anthony D. Wedo
-----------------------------------------
Anthony D. Wedo
Chief Executive Officer

Dated: May 31, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ Anthony D. Wedo Chief Executive Officer and Director May 31, 2002
------------------------- (Principal Executive, Financial and
Anthony D. Wedo Accounting Officer)

/s/ Karen Hogan Director May 31, 2002
-------------------------
Karen Hogan

/s/ Edward McCabe Director May 31, 2002
-------------------------
Edward McCabe

/s/ William Nimmo Director May 31, 2002
-------------------------
William Nimmo

/s/ Leonard Tannenbaum Director May 31, 2002
-------------------------
Leonard Tannenbaum

/s/ Eve Trkla Director May 31, 2002
-------------------------
Eve Trkla

NEW WORLD RESTAURANT GROUP, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS............................................ F-2

FINANCIAL STATEMENTS:

Consolidated Balance Sheets as of January 1, 2002 and December 31, 2000........ F-3

Consolidated Statements of Operations for the Years Ended January 1, 2002,
December 31, 2000 and December 26, 1999........................................ F-4

Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
January 1, 2002, December 31, 2000 and December 26, 1999....................... F-5

Consolidated Statements of Cash Flows for the Years Ended January 1, 2002,
December 31, 2000 and December 26, 1999........................................ F-6

Notes to Consolidated Financial Statements .................................... F-8

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO NEW WORLD RESTAURANT GROUP, INC.:

We have audited the accompanying consolidated balance sheets of New World
Restaurant Group, Inc. (formerly known as New World Coffee-Manhattan Bagel,
Inc.) (a Delaware corporation) and subsidiaries as of January 1, 2002 and
December 31, 2000, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the years ended January 1,
2002, December 31, 2000 and December 26, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of New World Restaurant Group,
Inc. and subsidiaries as of January 1, 2002 and December 31, 2000, and the
results of their operations and their cash flows for the years ended January 1,
2002, December 31, 2000 and December 26, 1999 in conformity with accounting
principles generally accepted in the United States.

/s/ Arthur Andersen LLP

Arthur Andersen LLP
New York, NY
May 15, 2002

F-2

NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 1, 2002 AND DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)

December
January 1, 31,
2002 2000
--------- ---------

ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 14,238 $ 2,271
Franchise and other receivables, net of allowance of $777 and $723 6,331 3,068
Due from bankruptcy estate........................................ 3,918 -
Current maturities of notes receivables........................... 248 677
Inventories....................................................... 8,806 1,436
Prepaid expenses and other current assets......................... 1,779 621
Deferred income taxes - current portion........................... 500 500
Investment in debt securities..................................... 34,156 13,889
Assets held for resale............................................ 1,224 5,141
--------- ---------
Total current assets.............................................. 71,200 27,603

Property, plant and equipment, net................................ 115,362 6,970
Notes and other receivable, net of allowance of $2,022 and $1,542. 786 1,222
Trademarks and recipes, net of amortization of $2,748 and $649.... 101,159 15,724
Goodwill, net of amortization of $880 and $761.................... 2,211 2,326
Deferred income taxes............................................. 8,934 9,100
Debt issuance costs and other assets.............................. 6,206 2,754
--------- ---------
Total Assets...................................................... $305,858 $ 65,699
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................. $ 20,170 $ 2,708
Accrued expenses.................................................. 33,860 3,731
Short-term debt and current portion of long-term debt............. 37,137 4,423
Current portion of obligations under capital leases............... 199 200
Other current liabilities......................................... 76 14
--------- ---------
Total current liabilities......................................... 91,442 11,076

Senior notes and other long-term debt............................. 120,536 13,690
Obligations under capital leases.................................. 400 363
Other liabilities................................................. 19,803 1,829
--------- ---------
Total Liabilities................................................. 232,181 26,958

Series D Preferred Stock, $.001 par value, $1,000 per share
liquidation value; 25,000
shares authorized; 0 and 16,216 shares issued and outstanding..... - 12,008
Series F Preferred Stock, $.001 par value, $1,000 per share
liquidation value; 116,000
shares authorized; 72,192 and 0 shares issued and outstanding..... 46,743 -

Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized; 0
issued and outstanding............................................ - -
Series A convertible preferred stock, $.001 par value; 400 shares
authorized; 0 shares
issued and outstanding............................................ - -
Series B convertible preferred stock, $.001 par value; 225 shares
authorized, 0 shares
outstanding....................................................... - -
Series C convertible preferred stock, $.001 par value; 500,000 shares
authorized, 0 shares
Outstanding.......................................................
- -
Common stock, $.001 par value; 150,000,000 shares
authorized; 17,481,394 and 15,404,828 shares issued and outstanding 17 15
Additional paid-in capital........................................ 100,189 45,181
Accumulated deficit............................................... (73,272) (18,463)
--------- ---------
Total stockholders' equity........................................ 26,934 26,733
--------- ---------
Total liabilities and stockholders' equity........................ $305,858 $ 65,699
========= =========

F-3

The accompanying notes are an integral part of these
consolidated financial statements.

NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 1, 2002, DECEMBER 31, 2000 AND
DECEMBER 26, 1999 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE
INFORMATION)

January 1, December 31, December 26,
2002 2000 1999
---------- ------------ ------------

Revenues:
Manufacturing revenues................................... $ 23,975 $ 26,011 $ 25,105
Franchise related revenues............................... 5,859 7,715 6,171
Retail sales............................................. 206,186 11,997 8,649
---------- ------------ ------------
Total revenues........................................... 236,020 45,723 39,925
Cost of sales............................................ 190,530 31,045 27,948
General and administrative expenses...................... 25,386 6,694 6,137
Depreciation and amortization............................ 13,442 2,774 2,249
Provision for integration and reorganization costs....... 4,391 - -
Noncash charge in connection with realization of assets.. 2,800 - -
---------- ------------ ------------
(Loss) income from operations............................ (529) 5,210 3,591
Interest expense, net.................................... 28,490 1,960 1,407
Gain (loss) from sale of investments..................... 241 (339) -
Permanent impairment in the value of investments......... 5,806 - -
---------- ------------ ------------
(Loss) income before income taxes, minority interest and
extraordinary
item..................................................... (34,584) 2,911 2,184
Provision (benefit) for income taxes..................... 167 (3,100) -
Minority interest........................................ 1,578 - -
---------- ------------ ------------
(Loss) income before extraordinary item.................. (36,329) 6,011 2,184
Extraordinary item
Net gain from early extinguishment of debt.............. - - 240
---------- ------------ ------------
Net (loss) income........................................ (36,329) 6,011 2,424
Dividends and accretion on preferred stock............... 18,480 2,128 -
Net (loss) income available to common stockholders....... $ (54,809) $ 3,883 $ 2,424
---------- ------------ ------------
Net (loss) income per common share - Basic:
Net (loss) income before extraordinary item.............. ($3.24) $0.32 $0.22
========== ============ ============
Extraordinary item....................................... - - $0.02
========== ============ ============
Net (loss) income........................................ ($3.24) $0.32 $0.24
========== ============ ============
Net (loss) income per common share - Diluted:
Net (loss) income before extraordinary item.............. ($3.24) $0.29 $0.21
========== ============ ============
Extraordinary item....................................... - - $0.02
Net (loss) income........................................ ($3.24) $0.29 $0.23
========== ============ ============
Weighted average number of common shares outstanding:
Basic.................................................... 16,923,168 12,074,356 10,317,490
========== ============ ============
Diluted.................................................. 16,923,168 13,374,975 10,692,613
========== ============ ============

The accompanying notes are an integral part of these
consolidated financial statements.

F-4

NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
JANUARY 1, 2002, DECEMBER 31, 2000 AND DECEMBER 26,
1999 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE
INFORMATION)

SERIES B PREFERRED SERIES C PREFERRED
STOCK STOCK COMMON STOCK
------------------ ------------------- -----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- --------- --------- -------- ------------ --------

BALANCE, DECEMBER 27, 1998................................. 58.5 $- $- 9,721,322 $10
Issuance of common stock, net of offering expenses......... 1,167,171 1
Common stock issued in connection with the conversion of
Series B convertible preferred stock....................... (58.5) 425,015 -
Net Income for the year....................................
--------- --------- --------- -------- ------------ --------
BALANCE, DECEMBER 26, 1999................................. - - - - 11,313,508 11
--------- --------- --------- -------- ------------ --------
Issuance of common stock, net of offering expenses......... 1,228,458 1
Private placement of securities consisting of common and
preferred Series C stock, net of offering expenses......... 444,190 444 1,530,292 2
Conversion of series C preferred stock..................... (444,190) (444) 1,332,570 1
Insurance of warrants in connection with issuance of series
D preferred stock..........................................
Dividends and accretion on series D preferred stock........
Net Income for the year....................................
--------- --------- --------- -------- ------------ --------
BALANCE, DECEMBER 31, 2000................................. - - - - 15,404,828 15
--------- --------- --------- -------- ------------ --------
Exchange of Series D for Series F.......................... - -
Issuance of common stock................................... 2,076,566 2
Issuance of Warrants in connection with Senior Notes.......
Issuance of Warrants in connection with Series F Preferred
Stock......................................................

Issuance of Warrants to minority owners in affiliated entity
Dividends and accretion on Series F Preferred Stock........
Net loss for the year......................................
--------- --------- --------- -------- ------------ --------
BALANCE, JANUARY 1, 2002................................... - $- - $- 17,481,394 $17
--------- --------- --------- -------- ------------ --------

TOTAL
ADDITIONAL ACCUMU- STOCK-
PAID-IN LATED HOLDERS'
CAPITAL DEFICIT EQUITY
---------- ----------- -----------

BALANCE, DECEMBER 27, 1998................................. $33,704 $ (24,770) $ 8,944
Issuance of common stock, net of offering expenses......... 1,003 - 1,004
Common stock issued in connection with the conversion of
Series B convertible preferred stock....................... - - -
Net Income for the year.................................... 2,424 2,424
---------- ----------- -----------
BALANCE, DECEMBER 26, 1999................................. 34,707 (22,346) 12,372
---------- ----------- -----------
Issuance of common stock, net of offering expenses......... 1,835 - 1,836
Private placement of securities consisting of common and
preferred Series C stock, net of offering expenses......... 5,405 (1,263) 4,144
Conversion of series C preferred stock..................... - - 1
Insurance of warrants in connection with issuance of series
D preferred stock.......................................... 3,234 - 3,234
Dividends and accretion on series D preferred stock........ - (865) (865)
Net Income for the year.................................... - 6,011 6,011
---------- ----------- -----------
BALANCE, DECEMBER 31, 2000................................. 45,181 (18,463) 26,733
---------- ----------- -----------
Exchange of Series D for Series F.......................... 1,848 (1,159) 689
Issuance of common stock................................... 2,698 - 2,700
Issuance of Warrants in connection with Senior Notes....... 19,120 - 19,120
Issuance of Warrants in connection with Series F Preferred
Stock...................................................... 28,112 - 28,112

Issuance of Warrants to minority owners in affiliated entity 3,230 - 3,230
Dividends and accretion on Series F Preferred Stock........ (17,321) (17,321)
Net loss for the year...................................... - (36,329) (36,329)
---------- ----------- -----------
BALANCE, JANUARY 1, 2002................................... $100,189 $ (73,272) $26,934
---------- ----------- -----------

The accompanying notes are an integral part of these
consolidated financial statements.

F-5

NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 1, 2002, DECEMBER 31, 2000 AND DECEMBER 26, 1999
(IN THOUSANDS)

January 1, December 31, December
2002 2000 26, 1999
------------- -------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:

Net (loss) income...................................................... ($36,329) $6,011 $2,424
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization.......................................... 13,442 2,774 2,250
Minority interest...................................................... 1,578 - -
Stock issued for compensation.......................................... 818 - -
(Gain) loss on sale of debt securities................................. (241) 339 -
Gain on sale of fixed assets........................................... - (339) (704)
Provision for integration and reorganization costs..................... 3,895 - -
Noncash charge in connection with the realization of assets............ 2,800 - -
Permanent impairment in value of debt securities....................... 5,806 - -
Amortization of debt issuance costs and debt discount.................. 6,305 - -
Notes issued as payment in kind for interest on bridge loan............ 2,627 - -
Accretion of warrant value and investment return....................... 4,816 - -
Extraordinary gain from the early extinguishment of debt............... - - (240)
Provision for uncollectible accounts and notes receivable.............. 474 - -
Deferred income tax asset.............................................. 167 (3,100) -
Changes in operating assets and liabilities:
Franchise and other receivables........................................ (1,416) (1,056) (1,047)
Inventories............................................................ 648 409 (489)
Prepaid expenses and other current assets.............................. 903 (345) (70)
Deposits and other assets.............................................. (134) (446) 656
Receipts of notes receivable........................................... 459 230 995
Additions to notes receivable.......................................... (68) (276) (602)
Accounts payable....................................................... 590 693 264
Accrued expenses and other current liabilities......................... (680) (2,799) (1,702)
------------ -------------- -------------
Net cash provided by operating activities.............................. 6,460 2,095 1,735
------------ -------------- -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................... (3,311) (335) (1,432)
Proceeds from sales of fixed assets................................... - 467 952
Disposal of assets held for resale..................................... 641 - -
Net cash paid for acquisitions......................................... (161,702) (4,166) (2,422)
Deferred acquisition costs............................................. - (865) -
Additions to assets held for resale.................................... - - 38
Investment in debt securities.......................................... (28,911) (17,412) -
Proceeds from the sale of debt securities.............................. 3,885 3,183 -
------------ -------------- -------------
Net cash used in investing activities.................................. (189,398) (19,128) (2,864)
------------ -------------- -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock, net................................... 47,068 19,412 1,004
Minority owners' capital contributions to affiliated entity............ 9,166 - -
Proceeds from bridge loan.............................................. 33,250 - -
Proceeds from issuance of senior notes................................. 128,450 - -
Debt issuance costs.................................................... (7,220) - -
Proceeds from long-term borrowings..................................... - 1,500 13,788
Payment of liabilities in connection with acquired assets.............. (987) (2,474) (3,666)
Repayments of capital leases........................................... (386) (229) (572)
Repayment of notes payable............................................. (14,436) (1,785) (7,164)
Early retirement of debt............................................... - - (4,650)
------------ -------------- -------------
Net cash provided by financing activities.............................. 194,905 16,424 (1,260)
------------ -------------- -------------
Net increase in cash................................................... 11,967 (609) (2,389)
CASH, beginning of period.............................................. 2,271 2,880 5,269
------------ -------------- -------------
CASH, end of period.................................................... $14,238 $2,271 $2,880
============ ============== =============

The accompanying notes are an integral part of these
consolidated financial statements.

F-6

NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
FOR THE YEARS ENDED JANUARY 1, 2002, DECEMBER 31, 2000 AND DECEMBER 26, 1999

January 1, December 31, December
2002 2000 26,
1999
--------------- ---------------- ---------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest...................................................... $ 11,180 $ 1,965 $ 1,263

Non-cash Investing and Financing Activities:
Non-cash dividends and accretion on preferred stock........... 18,480 461 -

Stock issued for services provided............................ 459 946 -

Stock issued to extinguish liabilities........................ 375 - -

Stock issued in exchange for debt securities.................. 805 - -

Equipment purchased under capital leases...................... 250 398 511

Notes received from sale of fixed assets...................... - - 45

Conversion of Series B Convertible Preferred Stock to - - (30)
Common Stock..................................................

Issuance of notes related to acquisitions..................... - - 1,500

DETAILS OF ACQUISITION:
Tangible assets acquired...................................... 134,186 5,116 -
Intangible assets acquired.................................... 87,494 300 6,422
Due from bankruptcy estate.................................... 3,918 - -
Notes Receivable extinguished................................. - (1,250) -
Notes issued.................................................. - - (1,500)
Estimated accruals and liabilities assumed.................... (54,501) - (2,500)
Accrued acquisition costs..................................... (4,021) - -
--------------- ---------------- ---------------
Cash paid for acquisition..................................... 167,076 4,166 2,422
--------------- ---------------- ---------------
Less cash acquired............................................ 5,374 0 0
--------------- ---------------- ---------------

Net cash paid for acquisition................................. $161,702 $4,166 $2,422
=============== ================ ===============

The accompanying notes are an integral part of these
consolidated financial statements.

F-7

NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS AND ORGANIZATION

We are a leader in the quick casual segment of the restaurant industry and the
largest operator of bagel bakeries in the United States. With 770 locations in
34 states as of January 1, 2002, we operate and license locations primarily
under the Einstein Bros. and Noah's New York Bagels ("Noah's") brand names and
franchise locations primarily under the Manhattan Bagel ("Manhattan") and
Chesapeake Bagel Bakery ("Chesapeake") brand names. Our locations specialize in
high-quality foods for breakfast and lunch, including fresh baked goods,
made-to-order sandwiches on a variety of breads and bagels, soups, salads,
desserts, premium coffees and other cafe beverages, and offer a cafe experience
with a neighborhood emphasis. As of January 1, 2002, our retail system consisted
of 483 company-operated locations and 287 franchised and licensed locations. We
also operate three dough production facilities and one coffee roasting facility.
We are vertically integrated and have bagel dough manufacturing plants in New
Jersey and California, and a coffee roasting plant in Connecticut. The Company's
manufactured products are sold to franchised, licensed and company-operated
stores as well as to wholesale, supermarket and non-traditional outlets.

During 2001, the Company changed its name from New World Coffee-Manhattan Bagel,
Inc. to New World Restaurant Group, Inc.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements herein include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.

FISCAL YEAR

Effective for the quarter ended July 3, 2001 and as a result of the Einstein
Acquisition (see Note 2), the Company elected to change its fiscal year end to
the Tuesday closest to December 31. The Company's annual accounting period had
previously ended on the Sunday closest to December 31. The fiscal year-end dates
for 2001, 2000 and 1999 are January 1, 2002, December 31, 2000 and December 26,
1999, resulting in years containing 52, 53 and 52 weeks, respectively. The year
ended January 1, 2002 includes two extra days of operations as the result of
this change.

CASH AND CASH EQUIVALENTS

The Company considers securities with maturities of three months or less when
purchased to be cash equivalents. The Company had cash equivalents totaling
$1,518,425 at January 1, 2002 and $905,216 at December 31, 2000, which were
comprised of money market accounts and overnight treasury investments, the cost
of which approximates market value.

The Company acts as custodian for certain funds paid by its franchisees which
are earmarked as advertising fund contributions. Cash and cash equivalents
includes $478,131 and $1,032,593 as of January 1, 2002 and December 31, 2000,
respectively, which the Company holds in such advertising fund.

INVENTORIES

Inventories are stated at the lower of cost or market, with cost being
determined by the first-in, first-out method. Inventories consist of the
following:

F-8

JANUARY 1 DECEMBER 31,
2002 2000
------------ ----------
(amounts in thousands)

Finished Goods.......................................... $8,381 $1,085
Work in Progress........................................ - 148
Raw Materials........................................... 425 203
------------ ----------
$8,806 $1,436
============ ==========

INVESTMENT IN DEBT SECURITIES

Investments in debt securities includes 7.25% Convertible Debentures due 2004 of
Einstein/Noah Bagel Corp., which is reported at realizable value.

During the year ended January 1, 2002, the Company determined that a permanent
decline of $5,806,000 of the above-noted Einstein/Noah Bagel Corp. debentures in
fair value had occurred. Accordingly, the Company recorded such amount as an
investment impairment with a comparable charge in the accompanying statement of
operations. At January 1, 2002, the carrying amount of debt securities
approximates their fair market value.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. Expenditures for maintenance
and repairs are generally charged to expense as incurred. Leasehold improvements
are amortized over the shorter of their useful lives or the term of the related
leases by use of the straight-line method. Depreciation is provided using the
straight-line method over the following estimated useful lives:

Leasehold improvements.................................. 5 to 15 years
Store equipment......................................... 3 to 7 years
Furniture and fixtures.................................. 5 to 8 years
Office equipment........................................ 3 to 5 years

TRADEMARKS AND INTELLECTUAL PROPERTY

Trademarks and intellectual property are being amortized on a straight-line
basis over a period of 30 years.

GOODWILL

Goodwill resulting from the acquisition of MBC is being amortized on a
straight-line basis over a period of 25 years.

LONG-LIVED ASSETS

The Company's policy is to record long-lived assets at cost, amortizing these
costs over the expected useful lives of the related assets. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
these assets are reviewed on a periodic basis for impairment whenever events or
changes in circumstances indicate that the carrying amounts of the assets may
not be realizable. Furthermore, the assets are evaluated for continuing value
and proper useful lives by comparison to expected future cash flows.

REVENUE RECOGNITION

Manufacturing revenues are generally recognized upon shipment to customers.

Retail sales are recognized when payment is tendered at the point of sale.

F-9

Pursuant to the franchise agreements, franchisees are generally required to pay
an initial franchise fee and a monthly royalty payment equal to a percentage of
the franchisee's gross sales. Initial franchise fees are recognized as revenue
when the Company performs substantially all of its initial services as required
by the franchise agreement. Royalty fees from franchisees are accrued as earned.

Royalty income, initial franchise fees and gains on sales of company-operated
stores to franchisees are included in franchise revenues.

ADVERTISING COSTS

The Company expenses advertising costs as incurred.

DEFERRED RENT

Certain of the Company's lease agreements provide for scheduled rent increases
during the lease term or for rental payments commencing at a date other than
initial occupancy. Provision has been made for the excess of operating lease
rental expense, computed on a straight-line basis over the lease term, over cash
rentals paid.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Franchise notes receivable (Note 4) are estimated by discounting future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings. The fair value of debt and notes payable
outstanding is estimated by discounting the future cash flows using the current
rates offered by lenders for similar borrowings with similar credit ratings. The
carrying amounts of franchise and other receivables and accounts payable
approximate their fair value.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents, debt securities and
notes and accounts receivable. The Company maintains cash and cash equivalents
with various major financial institutions. The Company believes that
concentrations of credit risk with respect to notes and franchise accounts
receivable are limited due to the large number and geographic dispersion of
franchises comprising the Company's franchise base. The Company performs ongoing
credit evaluations of its franchises and maintains reserves for potential
losses.

REPORTING COMPREHENSIVE INCOME

In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components. The Company's comprehensive net income is equal to
its net income for the years ended January 1, 2002, December 31, 2000 and
December 26, 1999.

EARNINGS PER SHARE

In accordance with SFAS No. 128, Earnings Per Share, basic earnings per common
share amounts (basic EPS) are computed by dividing net earnings by the weighted
average number of common shares outstanding and exclude any potential dilution.
Diluted earnings per common share amounts assuming dilution (diluted EPS) are
computed by reflecting potential dilution of the Company's common stock
equivalents. The following table summarizes the equivalent number of common
shares assuming the related securities that were outstanding as of January 1,
2001 had been exercised, but not included in the calculation of diluted loss per
share as such shares are antidilutive:

Warrants.................................... 57,465,456
Options..................................... 6,148,399
-----------
63,613,855
===========

F-10

SEGMENT DISCLOSURE

The Company adopted the provisions of SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information. SFAS 131, applicable to public companies,
which establishes new standards for reporting information about operating
segments in annual financial statements. The Company does not believe that it
operates in more than one segment.

INCOME TAXES

The Company accounts for income taxes in accordance with SFAS 109, Accounting
for Income Taxes, using the asset and liability method. Under this method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their tax bases for
operating profit and tax liability carryforward. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets or liabilities of a
change in tax rates is recognized in the period that the tax change occurs.

STOCK-BASED COMPENSATION

SFAS No. 123, Accounting for Stock-Based Compensation, establishes financial
accounting and reporting standards for stock-based employee compensation plans.
SFAS No. 123 encourages entities to adopt a fair-value-based method of
accounting for stock compensation plans. However, SFAS No. 123 also permits
entities to continue to measure compensation costs under APB 25 with the
requirement that pro forma disclosures of net income and earnings per share be
included in the notes to financial statements. The Company has elected to adopt
the disclosure requirements of SFAS No. 123 and show pro forma results of net
income and earnings per share data.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

RECENT PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141, Business Combination ("SFAS 141"),
and No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141
requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method. SFAS 142 requires goodwill be subject
to at least an annual assessment for impairment with amortization over its
estimated useful life to be discontinued effective January 1, 2002. The Company
is currently evaluating the effect of the adoption of SFAS 142 on its
consolidated financial statements. In this connection, the Company is in the
process of assessing its reporting units. Once the reporting units have been
established, the Company will use the two-step approach to assess its goodwill
and intangible assets. In the first step, the Company will compare the estimated
fair value of each reporting unit that houses goodwill to the carrying amount of
the unit's assets and liabilities, including its goodwill and intangible assets.
If the fair value of the reporting unit is below its carrying amount, then the
second step of the impairment test is performed, in which the current fair value
of the unit's assets and liabilities will determine the current implied fair
value of the unit's goodwill and intangible assets. In addition, the Company
will reassess the classifications of its intangible assets, including goodwill,
previously recorded in connection with earlier purchase acquisitions, as well as
their useful lives.

The Company expects that the discontinuation of amortization of the remaining
goodwill and intangible assets with indefinite lives of approximately
$105,423,000 at January 1, 2002 will reduce operating expenses by approximately
$883,000 per quarter in 2002, or approximately $3,532,000 for the year ending
December 31, 2002. The adoption of SFAS No. 141 had no impact on the Company's
consolidated financial statements.

F-11

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
retirement costs. This statement is effective for fiscal years beginning after
June 15, 2002. The Company is currently assessing the impact of the adoption of
this new standard, although it does not expect it to affect its consolidated
financial statements.

In June 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which is effective for fiscal years beginning
after December 15, 2001. The provisions of this statement provide a single
accounting model for impairment of long-lived assets. The Company is currently
assessing the impact of the adoption of this new standard, although it does not
expect it to affect its consolidated financial statements.

2. ACQUISITIONS

On August 31, 1999, the Company acquired the assets of Chesapeake Bagel Bakery
(CBB), a franchisor of bagel bakeries operating under the Chesapeake Bagel
Bakery brand name. The purchase price approximated $6,422,000 consisting of
$2,422,000 in cash paid to the seller, $1,500,000 in notes payable to the seller
and the accrual of $2,500,000 of post acquisition liabilities representing
unearned franchise fees and post closing store conversion costs.

The purchase price was allocated to the assets acquired and liabilities assumed
based on management's estimate of their fair market value at the date of
acquisition, which was determined by an independent appraisal. The allocation of
purchase price was done based on the information available to management at that
time.

On May 5, 2000, the Company acquired certain lien rights on substantially all
the assets of New York Bagel Enterprises (NYBE) and its wholly owned subsidiary
Lots `A Bagels, Inc. (LAB) from a bank. Both NYBE and LAB were operating as
Debtors in Possession under Chapter 11 of the bankruptcy code. On May 13, 2000,
the Company acquired the leases and other assets of 17 NYBE stores through
NYBE's bankruptcy proceeding. In addition, the Company acquired all trademarks
and franchise rights for 12 stores operating under the New York Bagel & Deli
trade name. The store assets acquired are included as assets held for resale in
the accompanying balance sheet, as the Company intends to sell the stores to
franchisees. On July 12, 2000, in LAB's bankruptcy proceeding, the Company
acquired the leases and other assets of an additional 6 LAB stores.

The purchase price was allocated to the assets acquired and liabilities assumed
based on management's estimate of their fair market value at the date of
acquisition. The allocation of purchase price was done based on the information
available to management at that time.

On June 26, 2000, the Company acquired the operating assets of 13 Manhattan
Bagel stores in Western New York from a franchisee that was operating in
Bankruptcy. The store assets were acquired for cash approximating $1,037,000 and
settlement of a note receivable with a carrying value of $1,250,000 held by the
Company. The stores acquired are included in assets held for resale in the
accompanying balance sheet, as the Company intends to sell them to franchisees.

On June 19, 2001, the Company purchased substantially all of the assets (the
Einstein Acquisition) of Einstein/Noah Bagel Corp. and its majority-owned
subsidiary, Einstein/Noah Bagel Partners, L.P. (collectively, Einstein).
Einstein was the largest bagel bakery chain in the United States, with 463
stores, nearly all of which are company-operated. The Einstein Acquisition was
made pursuant to an Asset Purchase Agreement, which was entered into by the
Company as the successful bidder at an auction conducted by the United States
Bankruptcy Court, District of Arizona, on June 1, 2001 in the Einstein
bankruptcy case. The purchase price was $160,000,000 in cash and the assumption
of certain liabilities, subject to adjustment to the extent that Assumed Current
Liabilities (as defined in the Asset Purchase Agreement) exceed $30,000,000.

F-12

In connection with the Einstein Acquisition, the Company incurred approximately
$13,564,000 of acquisition costs. The acquisition has been accounted for under
the purchase method of accounting. The aggregate purchase price of $167,179,000
is being allocated based on the preliminary estimates of the fair value of the
tangible and intangible assets acquired and liabilities assumed as follows
(amounts in thousands):

Assets Acquired:
Current assets............................. $17,326
Plant property and equipment............... 116,860
Trademarks and intangible assets........... 87,494
Liabilities assumed:
Current liabilities........................ 42,370
Long-term liabilities...................... 12,131
Total purchase price....................... $167,179

The estimation of the fair value of assets acquired and liabilities assumed was
determined by the Company's management based on information currently available.
The Company has obtained appraisals of the fair value of certain acquired
property, plant and equipment as well as certain identified intangibles. The
Company is in the process of completing such evaluations. Accordingly, the
allocation of the purchase price is subject to revisions.

Pursuant to the Asset Purchase Agreement, the Company is entitled to a reduction
in purchase price to the extent that assumed current liabilities (as defined)
exceed $30,000,000 as of the acquisition date. The accompanying balance sheet as
of January 1, 2002 reflects approximately $3,918,000 as due from the Einstein
Bankruptcy Estate. This amount is based upon the final determination of assumed
current liabilities by the independent arbitrator as of the acquisition date,
net of certain payments received from the Einstein Bankruptcy Estate through the
date of these financial statements.

The following unaudited pro forma consolidated statements of operations data for
the years ended January 1, 2002 and December 31, 2000, give effect to the
Einstein Acquisition as if it had occurred as of the beginning of each period
reported. All of the following unaudited pro forma consolidated results of
operations give effect to purchase accounting adjustments and the financings
necessary to complete the acquisition. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
what operating results would have been had the acquisitions actually taken place
as of the beginning of each period reported, and may not be indicative of future
operating results.

Pro Forma
For the Year Ended
------------------------------------
(In thousands, except per share data)
January 1, 2002 December 31, 2000
---------------- -----------------

Revenues........................................... $405,622 $421,426
============== ==============
Loss before extraordinary items.................... ($ 52,049) ($28,039)
============== ==============
Net loss........................................... ($ 52,049) ($ 28,039)
============== ==============
Net loss available to common stockholders.......... ($ 75,842) ($ 40,892)
============== ==============
Earnings per share - Basic......................... ($ 4.48) ($ 3.39)
============== ==============

F-13

3. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

JANUARY 1, DECEMBER 31,
2002 2000
------------- --------------

Leasehold Improvements............... $ 58,097 $ 3,735
Store/factory equipment.............. 69,982 5,336
Furniture & Fixtures................. 180 180
Office Equipment..................... 1,563 1,515
---------- ----------
129,822 10,766
Less Accumulated Depreciation and
Amortization......................... (14,460) (3,796)
---------- ----------
$ 115,362 6,970
========== ==========

Depreciation and amortization expense totaled approximately $13,442,000,
$2,774,000 and $2,249,000 for the years ended January 1, 2002, December 31, 2000
and December 26, 1999, respectively.

4. NOTES RECEIVABLE

During 1998, the Company issued promissory notes to franchisees to facilitate
their construction of stores and provide other initial operating cash flows,
including franchise fees. The notes are payable with interest thereon at rates
ranging from 6-10% per annum and are generally to be paid in full simultaneously
upon the closing of a subsequent financing by the franchisee. The notes have
terms expiring through November 2004. Substantially all of the assets of the
franchisee's store are pledged as collateral for the notes.

5. DEBT ISSUANCE COSTS AND OTHER ASSETS

Debt issuance costs and other assets consist of the following:

JANUARY 1, DECEMBER 31,
2002 2000
(amount in thousands)
------------- ---------------

Security Deposits.................... $ 269 $ 424
Deferred Acquisition Costs........... - 1,812
Debt Issuance Costs.................. 5,103 -
Other................................ 834 518
---------- ----------
Totals............................... $ 6,206 2,754
========== ==========

F-14

6. LONG-TERM DEBT

Long-Term debt consists of the following:

JANUARY 1, DECEMBER 31,
2002 2000
------------- ---------------
(amount in thousands)

Senior Secured Increasing Rate Notes, net of unamortized discount of
$8,517,727 and unaccreted warrant value of $14,304,205 (a).......... $ 117,178 -
Note payable to a bank (b).......................................... - $ 11,000
Revolving credit note payable to a bank (c)......................... - 3,000
Promissory note payable in connection with Chesapeake Bagel Bakery
acquisition (d)..................................................... 1,500 1,500
Note payable to New Jersey Economic Development Authority (e)....... 1,960 2,240
Other (f) (g)....................................................... 217 373
---------- ----------
120,855 18,113
Less - Current portion of long-term debt............................ 319 4,423
---------- ----------
$ 120,536 $ 13,690
========== ==========

(a) The Company consummated a private placement of 140,000 units consisting of
$140 million of senior secured increasing rate notes (the $140 Million Facility)
and 140,000 Common Stock purchase warrants, each exercisable into 98 shares of
the Company's Common Stock. The $140 Million Facility was placed through
Jefferies & Company, Inc. (Jefferies). The notes under the $140 Million
Facility, the terms of which are governed by a certain Indenture (the Indenture)
dated as of June 19, 2001, by and among the Company, Jefferies and the United
States Trust Company of New York (U.S. Trust), mature on June 15, 2003 and bear
interest at an initial annual rate of 13%, increasing by 100 basis points each
quarter commencing September 15, 2001 to a maximum rate of 18%. The Company
commenced quarterly interest payments on September 15, 2001. The Company may
redeem all or a portion of the notes at any time for their face value plus
accrued and unpaid interest. If there is a Change in Control (as such term is
defined in the Indenture) of the Company, the holders of the notes will have the
right to require the Company to repurchase the notes at a price equal to 101% of
the face amount plus accrued and unpaid interest. The notes are secured by a
security interest in all of the Company's assets and the assets of the Company's
subsidiaries (other than the assets of a non-restricted subsidiary (Bondco)
holding the Einstein Bonds (as defined below)). The Indenture also contains
certain restrictive covenants, including certain financial covenants that are
required to be measured on an annual basis. The proceeds were $128,450,000. The
debt discount aggregating $11,550,000 is being amortized over the term of the
notes (2 years) using the effective interest method.

As noted above, the Company also issued warrants to purchase in the aggregate
13,720,000 shares of the Company's Common Stock at an exercise price of $0.01
per share. The warrants will expire on June 15, 2006. The fair value of the
warrants of $19,120,000 was recorded as a debt discount and is being amortized
over the term of the notes (2 years) using the effective interest method. The
Company is required to repurchase all the outstanding warrants in the event of a
change in control (as defined in the warrant agreement) at a price equal to the
fair market value of the common stock issuable upon exercise of the warrants,
less the exercise price.

The notes and warrants were separated immediately after the conclusion of the
offering. The warrants were issued pursuant to, and are governed by, the terms
of a certain Warrant Agreement dated as of June 19, 2001, by and among the
Company, Jefferies and U.S. Trust. The holders of the notes and warrants are
entitled to certain registration rights as set forth in a certain Registration
Rights Agreement dated as of June 19, 2001, by and among the Company, Jefferies
and U.S. Trust. Pursuant to a Registration Rights Agreement, the Company was
required, among other things, to consummate an exchange offer for the notes
pursuant to which the Company would offer to the holders of the notes the
opportunity to exchange their notes for substantially identical new notes that
would not

F-15

be subject to transfer restrictions. In the event of a breach of the covenants
in the Registration Rights Agreement, the Company is required to pay, as
liquidated damages, additional interest on the notes at the rate of 0.25% per
annum for the first 90 days of such breach, increasing by an additional 0.25%
per annum at the beginning of each subsequent 90-day period up to a maximum
increase in the interest rates on the notes of 1% per annum, until the Company
cures any such breach. Commencing November 17, 2001, the Company failed to
comply with certain covenants in the Registration Rights Agreement, which remain
uncured, and accordingly, as of January 1, 2002, was paying interest on the
notes at the rate of 15.25%, increasing by .25% for each subsequent 90-day
period thereafter until such default is cured, up to a maximum of 1% of
additional interest.

In connection with the $140 Million Facility, the Company incurred approximately
$6 million of issuance costs. Such costs are included in the accompanying
consolidated balance sheet and are being amortized over the term of the notes (2
years) using the effective interest method.

(b) The note is payable as to interest only for the first year of the Note
Agreement with quarterly principal installments due thereafter, through December
31, 2002. The note carries a variable rate of interest, permitting the Company
to select an interest rate based upon either the prime rate or the Eurodollar
rate, adjusted by margin percentages defined in the credit agreement. The
interest rate at December 31, 2000 was 10.75%. The note is secured by
substantially all assets of the Company. In addition, the credit agreement
between the lender and the Company requires the Company to maintain certain
financial ratios and places certain restrictions on the Company's ability to
incur indebtedness, dispose of assets or merge with another company without the
consent of the lender. This note payable was repaid from the proceeds of the
$140 Million Facility discussed in (a) above.

(c) The Company secured a $3,000,000 revolving credit facility with a bank. At
December 31, 2000, the entire credit facility was outstanding. The credit
facility is payable as interest only for its term, with all unpaid principal due
on December 31, 2002. The credit facility carries a variable rate of interest,
permitting the Company to select an interest rate based upon either the prime
rate or the Eurodollar rate, adjusted by margin percentages defined in the
credit agreement. The interest rate at December 31, 2000 was 10.75% on
$1,500,000 of the credit facility for which the Company had selected a
Eurodollar rate option and 12.00% on $1,500,000 of the credit facility for which
the Company had selected a prime rate option. The note is secured by
substantially all assets of the Company. The revolving credit facility was
repaid in full and terminated at the time of the issuance of the $140 Million
Facility discussed in (a) above.

(d) As a part of the acquisition of the assets of Chesapeake Bagel Bakery, the
Company entered into a note payable to the seller. The note provides for
quarterly payments of interest only at 10% with principal payments of $675,000
and $825,000 in 2003 and 2004, respectively. The note is due in full on August
31, 2004 and is secured by the related assets of Chesapeake Bagel Bakery.

(e) In December 1998, the Company entered into a note payable of $2,800,000
with the New Jersey Economic Development Authority at an interest rate of 9% per
annum. The note has a 10-year maturity. Principal is paid annually and interest
is paid quarterly. The note is secured by substantially all of the Company's
assets.

(f) In June 1997, a promissory note of $770,000 was issued by the Company in
connection with the Coopers acquisition. The note is payable over four years in
equal installments and bears interest at 6%. The note was discounted using an
interest rate of 10%. The note is secured by certain store assets purchased
pursuant to the acquisition. This note was repaid in full during 2001.

(g) The Company is obligated under a mortgage payable of $208,000 on its plant
in South Carolina. The mortgage bears interest at prime plus 1.25% and matures
in March 2010. The mortgage is secured by the associated real estate.

F-16

Scheduled maturities of long-term debt as of January 1, 2002 are as follows:

(amounts in thousands)

2002................................... $319
2003................................... 118,164
2004................................... 1,139
2005................................... 318
2006................................... 322
Thereafter............................. 593
---------
$120,855
=========

Interest expense on long-term debt totaled approximately $12,406,000 (excluding
$11,122,000 representing the accretion of warrants, amortization of debt
discount and amortization of debt issuance costs), $2,123,000 and $1,483,000 for
the years ended January 1, 2002, December 31, 2000 and December 26, 1999,
respectively.

7. BRIDGE LOAN

In 2001, the Company entered into a $35 million asset-based secured loan due
June 15, 2002 to a wholly owned non-restricted subsidiary of the Company. The
aggregate proceeds were $33,250,000. The debt discount aggregating $1,750,000 is
being amortized over the term of the loan (1 year) using the effective interest
method. Pursuant to the terms of a certain Note Purchase and Security Agreement
dated as of June 19, 2001, by and among the Company, Bondco and Jefferies (the
Purchase and Security Agreement), Bondco sold $35 million aggregate principal
amount of secured increasing rate notes. The notes are secured by $61.5 million
aggregate principal amount of 7.25% subordinated convertible debentures due June
2004 of Einstein/Noah Bagel Corp. (the "Einstein Bonds"). Interest on the $35
million of notes initially accrues at a rate of 14% per annum, increasing by
..35% on the fifteenth day of each month following issuance. Interest is payable
on the fifteenth day of every month and may be paid in kind at Bondco's option.
An aggregate of $37,627,168 principal amount of the notes was outstanding as of
January 1, 2002. The Purchase and Security Agreement provides for a mandatory
pre-payment of the notes upon a change of control of the Company which requires
the Company to pay 101% of the principal amount thereof plus accrued and unpaid
interest thereon. Bondco is required to apply all proceeds relating to the
Einstein Bonds as a repayment of the $35 million notes. The Company anticipates
that this loan will be repaid in part from the proceeds of the Einstein Bonds
distributed in the Einstein bankruptcy case. To the extent that the proceeds
received by Bondco from the Einstein bankruptcy are insufficient to repay these
notes, the holders of the notes will have the option to require the Company to
issue to such holders preferred stock having a redemption value equal to the
deficiency. If the amount of such deficiency is less than $5.0 million, then the
preferred stock will be entitled to an annual cash dividend equal to 17% per
annum, increasing 100 basis points per month until the preferred stock is
redeemed and the Company will be required to issue warrants to purchase 5% of
the fully-diluted shares of common stock of the Company. If the amount of such
deficiency is greater than or equal to $5.0 million, then the preferred stock
will be entitled to an annual cash dividend equal to 18% per annum, increasing
100 basis points per month until the preferred stock is redeemed and the Company
will be required to issue warrants to purchase 10% of the fully-diluted shares
of common stock of the Company. In April 2002, the Company received a
preliminary distribution on the Einstein Bonds of approximately $24.2 million,
which was used to repay an equivalent portion of the Bridge Loan.

In connection with the bridge loan, the Company incurred approximately $1
million of issuance costs. Such costs are included in the accompanying
consolidated balance sheet as debt issuance costs and are being amortized over
the term of the loan (1 year) using the effective interest method.

F-17

8. ACCRUED EXPENSES

Accrued expenses consist of the following:

January 1, December 31,
2002 2000
----------------- ---------------
(amounts in thousands)

Accrued payroll and related bonuses $ 13,034 $ 745
Accrued reorganization 2,895 -
Acquisition related expenses 2,125 1,147
National marketing fund 2,477 837
Accrued taxes 1,622 -
Accrued interest 1,292 528
Other 10,415 474
---------------- --------------
$ 33,860 $ 3,731
================ ==============

9. GREENLIGHT NEW WORLD, L.L.C.

On January 17, 2001, the Company entered into a Bond Purchase Agreement (the
Bond Purchase Agreement) with Greenlight. Pursuant to the Bond Purchase
Agreement, Greenlight formed a limited liability company Greenlight New World,
L.L.C. (GNW) and funded same with $10 million (the Contribution Amount) to be
utilized for the purchase of Einstein Bonds. The Company is the exclusive
manager of GNW. Accordingly, the Company has consolidated GNW since its
inception and reflected the contribution amount as minority interest. The Bond
Purchase Agreement provided Greenlight with a secure interest in GNW and a right
for repayment of its investment with a guaranteed accretion of 15% per year
within two years. In connection with the Bond Purchase Agreement, the Company
issued Greenlight five year warrants to purchase an aggregate of 4,242,056
shares of the Company's common stock at $0.01 per share. The fair value of the
warrants at the date of grant of $3,230,500 was recorded as a reduction in
minority interest and is being accreted over a two-year period to the earliest
redemption date. In addition, warrants for an additional 1.5% of the fully
diluted Common Stock of the Company shall be issued at such time as the Series F
Stock is redeemed.

On June 19, 2001 the Company, GNW and Greenlight entered into a letter agreement
(the Letter Agreement). Under the terms of the Letter Agreement, Greenlight
consented to the pledge (the Pledge) by the Company, as manager of GNW, of the
Einstein Bonds to Jefferies to secure a loan to a non-restricted subsidiary of
the Company in the principal amount of $35.0 million (the Bridge Loan). The
Company is required to apply all of the proceeds related to the Einstein Bonds
to the repayment of the Bridge Loan. To the extent that there are net proceeds
from the Einstein Bonds, after payment of the Bridge Loan in full, the excess
shall be payable to GNW. If the excess payment, if any, is less than the
original investment by Greenlight, the difference, plus a 15% per annum
increment (increasing to 17% on January 16, 2002 and by an additional 2% each
six months thereafter), shall be payable in the Company's Series F Preferred
Stock (valued at $1,000 per share) and warrant coverage comparable to that
described under Series F Private Placement above (1.5% of the fully diluted
Common Stock for every $1 million of the deficiency).

In connection with the Letter Agreement, Greenlight gave up its secured interest
in the bonds. Accordingly, the Contribution Amount that was previously
classified as minority interest is currently classified as long-term liability.
In addition, the 15% investment return due to Greenlight is included as interest
expense in the accompanying income statement.

10. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK

SERIES A AND SERIES B CONVERTIBLE PREFERRED STOCK

The Series B Convertible Preferred Stock bears no dividend and has limited
voting rights except as provided under the General Corporation Law of the State
of Delaware. The stock is convertible into shares of common stock in accordance
with the Certificate of Designation of Series B Convertible Preferred Stock. In
1998, 51.25 shares of the

F-18

Series B Convertible Preferred Stock were converted into 240,556 shares of
Common Stock. In 1999, 58.5 shares of the Series B Convertible Preferred Stock
were converted into 425,015 shares of Common Stock.

On June 7, 1999, the Company's Board of Directors authorized the issuance of a
Series A Junior Participating Preferred Stock in the amount of 700,000 shares.
This issuance was made in accordance with the Stockholders' rights plan
discussed below.

SERIES C CONVERTIBLE PREFERRED STOCK

In connection with a private placement discussed below, the Company issued
444,190 shares of Series C Convertible Preferred Stock. Each share of Series C
Preferred Stock was converted into 3 shares of the Company's Common Stock upon
the effective date of the registration of the Common Stock issued in connection
with the offering (September 11, 2000). The Series C Convertible Preferred Stock
provided for a cumulative dividend equal to 10% per annum, based upon a deemed
value of $ 7.00 per share. Pursuant to the terms of the offering, the Series C
Convertible Preferred Stock was converted to 1,332,570 shares of Common Stock on
the effective date of the registration of the Common Stock.

SERIES D REDEEMABLE PREFERRED STOCK

On August 11, 2000, the Company, Brookwood New World Investors, LLC (Brookwood)
and BET Associates, L.P. (BET) entered into a Series D Preferred Stock and
Warrant Purchase Agreement (the Purchase Agreement). The first closing under the
Purchase Agreement, pursuant to which BET purchased its Series D Preferred Stock
and its Warrant (as defined below), occurred on August 11, 2000. The second
closing under the Purchase Agreement, pursuant to which Brookwood purchased its
Series D Preferred Stock and Warrant (as defined below), occurred on August 18,
2000. Under the terms of the Purchase Agreement, Brookwood and BET each
purchased (i) 8,108.108 shares of New World's Series D Preferred Stock (the
Series D Preferred Stock) and (ii) a warrant to purchase up to 1,196,910 shares
of the Common Stock of the Company, each of which represents the right to
purchase approximately 7.7% of the Common Stock (each, a Warrant). Pursuant to
the Purchase Agreement, the number of shares that Brookwood and BET may receive
upon exercise of their Warrants is subject to upward adjustment depending upon
certain future events affecting the capitalization of the Company. The shares of
Common Stock issuable upon exercise of a Warrant are entitled to registration
rights under the terms of a Registration Rights Agreement among New World,
Brookwood and BET. Under the terms of the Purchase Agreement, if the Company
fails to take actions to redeem the Series D Preferred Stock within one year of
the closing, the Company will be required to issue to each of Brookwood and BET,
each quarter for the next four quarters, additional warrants representing the
right to purchase an additional 1.34% of the Company's Common Stock, subject to
reduction for any redemption(s) of Preferred Stock that occur during that year.
Further, under the terms of the Purchase Agreement, if the Company fails to take
actions to redeem the Series D Preferred Stock within two years of the closing,
the Company will be required to issue to each of Brookwood and BET, each quarter
for the next four quarters, additional warrants representing an additional
2.015% of the Company's Common Stock, subject to reduction for any redemption(s)
that occur during that year. The Series D Preferred Stock provided for a
cumulative dividend equal to 7.5% per annum, based upon a deemed value of $1,000
per share. The warrants have an exercise price of $.01 per share and have a term
of five years. The fair value of the warrants at the date of grant of
$3,234,000, as determined by an independent appraisor, was recorded as a
reduction in the carrying amount of the Series D Preferred Stock and is being
accreted over the three year period to the earliest fixed redemption date. In
January 2001, the Series D Preferred Stock was exchanged for newly authorized
Series F Redeemable Preferred Stock (see Series F Redeemable Preferred Stock
below). As of December 31, 2000, the components of Series D Redeemable Preferred
Stock were included in the accompanying balance sheet as follows:

Proceeds from issuance of Series D
Preferred Stock.................................................. $15,000
Fees and commissions............................................. (622)
Value assigned to warrants issued in connection with Series D
Preferred Stock.................................................. (3,234)
Accretion of warrant value and dividends......................... 864
---------
$12,008
=========

F-19

In January 2001, all shares of Series D Redeemable Preferred Stock were
exchanged for Series F Redeemable Preferred Stock (see below).

SERIES F REDEEMABLE PREFERRED STOCK

On January 22, 2001, the Company consummated a sale of 20,000 shares of its
authorized but unissued Series F Preferred Stock to Halpern Denny III, L.P.
(Halpern Denny) in exchange for the sum of $20,000,000. In connection with the
purchase, the Company issued Halpern Denny five-year warrants to purchase
8,484,112 shares of the Company's Common Stock at an exercise price of $0.01 per
share. The fair market value of the warrants at the date of grant of $6,431,000
was recorded as a reduction in the carrying amount of the Series F Preferred
Stock and is being accreted over the three year period to the earliest fixed
redemption date. The Series F Purchase Agreement provides that for so long as
the Series F Preferred Stock has not been redeemed for cash (including payment
of any Notes), Halpern Denny shall receive additional warrants equal to 1.5% of
the fully diluted common stock of the Company (excepting certain options and
warrants) on January 22, 2002 and on each succeeding June 30 and December 31.
The warrant agreement further provides that it would be exercisable for
additional shares under certain events, as set forth in the warrant agreement.

On January 22, 2001 BET and Brookwood entered into an Exchange Agreement with
the Company, whereby they exchanged all of their outstanding Series D Preferred
Stock, including accrued but unpaid dividends (all of which were retired) for a
total of 16,398.33 shares of Series F Preferred Stock. BET and Brookwood also
exchanged the warrants received by them in August 2000 for warrants to purchase
an aggregate of 6,526,356 shares of Common Stock of the Company at an exercise
price of $0.01 per share. The form of these warrants is substantially identical
to the form of the warrant issued to Halpern Denny including the provisions
thereof relating to the increase of the warrant shares, except that the
semi-annual increases are an aggregate of 1.154% of the fully diluted Common
Stock of the Company (excepting certain options and warrants). The fair value of
the warrants at the date of grant of $4,970,088 was recorded as a reduction in
the carrying amount of the Series F Preferred Stock and is being accreted over
the three year period to the earliest fixed redemption date. The difference in
the fair value of securities exchanged of $1,171,806 was charged to accumulated
deficit.

On March 29, 2001, the Company consummated a sale of 5,000 additional shares of
its authorized, but unissued, Series F Preferred Stock to Halpern Denny in
exchange for the sum of $5,000,000. Pursuant to the terms of the Second Series F
Preferred Stock and Warrant Purchase Agreement with Halpern Denny, the Company
also sold Halpern Denny five-year warrants to purchase 2,121,028 shares of the
Company's Common Stock at a price per share of $0.01 (subject to adjustment as
provided in the form of warrant). The fair value of the warrants at the date of
grant of $1,477,000 was recorded as a reduction in the carrying amount of the
Series F Preferred Stock and is being accreted over the three-year period to the
earliest fixed redemption date.

On June 7, 2001, the Company consummated a sale of 4,000 additional shares of
its authorized, but unissued, Series F Preferred Stock to Halpern Denny in
exchange for the sum of $4,000,000 pursuant to the terms of the Series F
Preferred Stock and Warrant Purchase Agreement (the Second Purchase Agreement)
with Halpern Denny, dated June 7, 2001.

In addition, on or about June 19, 2001, the Company consummated the sale of
21,000 additional shares of its authorized, but unissued, Series F Preferred
Stock in exchange for $21,000,000, pursuant to the terms of the Third Series F
Stock and Warrant Purchase Agreement (the Third Purchase Agreement) by and among
the Company, Halpern Denny, Greenlight Capital, L.P. (Greenlight Capital),
Greenlight Capital Qualified, L.P. (Greenlight Qualified), Greenlight Capital
Offshore, Ltd. (Greenlight Offshore, and together with Greenlight Capital,
Greenlight Qualified collectively referred to as Greenlight), Special Situations
Private Equity Fund, L.P. (Special Situations Private), Special Situations
Cayman Fund, L.P., (Special Situations Cayman) and Special Situations Fund, L.P.
(Special Situations Fund, and together with Special Situations Private and
Special Situations Cayman, collectively referred to as Special Situations).

As set forth in a Second Amended Certificate of Designation, Rights and
Preferences of Series F Preferred Stock (the Second Amended Certificate of
Designation), the Series F Preferred Stock accrues dividends payable in shares
of Series F Preferred Stock at the rate of 16% per annum for the first year,
which rate increases semi-annually

F-20

thereafter at the rate of 2% per annum. The Series F Preferred Stock, including
accrued dividends, is redeemable three years from the date of issue (the
Mandatory Redemption Date). If the Company fails to redeem the Series F
Preferred Stock at the Mandatory Redemption Date, the Company is entitled to
redeem the Series F Preferred Stock by issuing subordinated senior notes (the
Notes) to the holder of the Series F Preferred Stock. The Notes would bear
interest at a rate comparable to the dividend rate under the Series F Preferred
Stock, which rate increases monthly thereafter at the rate of 1% per month and
are due and payable 120 days from the Mandatory Redemption Date.

The Company, Halpern Denny, Brookwood, Greenlight and Special Situations entered
into an agreement which stated that notwithstanding the provisions concerning
the mandatory redemption date of the Series F Preferred Stock contained in the
Second Amended Certificate of Designation, the Series F Preferred Stock shall be
redeemable on the later of (a) January 18, 2004 for all shares of Series F
Preferred Stock issued on or prior to March 31, 2001, and June 30, 2004 for all
shares of Series F Preferred Stock issued after March 31, 2001, and (b) the
maturity date of any notes (the Refinancing Senior Notes), the proceeds of which
are used to repay the outstanding notes issued under the $140 Million Facility,
provided that the indenture for the Refinancing Senior Notes includes language
which permits the Company to make certain specified restricted payments (a
Restricted Payment) (including payments to redeem Series F Preferred Stock) so
long as certain covenants contained therein are satisfied. The amount of any
Restricted Payment, together with any aggregate amount of all other Restricted
Payments made by the Company and its subsidiaries must be less than the sum of
(x) fifty (50%) percent of the consolidated net income of the Company for the
period from the issue date of the Refinancing Senior Notes to the end of the
Company's most recently ended fiscal quarter, plus (y) one hundred (100%)
percent of the aggregate net cash proceeds received by the Company from the
issuance or sale of equity interests in the Company or any subsidiary, plus (z)
one hundred (100%) percent of the net cash proceeds received by the Company from
the issuance or sale, other than to a subsidiary of the Company, of any debt
security of the Company that has been converted into equity interests of the
Company. In the event that the maturity date of the Refinancing Senior Notes is
after January 18, 2004 or June 30, 2004, as the case may be, then the Mandatory
Redemption Date for such Series F Preferred Stock will be the maturity date of
the Refinancing Senior Notes.

In connection with the sale of the June 2001 Series F Preferred Stock, the
Company sold warrants to purchase 21,153,934 shares of the Company's Common
Stock at a price per share of $0.01 (subject to adjustment as provided in the
warrant agreement) pursuant to the Second Purchase and Third Purchase Agreement.
The warrants have a term of five years and further provide that they would be
exercisable for additional shares under certain events, as set forth in the
warrant agreement. The fair value of the warrants at the date of grant in the
amount of $21,174,000 was recorded as a reduction in the carrying amount of the
Series F Preferred Stock and is being accreted over the three year period to the
earliest fixed redemption date. Due to insufficient authorized Common Stock
available to settle certain warrants, the Company initially classified such
warrants as well as certain warrants to purchase 5,088,398 shares of the
Company's Common Stock issued in connection with the January and March 2001
financings as temporary equity on its balance sheet through July 3, 2001.
Pursuant to a vote held at a special meeting of the Company's shareholders on
September 20, 2001, the authorized shares of the Company's Common Stock was
increased to 150,000,000 shares, an amount sufficient to provide for the
exercise of the above warrants. Consequently, the fair value of the warrants
previously included in temporary equity has been reclassified to additional paid
in capital.

In connection with the execution and delivery of both the Second Purchase and
Third Purchase Agreements, each of Halpern Denny and Brookwood waived preemptive
rights they may have had concerning the issuance of additional shares of Series
F Preferred Stock and consented to the filing of the Second Amended Certificate
of Designation which increased the number of shares of Series F Preferred Stock
the Company is authorized to issue from 73,000 shares to 116,000 shares.

The Third Purchase Agreement provides that for so long as the Series F Preferred
Stock has not been redeemed for cash (including payment of the Notes, if any),
Halpern Denny, Greenlight and Special Situations shall receive additional
warrants equal to a percentage (specified therein) of the fully diluted Common
Stock of the Company (excepting certain options and warrants) on June 19, 2002,
and on each succeeding June 30 and December 31. If the Company redeems all its
issued and outstanding shares of Series F Preferred Stock on or prior to March
19, 2002, the number of shares of Common Stock issuable upon the exercise of the
warrants (the Original Warrant Shares) which were issued pursuant to the Second
Purchase and Third Purchase Agreements shall be reduced by an amount equal to
one-third (1/3) the number of Original Warrant Shares. If the Company redeems
all issued and outstanding

F-21

shares of Series F Preferred Stock on or prior to June 19, 2002, the number of
Original Warrant Shares shall instead be reduced by an amount equal to
one-fourth (1/4) of the number of Original Warrant Shares.

In connection with each of the Second Purchase and Third Purchase Agreements,
the parties amended the form of the Notes to be issued to the holders of Series
F Preferred Stock upon redemption of their shares to refer to their agreement
with the Company's secured lender concerning subordination of their interests to
the secured lender's interests. As a consequence of the amendment to the Notes,
the Company amended its January 2001 Exchange Agreement with BET and Brookwood
and the January 2001 Purchase Agreement with Halpern Denny to reflect the new
form of Notes. In addition, the Company, BET, Brookwood and Halpern Denny
entered into amendments to each of the Stockholders' Agreement and Amended and
Restated Registration Rights Agreement executed in connection with the January
2001 financing to conform certain defined terms therein to include the
additional securities issued pursuant to the Second and Third Purchase
Agreements.

The holders of warrants issued in connection with Series F Preferred Stock
issued prior to March 31, 2001 may be entitled to purchase additional shares of
Common Stock as the result of the warrants to purchase 13,720,000 shares of
Common Stock issued in connection with the $140 Million Facility and have agreed
that such warrants may not be issuable if such Series F Preferred Stock is
redeemed for cash not later than June 19, 2002.

In connection with the issuance of the Series F Preferred shares, the Company
incurred approximately $2.6 million of issuance costs. Such amount was recorded
as a reduction in the carrying amount of the Series F Preferred shares and is
being accreted over three years to the earliest fixed redemption date.

COMMON STOCK

At a special meeting of the Company's shareholders held on September 20, 2001,
the Company's shareholders approved an increase in the number of authorized
shares of the Company's Common Stock to 150,000,000 shares.

In a series of closings from April 18, 2000 through June 21, 2000, the Company
completed a private placement consisting of 1,360,390 shares of Common Stock and
444,190 shares of convertible Series C Preferred Stock. The proceeds from the
offering, net of related offering expenses were $4,144,305, exclusive of 169,902
shares of Common Stock issued to the placement agent. Each share of Series C
Preferred Stock was converted into three shares of the Company's Common Stock
upon the effective date of the registration of the Common Stock issued in
connection with the offering (September 11, 2000). The Company accounted for the
offering pursuant to the rules under ETIF Issue 98-5. Pursuant to these rules,
convertible securities with an embedded conversion right that is in-the-money
when the security is issued are considered to contain a beneficial conversion
feature. The value of the beneficial conversion feature associated with the
Series C Preferred Stock issued was $ 1,263,045. This amount has been charged to
accumulated deficit and was accounted for as a reduction in net income available
to common stockholders for the purpose of computing earnings per share.

STOCKHOLDERS' RIGHTS PLAN

On June 7, 1999, the Board declared a dividend distribution of one Right on each
outstanding share of the Company's Common Stock, as well as on each share later
issued. Each Right will allow stockholders to buy one one-hundredth of a share
of Series A Junior Participating Preferred Stock at an exercise price of $10.00.
The Rights become exercisable if an individual or group acquires 15% or more of
the Company's Common Stock, or if an individual or group announces a tender
offer for 15% or more of the Company's Common Stock. The Company's Board can
redeem the Rights at $0.001 per Right at any time before any person acquires 15%
or more of the outstanding Common Stock. In the event an individual (the
Acquiring Person) acquires 15% or more of the outstanding Common Stock, each
Right will entitle its holder to purchase, at the Right's exercise price, one
one-hundredth of a share of Preferred Stock--which is convertible into Common
Stock at one-half of the then value of the Common Stock, or to purchase such
Common Stock directly if there are a sufficient number of shares of Common Stock
authorized. Rights held by the Acquiring Person are void and will not be
exercisable to purchase shares at the bargain purchase price. If the Company is
acquired in a merger or other business combination transaction, each Right will
entitle its holder to purchase, at the Right's then-current exercise price, a
number of the acquiring company's common shares having a market value at that
time of twice the Right's exercise price.

F-22

WARRANTS

As of January 1, 2002, the Company has 57,465,456 warrants outstanding all of
which were exercisable. These warrants have exercise prices ranging from $0.01 -
$18.15 per share, of which 56, 247, 486 are exercisable at $0.01 per share, and
have terms ranging from five to 10 years. Such warrants were issued in
connection with financings and certain other services.

STOCK OPTIONS

The Company's 1994 Stock Plan (the 1994 Plan) provides for the granting to
employees of incentive stock options and for the granting to employees and
consultants of nonstatutory stock options and stock purchase rights. Unless
terminated sooner, the 1994 Plan will terminate automatically in August 2004.
The Board of Directors has the authority to amend, suspend or terminate the 1994
Plan, subject to any required stockholder approval under applicable law,
provided that no such action may affect any share of common stock previously
issued and sold or any option previously granted under the 1994 Plan.

Options generally become exercisable in ratable installments over a period of up
to 4 years. A total of 375,000 shares of Common Stock are currently reserved for
issuance pursuant to the 1994 Plan and all have been issued.

The Company's 1995 Directors' Stock Option Plan (the Directors' Option Plan) was
adopted by the Board of Directors and approved by the Company's shareholders in
August 1995. Unless terminated sooner, the Director Option Plan will terminate
automatically in August 2005. The Board of Directors may amend or terminate the
Directors' Option Plan at any time; provided, however, that no such action may
adversely affect any outstanding option without the optionee's consent and the
provisions affecting the grant and terms of options may not be amended more than
once during any six-month period. A total of 100,000 shares of Common Stock have
been reserved for issuance under the Directors' Option Plan. The Directors'
Option Plan provides for the automatic grant of nonstatutory stock options to
nonemployee directors of the Company. These options vest immediately upon grant.

The Company issues options from time to time outside the plans described above.

A summary of the Company's options activity during the years ending January 1,
2002, December 31, 2000 and December 26, 1999 is presented in the table and
narrative below:

January 1, December 31, December 26,
2002 2000 1999
--------------------- --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ---------- ---------- --------- ---------- ----------

Outstanding, beginning of year 1,927,729 $2.56 1,284,179 $2.81 865,578 $3.24

Grant 4,220,670 0.98 643,550 2.86 425,000 1.97
Exercised - - - - - -
Forfeited - - - - (6,399) 4.78
--------- ---------- ---------- ----------
Outstanding, end of year 6,148,399 1.48 1,927,729 2.56 1,284,179 2.81
========= ========== ========== ========= ========== ==========
Exercisable, end of year 2,255,540 2.23 1,874,329 2.57 780,179 3.03
========= ========== ========== ========= ========== ==========
Weighted average, fair value of options
granted $0.82 $0.88 $0.56
========== ========= ==========

F-23

The following table summarizes information about the Company's two stock option
plans at January 1, 2002:

Number Weighted Average Number
Exercise Outstanding at Remaining Weighted Average Exercisable at Weighted Average
Price January 1, 2002 Contractual Life Exercise Price January 1, 2002 Exercise Price
-------------- ---------------- ---------------- ---------------- ---------------- ------------------

$.050 - $2.00 5,330,037 9.69 $ 1.19 1,478,078 $ 1.61
$2.01 - $5.00 800,962 6.72 $ 3.22 760,062 $ 3.26
$5.01 - $11.00 17,400 5.29 $ 9.49 17,400 $ 9.49
---------------- ---------------- ---------------- ------------------
6,148,399 $ 1.48 2,255,540 $ 2.23
================ ================ ================ ==================

Had compensation cost for these plans been determined consistent with SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the following pro forma amounts:

January 1, December 31, December 26
2002 2000 1999
---------- ------------ -----------
(amounts in thousands, except per share amounts)

Net (loss) income available to Common
Stockholders:
As reported................................ $ (54,809) $ 3,883 $ 2,424
Pro forma.................................. (55,195) 2,873 1,972

Basic net (loss) income available to Common
Stockholders per common share:
As reported................................ (3.24) 0.32 0.24
Pro forma.................................. (3.26) 0.24 0.19

Diluted net (loss) income available to
Common Stockholders per common share:
As reported................................ (3.24) 0.29 0.23
Pro forma.................................. (3.26) 0.18 0.18

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2001, 2000 and 1999, respectively: risk-free
interest rates of 6.0%, 5.5% and 6.2%; expected dividend yields of 0%; expected
lives of 5.5, 4 and 4 years; expected stock price volatility of 78%, 78% and
57%.

11. INCOME TAXES

The Company's effective tax rate differs from the federal statutory rate
primarily due to the impact of the recognition of valuation allowances against
certain future deferred tax benefits for the periods presented.

A summary of the significant components of deferred assets as of January 1, 2002
and December 31, 2000 is as follows:

January 1, December 31,
2002 2000
----------- -----------
(amounts in thousands)

Operating loss carryforwards............... $ 20,550 $ 15,885
Non-cash charges not yet realized for tax
reporting purposes......................... 6,298 509
Allowance for doubtful accounts............ 1,218 783

F-24

Other...................................... (3,916) -
----------- -----------
Net deferred tax assets.................... 24,150 17,177
Valuation allowance........................ (14,716) (7,577)
----------- -----------
$ 9,434 $ 9,600
=========== ===========

At January 1, 2002, the Company had net operating loss carryforwards of
approximately $59,300,000 available to offset future taxable income. These net
operating loss carryforwards expire on various dates through 2021. As a result
of ownership changes which resulted from the issuance of warrants in connection
with the sale of Series F Preferred Stock and the acquisition of MBC, the
Company's ability to utilize the loss carryforwards is subject to limitations as
defined in Section 382 of the Internal Revenue Code, as amended.

At January 1, 2002, the Company has recorded a valuation allowance of
$14,716,000 to reduce the deferred tax asset. The valuation allowance is based
upon management's current assessment of the Company's ability to realize the
related tax benefits considering the limitations imposed by Section 382 of the
Internal Revenue Code and the status of the Company's integration of the
operations of Einstein.

During 2000, the Company evaluated its tax loss carryforwards and related
deferred tax asset resulting in the recognition of a deferred income tax benefit
of $3,100,178. This benefit relates primarily to expected utilization of loss
carryforwards related to New World Coffee prior to the acquisition of MBC.

In 1999, MBC contributed substantially all the profitability of the Company and
accordingly, the valuation allowance of $6,500,000 on its net operating loss
carryforwards has been reversed. The offsetting benefit has been reflected as a
reduction in the goodwill recorded in the acquisition of MBC.

12. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases office and retail space under various non-cancelable
operating leases. Property leases normally require payment of a minimum annual
rental plus a pro rata share of certain landlord operating expenses.

As of January 1, 2002, approximate future minimum rental payments under
non-cancelable operating leases for the next five years and the period
thereafter are as follows:

(Amounts in thousands)

YEAR
----
2002 $ 27,091
2003 25,456
2004 24,377
2005 21,965
2006 15,933
2007 and thereafter 15,739
--------
Total minimum lease payments 130,561
Less: Sub-let rental income (2,728)
--------
127,833
========

Rent expense under operating leases was approximately $17,539,000, $2,617,000
and $2,849,000 for the years ended January 1, 2002, December 31, 2000 and
December 26, 1999, respectively.

F-25

CAPITAL LEASES

The Company has capital leases for computer equipment used in its stores and
offices. As of January 1, 2002, payments under such capital leases are as
follows:

(Amounts in thousands)

YEAR
----
2002 $289
2003 237
2004 165
2005 51
2006 31
-----
773
-----
Less: Amount representing interest (174)
$599
=====

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with four officers of the
Company expiring between May 2002 and July 2003. Minimum base salaries and
bonuses for the term of these employment agreements total approximately
$1,608,000 annually, of which the Company is committed to pay $1,457,000 after
January 1, 2001. In addition, severance payments of approximately $2,330,000 may
be due under the contracts depending on the circumstance of the officer's
termination.

CONTINGENCIES

From time to time, the Company is a party to litigation arising in the normal
course of its business operations. In the opinion of management and counsel, it
is not anticipated that the settlement or resolution of any such matters will
have a material adverse impact on the Company's financial condition, liquidity
or results of operations.

Effective November 27, 2001, the Company's Common Stock was delisted from the
Nasdaq National Market. The failure to maintain its listing on the Nasdaq
National Market or another national or regional exchange could have a material
adverse effect on the liquidity and trading market for the Company's Common
Stock, which in turn may have an adverse effect on the price of the Company's
Common Stock.

On April 3, 2002, the Company was notified by the Securities and Exchange
Commission that the Commission is conducting an informal investigation into the
resignation of the former Chairman, R. Ramin Kamfar, the termination of the
former Chief Financial Officer, Jerold Novack, and the delay in filing this Form
10-K. The Company is cooperating fully with the investigation. The Company is
also cooperating fully with a recent Department of Justice inquiry relating to
these issues.

The Company has also been notified by Special Situations, holders of our Series
F Preferred Stock, that they believe that material misrepresentations were made
to them in June 2001 in connection with their purchase of the Company's stock.
Although the Special Situations Funds have not initiated any legal proceedings
against the Company, they may do so.

Given the early stage of these matters, Management cannot predict their outcome.
However, there can be no assurance that that the Company will not be subject to
regulatory sanctions, civil penalties and/or claims for monetary damages and
other relief.

F-26

RELATED PARTY TRANSACTIONS

Leonard Tannenabum, a director, is a limited partner and 10% owner in BET, one
of the Company's principal stockholders. On August 11, 2000, BET purchased
approximately 8,108 shares of the Company's Series D Preferred Stock for a sum
of $7,500,000. In a related transaction on August 18, 2000, Brookwood, one of
the Company's principal stockholders, purchased approximately 8,108 shares of
the Company's Series D Preferred Stock for a sum of $7,500,000 (collectively,
the "Series D Financing"). Each of BET and Brookwood received a warrant to
purchase 1,196,909 shares of the Company's Common Stock at a price of $0.01 per
share. In connection with the Series D Financing, MYFM Capital LLC, of which Mr.
Tannenbaum is the Managing Director, received a fee of $225,000 and a warrant to
purchase 70,000 shares of the Company's Common Stock at its closing price on
August 18, 2000. In addition, Mr. Tannenbaum was designated by BET as a director
to serve for the period specified in the Stockholders' Agreement dated January
18, 2001, as amended (the "Stockholders' Agreement"), among the Company and the
holders of its Series F Preferred Stock.

Eve Trkla, a director of the Company, is the Chief Financial Officer of
Brookwood Financial Partners, L.P., an affiliate of Brookwood. Ms. Trkla was
designated by Brookwood as a director to serve for the period specified in the
Stockholders' Agreement.

On January 22, 2001, the Company consummated a sale of 20,000 shares of its
authorized but unissued Series F Preferred Stock to Halpern Denny, one of the
Company's principal stockholders, in exchange for the sum of $20 million. At
such time, the Company entered into a Series F Preferred Stock and Warrant
Purchase Agreement with Halpern Denny. Pursuant to the Series F Preferred Stock
and Warrant Agreement, Halpern Denny was paid a transaction fee of $500,000.
William Nimmo, a director, is a partner in Halpern Denny and Co., an affiliate
of Halpern Denny. Mr. Nimmo was designated by Halpern Denny as a director of the
Company. In connection with the Series F Preferred Stock and Warrant Purchase
Agreement, the Company issued Halpern Denny a warrant to purchase 8,484,112
shares of its Common Stock at an exercise price of $0.01 per share.

BET and Brookwood had invested the sum of $15 million for substantially the same
purpose as that contemplated by the Series F Purchase Agreement, which
investment was made in August 2000, and BET and Brookwood were then holding
Series D Preferred Stock, which had a right to approve the creation of the
Series F Preferred Stock. Therefore, the Company considered it appropriate to
restructure the investment documents relating to the August 2000 investment by
BET and Brookwood. Accordingly, the Company, BET and Brookwood entered into an
Exchange Agreement on January 22, 2001, whereby the Company exchanged all of its
outstanding Series D Preferred Stock, including accrued but unpaid dividends
(all of which were retired), for a total of 16,398.33 shares of Series F
Preferred Stock. BET and Brookwood also exchanged the warrants received by them
in August 2000 for warrants to purchase an aggregate of 6,526,356 shares of the
Company's Common Stock. On May 30, 2001, the Company issued 25,000 shares of
Common Stock to Mr. Tannenbaum in connection with the exchange of all of the
outstanding shares of Series D Preferred Stock for shares of Series F Preferred
Stock. In connection with the January 2001 Series F Preferred Stock financing,
Bruce Toll, an affiliate of BET, was issued 200,000 shares of Common Stock.

On March 29, 2001, the Company consummated a sale of 5,000 additional shares of
its Series F Preferred Stock to Halpern Denny in exchange for the sum of
$5,000,000. Pursuant to the terms of the Second Purchase Agreement with Halpern
Denny, the Company also sold Halpern Denny warrants to purchase 2,121,028 shares
of its Common Stock at a price per share of $0.01 (subject to adjustment as
provided in the form of warrant). Pursuant to the Second Purchase Agreement,
Halpern Denny was paid a transaction fee of $200,000.

In connection with the Einstein Acquisition, on June 7 and June 19, 2001,
Halpern Denny purchased an additional 7,500 shares of Series F Preferred Stock
for the sum of $7,500,000 and warrants to purchase 2,961,551 shares of the
Company's Common Stock at a price per share of $0.01 (subject to adjustment as
provided in the form of warrant) pursuant to the Series F Preferred Stock
Purchase Agreement. In addition, on June 19, 2001, Greenlight, one of the
Company's principal stockholders, purchased 12,500 shares of Series F Preferred
Stock and warrants to purchase 10,576,967 shares of the Company's Common Stock
at a price per share of $0.01 (subject to adjustment as provided in the form of
warrant) pursuant to the Third Purchase Agreement. Pursuant to the Third
Purchase Agreement, Halpern Denny was paid a transaction fee of $250,000 and
Greenlight was paid a transaction fee of $250,000.

F-27

Commencing in 2002, the holders of the Series F Preferred Stock are entitled to
receive additional warrants. See Note 10.

On January 17, 2001, the Company entered into a Bond Purchase Agreement with
Greenlight Capital. Pursuant to the agreement, Greenlight Capital formed a
limited liability company, Greenlight New World, L.L.C. ("GNW"), and contributed
$10 million to GNW to purchase Einstein bonds. The Company is the exclusive
manager of GNW. The agreement provided Greenlight Capital with a secure interest
in GNW and a right to receive the return of its original contribution plus a
guaranteed accretion of 15% per year, increasing to 17% on January 16, 2002 and
by an additional 2% each six months thereafter (the "Guaranteed Return"). In
connection with the agreement, the Company issued Greenlight Capital warrants to
purchase an aggregate of 4,242,056 shares of its Common Stock at $0.01 per
share. On June 19, 2001, the Company, GNW and Greenlight Capital entered into a
letter agreement, pursuant to which, among other things, Greenlight Capital
consented to the pledge of the Einstein bonds owned by GNW to secure the Bondco
notes. The Company is required to apply all proceeds received with respect to
the Einstein bonds to repay the Bondco notes. To the extent that there are any
excess proceeds, the Company is required to pay them to Greenlight Capital. If
Greenlight Capital does not receive a return equal to its Guaranteed Return, the
Company is obligated to issue Greenlight Capital Series F Preferred Stock with a
face amount equal to the deficiency and warrant coverage equal to 1.5% of its
fully diluted Common Stock for each $1 million of deficiency.

The Company, BET, Brookwood, Halpern Denny, Greenlight and Special Situations
entered into a Stockholders' Agreement, which relates principally to the
composition of the Board of Directors of the Company. Pursuant to the terms of
the Stockholders Agreement, as amended, the authorized number of directors shall
be ten members. BET and Brookwood are each entitled to designate one member of
the Board of Directors until such time as its Series F Preferred Stock,
including any notes issued upon redemption thereof, have been redeemed and paid
in full. Halpern Denny is entitled to designate two members to the Board of
Directors (and has designated one, Mr. Nimmo, as of this time) until such time
as its Series F Preferred Stock, including any notes issued upon redemption
thereof, have been redeemed and paid in full, at which time it shall be allowed
to designate one director, which right will continue until such time as it owns
less than 2% of our outstanding Common Stock. The Stockholders Agreement
provides that should Halpern Denny designate a second member to the Board of
Directors, a majority of directors who are not designees of BET, Brookwood or
Halpern Denny may designate an additional member to the Board of Directors
bringing the total membership of the Board of Directors to ten persons. In
addition, pursuant to the terms of the Certificate of Designation for the Series
F Preferred Stock, in the event that any dividends on the Series F Preferred
Stock are in arrears, the holders of the Series F Preferred Stock will have the
right to designate not less than 50% of the members of the Board of Directors.

On May 30, 2002, the Company entered into a Loan and Security Agreement with
BET, which provides for a $7.5 million revolving loan facility. The facility
will be secured by substantially all of the Company's assets. Borrowings under
the facility will bear interest at the rate of 11% per annum. The facility will
expire on March 31, 2003. In connection with obtaining the facility, the Company
paid MYFM Capital LLC a fee of $75,000. Leonard Tannenbaum, one of the Company's
directors, is the Managing Director of MYFM Capital and is a partner at BET.

In June 1999, the Company entered into a franchise agreement for a New World
location with NW Coffee, Inc., pursuant to which NW Coffee, Inc. paid the
Company an initial franchise fee of $25,000 for the franchise. In addition, the
franchise agreement provides for royalty payments equal to 5.0% of gross sales,
due and payable monthly. In connection with the franchise agreement we also
entered into an asset purchase agreement with NW Coffee, Inc. pursuant to which
NW Coffee, Inc. purchased the assets of the New World location from us for
$250,000. In connection with the asset purchase agreement, NW Coffee, Inc.
delivered to us a promissory note in the amount of $255,000, which bears
interest at 8% and is payable in installments commencing in June 2002. The note
is secured by the assets of NW Coffee, Inc. used in the operation of the
franchise. Mr. Kamfar's uncle owns NW Coffee, Inc. and Mr. Kamfar's parents are
officers of NW Coffee, Inc. In periods prior to April 2001, the Company
purchased goods for the franchise and paid for all of the expenses of the
franchise other than payroll (other than the salary of the general manager),
which generated receivables for the Company. From time to time, NW Coffee, Inc.
and Mr. Kamfar made payments to the Company to reduce the outstanding
receivables. As of January 1, 2002, the outstanding receivables of NW Coffee,
Inc. was $249,948. Until April 2002, the Company also provided payroll,
accounting and other services to NW Coffee, Inc. for no charge.

F-28

In August 1997, the Company entered into a franchise for a New World location
with 723 Food Corp., pursuant to which 723 Food Corp. paid us an initial
franchise fee of $25,000 for the franchise. In addition, the franchise agreement
provides for royalty payments equal to 5.0% of gross sales, due and payable
monthly. In connection with the franchise agreement, 723 Food Corp. purchased
the assets of the New World location from the Company for $275,000. In
connection with the asset purchase agreement, 723 Food Corp. delivered to the
Company a promissory note in the amount of $125,000, which bears interest at 6%
and is payable on August 30, 2002 and a promissory note in the amount of
$100,000, which bears interest at 6% and is payable on November 30, 2002. The
notes are secured by the assets of 723 Food Corp. and 200,000 shares of Common
Stock of New World. In addition, Mr. Novack guaranteed the obligations of 723
Food Corp. The guarantee is no longer in effect. Until August 17, 2000, Mr.
Novack owned 50% of the capital stock of 723 Food Corp. and was an officer and
director of 723 Food Corp. As of January 1, 2002, the outstanding receivables of
723 Food Corp. was $16,137. In addition, the Company issued a warrant to 723
Food Corp. to purchase 100,000 shares of Common Stock for $1.25 per share.

13. ASSETS HELD FOR RESALE

In 1998, the Company determined that it would seek to sell the assets relating
to stores it had previously acquired in accordance with the Company's strategy
to sell its Company-owned stores to franchisees. The Company evaluated the
realizability of the carrying amount of such assets based on the estimated fair
value of such assets which was determined based on the stores estimated selling
prices. Based on this evaluation, the Company wrote off approximately $1,439,000
of goodwill and fixed assets relating to six locations. The remaining value of
such assets was classified as held for sale based on the Company's plan and
intent to dispose of such stores by the end of fiscal 2000. During 2000, the
Company reviewed the salability of these assets based upon current market
conditions and the prospect for sale within the next year. As a consequence of
this review, approximately $234,000 of assets held for sale were reclassified to
Property and Equipment and Goodwill based upon management's expectation that
such assets would not be sold in the year 2001.

During 2000, the Company acquired certain store assets in upstate New York and
in Oklahoma, Colorado and Kansas (see Note 2). Such assets, approximating
$4,854,000 have been classified as assets held for sale based upon the Company's
plan and intent to dispose of such stores.

In the second quarter of 2001, the Company recorded an asset impairment of
approximately $2.8 million in accordance with SFAS 121. Such impairment was
required to write down the net book value of certain assets held for resale to
their fair value.

During 2001, the Company sold four stores in New York and closed eight locations
in Colorado and Oklahoma.

F-29

14. OTHER LONG-TERM LIABILITIES

Other long-term liabilities consist of the following:

JANUARY 1, DECEMBER 31,
2002 2000
---------- ---------
(AMOUNTS IN THOUSANDS)

Greenlight New World L.L.C. Contribution..................................... $9,341 $-
Vendor Contractual Agreements................................................ 6,251 -
Distributor Contractual Agreements........................................... 2,670 1,654
Other........................................................................ 1,541 175
------------- ------------
19,803 $1,829
============= ============

15. REORGANIZATION AND INTEGRATION

During the quarter ended July 3, 2001, the Company implemented a plan to
consolidate the two dough manufacturing facilities on the West Coast, eliminate
duplicative labor lines of assembly, terminate certain lease obligations
inclusive of several company-operated locations. When initiated, the
restructuring plan was expected to take approximately one year to complete. The
Company recorded a $4.4 million charge associated with this restructuring plan.
Approximately $1.0 million of this charge represented a write-off of the
equipment and leasehold improvements.

As of January 1, 2002, payments totaling $0.5 million were applied against the
established restructuring reserves, resulting in a remaining balance of $3.9
million. The following table displays the activity and balances of the
restructuring reserve account from inception to January 1, 2002:

Initial Charge - July 3, 2001............................ $ 4,391
Amount classified as impairment of
Property, Plant & Equipment.............................. (1,000)
------------
Balance, July 3, 2001.................................... 3,391
Additions................................................ -
Deductions............................................... (177)
------------
Balance, October 2, 2001................................. 3,214
Additions................................................ -
Deductions............................................... (320)

------------
Balance, January 1, 2002................................. $ 2,894
============

16. SUBSEQUENT EVENTS

FIXED FEE DISTRIBUTION AGREEMENT

The Company maintains a fixed fee distribution agreement with a national
distribution company (distributor) whereby the distributor supplies
substantially all products for resale in the Company's company-operated
restaurant locations. In addition, the Company maintains a separate fixed fee
distribution agreement with the distributor for delivery of certain proprietary
products to its franchised locations. Effective February 20, 2002, the Company
entered into Mutual Termination Agreements (Agreement) with the distributor
which provided for the termination of each of the fixed fee distribution
agreements effective August 2, 2002. Pursuant to the restated agreement, the
distributor is required to provide distribution services to all locations
through August 2, 2002, which services must meet or exceed minimum service
parameters, and the Company is required to pay the distributor $12,000,000,
representing a portion of the unamortized $5,000,000 investment made by the
distributor at the inception of the original agreement and a reduced amount of
outstanding trade payables and other previously accrued charges, payable as
follows:
(a) The sum of $1,200,000 on February 25, 2002 (net of $900,000 rebate);

F-30

(b) The sum of $ 4,800,000 in equal installments of $228,571 on each
Wednesday beginning on February 27, 2002 through and including July
31, 2002;
(c) The sum of $6,000,000 which will accrue interest on the first day of
each calendar month from August 1, 2002 at the rate of 9% per annum
and will be payable in equal installments of $176,500 each week
beginning August 28, 2002 through March 28, 2003. In the event that
the Company repays the full $6,000,000 prior to October 31, 2002,
all interest will be forgiven and all previous interest payments
recharacterized as payments of principal.

The Company has begun the process of replacing the distributor in order to
insure the continuing delivery of goods to its company-operated and franchised
locations. Failure to engage the services of a new distributor prior to August
2, 2002 could result in a significant disruption to the operations of
company-operated and franchised locations.

REVOLVING LINE OF CREDIT

On January 18, 2002, the Company entered into a Loan and Security Agreement
(loan agreement) with a lender which provided for a $7,500,000 Revolving Loan
Facility (facility). The revolving loan facility was secured by substantially
all of the assets of the Company. The underlying loan agreement provided for
periodic borrowings based upon availability as calculated pursuant to the loan
agreement. In addition, the loan agreement required the Company to meet certain
financial covenants and placed restrictions on the Company's ability to obtain
additional borrowings and to enter into certain capital transactions. The
Company did not use or draw under the facility. Nevertheless, on March 25, 2002,
the lender notified the Company that the Company was in default under certain
terms and conditions of the loan agreement. As the result of these defaults, the
Company was unable to obtain advances under the revolving loan facility. In
addition, the lender requested payment of certain lender expenses approximating
$126,000 due under the loan agreement.

On May 30, 2002, the Company entered into a Loan and Security Agreement with
BET, one of the Company's principal stockholders, which provides for a
$7,500,000 revolving loan facility. The facility will be secured by
substantially all of the Company's assets. Borrowings under the facility will
bear interest at the rate of 11% per annum. The facility will expire on March
31, 2003. At the time that the Company entered into this facility the Company
terminated its prior revolving loan facility.

F-31

SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS

NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Year Expenses Accounts Deductions Year
---------- ----------- ----------- ------------- -----------

For the fiscal year ended December 26, 1999:
Allowance for doubtful accounts.......... $11,915 $ 2,146 $ $(4,502) $ 9,559
========== =========== =========== ============= ===========
Restructuring reserve.................... $ 2,344 $ $ $ (224) $ 2,120
========== =========== =========== ============= ===========
Valuation allowance for deferred tax assets $ 9,358 $ 4,278 $(6,500) $ $ 7,136
========== =========== =========== ============= ===========

Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Year Expenses Accounts Deductions Year
---------- ----------- ----------- ------------- -----------
For the fiscal year ended December 31, 2000:
Allowance for doubtful accounts.......... $ 9,559 $ 160 $ $(7,454) $ 2,265
========== =========== =========== ============= ===========
Restructuring reserve.................... $ 2,120 $ $ $(1,223) $ 897
========== =========== =========== ============= ===========
Valuation allowance for deferred tax assets $ 7,136 $(3,100) $ 3,541 $ $ 7,577
========== =========== =========== ============= ===========

Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Year Expenses Accounts Deductions Year
For the fiscal year ended January 1, 2002:
Allowance for doubtful accounts.......... $ 2,265 $ 1,660 $ $(1,127) $ 2,798
========== =========== =========== ============= ===========
Restructuring reserve.................... $ 897 $ 4,391 $ $(2,393) $ 2,895
========== =========== =========== ============= ===========
Valuation allowance for deferred tax assets $ 7,577 $ 167 $ 6,972 $ $14,716
========== =========== =========== ============= ===========

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted since
they are either not applicable or not required.

S-1