<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549


                                   FORM 10-K



                 Annual Report Pursuant to Section 13 or 15(d)
                    of the Securities Exchange Act of 1934
                  For the Fiscal Year Ended February 3, 1999


                          Commission File No. 0-21486

                         HARRY'S FARMERS MARKET, INC.

                             A Georgia Corporation
                 (IRS Employer Identification No. 58-2037452)
                            1180 Upper Hembree Road
                            Roswell, Georgia  30076
                                (770) 667-8878

                Securities Registered Pursuant to Section 12(b)
                    of the Securities Exchange Act of 1934:

                                     None


                Securities Registered Pursuant to Section 12(g)
                    of the Securities Exchange Act of 1934:

                      Class A Common Stock, no 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
amendment to this Form 10-K. [X]
                             --- 

The aggregate market value of the Class A Common Stock of the registrant held by
nonaffiliates of the registrant on April 28, 1999, was approximately $4,002,019.
For the purposes of this response, officers, directors and holders of 10% or
more of the registrant's common stock are considered affiliates of the
registrant at that date.

The number of shares outstanding of the registrant's Class A Common Stock, no
par value, as of April 28, 1999: 4,139,375 shares.  The number of shares
outstanding of the registrant's Class B Common Stock, no par value, as of April
28, 1999:  2,050,701 shares.

                      DOCUMENTS INCORPORATED BY REFERENCE
                      -----------------------------------

Portions of the registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders to be held in 1999 are incorporated by reference in answer to
Part III of this report, with the exception of information regarding executive
officers required under Item 10 of Part III, which information is included in
Part I, Item 1.
<PAGE>
 
                                    PART I


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

   Harry's Farmers Market, Inc. ("Harry's" or the "Company") owns and operates
concept megastores and convenience stores specializing in perishable food
products -- fresh fruits and vegetables; fresh meats, poultry and seafood; fresh
bakery goods; freshly made ready-to-eat, ready-to-heat and ready-to-cook
prepared foods; and deli, cheese and dairy products. Harry's stores also feature
lines of specialty, hard-to-find and gourmet nonperishable food products that
are complementary to the fresh food offerings. In addition, the Company's stores
carry kitchen-oriented housewares, floral items, natural health and beauty care
items, and a full line of wines and imported and domestic beers. The Company's
bakery and prepared foods departments are fully-integrated food manufacturing
operations. The Company presently owns and operates three megastores and five
Harry's In A Hurry convenience stores, all in the Atlanta, Georgia, metropolitan
area.

HARRY'S MEGASTORES

   Harry's megastores are presently located in Alpharetta, Georgia; Gwinnett
County, Georgia and Cobb County, Georgia. Each megastore is within 30 miles of
downtown Atlanta. The Alpharetta store, which opened in 1988, is housed in a
132,500 square foot facility with approximately 81,000 square feet devoted to
retailing and retailing support. The Alpharetta facility also houses the
Company's receiving, inspection and distribution operations, prepared foods
manufacturing plant, bakery facility and corporate offices. The Gwinnett County
store, which first opened in 1991 and was expanded in 1994, is a 95,000 square
foot facility devoted entirely to retailing and retailing support. During the
latter part of fiscal 1996, the Company utilized the expanded square footage to
add a full line of perishable and nonperishable ethnic foods. The Cobb County
store, which opened in October 1993, is a 100,000 square foot facility, also
entirely devoted to retailing and retailing support.

   Harry's stores utilize an open warehouse format with high ceilings and fully
stocked bins, cases and shelves. The store layout directs customers through each
department, maximizing buyer exposure to the full range of Harry's products.
Shopping aisles are two to three times wider than those of the typical grocery
store to accommodate a higher traffic volume. Fresh food work spaces (produce
preparation and meat and seafood cutting areas) are incorporated onto the
selling floor to enhance the open market atmosphere and animation, although such
areas are restricted from customer traffic flow. Each store has approximately 25
check-out stations.

HARRY'S IN A HURRY STORES

   To increase the retail outlets for Harry's manufactured products (bakery and
prepared food items), the Company operates five strategically located specialty
stores under the name "Harry's In A Hurry." In June 1993, a 3,700 square foot
Harry's In A Hurry opened in the Buckhead area of Atlanta and in March 1994, the
Company opened a second 7,200 square foot Harry's In A Hurry approximately four
miles from the first Harry's In A Hurry. A third 15,000 square foot Harry's In A
Hurry opened in January 1998 in the Cobb County area of Atlanta. In September
1998 and December 1998, the Company opened the fourth and fifth Harry's In A
Hurry stores in the

                                      -1-
<PAGE>
 
Dunwoody area and Virginia-Highland area of Atlanta, respectively, each totaling
approximately 15,000 square feet. These stores carry a full range of Harry's
bakery goods and prepared food items, a limited line of fresh food products and
selected complementary foods. The Harry's In A Hurry stores provide more
convenient, quick stop shopping for those customers less inclined to visit the
megastores.


HARRY'S PRODUCTS AND DEPARTMENTS

   Harry's megastores are operationally divided into category-managed
departments, each of which is supervised by an experienced manager. Each
department operates independently and has its own procedures and methods for
purchasing, receiving, storage and handling and merchandising. The bakery and
prepared foods departments are fully integrated food manufacturing operations.
Substantial processing and food preparation are likewise involved in the
delicatessen and seafood/meat departments. Fresh produce is the largest
department of Harry's megastores, generating between 25 to 35 percent of the
total revenue. Seafood/meat, staples and wine and beer are the next largest
departments. No other department makes up more than eight percent of any
megastore's sales. The following is an overview of the major departments.

  Perishable Products

     Fresh Fruits and Vegetables. Harry's offers approximately 1,000 varieties
of fresh produce items during the year. In addition to the traditional selection
of domestically grown fruits and vegetables, Harry's offers exotic products from
around the world, a full line of organically grown produce and produce
particular to ethnic cuisines.

     Most fresh produce offered at Harry's is purchased directly from growers
through a network of field buyers, some of whom are full-time employees of the
Company and the remainder are independent buying brokers. Most of Harry's
produce is domestically grown, primarily in California, Arizona, Florida,
Washington, Texas and the East Coast, with the bulk of the remainder being
purchased from South American growers during off-growing season in the northern
hemisphere. Small amounts of products are also purchased from European and
Middle Eastern countries. A minimal amount of produce is also grown under
contract for Harry's.

     Approximately 30 percent of the produce offered at Harry's is transported
from the grower to the Company's receiving facility located at the Alpharetta
megastore under special arrangements with a single contract carrier, for whom
Harry's represented a major portion of revenues for such carrier's most recent
fiscal year. Produce is picked up at the point of origin in, where appropriate,
refrigerated and temperature-monitored trucks. Transportation requirements
usually are communicated to the carrier within hours of the purchase commitment.

     Incoming shipments are immediately off-loaded and directed to inspection
stations where trained produce inspectors sample and test incoming pallets for
quality and freshness. Shipments or lots which do not meet Harry's rigorous
quality standards are immediately rejected. In addition, incoming produce is
regularly sampled and tested by Nutriclean, an independent food testing
laboratory, for compliance with federal standards regarding toxic contamination
and pesticide and herbicide residues.

                                      -2-
<PAGE>
 
     After inspection, the fresh produce is moved to storage in one of six
separate temperature-controlled environments appropriate for maintaining
freshness of the various products. The produce is also separated where there is
a risk of cross-contamination by taste or smell. Produce is transported to the
stores as needed in temperature-controlled trucks.

     Fresh produce is displayed on the sales floor on movable bins/racks, with
temperature-sensitive items kept on beds of crushed ice. Floor display
quantities are intentionally limited and controlled so that temperature-
sensitive items turn three to four times per day. The produce displays are
continuously replenished from the temperature-controlled storage coolers and
hand-culled to remove bruised or damaged items. At the end of each selling day,
the movable produce racks are returned to the appropriate temperature-controlled
storage environment. To further ensure freshness, the entire selling floor is
maintained at temperatures substantially below normal room temperature.

     Fresh Seafood, Fish and Meat. Harry's meat department carries a full range
of beef, pork, veal, lamb, chicken, turkey and other poultry items. Harry's
stores feature Coleman(R) Natural Beef (Colorado grain-fed beef which utilizes
no antibiotics, growth stimulants or other additives) and Perdue(R) grain-fed
chicken. Harry's also offers exotic meats and poultry such as beefalo, venison,
duck, goose, quail and free range chicken as well as a variety of fresh
processed meats such as sausage and ground beef. All meat and poultry is
purchased and sold fresh, except immediately before major holidays, when demand
upon the production facilities of Harry's suppliers requires fresh-frozen
shipments. Harry's maintains a strict "sell by" date policy on all cut meat and
poultry, and ground meat must be sold the day it is ground.

     Meat is purchased by an experienced in-house buyer; delivered in
refrigerated trucks; and received, inspected and stored at the Company's
Alpharetta megastore which is used as the central Distribution Center. Beef,
pork, lamb and veal are purchased in vacuum-packed primal cuts; lamb is also
purchased in whole carcasses; and chicken and other poultry products are
purchased both as whole birds and in prepackaged, precut pieces. Both full-
service and self-service (precut and packaged) meat cases are available in each
megastore. Each megastore has its own meat-cutting room, and all machinery is
cleaned and sanitized twice each day. Meat cases are cleared and cleaned
nightly. Separate processing areas are maintained for beef, pork and chicken to
avoid cross-contamination, and meat and poultry cases are checked hourly for
proper temperature.

     Harry's carries one of the most extensive selections of fresh fish and
seafood in the country. Each megastore typically carries between 200 and 250
seafood items, including whole and filleted fish (over 100 species); crustacea
such as shrimp, lobster, crab and crayfish; and mollusks such as oysters, clams,
scallops, mussels, squid and octopus. Lobster, blue crab, shellfish and crayfish
are often offered live.

     Seafood is purchased by the Company's in-house buyer from a variety of
sources including independent growers, producers, importers, packers, processors
and distributors. The Company regularly purchases seafood from over 40
suppliers. Fish is purchased whole and processed where appropriate (head-off,
scaled, filleted, de-boned) in the store. Harry's seafood department also makes
daily fresh sushi, seafood dim sum and a variety of marinated seafood items.

     Generally, seafood requires the greatest degree of care to maintain
freshness and quality, and temperature control and handling are the most
important aspects of preserving quality.  Seafood is centrally received at the
Company's Alpharetta store, where it is extensively inspected

                                      -3-
<PAGE>
 
by an experienced staff of seafood inspectors who examine it for conformity to
species specification, the presence of any foreign materials and apparent
freshness (eyes clear, no odor, no gill discoloration or trauma). Shipments are
then sampled and tested by lot for bacteriological and chemical contamination.

     Harry's seafood department is certified by the United States Department of
Commerce to inspect and grade its own seafood. The Company currently has 24
HACCP (Hazard Assessment Critical Control Point) certified personnel who are
responsible for the grading and inspection.

     Bakery.  Harry's bakery department offers approximately 200 items which are
fresh baked daily at the Company's bakery facility now located within the same
building as the Alpharetta megastore.  The baking facility is fully equipped
with state-of-the-art industrial baking equipment.  Bakery products currently
include approximately 50 different breads, 11 different types of hand-rolled
bagels, 9 varieties of cookies, 8 kinds of muffins and 30 different cakes, pies
and desserts.  Bakery items include traditional recipes from around the world,
as well as recipes developed exclusively by Harry's.

     More than 90 percent of the Company's manufactured bakery products are
produced fresh daily and removed from the shelves if not sold on the day made.
All bakery dough is made from scratch-blended ingredients (not from mixes) and
hand or machine shaped before being baked in commercial ovens.

     Prepared Foods.  Harry's manufactures and sells a broad range of ready-to-
eat, ready-to-heat and ready-to-cook fresh prepared foods.  This line of
approximately 250 products includes fresh pasta, ready-to-heat pizzas, pasta
sauces, fresh casseroles, lasagnas, filled pastas, quiches and a line of
refrigerated (not frozen) microwaveable meals marketed under the name "Harry's
Hungry In A Hurry Meals."

     Since 1993, the Company has maintained a United States Department of
Agriculture ("USDA") approved food manufacturing facility located within the
same building as the Alpharetta megastore. Effective December 3, 1998, the
Company's prepared foods facility began operating under a provision of the USDA
law known as the "Central Kitchen Exemption". This law was approved by Congress
for specific food processing operations, which prepare and distribute meat and
poultry food products to markets and stores operating under the same ownership
as the central kitchen. The Company remains subject to specific USDA rules and
regulations normally required of all USDA inspected facilities and will be
randomly monitored for compliance by USDA inspection personnel.

     All of Harry's prepared foods are made fresh in the Company's prepared
foods manufacturing facility. Harry's kitchens make approximately 30 varieties
of prepared salad items (such as potato and pasta salads). Recipes are developed
in-house by Harry's product development staff. They are then extensively
documented for commercial production (including step-by-step production
instructions and quality control procedures) and tested for customer acceptance.

     Deli, Cheese and Dairy. Harry's carries more than 85 varieties of
delicatessen meats, and features the quality Boar's Head(R) brand. The deli also
prepares fresh rotisserie chicken, barbecue, roast beef, knishes and baked hams.
In addition, Harry's offers more than 300 varieties of cheeses from around the
world which are purchased in bulk from distributors and importers and directly
from cheese processors. The Company believes that its stores offer one of the
largest selections of

                                      -4-
<PAGE>
 
cheeses in the southeastern United States. Harry's also offers a broad range of
dairy items such as milk, yogurt, cottage cheese, ice cream and butter.


  Nonperishable Products

     Staples, Housewares and Health and Beauty Care. Harry's offers a selection
of nonperishable food products generally consisting of hard-to-find gourmet
items, natural products and foods useful in the preparation of ethnic cuisines
that are complementary to its fresh food offerings. Harry's also carries a full
line of gourmet, fresh roasted coffees.

     A limited line of kitchen-oriented housewares is also offered at Harry's,
including gourmet utensils and gadgets. Harry's stores also feature more than
1,500 health and beauty care items, primarily natural and organic products, as
well as products marketed to the environmentally sensitive consumer.

     Harry's stores also feature a broad selection of blooming, in-pot and fresh
cut flowers and decorative plants which are purchased directly from growers both
domestically and abroad.

     Wine and Beer. Harry's megastores offer a selection of more than 2,000
different foreign and domestic wines (including vintages) and more than 150
brands of domestic and imported beers, with Harry's in a Hurry stores offering a
somewhat smaller selection.

     The following table indicates sales (rounded to the nearest thousand) and
percentage of total revenues contributed by perishable and nonperishable
products for each of the last three fiscal years:

<TABLE>
<CAPTION>
MAJOR PRODUCT CATEGORY           FISCAL 1999 SALES     %    FISCAL 1998 SALES      %     FISCAL 1997 SALES    %
<S>                              <C>                  <C>   <C>                   <C>    <C>                 <C>
Perishables(1)                        $108,457,000    80        $110,561,000      81        $113,838,000     81 
Staples and Nonperishables(2)           27,689,000    20          26,438,000      19          26,324,000     19  
</TABLE>
__________________

(1) Includes fresh fruits, vegetables, meats, fish and seafood, bakery and fresh
    prepared food items, cheeses, deli items, dairy products, flowers and 
    coffee.
(2) Includes nonperishable food items, wine and beer, housewares, health and
    beauty care and other complementary nonperishables.


MARKETING AND ADVERTISING

   While the Company participates in some traditional campaign-style media,
including print, billboard and broadcast, it spends less on traditional
advertising than is normative in the supermarket industry. In management's
opinion, non-traditional methods such as community involvement, promotional
events, local event sponsorship, newcomer programs and alliances with area
schools maintain and improve customer counts and sales volumes without the
expense typically associated with large media campaigns. Harry's employs in-
store promotional activities, such as product sampling, cooking demonstrations,
educational materials and signage.

                                      -5-
<PAGE>
 
EMPLOYEES AND EMPLOYEE TRAINING

   The Company currently employs 1,204 people, of whom 78.5 percent are 
full-time employees. Approximately 193 employees are salaried, with the
remainder being paid on an hourly basis. The Company believes that it devotes
more time and expense to the training and education of its employees, both in
the operations process and in product information, than does the typical food
retailer. Accordingly, the Company stresses the importance of maintaining and
retaining a greater portion of its workforce as full-time employees. The Company
has devised, documented and implemented formal training procedures in areas such
as equipment operation, product handling and sanitation and product information.
None of the Company's employees are represented by a union and the Company
believes its employee relations are satisfactory.


COMPETITION

   The Company competes in the Atlanta metropolitan market area with traditional
grocery stores and supermarkets, other farmer's market format retailers,
specialty food shops such as butchers, bakeries, produce stands and seafood
shops, home meal replacement retailers, restaurants and wholesale club stores.
Competition for the consumer's food dollar is generally intense and has
increased in recent years with the entrance of more regional chains in the
Company's market area. General food retailers such as grocers and supermarkets
compete primarily on the basis of promotional pricing, convenience to the
customer of location and one-stop shopping, and, to a lesser extent, product
selection and quality. Farmer's markets and specialty food shops compete
primarily on the basis of selection of products and, to a lesser extent, price.
Club stores compete primarily on the basis of price. Harry's competitive
strategy is to be unmatched in the freshness and quality of its products and
unequaled in the selection and overall pricing and value of its products. The
Company's Harry's in a Hurry stores compete favorably, in management's opinion,
with both convenience outlets, restaurants and traditional supermarkets.


GOVERNMENT REGULATION


   The distribution and sale of meat, poultry and dairy products and fresh
produce are regulated and subject to inspection by the USDA under, among others,
the Federal Meat Inspection Act and the Federal Poultry Products Inspection Act
and by various state agencies under applicable state legislation. The USDA has
delegated its inspection responsibility to the states for fresh produce and
dairy products and for meat and poultry processing and handling facilities which
do not serve more than two retail outlets. Meat or poultry processing facilities
which serve more than two retail outlets are subject to direct inspection and
approval by the USDA.


   Effective December 3, 1998, the Company's prepared foods facility began
operating under a provision of the USDA law known as the "Central Kitchen
Exemption". This law was approved by Congress for specific food processing
operations, which prepare and distribute meat and poultry food products to
markets and stores operating under the same ownership as the central kitchen.
The Company remains subject to specific USDA rules and regulations normally
required of all USDA inspected facilities and will be randomly monitored for
compliance by USDA inspection personnel.


   The Company's seafood operations participate voluntarily in the United States
Department of Commerce self-inspection and rating program (Hazard Assessment
Critical Control Point or "HACCP"), which subjects it to standard specification
and inspection by that agency.

                                      -6-
<PAGE>
 
Participation in the voluntary program permits the Company to label its fresh
seafood with the governmentally approved "Grade A" stamp. The Company currently
has approximately 24 HACCP certified personnel who are responsible for such
grading and inspection.

   In May 1994, all preparers of packaged foods were required to comply with the
federal Nutrition Labeling and Education Act, which requires that the labeling
of all manufactured food items must display specific nutritional content
information. Compliance with such act requires the Company to conduct extensive
testing of its prepared food items to determine the nutritional content and
requires strict portion control of prepared food items. The Company complies
with all regulations under this act. Additionally, the Company voluntarily
complies with nonmandatory consumer information regulations under this act,
which provide for in-store posting of generic information on the nutritional
content of selected fruits and vegetables, meat, poultry and seafood.

   The Company's relationship with its fresh food suppliers with respect to the
grading and commercial acceptance of product shipments is governed by the
federal Produce and Agricultural Commodities Act, which specifies standards for
sale, shipment, inspection and rejection of agricultural products. The Company
is also subject to regulation by state authorities for accuracy of its weighing
and measuring devices.

   Management believes that the Company is currently in substantial compliance
with all applicable government regulations.


OFFICERS

   The officers of the Company are as follows:

   Name                     Position with Company                             
   ----                     ---------------------                             
                                                                              
   Harry A. Blazer          Chairman, President and Chief Executive Officer   
                                                                              
   Harold C. Weissman       Treasurer and Chief Financial Officer             
                                                                              
   John L. Latham           Corporate Secretary and General Counsel            
_______________

   HARRY A. BLAZER, age 48, was the founder of the Company and served as the
sole General Partner of the predecessor to the Company and as Chief Executive
Officer from its inception in 1987. Upon the Company's incorporation in 1993,
Mr. Blazer was named a director and President and Chief Executive Officer. In
June 1994, Mr. Blazer was elected to the additional office of Chairman. From
1979 to 1987, Mr. Blazer was employed at DeKalb Farmer's Market in Atlanta and
served as its General Manager from 1983 until he left to form the Company.

   HAROLD C. WEISSMAN, age 45, is a native of Atlanta, Georgia.  Mr. Weissman
graduated in 1976 from the University of Georgia with a B.B.A. in Accounting.
Mr. Weissman acquired an extensive background in bank auditing while employed
with Grant Thornton, LLP, and thereafter ten years of experience as controller
for various manufacturing firms.  Mr. Weissman joined the Company in 1990
spending nearly one year in operations before becoming Director of Accounting in
1991. Mr. Weissman was appointed Treasurer in 1995 and Chief Financial Officer
in 1996.

                                      -7-
<PAGE>
 
   JOHN L. LATHAM, age 44, was appointed Corporate Secretary and General Counsel
for the Company in September 1995. From 1992 until 1996, Mr. Latham had been a
partner in the firm of Nelson Mullins Riley & Scarborough, L.L.P. In August
1996, Mr. Latham joined as a partner to the firm Alston & Bird LLP, which now
serves as general counsel for the Company.



ITEM 2. PROPERTIES.
------  -----------


   Each of the Company's three present megastore sites is owned by the Company.
The 132,500 square foot Alpharetta site houses the Alpharetta megastore, which
has approximately 81,000 square feet devoted to retailing and retailing support,
the Company's corporate offices, receiving, inspection, distribution operations,
the prepared foods manufacturing plant and the bakery facility. The Gwinnett
County site and the Cobb County site each house megastores, utilizing 95,000
square feet and 100,000 square feet, respectively. Both the Gwinnett and Cobb
megastores are devoted entirely to retailing and retailing support.


   The Company also owns a 151,000 square foot facility, previously used by the 
Company as a distribution and bakery site, located approximately two miles from
the Alpharetta megastore. During fiscal 1999, the Company relocated the bakery
facility from this site to its Alpharetta store and, as a result, does not
currently utilize this facility. Accordingly, the entire facility has been
offered for sale or lease. At February 3, 1999, approximately 58,000 square feet
was leased to a third party through May 2005.


   The Company leases each of the five existing Harry's In A Hurry locations in
Atlanta.  The first Harry's In A Hurry contains 3,700 square feet, is located on
Peachtree Road in the Buckhead area of Atlanta and is leased through 2002.  The
second Harry's In A Hurry location, which is leased through 2004, with options
through 2019, contains 7,200 square feet and also is located in the Buckhead
area of Atlanta, approximately four miles north of the first location. The third
Harry's In A Hurry location is 15,000 square feet, is located on Cobb Parkway in
the Marietta area of Atlanta and is leased through 2007, with options through
2017. The fourth Harry's In A Hurry location, which is leased through 2009, with
options through 2024, is approximately 15,400 square feet and is located off
Mount Vernon Road in the Dunwoody area of Atlanta. The fifth Harry's In A Hurry
location, which is also leased through 2008, with options through 2018, is
approximately 14,400 square feet and located on Ponce deLeon Avenue in the
Virginia-Highland area of Atlanta.

ITEM 3. LEGAL PROCEEDINGS.
------  ----------------- 

   There are no (i) material legal proceedings to which the Company is a party
or to which its properties are subject; (ii) material proceedings known to the
Company to be contemplated by any governmental authority; or (iii) material
proceedings known to the Company, pending or contemplated, in which any
director, officer or affiliate or any principal security holder of the Company,
or any associate of any of the foregoing is a party or has an interest adverse
to the Company.


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

   No matters were submitted to a vote of security holders of the Company during
the fourth quarter ended February 3, 1999.

                                      -8-
<PAGE>
 
                                    PART II


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

   The Company's Class A Common Stock is traded on the NASDAQ National Market
under the symbol "HARY". There is no established public trading market for the
Company's Class B Common Stock. The following tables set forth, by fiscal
quarter, the high and low sales prices of the Class A Common Stock reported by
the NASDAQ National Market for the two most recent fiscal years.



<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 3, 1999                      HIGH SALE              LOW SALE
----------------------------------                      ---------              -------- 
<S>                                                     <C>                    <C>
First Quarter ended April 29, 1998                         $1 15/16              $1 25/32
                                                                         
Second Quarter ended July 29, 1998                          1 23/32               1 5/8
                                                                         
Third Quarter ended October 28, 1998                        1 22/32               1 5/8
                                                                         
Fourth Quarter ended February 3, 1999                       1 9/32                1 1/16
</TABLE>


<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 28, 1998                      HIGH SALE              LOW SALE
----------------------------------                      ---------              --------
<S>                                                     <C>                    <C>
First Quarter ended April 30, 1997                       $8 1/2                $3 3/4

Second Quarter ended July 30, 1997                        4 5/8                 3 1/8

Third Quarter ended October 29, 1997                      3 13/16               2 1/4

Fourth Quarter ended January 28, 1998                     3 1/8                 1
</TABLE>



   On April 28, 1999, the closing sales price for the Class A Common Stock as
reported by the NASDAQ National Market was $1.00 per share. The Company had 821
record holders and approximately 6,200 beneficial holders of its Class A
Common Stock as of April 28, 1999, and two record and beneficial holders of its
Class B Common Stock. The Company has not declared or paid any cash dividend on
either class of its Common Stock. The policy of the Board of Directors of the
Company is to retain future earnings for use in operations and, if available,
for the expansion and development of the Company's business. The Company's
primary credit facility prohibits the payment of dividends without the consent
of the lenders. Future dividend policy and the payment of dividends, if any,
will be determined by the Board of Directors in light of circumstances then
existing, including the Company's earnings, financial condition, contractual
restrictions and other factors deemed relevant by the Board.

                                      -9-
<PAGE>
 
ITEM 6.   SELECTED FINANCIAL DATA.

     The following selected financial data should be read in conjunction with
the Consolidated Financial Statements and notes thereto included elsewhere
herein.

<TABLE>
<CAPTION>
                                                                                            FISCAL YEAR ENDED
                                                            FEBRUARY 3,    JANUARY 28,    JANUARY 29,    JANUARY 31,    FEBRUARY 1, 
                                                              1999           1998            1997           1996           1995
                                                            ---------------------------------------------------------------------   
Statement of Operations Information:                                                      (in thousands, except per share data)
-----------------------------------
<S>                                                         <C>            <C>            <C>            <C>            <C>
Net sales...............................................    $136,146       $136,999       $140,162       $145,938       $143,814
Cost of goods sold......................................      99,974        102,320        104,363        109,845        109,364
                                                            --------       --------       --------       --------       --------
Gross profits...........................................      36,172         34,679         35,799         36,093         34,450
Operating expenses......................................      41,417         42,318         36,002         43,677         38,301
                                                            --------       --------       --------       --------       --------
Operating profit (loss).................................      (5,245)        (7,639)          (203)        (7,584)        (3,851)
Interest expense........................................      (2,407)        (2,254)        (2,600)        (3,198)        (3,032)
Other income............................................       1,233          4,026          1,321            906            159
                                                            --------       --------       --------       --------       --------
Earnings (loss) before income taxes.....................      (6,419)        (5,867)        (1,482)        (9,876)        (6,724)

Income taxes............................................         -0-            -0-            -0-            -0-            -0-
                                                            --------       --------       --------       --------       --------
Net earnings (loss).....................................      (6,419)        (5,867)        (1,482)        (9,876)        (6,724)
Provision for Accretion of Warrants.....................        (148)          (148)          (229)          (229)           (19)
                                                            --------       --------       --------       --------       --------
Net earnings (loss) applicable to
  common shareholders...................................    $ (6,567)      $ (6,015)      $ (1,711)      $(10,105)      $ (6,743)
                                                            ========       ========       ========       ========       ========
Net earnings (loss) per share...........................    $  (1.06)      $  (0.97)      $  (0.28)      $  (1.64)      $  (1.09)
                                                            ========       ========       ========       ========       ========
Weighted average shares outstanding.....................       6,184          6,183          6,168          6,167          6,164

------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                                                AS OF
                                                            FEBRUARY 3,    JANUARY 28,    JANUARY 29,    JANUARY 31,    FEBRUARY 1, 
                                                              1999           1998            1997           1996           1995
                                                            ------------------------------------------------------------------------
<S>                                                         <C>            <C>            <C>            <C>            <C>
BALANCE SHEET INFORMATION:
-------------------------
Working capital (deficit)................................   $(1,447)       $ 3,102        $ 4,009        $  (110)       $ 3,456 
Property and equipment, net..............................    41,320         38,046         45,817         49,380         59,145 
Total assets.............................................    56,987         57,247         60,428         66,963         76,102 
Long-Term obligations, net of                                                                                                   
  current maturities.....................................    14,202         13,359         26,225         28,789         30,502 
Convertible Debt.........................................    15,160         13,042             --             --             -- 
Redeemable convertible preferred stock...................    10,582         10,434         10,352         10,124          9,895 
Stockholders' equity.....................................     4,969         11,528         16,330         17,666         27,756 
</TABLE>

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

GENERAL

          The Company opened its first megastore, with an initial size of 63,000
square feet, in July 1988 in Alpharetta, Georgia. In May 1991, the Company
expanded this facility to 132,500 square feet, of which approximately 81,000
square feet is currently being utilized as retailing space. In October 1991, the
Company opened a second megastore in Gwinnett County, Georgia of 60,000 square
feet, which was expanded to 95,000 square feet in 1994. In October 1993, the
Company opened its third megastore, a 100,000 square foot facility located in
Cobb County, Georgia. A fourth megastore

                                      -10-
<PAGE>
 
was opened in May 1995 in Clayton County, Georgia but was subsequently closed in
November 1995 due to insufficient sales volume to cover operating expenses of
the store.

          In June 1993, the Company opened its first Harry's In A Hurry store, a
3,700 square foot convenience store. In March 1994, the Company opened its
second Harry's In A Hurry store, a 7,200 square foot convenience store and in
January 1998, the Company opened its third Harry's In A Hurry store, a 15,000
square foot convenience store. In September 1998 and December 1998, the Company
opened its fourth and fifth Harry's in a Hurry stores in Dunwoody, Georgia and
the Virginia-Highland area of Atlanta, Georgia , which stores are approximately
15,400 and 14,400 square feet, respectively. Net sales for the Company have
increased from $98.9 million in fiscal 1993 to $136.1 million in fiscal 1999.

     Fiscal 1997 consisted of maintaining and improving previously implemented
initiatives, which included a reduction in the number of employees at the
general and administrative level, a consolidation of certain inspection and
distribution sites to the Alpharetta megastore and a focused effort to reduce
waste at the Company's manufacturing facilities and in its stores. Improving the
merchandising efforts as well as controlling the manufacturing expenses was a
high priority for fiscal 1997. The Company focused on new management information
systems in an effort to gain more timely information to affect quicker decision
making. In addition, during fiscal 1997, the Company attempted to utilize the
excess capacity of its manufacturing facilities by producing goods for sale by
third-party retailers. The Company also spent the summer of fiscal 1997
supplying many events related to the Olympic games in the Atlanta metropolitan
area.

     Fiscal 1998 was a year for growth and strategic planning in several major
areas for the Company. First, the Company entered into several agreements with
Progressive Food Concepts, Inc. ("PFCI") as described below. See "--Liquidity
and Capital Resources" Secondly, management of the Company decided to emphasize
newcomer awareness to its stores, more shopper convenience and local community
involvement in its marketing endeavors. In addition, operational improvements
were made to minimize waste and maximize gross profit by product categories,
while overall better manufacturing utilization was a focal point of the
Company's operations. Furthermore, the Company's MIS department helped develop
more timely and accurate management reporting through the Company's intranet
which provided quick and precise on-line information to management to assist
with the aforementioned initiatives. Finally, the implementation of a
comprehensive tracking system for the products being sold at the Harry's In A
Hurry stores was initiated during 1998, in order to assist the Company with
properly and efficiently opening the new Harry's In A Hurry stores during fiscal
1999.

     Management of the Company spent much of fiscal 1999 attempting to create
positive momentum which would carry into fiscal 2000. In particular,
management's focus centered on improving certain operational results such as
obtaining higher and more consistent gross margins without affecting the quality
of the Company's offerings. Such efforts included reducing waste at all levels
of operation, prioritizing the implementation of certain systems and procedures
in different departments of the Company and focusing on improving efficiencies
in employee behavioral patterns and product offerings. These actions resulted in
an improvement of gross margin by 1.3% over the gross margin in fiscal 1998, and
a decrease in direct store expenses by 0.5% as compared to fiscal 1998. Such
improvements however were offset by expenses and one-time charges resulting from
the opening of two new Harry's In A Hurry stores during fiscal 1999.

                                      -11-
<PAGE>
 
     The statements which are not historical facts contained in this Annual
Report on Form 10-K are forward looking statements that involve risks and
uncertainties, including, but not limited to, the effect of weather, the effect
of economic conditions, the impact of competitive products, services, pricing
capacity and supply constraints or difficulties, the impact of advertising and
promotional activities and the effect of the Company's accounting policies. For
more information see "--Factors Affecting Future Performance."

     The Company's fiscal year ends on the Wednesday nearest January 31. Fiscal
1999 ended on February 3, 1999, Fiscal 1998 ended on January 28, 1998 and fiscal
1997 ended on January 29, 1997.

RESULTS OF OPERATIONS

     The following table sets forth the percentage relationship to net sales of
the listed items included in the Company's consolidated statements of operation:

<TABLE>
<CAPTION>
                                                         ----------------------------------------- 
                                                         FEBRUARY 3,    JANUARY 28,    JANUARY 29,
                                                            1999           1998           1997
                                                         ----------------------------------------- 
<S>                                                      <C>            <C>            <C>
Net sales...............................................    100.0%         100.0%         100.0%
Cost of goods sold......................................     73.4           74.7           74.5
                                                            -----          -----          -----
    Gross profit........................................     26.6           25.3           25.5
Operating Expenses
    Direct store expenses...............................     16.5           17.0           15.4
    Selling, general and administrative expenses........      9.9            9.3            7.8
    Depreciation and other amortization.................      3.0            2.5            2.4
    Impairment Loss.....................................      1.0            2.1            0.0
                                                            -----          -----          -----
         Loss from Operations...........................     (3.8)          (5.6)          (0.1)
Other income (expense)
    Interest expense....................................     (1.8)          (1.6)          (1.9)
    Other income........................................      0.9            2.9            1.0
Income taxes............................................      0.0            0.0            0.0
                                                            -----          -----          -----
                Net (loss)..............................    (4.7)%         (4.3)%         (1.0)%
                                                            =====          =====          =====                
</TABLE>

                                      -12-
<PAGE>
 
Comparison of Fiscal 1999 to Fiscal 1998
----------------------------------------

     Net sales in fiscal 1999 decreased 0.6% to $136.1 million from $136.9
million in fiscal 1998. Comparable store sales decreased 8.1% for the year.
Management believes the decline in sales can be attributed to increased drive
times due to increased traffic congestion in metropolitan Atlanta, a consumer
trend which values convenience and accessibility more highly everyday and in
increased number of supermarkets and restaurants that provide more accessible
alternatives for the consumer.

     Gross profit as a percentage of net sales in fiscal 1999 increased to
approximately $36.2 million or 26.6% from approximately $34.7 million or 25.3%
in fiscal 1998. This increase resulted mainly from the Company's efforts during
fiscal 1999 to implement the necessary technology in order to provide timely and
accurate information to management.

     Direct store expenses decreased to approximately $22.5 million or 16.5% of
net sales in fiscal 1999 from approximately $23.3 million or 17.0% of net sales
for fiscal 1998. During fiscal 1999 direct store expenses were lower as a result
of (i) efficiencies in wages and benefits, in particular, the Company has
experienced better overall costs on its workers' compensation insurance because
its multi-year initiatives have improved its safety records, and (ii) lower
lease expenses as a result of the Company's purchase and refinancing, pursuant
to a capital lease structure, of certain equipment during fiscal 1999, which had
previously been subject to operating leases. These expenses were partially
offset with an increase in the cost of supplies, utilities, repairs and
maintenance and building rents as a result of opening two new Harry's In A Hurry
stores.

     Selling, general and administrative expense for fiscal 1999 increased to
approximately $13.4 million or 9.9% of net sales from approximately $12.7
million or 9.3% of net sales for fiscal 1998. The increase in fiscal 1999 is
primarily attributable to (i) higher labor and benefit expenses incurred as a
result of adding new personnel to support growth (ii) additional advertising
costs, as the Company increased its market exposure, and (iii) higher general
taxes and license costs as a result of the new Harry's In A Hurry stores opened
during this fiscal year. In addition, in connection with the opening of such
stores, the Company has realized an increase in communication expenses due to
installation and use of new phone services at the stores and expanded internal
communication devices. These expenses were partially off set with a decrease in
consulting, legal and accounting fees and repair and maintenance expenses.

     Depreciation and amortization which includes depreciation and amortization
for the stores and the corporate facilities but not manufacturing (which is
included in cost of goods sold) increased to approximately $4.1 million or 3.0%
of net sales during fiscal 1999 from approximately $3.5 million or 2.5% in
fiscal 1998. This increase resulted from additional depreciation on facilities
and new assets purchased, primarily in connection with the new Harry's In A
Hurry stores opened during fiscal 1999. In addition, as a result of the 
Company's purchase and refinance, in accordance with a capital lease structure, 
of the residual values of certain existing assets, the Company has reclassified 
such assets and is now depreciating them. Such assets had previously been 
classified as operating leases.

     The Company recorded an additional loss on the impairment of its bakery and
distribution center of approximately $0.7 million. The book value of this asset
has been adjusted to reflect the amount the Company could expect upon its sale.
The Company also recorded a writedown of its equipment held for sale of
approximately $0.7 million in order for the book value of the assets to properly
reflect the amount the Company expects to receive from the disposal of such
property.

                                     -13-
<PAGE>
 
     Due to reasons set forth above, in particular the expenses incurred with
the Harry's In A Hurry expansion program as well as the expenses related to the
Company's continued efforts at improving efficiencies, in fiscal 1999 the
Company had an operating loss of approximately $5.2 million or (3.8) % of net
sales as compared to an operating loss in fiscal 1998 of approximately $7.6
million or (5.6)%.

     Interest expense in fiscal 1999 increased to approximately $2.4 million or
1.8% of net sales in fiscal 1999 from approximately $2.3 million or 1.6% in
fiscal 1998. This increase is primarily attributable to interest on an 
additional $2.0 million of convertible debt received May 5, 1998 from PFCI, as 
well as additional interest on long-term obligations resulting from the purchase
and refinance, in accordance with a capital lease structure, of the residual 
value of certain assets previously recorded as operating leases. 

     Other income in fiscal 1999 increased to approximately $1.2 million or 0.9%
of net sales compared to approximately $1.0 million or 0.7% of net sales in
fiscal 1998. This increase is primarily due to an increase in the rental income
from the shopping center it currently owns in Cobb County, Georgia, at which the
Cobb County megastore is a major component. Rent received during fiscal 1999 and
fiscal 1998 was approximately $1.2 million and $0.9 million, respectively, which
amounts are net of the Cobb County megastore rent. The shopping center is
currently fully occupied.

     In fiscal 1999 the Company owed no income taxes as the Company incurred a
net loss. The Company has net operating loss carry forwards of approximately
$32.0 million which may be applied against future earnings for income tax
purposes.

     As a result of the above, the Company's operations generated a net loss
applicable to common shareholders for fiscal 1999 of approximately $6.6 million
or ($1.06) per common share compared with a net loss applicable to common
shareholders of approximately $6.0 million, or ($0.97) per common share for
fiscal 1998.

Comparison of Fiscal 1998 to Fiscal 1997
----------------------------------------

     Net sales in fiscal 1998 decreased 2.3% to $136.9 million from $140.2
million in fiscal 1997. Comparable store sales decreased 1.5% for the year. This
decrease is primarily the result of the inclusion in fiscal 1997 of
approximately $1.2 million of revenues directly associated with the 1996 Olympic
and Paralympic Games in the Atlanta metropolitan area. Additionally, during
fiscal 1997, the Company indirectly benefited by increased sales during the
Olympic and Paralympic Games. Increased competition in the Atlanta area during
fiscal 1998 also contributed towards lower sales during such period.

     Gross profit as a percentage of net sales in fiscal 1998 decreased to
approximately $34.7 million or 25.3% from approximately $35.8 million or 25.5%
in fiscal 1997. This decrease resulted mainly from the Company's efforts during
fiscal 1998 to markdown and close out slow moving non-perishable merchandise,
which accounted for approximately $0.8 million of the decrease. In addition,
gross profit during fiscal 1997 was enhanced by approximately $0.3 million as a
result of certain adjustments to workers' compensation expense.

     Direct store expenses increased to approximately $23.3 million or 17.0% of
net sales in fiscal 1998 from approximately $21.6 million or 15.4% of net sales
for fiscal 1997. During fiscal 1998 direct store expenses were higher as a
result of (i) higher labor and labor related expenses due to (a) wage increases,
(b) one-time costs related to additional labor hours (time spent in addition to
regular duties) for training and consulting with PFCI employees and consultants
and (c) personnel expenses relating to the new Harry's In A Hurry store which
opened in January 1998, which although one-time costs, as relates to the new
store, similar costs may occur with the anticipated 

                                      -14-
<PAGE>
 
additional new stores, (ii) increased workers' compensation expense due to
retrospective workers' compensation adjustments, (iii) higher repairs and
maintenance expenses as a result of the implementation of a more preventive
maintenance program for extending the useful lives of the assets, and (iv) rent
for the new Harry's in a Hurry store which opened in January 1998. These
expenses were partially offset with (i) a decrease in the cost of supplies, as a
result of the Company's continuing efforts to improve operating efficiencies and
(ii) a decrease in lease expenses as a result of certain operating leases
expiring prior to or during fiscal 1998.

     Selling, general and administrative expense for fiscal 1998 increased to
approximately $12.7 million or 9.3% of net sales from approximately $10.9
million or 7.8% of net sales for fiscal 1997. The increase in fiscal 1998 is
primarily attributable to (i) higher labor and labor related expenses incurred
as a result of adding new personnel to support growth, including the costs
related to the hiring process for such employees, (ii) higher consulting costs
directly relating to the development of new management information systems and
the training of new personnel for the new Harry's In A Hurry store, (iii) higher
professional expenses in preparation for the new Harry's In A Hurry locations,
(iv) higher repairs and maintenance expenses, (v) additional advertising costs,
as the Company increased its market exposure, and (vi) higher bank fees due to
an increase in credit card purchases by the Company's customers. These expenses
were partially off set with a decrease in the cost of supplies and general
insurance. 

     Depreciation and amortization, which includes depreciation and amortization
for the stores and the corporate facilities but not manufacturing (which is
included in cost of goods sold) remained relatively unchanged in fiscal 1998 at
approximately $3.45 million or 2.5% as a percentage of net sales as compared to
approximately $3.44 million or 2.4% in fiscal 1997. This slight increase
resulted from additional depreciation on new assets purchased during fiscal
1998.

     The Company recorded a loss on the impairment of its bakery and
distribution center of approximately $2.9 million or 2.1% of net sales. The book
value of this asset has been adjusted to reflect the amount the Company could
expect upon its sale. Due to reasons set forth above, in fiscal 1998 the Company
had an operating loss of approximately $7.6 million or (5.6) % of net sales as
compared to an operating loss in fiscal 1997 of approximately $0.2 million or
(0.1)%.

     Interest expense in fiscal 1998 decreased to approximately $2.3 million or
1.6% of net sales in fiscal 1998 from approximately $2.6 million or 1.9% in
fiscal 1997. This decrease is primarily attributable to the January Transaction
between the Company and PFCI, whereby the Company used approximately $13.0
million of proceeds to repay a portion of its bank term loan. Such bank term
loan was bearing interest at LIBOR plus 3.5% or prime plus 1.5%, which resulted
in an effective rate of interest of 9.0% at January 29, 1997. The amounts now
outstanding under the Loan Agreement with PFCI, as further described below, bear
interest at 5.0% per annum, which has resulted in a significant decrease in the
Company's borrowing rate.

     Other income in fiscal 1998 decreased to approximately $1.0 million or 0.7%
of net sales compared to approximately $1.3 million or 1.0% of net sales in
fiscal 1997. This decrease is primarily due to a gain in fiscal 1997 of an
aggregate of approximately $0.4 million from the sale of an outparcel at the
Gwinnett megastore and the Nashville, Tennessee property, while during fiscal
1998, the Company recognized approximately $0.1 million of consulting income
from PFCI. In addition, the Company received rental income from the shopping
center it currently owns in

                                      -15-
<PAGE>
 
Cobb County, Georgia, at which the Cobb County megastore is a major component.
Rent received during fiscal 1998 and fiscal 1997 was approximately $0.86 million
and $0.85 million, respectively, which amounts are net of the Cobb County
megastore rent.

     In addition to the other income described above, during fiscal 1998, the
Company sold certain intellectual property in the amount of approximately $1.4
million, net of expenses, to PFCI, and recognized $2.5 million from the
redemption of the 2.5% interest the Company held in PFCI during the
Restructuring. The Company has also increased its allowance for doubtful
accounts during 1998 by approximately $0.9 million or 0.7% of net sales to cover
potential losses in connection with notes receivable from its principal supplier
of premium quality tomatoes.

     In fiscal 1998 the Company owed no income taxes as the Company incurred a
net loss. The Company has net operating loss carry forwards of approximately
$23.5 million which may be applied against future earnings.

     As a result of the above, the Company's operations generated a net loss for
fiscal 1998 of approximately $6.0 million or ($0.97) per common share compared
with a net loss of approximately $1.7 million, or ($0.28) per common share for
fiscal 1997.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's operating activities provided net cash of approximately $4.3
million, $1.0 million and $2.0 million in fiscal 1999, 1998 and 1997,
respectively.

     Cash provided or (used) by investing activities in fiscal 1999, 1998 and
1997 was approximately ($5.0) million, ($1.8) million and $4.0 million,
respectively. Cash used by investing activities consisted of capital
expenditures for property and equipment relating to stores and distribution and
manufacturing facilities, totaling approximately $5.8 million, $4.7 million $1.4
million in fiscal 1999, 1998 and 1997, respectively. Cash provided by investing
activities for fiscal 1999, 1998 and 1997 consisted, in part, of approximately
$0.08 million, $0.1 million and $9,000, respectively, in payments on certain
notes receivable. In addition, proceeds from the sale of property and equipment
in fiscal 1999, 1998 and 1997 were approximately $0.7 million, $0.1 million and
$5.4 million, respectively.

     Cash provided or (used) by financing activities in fiscal 1999, 1998 and
1997 was approximately $0.9 million, $0.9 million and ($5.8) million. In fiscal
1999, financing activities consisted of approximately $0.7 million borrowed on
the Company's line of credit and approximately $1.8 million paid on long-term
obligations as well as approximately $2.0 million of proceeds from the Company's
Development Loan with PFCI, as described below. At the end of fiscal 1999, the
Company had $0.8 million available on its line of credit.

     The Company's working capital position in 1999 and 1998 was ($1.4) million
and $3.1 million, respectively. The decrease in working capital in fiscal 1999
is due largely to a temporary increase in the Company's payables, consisting of
certain costs related to the moving of the bakery facility to the Alpharetta
megastore and certain expenses and leasehold improvements with the Harry's In A
Hurry store opened in December 1998. In addition, the Company experienced a
decrease in inventory due to better inventory controls and operational
efficiencies.

                                      -16-
<PAGE>

     Pursuant to a Secured Loan Agreement (the "Loan Agreement") dated as of
January 31, 1997, the Company received a commitment from PFCI for certain loans
in an aggregate principal amount not to exceed $20 million outstanding. The
aggregate amount includes a term loan to the Company in the principal amount of
$12 million ("Refinancing Loan"), which loan was funded on January 31, 1997 and
used by the Company to repay certain indebtedness, and an $8 million development
loan (the "Development Loan" and, together with the Refinancing Loan, the
"Loans") to be used by the Company for refurbishment of existing Company stores,
for the development of new Harry's In A Hurry stores, for general corporate
purposes and to fund development costs relating to the development of a business
model for the improvement of the Company's business and facilities as
contemplated by a five-year mutual consulting agreement. The Loans accrue
interest at a rate of 5% per annum for a period of five years from January 31,
1997 and at the "reference rate," as set by the Bank of America, Illinois, plus
1%, thereafter. The Loans are subordinated in right of payment to certain
indebtedness of the Company and are secured by a second priority lien on
substantially all of the assets of the Company and its subsidiaries.

     Pursuant to the Transaction Agreement (the "Transaction Agreement"), dated
as of January 31, 1997, PFCI purchased a warrant, for $1.0 million, to purchase
up to an additional 2,000,000 shares of Class A Common Stock (the "Warrant") at
exercise prices ranging from $4.00 to $5.50. The Warrant expires on January 31,
2001 and is subject to adjustment in certain circumstances.

     In addition, in accordance with the terms of the Transaction Agreement, the
Company agreed that at any time the Company desires to seek additional financing
(whether debt or equity financing), the Company will negotiate in good faith
with PFCI for a period of 20 days with regard to any portion of the entire
amount (at the option of PFCI) of such financing prior to negotiating with any
other entity with regard thereto.

          On November 3, 1997, the Company entered into a series of agreements
with PFCI, (the "Restructuring") pursuant to which the two entities amended and
restructured certain aspects of the January Transaction. In accordance with such
amendments, as more particularly described below, PFCI has redeemed the 2.5%
interest the Company held in PFCI, as consideration for (i) PFCI's payment of
$2.5 million, (ii) the funding of $2.5 million under the Development Loan, (iii)
the commitment by PFCI to make available to the Company $4.0 million under the
Development Loan, within the next twelve months, and (v) beginning in 1999, the
Company's right to use certain intellectual property, including the trademarks
and developmental rights to the Harry's Farmers Market and Harry's In A Hurry
concepts, which had been sold to PFCI in connection with the series of
agreements entered into as of January 31, 1997 (the "January Transaction"), as
further described below.

     As part of the Restructuring, the Company and PFCI amended the Loan
Agreement between the parties whereby the Company, using a portion of the
consideration described above, paid $2.5 million to reduce outstanding
indebtedness under the Development Loan. The amount available under the
Development Loan was reduced to $5.5 million of which $3.5 million is currently
outstanding. PFCI had committed to loan the remaining funds under the
Development Loan to the Company by funding $2.0 million on May 3, 1998 and $2.0
million on November 3, 1998. However, during the third quarter of fiscal 1999,
the Company was informed that PFCI did not 

                                      -17-
<PAGE>
 
intend to fund the $2.0 million due on November 3, 1998 under the Development
Loan. In October 1998, PFCI filed for protection from creditors under Chapter 11
of the United States Bankruptcy Code.

     As an additional part of the January Transaction, the Company transferred
to a newly organized business trust (the "Trust") certain federal and state
registered and unregistered trademarks, trademark applications, registered and
unregistered service marks, service mark applications, trade names, trade name
rights, copyrights, trade secrets and know-how and other proprietary information
of the Company (the "Intellectual Property"). The Trust issued to the Company
two ownership certificates, one of which entitled the holder thereof to
beneficial ownership of the Intellectual Property in the States of Georgia and
Alabama and one of which (the "Worldwide Certificate") entitled the holder
thereof to beneficial ownership of the Intellectual Property throughout the rest
of the world. Neither the Company nor either certificate holder is entitled to
any continuing royalties or other fees associated with the use of the
Intellectual Property by the other party. The Trust also granted to the Company
and PFCI licenses to use the Intellectual Property in their respective
territories.

     The Company then sold the Worldwide Certificate to PFCI for $1.5 million in
cash and 712.3746 shares of the common stock, of PFCI ("PFCI Common Stock"),
representing 2.5% of the PFCI Common Stock on a fully diluted basis.

     As a result of the Restructuring, and the redemption of 712.3746 shares of
PFCI previously held by the Company, the Company's rights to use the
Intellectual Property were expanded. Beginning on November 3, 1999, the Company
will be entitled to use the Intellectual Property, on a non-exclusive basis, in
the states of Tennessee, North Carolina and South Carolina. However, in such
states, the Company will have the exclusive right to use the "Harry's" name and
trademarks, service marks and trade names incorporating the "Harry's" name (the
"Harry's Marks") effective immediately. Also on November 3, 1999, the Company's
exclusive rights to use the Intellectual Property in the states of Georgia and
Alabama ceases, notwithstanding the continued exclusivity on behalf of the
Company to the Harry's Marks in such states. In addition, on January 31, 2004,
the Company will be entitled to use the Intellectual Property, on a non-
exclusive basis, throughout the world; provided however, that the Company's
exclusive right to use the Harry's Marks on a worldwide basis are subject to
PFCI having not made the decision to use the Harry's Marks by such time.

     In addition, the Restructuring provides the Company, at its option, with
the ability to create or develop a new name or identity for the Harry's In A
Hurry stores and the Harry's Farmers Market megastores, and such new name will
not be included in the Intellectual Property, as ownership thereof will belong
exclusively to the Company.

     As a result of the January Transaction and the Restructuring, the Company
has a line of credit and term loan agreement with Bank Austria Creditanstalt
Corporate Finance, Inc. ("Creditanstalt") that allows borrowing up to $12.0
million bearing interest at LIBOR plus 3.5% or prime plus 1.5% which matures on
January 29, 2001 (the "Senior Credit Agreement"). The average outstanding
borrowings on the line of credit portion of the credit facility during fiscal
1999 was approximately $4.3 million. The weighted average interest rate during
fiscal 1999 was approximately 9.95%. The maximum borrowings on the line of
credit outstanding at any month end during fiscal 1999 totaled approximately
$5.8 million. The line of credit and term loan are collaterallized by
substantially

                                      -18-
<PAGE>
 
all assets of the Company. The total amount drawn at February 3, 1999 was
approximately $11.2 million. The total amount available at February 3, 1999 was
approximately $0.8 million.

     Effective February 3, 1999, the Company further amended the Senior Credit
Agreement to, among other things,: (i) extend the maturity date of the agreement
to January 29, 2001; and, (ii) amend certain negative covenants and financial
covenants. In addition, the Company and Creditanstalt agreed to (a) reduce the
exercise price of 216,000 warrants to purchase shares of Class A Common Stock
previously issued to Creditanstalt from $3.00 to an exercise price equal to the
lowest public market trading price per share for the Class A Common Stock at the
close of trading between May 4, 1999 and May 18, 1999 (the "Revised Exercise
Price"); (b) grant an additional 50,000 warrants to purchase shares of Class A
Common Stock at the Revised Exercise Price; and (c) upon the occurrence of
certain events, grant an additional 150,000 warrants to purchase Class A Common
Stock at the Revised Exercise Price.

     The Company's ability to fund its working capital and capital expenditure
requirements, make interest payments and meet its other cash requirements
depends, among other things, on the availability of internally generated funds
and the continued availability of and compliance with its credit facilities.
Management believes that internally generated funds and its available credit
facilities, as restructured, will provide the Company with sufficient sources of
funds to satisfy its anticipated cash requirements in fiscal 2000. However, such
forward-looking statements are subject to risks, uncertainties and other factors
which could cause actual results to differ materially from results expressed or
implied by such forward looking statements. Potential risks and uncertainties
include, but are not limited to: economic conditions, changes in consumer
spending, weather, competition, changes in the rate of inflation, potential
sales by the Company of certain out-parcels and other assets, the inability to
develop new stores as planned and other uncertainties that may occur from time
to time. In the even of any significant reduction of internally generated funds,
the Company may require funds from outside financing sources. In such event,
there can be no assurance that the Company would be able to obtain such funding
as and when required or on acceptable terms.

SEASONALITY

     The Company's sales mix varies seasonally as the availability of fresh
product dictates and the Company generally experiences substantially increased
sales volume in the days immediately preceding major holidays. In addition, the
Company realizes increased sales during its second quarter due to greater
availability and demand for produce.

EFFECTS OF INFLATION

     The Company generally has been able to pass on increased costs attributable
to inflation through appropriate increases in selling prices of its products
and, accordingly, has not experienced any material adverse effect from
inflation.

YEAR 2000

     The Year 2000 issue is the use of a two-digit year date in many of the
computer programs and embedded systems in use today. A problem occurs when a
system unable to read more than two-digit years reads the year 2000 as "00" and,
as a result, experiences a set back in calendar date, which could cause a
failure of either the software application or the computer hardware itself.

     In 1997, the Company established a investigative group consisting of
personnel from the Company's internal MIS department, outside product
specialists and supervised by Harry A. Blazer, the President and Chief Executive
Officer of the Company. This group has identified all computer based systems and
applications that the Company uses in its operations and has 

                                      -19-
<PAGE>
 
categorized them by their critical nature to the operations of the Company. The
group is in the process of determining and performing the necessary
modifications and replacements to insure that the Company's operations will be
minimally effected by the Year 2000 issue. Management currently estimates that
all critical systems and applications will be Year 2000 compliant by September
15, 1999 and that related costs will not have a material impact on the results
of operations, cash flows or financial condition of future periods.

     Although the investigative group is also verifying the Year 2000 compliance
of the Company's material outside vendors, at the present time, it does not
believe that the failure of any particular third party to be Year 2000 compliant
will have a material adverse effect of the operations or financial condition of
the Company. However, the investigative group is in the process of establishing
and implementing a contingency plan for the Company to provide alternative
methods to insure the continuation of the Company's operations in the event of a
Year 2000 based failure either internally or externally.

     During the fiscal year ended February 3, 1999, the Company spent
approximately $325,000 to address the Year 2000 issue and management estimates
that the Company will incur an additional expense of approximately $300,000 .
These costs are directly related to hardware and software services.

                     FACTORS AFFECTING FUTURE PERFORMANCE

SIGNIFICANT OPERATING LOSSES

     As of February 3, 1999, we had an accumulated deficit of $35.0 million. We
incurred net losses of approximately $6.6 million, $6.0 million and $1.7 million
for the fiscal years ended February 3, 1999, January 28, 1998 and January 29,
1997, respectively. There can be no assurance that we will be profitable in the
fiscal year ended February 2, 2000 and beyond. Future events that could
adversely effect our operating margins and results of operations include:

     .    unanticipated expenses;
     .    increased competition; or
     .    changes in the supply of our products.

SUPERMARKET INDUSTRY IS A HIGHLY COMPETITIVE INDUSTRY

     The supermarket industry is highly competitive and generally characterized
by narrow profit margins. We compete in the Atlanta market area with:

     .    numerous traditional grocery stores and supermarkets;
     .    other farmers market format retailers;
     .    specialty food shops and warehouse club stores; and
     .    restaurants and other providers of prepared meals.
 
     Competition for the consumer's food dollar in Atlanta and in most market
areas is intense and is expected to remain so. Our primary competition strategy
is to consistently provide the customer with a broad selection of products of
exceptional freshness and quality delivered at a price that represents real
value. By contrast, traditional food retailers compete principally by:

                                      -20-
<PAGE>
 
     .    promotional pricing;
     .    convenience to customer location; and
     .    one-stop shopping.
 
     Many of our competitors have substantially greater financial resources than
we do.  Our ability to continue to compete successfully will largely depend upon
our ability to consistently maintain our reputation for exceptional quality
products at competitive prices.

DISCRETION OF MANAGEMENT LIMITED BY CREDIT AGREEMENT COVENANTS

     The Credit Agreement between us and Bank Austria Creditanstalt Corporate
Finance, Inc. contains numerous financial and operating covenants that limit the
discretion of our management in certain business matters. These covenants place
significant restrictions on, among other things, our ability to:

     .    incur additional indebtedness;
     .    create liens or other encumbrances;
     .    make certain payments and investments; and
     .    sell or otherwise dispose of assets and merge or consolidate with
          other entities.

     The Credit Agreement also requires us to meet specified financial ratios
and satisfy financial tests.  Events beyond our control can effect our ability
to meet these financial ratios and tests, and there can be no assurance that we
will meet these ratios and tests.  Failure to comply with the obligations in the
Credit Agreement could trigger an event of default, which could accelerate
related debt.  An event of default also could accelerate debt under other
instruments evidencing indebtedness that contain cross-acceleration or cross-
default provisions.

LIMITATIONS RELATING TO LOAN AGREEMENT

     Pursuant to the Second Amended and Restated Secured Loan Agreement with
Progressive Food Concepts, Inc., Progressive has a commitment to us for loans in
an aggregate principal amount not to exceed $17.5 million outstanding.  The
aggregate amount includes:

     .    a $12.0 million restructuring loan; and
     .    a $5.5 million development loan.
 
     The restructuring loan, which has been fully funded, was used to repay
indebtedness.  The development loan, under which we are owed $2.0 million, is to
be used for refurbishing existing stores and the development of new Harry's In A
Hurry stores.  In October 1998, Progressive filed for bankruptcy protection from
its creditors under Chapter 11 of the United States Bankruptcy Code.  As a
result, the $2.0 million due to us under the development loan may never be paid,
although we are evaluating all of our options and have made a claim to the
Bankruptcy Court for such amount.  The failure to ever receive the $2.0 million
may have a material adverse affect on our ability to open additional stores or
further develop existing stores.

                                      -21-
<PAGE>
 
WE HAVE LIMITED SHORT-TERM EXPANSION OPPORTUNITIES

     We currently operate stores only in the State of Georgia. However, pursuant
to agreements that we entered into in connection with the transactions between
us and Progressive, among other things:

     .    we transferred to Progressive certain intellectual property rights
          outside the States of Georgia and Alabama; and
     .    we entered into a five-year mutual consulting arrangement.

     As a result of these transactions, our use of such intellectual property is
limited to the States of Georgia and Alabama.  Progressive, in contrast, has
obtained the ownership of certain federal and state registered and unregistered
trademarks, trademark applications, registered and unregistered service marks,
service mark applications, trade names, trade name rights, copyrights, trade
secrets and know-now and other proprietary information of ours throughout the
rest of the world.
 
     In accordance with the agreement with Progressive, beginning on November 3,
1999, we will be entitled to use the all intellectual property, on a non-
exclusive basis, in the States of Tennessee, North Carolina and South Carolina.
In these states we will have the exclusive right to use the "Harry's" name and
trademarks, service marks and trade names incorporating the "Harry's" name.
However, also on November 3, 1999, our exclusive rights to use the intellectual
property in the States of Georgia and Alabama ceases, notwithstanding the
continued exclusivity on our behalf to the Harry's marks discussed above in
these states.  Finally, on January 31, 2004, we will be entitled to use the
intellectual property, on a non-exclusive basis, throughout the world.  Our
exclusive right to use the Harry's marks on a worldwide basis are subject,
however, to Progressive having not made the decision to use the Harry's marks by
such time.
 
     With the current limitation on our use of this intellectual property
outside the States of Georgia and Alabama, we are precluded from expanding our
present ideas and structure beyond these states.  We currently anticipate these
states will continue to provide sufficient opportunities for our growth and
development.  However, being unable to expand fully and immediately our current
format beyond the States of Georgia and Alabama could adversely affect our
results of operations in the future.

PRICE VOLATILITY WITH OUR PRODUCTS

     Prices of fresh produce and, to a lesser extent, fresh meat, poultry and
seafood items, are highly volatile and based upon available supply.  Factors
that can significantly affect supply in all levels of agricultural production
generally include weather, disease and general crop failure.

     Especially at the extremes, wide fluctuations in the prices of fresh
produce and other perishable items can be expected to impact adversely our
revenues and overall profitability.  We generally maintain standard profit
margins on fresh products regardless of price fluctuations, except at the
highest levels where profit margin decreases may occur.  At the same time,
however, exceptionally high prices of produce or other fresh products more
markedly effect consumer demand than do exceptionally low prices.  Periods of
abnormally high or low product prices could negatively affect both revenues and
overall profitability.

                                      -22-
<PAGE>
 
VOLATILITY OF MARKET PRICE FOR CLASS A COMMON STOCK

     We have recently experienced significant volatility in the market price of
our Class A Common Stock, while the stock market has periodically experienced
significant price and volume fluctuations which may be unrelated to our
operating performance, factors that may effect the market price or our Class A
Common Stock from period to period, include:

     .    actual or anticipated operating results;
     .    growth rates;
     .    changes in estimates by analysts;
     .    market conditions in the industry; and
     .    announcements by competitors and general economic conditions.

     As a result of the foregoing, our operating results and prospects may be
below the expectations of public market analysts and investors from time to
time.  Perceived lower operating results and prospects would likely materially
and adversely affect the price of the Class A Common Stock.

POTENTIAL DELISTING OF CLASS A COMMON STOCK FROM NASDAQ NATIONAL MARKET

     Our Class A Common Stock is currently traded on the Nasdaq National Market.
As of May 1, 1999, we are deficient in satisfying the Nasdaq National Market's
continued listing requirements of a minimum bid price of $1.00 and a total
market capitalization of at least $5.0 million.  While we believe we will be
able to satisfy such requirements prior to any formal delisting action being
taken by the Nasdaq National Market, we cannot be assured that market conditions
and our financial performance will not continue to keep our stock price and
market capitalization below the required levels.  In the event our Class A
Common Stock were delisted from the Nasdaq National Market, trading in this
stock would then be conducted in the over-the-counter market.  Such actions
could adversely impact the liquidity of our Class A Common Stock.

POTENTIAL CHANGE OF CONTROL UPON CONVERSION OF LOAN

     The Second Amended and Restated Secured Loan Agreement provides that the
principal outstanding under the restructuring loan and development loan are each
exchangeable, for shares of our Series B preferred stock.  The restructuring
loan is mandatorily convertible, to the extent principal is still outstanding,
on January 31, 2002, into Series B preferred stock, which is itself convertible
into approximately 3,000,000 shares of Class A Common Stock.  The development
loan is optionally exchangeable for shares of the Series B Preferred Stock,
which, based on the amount of principal currently outstanding, is then
convertible into approximately 875,000 additional shares of Class A Common
Stock.  If any conditions under the Loan Agreement are not satisfied, we would
remain liable to Progressive for the repayment of the full amount.  In addition,
in connection with entering into the loan agreements, we sold Boston Chicken,
Inc. a warrant to purchase up to 2,000,000 shares of Class A Common Stock at
exercise prices currently between $5.00 and $5.50 per share.  If the loans were
converted in full, and the Warrant was exercised in full, Boston Chicken would
control approximately 58.8% of the total shares of outstanding Class A Common
Stock.

                                      -23-
<PAGE>
 
VOTING CONTROL BY PRINCIPAL SHAREHOLDER

     Mr. Harry A. Blazer, our President and Chief Executive Officer, owns
2,050,701 shares of our Class B common stock. Each share of Class B common stock
is entitled to 10 votes, as compared to one vote for each share of Class A
Common Stock and, except as law otherwise requires or the Articles of
Incorporation expressly provide, the Class A Common Stock and Class B Common
Stock vote together as a single class.  The shares of Class B common stock owned
by Mr. Blazer represent all of the Class B Common Stock outstanding and
approximately 78% of the total voting power of all classes of voting stock of
the Company.  As a result, Mr. Blazer is able to:

     .    elect all of the Company's directors;
     .    amend the Articles of Incorporation;
     .    effect or prevent a merger, sale of assets or other business
          acquisition or disposition; and
     .    otherwise control the outcome of actions requiring shareholder
          approval.

DEPENDENCE ON SENIOR MANAGEMENT

     Our management and operations success depend largely upon the skills,
experience and efforts of our senior management -- especially our founder,
President and Chief Executive Officer, Harry A. Blazer.  The loss of the
services of Mr. Blazer or other members of our senior management, could
materially and adversely affect our business and prospects.  We maintain and are
the beneficiary of a $10 million key man life insurance policy on Mr. Blazer.

NO HISTORY OF DIVIDENDS

     We have not paid any dividends on the Class A Common Stock and do not
presently intend to pay dividends on these shares.  It is not likely that we
will pay any dividends in the foreseeable future.

YEAR 2000 ISSUE

     We have assessed and continue to assess the potential impact of the
situation commonly referred to as the Year 2000 issue.  The Year 2000 issue,
which affects most corporations, concerns the inability of management
information systems, primarily computer software programs, to properly recognize
and process date sensitive information relating to the year 2000 and beyond.

     READINESS OF MANAGEMENT INFORMATION SYSTEMS

     We have assessed our management information systems for the Year 2000
readiness, including our store automation systems (e.g. point of sale systems)
and our computer systems at our main offices that support these store systems.

     We expect that the original vendors will certify all in-store systems, as
well as the host support system located in our main offices, as Year 2000
compliant by September 15, 1999.  These systems were either Year 2000 compliant
as installed or the original vendors are upgrading them to a Year 2000 compliant
status under the existing maintenance program.  We currently 

                                      -24-
<PAGE>
 
estimate that the costs involved to bring these systems into Year 2000
compliance will be approximately $12,000.

     We have assessed our other management information systems, including
accounting and payroll systems, for Year 2000 compliance.  We have identified
the steps necessary to ensure systems will be Year 2000 compliant and believe
such systems will be Year 2000 compliant prior to September 15, 1999.

     We have developed and tested a methodology that will allow our existing
software programs to be Year 2000 compliant by making minor changes to some of
the existing programs.  The existing data files need not be altered.  We will
perform application level review to identify processes that involve the input or
output of a date.  Such programs will require a minor modification (utilizing
the already tested code) to make it Year 2000 compliant.  We will then test
these systems to confirm that they function as we expect.  Some of our hardware
is not now Year 2000 compliant.  We have budgeted approximately $300,000,
however, for the replacement or modification of such hardware as necessary.

     We expect all testing on these systems to be completed by September 15,
1999, at which time these systems will be Year 2000 compliant.

     READINESS OF NON-MANAGEMENT INFORMATION SYSTEMS

     We have assessed the majority of our non-management information systems for
Year 2000 readiness.  We have identified a small number of systems, including
some equipment at store level, which may not be Year 2000 ready.  We are working
with the vendors of these systems to identify the best approach for compliance.
While these systems have an internal clock and date, the date is not necessary
for the systems to be productive.  Such systems could, therefore, continue to
function as needed.  Management does not anticipate that these systems will pose
any significant Year 2000 problem or expense.

     READINESS OF VENDORS

     We have begun to review the Year 2000 readiness plans of our major vendors
in an effort to ensure that operations remain unaffected by Year 2000 related
failures.  We will place preset orders with certain major vendors to help ensure
product deliveries in the event that the vendor is affected by failures at some
level of its operations but is still able to deliver merchandise.  In the event
a major vendor is unable to provide products, we will increase our purchases
from other vendors from which we currently buy.

     We purchase merchandise sold in our stores from multiple vendors.  We are
not reliant on any one vendor for the normal conduct or our operations.  We are
not dependent on these supplier relationships.  Instead, merchandise is
available readily from numerous sources under different brand names, subject to
conditions affecting food supplies generally.

     We believe that our efforts will result in Year 2000 compliance.  However,
if we or external entities that we cannot control, such as vendors, fail to
achieve compliance, our business operations could be materially and adversely
affected.

                                      -25-
<PAGE>
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
--------  -----------------------------------------------------------

     Not Applicable.

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

     The following financial statements are filed with this report:

          Report of Independent Certified Public Accountants

          Consolidated Balance Sheets -- Fiscal Years Ended, February 3, 1999
               and January 28, 1998

          Consolidated Statements of Operations -- Fiscal Years Ended, February
               3, 1999, January 28, 1998 and January 29, 1997

          Consolidated Statements of Changes in Equity -- Fiscal Years Ended,
               February 3, 1999, January 28, 1998 and January 29, 1997

          Consolidated Statements of Cash Flows -- Fiscal Years Ended, February
               3, 1999, January 28, 1998 and January 29, 1997

          Notes to Consolidated Financial Statements



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

     Not applicable.



                                   PART III


     Except as to information with respect to executive officers which is
contained in a separate heading under Item 1 to this Form 10-K, the information
required by Part III of Form 10-K is, pursuant to General Instruction G(3) of
Form 10-K, incorporated by reference from the Company's definitive proxy
statement for the Company's Annual Meeting of Stockholders to be held on June
16, 1999 (the "Proxy Statement").  The Company will, within 120 days of the end
of its fiscal year, file with the Securities and Exchange Commission a  
definitive proxy statement pursuant to Regulation 14A.


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

     The information responsive to this item is incorporated by reference from
the sections entitled "Agenda Item One -- Election of Directors" and "--
Compliance with Section 16(a) of the Securities Exchange Act of 1934" contained
in the Proxy Statement.

                                      -26-
<PAGE>
 
ITEM 11.  EXECUTIVE COMPENSATION.
-------   ---------------------- 

     The information responsive to this item is incorporated by reference from
the section entitled "Executive Compensation" contained in the Proxy Statement.


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

     The information responsive to this item is incorporated by reference from
the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance"
contained in the Proxy Statement.


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

     The information responsive to this item is incorporated by reference from
the section entitled "Executive Compensation -- Compensation Committee
Interlocks and Insider Participation" contained in the Proxy Statement.


                                    PART IV


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

(a)  1.   Financial Statements and Auditors' Report.
          ----------------------------------------- 

     The following financial statements and auditors' report have been filed as
Item 8 in Part II of this report:

          Report of Independent Certified Public Accountants

          Consolidated Balance Sheets -- Fiscal Years Ended, February 3, 1999
               and January 28, 1998

          Consolidated Statements of Operations -- Fiscal Years Ended, February
               3, 1999 and January 28, 1998 and January 29, 1997

          Consolidated Statements of Changes in Equity -- Fiscal Years Ended,
               February 3, 1999, January 28, 1998 and January 29, 1997

          Consolidated Statements of Cash Flows -- Fiscal Years Ended, February
               3, 1999, January 28, 1998 and January 29, 1997

          Notes to Consolidated Financial Statements

                                      -27-
<PAGE>
 
     2.   Financial Statement Schedules.
          ----------------------------- 

     The following supporting financial statement schedule is filed with this
report:
 
          Schedule II  -  Consolidated Schedule of Valuation and Qualifying
Accounts
 
     All other schedules are omitted as the required information is
inapplicable, or the information is presented in the consolidated financial
statements or related notes.

     3.   Exhibits.
          -------- 

     The following exhibits are filed with or incorporated by reference into
this report. The exhibits which are denominated by an asterisk (*) were
previously filed as part of and are hereby incorporated by reference from
either: (i) the Company's Form S-1 Registration Statement under the Securities
Act of 1933, Registration No. 33-60452,("Form S-1"), (ii) the Company's Annual
Report on Form 10-K for the fiscal year ended February 2, 1994 ("1993 Form 10-
K"), (iii) the Company's Quarterly Report on Form 10-Q for the quarter ended
August 3, 1994 ("8/3/94 10-Q"), (iv) the Company's Quarterly Report on Form 10-Q
for the quarter ended November 2, 1994 ("11/2/94 10-Q"), (v) the Company's
Current Report on Form 8-K filed with the Securities and Exchange Commission on
January 30, 1995 ("1/30/95 8-K"), (vi) the Company's Annual Report on Form 10-K
for the fiscal year ended February 1, 1995 ("1995 Form 10-K"), (vii) the
Company's Quarterly Report on Form 10-Q for the quarter ended August 2, 1995
("8/2/95 10-Q"), (viii) the Company's Quarterly Report on Form 10-Q for the
quarter ended November 1, 1995 ("11/1/95 10-Q"), (ix) the Company's Annual
Report on Form 10-K for the year ended January 31, 1996 (the "1996 Form 10-K"),
(x) the Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 18, 1997 ("2/18/97 8-K"), (xi) the Company's
Annual Report on Form 10-K for the fiscal year ended January 29, 1997 ("1997
Form 10-K"), (xii) the Company's Quarterly Report on Form 10-Q for the quarter
ended April 30, 1997 ("4/30/97 10-Q"), (xiii) the Company's Quarterly Report on
Form 10-Q for the quarter ended July 30, 1997 ("7/30/97 10-Q") and (xiv) the
Company's Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 20, 1997 ("11/20/97 8-K").



EXHIBIT NO.                DESCRIPTION OF EXHIBIT
-----------                ----------------------

 *2.1     Transfer, Assignment and Assumption Agreement, dated March 31, 1993,
          between Harry's Farmers Market, Ltd. (the "Partnership") and Harry's
          Farmers Market, Inc. (Form S-1, Exhibit 10.1)

 *3.1.1   Articles of Incorporation of HFM, Inc. (Form S-1 Exhibit 3.1)

 *3.1.2   Articles of Amendment to Articles of Incorporation of the Company
          (Form S-1 Exhibit 3.2)

 *3.1.3   Articles of Amendment to Articles of Incorporation of the Registrant
          (1/30/95 8-K Exhibit 3(I).2)

                                      -28-
<PAGE>
 
 *3.1.4   Articles of Amendment to Articles of Incorporation of the Company
          regarding Series AA Preferred Stock (2/18/97 8-K Exhibit 3(I).3)

 *3.1.5   Articles of Amendment to Articles of Incorporation of the Company
          regarding Series B Preferred Stock (2/18/97 8-K Exhibit 3(I).4)

 *3.2     By-Laws of HFM, Inc.  (Form S-1 Exhibit 3.3)

 *4.1     Specimen Certificate of Class A Common Stock (Form S-1 Exhibit 4)

 *4.2     Specimen Certificate of Series A Redeemable Preferred Stock (1/30/95
          8-K Exhibit 4.2)

 *4.3     Share and Warrant Purchase Agreement dated December 30, 1994, among
          the Registrant and Robert Fleming Nominees Ltd., AXA Equity & Law Life
          Assurance Society, Orbis Pension Trustees Ltd., Ashford Capital
          Partners, L. P. and Theodore H. Ashford (1/30/95 8-K Exhibit 4.3)

 *4.4.1   Stockholders Agreement dated December 30, 1994, among the Registrant,
          Harry A. Blazer and Robert Fleming Nominees, Ltd. (1/30/95 8-K Exhibit
          4.4)

 *4.4.2   Amended and Restated Stockholders Agreement dated as of January 31,
          1997 by and among the Company, Harry A. Blazer and Robert Fleming
          Nominees, Ltd. (2/18/97 8-K Exhibit 4.4.1)

 *4.5.1   Investors' Agreement dated December 30, 1994, by and among the
          Registrant, AXA Equity & Law Life Assurance Society, Orbis Pension
          Trustees Ltd., Ashford Capital Partners, L.P. and Theodore H. Ashford
          (1/30/95 8-K Exhibit 4.5)

 *4.5.2   Amended and Restated Investors' Agreement dated as of January 31, 1997
          by and among the Company, Harry A. Blazer and AXA Equity & Law Life
          Assurance Society, Orbis Pension Trustees Ltd., Ashford Capital
          Partners, L.P. and Theodore H. Ashford (2/18/97 8-K Exhibit 4.5.2)

 *4.6.1   Registration Rights Agreement dated December 30, 1994, between the
          Registrant and Robert Fleming Nominees Ltd. (1/30/95 8-K Exhibit 4.6)

 *4.6.2   Amendment to Registration Rights Agreement dated as of January 31,
          1997 between the Company and Robert Fleming Nominees Ltd. (2/18/97 8-K
          Exhibit 4.6.1)

 *4.7.1   Registration Rights Agreement dated December 30, 1994, between the
          Registrant and AXA Equity & Law Life Assurance Society, Orbis Pension
          Trustees Ltd., Ashford Capital Partners, L.P. and Theodore H. Ashford
          (1/30/95 8-K Exhibit 4.7)

 *4.7.2   Amendment to Registration Rights Agreement dated as of January 31,
          1997 between the Company and AXA Equity & Law Life Assurance Society,
          Orbis

                                      -29-
<PAGE>
 
          Pension Trustees Ltd., Ashford Capital Partners, L.P. and Theodore H.
          Ashford (2/18/97 8-K Exhibit 4.7.1)

 *4.8.1   Form of Warrant Certificates issued to Robert Fleming Nominees Ltd.
          (300,000 shares), AXA Equity & Law Life Assurance Society (56,250
          Shares), Orbis Pension Trustees Ltd. (37,500 shares), Ashford Capital
          Partners, L.P. (15,000 shares) and Theodore H. Ashford (3,750 shares)
          (1/30/95 8-K Exhibit 4.8)

 *4.8.2   Amendment to Warrant Certificate dated January 31, 1997 between the
          Company and Robert Fleming Nominees Ltd. (2/18/97 8-K Exhibit 4.8.1)

 *4.8.3   Amendment to Warrant Certificate dated January 31, 1997 between the
          Company and AXA Equity & Law Life Assurance Society (2/18/97 8-K
          Exhibit 4.8.2)

 *4.8.4   Amendment to Warrant Certificate dated January 31, 1997 between the
          Company and Orbis Pension Trustees Ltd. (2/18/97 8-K Exhibit 4.8.3)

 *4.8.5   Amendment to Warrant Certificate dated January 31, 1997 between the
          Company and Ashford Capital Partners, L.P. (2/18/97 8-K Exhibit 4.8.4)

 *4.8.6   Amendment to Warrant Certificate dated January 31, 1997 between the
          Company and Theodore H. Ashford (2/18/97 8-K Exhibit 4.8.5)

 *4.9     Form of Performance Warrant Certificates issued to Robert Fleming
          Nominees Ltd. (44,444 shares), AXA Equity & Law Life Assurance Society
          (8,333 shares), Orbis Pension Trustees Ltd. (5,556 shares), Ashford
          Capital Partners, L.P. (2,222 shares) and Theodore H. Ashford (556
          shares) (1/30/95 8-K Exhibit 4.9)

 *4.10    Bank Warrant Certificate issued to NationsBank (1/30/95 8-K Exhibit
          4.10)

 *4.11.1  Bank Warrant Certificate issued to Creditanstalt-Bankverein (1/30/95
          8-K Exhibit 4.11)

 *4.11.2  Amendment to Bank Warrant Certificate issued to Creditanstalt-
          Bankverein (2/18/97 8-K Exhibit 4.11.2)

 *4.12    Preferred Stock Exchange Agreement dated January 31, 1997 among the
          Company and Robert Fleming Nominees Ltd., AXA Equity & Law Life
          Assurance Society, Orbis Pension Trustees Ltd., Ashford Capital
          Partners, L.P. and Theodore H. Ashford (2/18/97 8-K Exhibit 4.12)

 *4.13    Registration Rights Agreement dated as of January 31, 1997 by and
          between the Company and HFMI Acquisition Corporation ("PFCI") (2/18/97
          8-K Exhibit 4.13)

 *4.14    Warrant  certificate issued on January 31, 1997 to PFCI (2/18/97 8-K
          Exhibit 4.14)

                                      -30-
<PAGE>
 
*10.1     Harry's Farmers Market, Inc. 1993 Management Incentive Plan (Form S-1
          Exhibit 10.2)

*10.2     Harry's Farmers Market, Inc. 1993 Outside Directors' Incentive Plan
          (Form S-1 Exhibit 10.3)

*10.3     Harry's Farmers Market, Inc. Employee Stock Purchase Plan (Form S-1
          Exhibit 10.4)

*10.4     Lease Agreement dated July 1, 1992, between the Partnership and James
          B. Cumming (Form S-1 Exhibit 10.9)
 
*10.5     Master Equipment Lease Agreement dated June 30, 1991, between the
          Partnership and Sun Financial Group, Inc.  (Form S-1 Exhibit 10.11)
 
*10.6     Agreement to Dissolve and Liquidate Harry's Farmers Market, Ltd.
          (L.P.), dated March 30, 1993 (Form S-1 Exhibit 10.14)

*10.7.1   Amended and Restated Credit Agreement dated as of December 30, 1994,
          among the Registrant, Marthasville Trading Company, Karalea, Inc.,
          NationsBank of Georgia, National Association ("NationsBank"), as
          Agent, NationsBank and Creditanstalt-Bankverein, as Lenders (1/30/95 
          8-K Exhibit 10.16)

*10.7.2   Amendment Number One and Waiver Agreement dated April 27, 1995,
          relating to Amended and Restated Credit Agreement dated December 30,
          1994, among the Registrant, Marthasville Trading Company, Karalea,
          Inc., NationsBank, Creditanstalt-Bankverein and NationsBank, as Agent
          (1995 Form 10-K Exhibit 10.16(a))

*10.8.1   Revolving Credit Note of the Registrant dated December 30, 1994, in
          the original principal amount of $3,600,000 payable to the order of
          Creditanstalt-Bankverein (1/30/95 8-K Exhibit 10.16.1)

*10.8.2   Revolving Credit Note of the Registrant dated December 30, 1994, in
          the original principal amount of $5,400,000 payable to the order of
          NationsBank (1/30/95 8-K Exhibit 10.16.2)

*10.9     Term Loan Note of the Registrant dated December 30, 1994, in the
          original principal amount of $16,017,000 payable to the order of
          NationsBank (1/30/95 8-K Exhibit 10.16.4)

*10.10    Warrant Agreement dated December 30, 1994, among the Registrant,
          NationsBank and Creditanstalt-Bankverein (1/30/95 8-K Exhibit 10.16.5)

*10.11    Marthasville Trading Company Amended and Restated Guaranty dated
          December 30, 1994 (1/30/95 8-K Exhibit 10.6.6)

*10.12    Karalea, Inc. Amended and Restated Guaranty dated December 30, 1994
          (1/30/95 8-K Exhibit 10.16.7)

                                      -31-
<PAGE>
 
 *10.13   Harry's Farmers Market, Inc. Amended and Restated Security Agreement
          dated December 30, 1994, in favor of NationsBank (1/30/95 8-K Exhibit
          10.16.8)

 *10.14   Marthasville Trading Company Amended and Restated Security Agreement
          dated December 30, 1994, in favor of NationsBank (1/30/95 8-K Exhibit
          10.16.9)

 *10.15   Karalea, Inc. Amended and Restated Security Agreement dated December
          30, 1994, in favor of NationsBank (1/30/95 8-K Exhibit 10.16.10)

 *10.16   Trademark Collateral Assignment and Security Agreement dated December
          30, 1994, in favor of NationsBank (1/30/95 8-K Exhibit 10.16.11)

 *10.17   Interpretation dated May 22, 1995 of the Amended and Restated Credit
          Agreement dated as of December 30, 1994 (8/2/95 10-Q Exhibit 10.16.12)

 *10.18   Second Amendment dated September 15, 1995 relating to the Amended and
          Restated Credit Agreement dated as of December 30, 1994 (11/1/95 10-Q
          Exhibit 10.16.16)

 *10.19   Forbearance Agreement, dated December 14, 1995, by and among the
          Company, NationsBank of Georgia, National Association and
          Creditanstalt-Bankverein (11/1/95 10-Q Exhibit 10.16.17)

 *10.20   Sixth Amendment, Waiver and Forbearance Agreement dated May 8, 1996,
          by and among the Company, NationsBank, N.A. (South) and Creditanstalt-
          Bankverein (1996 10-K Exhibit 10.16.18)

 *10.21   Seventh Amendment, Waiver and Forbearance Agreement dated July 25,
          1996, by and among the Company, NationsBank, N.A. (South) and
          Creditanstalt-Bankverein (1997 10-K Exhibit 10.16.19)

 *10.22   Eighth Amendment, Waiver and Forbearance Agreement dated December 31,
          1996, by and among the Company, NationsBank, N.A. (South) and
          Creditanstalt-Bankverein (1997 10-K Exhibit 10.16.20)

 *10.23   Ninth Amendment to Loan Agreement dated January 31, 1997 between the
          Company, NationsBank, N.A. and Creditanstalt-Bankverein (2/28/97 8-K
          Exhibit 10.16.21)

 *10.24   Amendment to Loan Documents and Consent dated as of June 6, 1997
          between the Company, PFCI and Creditanstalt-Bankverein (7/30/97 10-Q
          Exhibit 10.16.22)

  10.25   Tenth Amendment to Amended and Restated Credit Agreement dated as of 
          February 3, 1999 by and among the Company and Bank Austria
          Creditanstalt Corporate Finance, Inc.

 *10.26   Lease Agreement dated September 16, 1993, between the Registrant and
          Metropolitan Life Insurance Company (1993 Form 10-K Exhibit 10.21)

                                      -32-
<PAGE>
 
 *10.27   Agreement for the Sale and Purchase of Property dated April 9, 1993,
          between Karalea, Inc. and MM Mooring #1 Corp., as amended by the First
          Amendment to Agreement for the Sale and Purchase of Property dated May
          14, 1993, and the Second Amendment to Agreement for the Sale and
          Purchase of Property dated May 28, 1993 (1993 Form 10-K Exhibit 10.22)

 *10.28   Agreement for the Sale of Property dated July 14, 1993, between the
          Registrant and Liberty Place Associates, Ltd., as amended by the First
          Amendment to Purchase Agreement dated September 10, 1993, and the
          Second Amendment to Agreement for the Sale of Property dated September
          20, 1993 (1993 Form 10-K Exhibit 10.23)

 *10.29   Agreement for Sale of Real Estate dated April 19, 1995, between the
          Registrant and Trammell Crow SE, Inc. (1995 Form 10-K Exhibit 10.26)

 *10.30   Lease Agreement dated effective March 17, 1997, between U.S. 41 & I285
          Company and the Registrant (1997 10-K Exhibit 10.27)

 *10.31   Transaction Agreement dated as of January 31, 1997 among PFCI and the
          Company (2/18/97 8-K Exhibit 10.28)

 *10.32.1 Secured Loan Agreement dated as of January 31, 1997 between PFCI and
          the Company (2/18/97 8-K Exhibit 10.29.1)

 *10.32.2 Second Amended and Restated Secured Loan Agreement dated as of
          November 3, 1997 between PFCI and the Company (11/20/97 8-K Exhibit
          19.2)

 *10.33   Acquisition Agreement dated January 31, 1997 between the Company and
          PFCI (2/18/97 8-K Exhibit 10.30)

 *10.34.1 Trust Agreement dated as of January 30, 1997 between and among
          Wilmington Trust Company, PFCI and the Company (2/18/97 8-K Exhibit
          10.31.1)

 *10.34.2 First Amendment to Trust Agreement dated as of November 3, 1997 by and
          among Wilmington Trust Company, PFCI and the Company (11/20/97 8-K
          Exhibit 10.31.2)

 *10.35.1 Newco License Agreement dated as of January 31, 1997 between HFMI
          Trust and PFCI (2/18/97 8-K Exhibit 10.32.1)

 *10.35.2 First Amendment to Newco License Agreement dated as of November 3,
          1997 between HFMI Trust and PFCI (11/20/97 8-K Exhibit 10.32.2)

 *10.36.1 Newco License Agreement dated as of January 31, 1997 between HFMI
          Trust and the Company (2/18/97 8-K Exhibit 10.33.1)

 *10.36.2 First Amendment to HFMI License Agreement dated as of November 3, 1997
          between HFMI Trust and the Company (11/20/97 8-K Exhibit 10.33.2)

                                      -33-
<PAGE>
 
 *10.37.1 Transfer Agreement dated as of January 31, 1997 between and among the
          Company, HFMI Trust and PFCI (2/18/97 8-K Exhibit 10.34.1)

 *10.37.2 First Amendment to Transfer Agreement dated as of November 3, 1997
          between and among the Company, HFMI Trust and PFCI (11/20/97 8-K
          Exhibit 10.34.2)

 *10.38   Trust Certificate dated January 30, 1997 issued to HFMI Trust
          regarding the Georgia Class Interests (2/18/97 8-K Exhibit 10.35)

 *10.39   Trust Certificate dated January 30, 1997 issued to HFMI Trust
          regarding the Worldwide Class Interests (2/18/97 8-K Exhibit 10.36)

 *10.40   Administration and Servicing Agreement dated as of January 31, 1997
          between HFMI Trust, PFCI and the Company (2/18/97 8-K Exhibit 10.37)

 *10.41   Assignment of Intellectual Property dated January 31, 1997, by and
          between the Company and HFMI Trust (2/18/97 8-K Exhibit 10.38)

 *10.42.1 Consulting Services Agreement dated as of January 31, 1997 between
          PFCI, the Company and Harry A. Blazer (2/18/97 8-K Exhibit 10.39.1)

 *10.42.2 First Amendment to Consulting Services Agreement dated as of November
          3, 1997 between PFCI, the Company and Harry A. Blazer (11/20/97 8-K
          Exhibit 10.39.2)

 *10.43   Loan and Security Agreement dated as of March 28, 1997 by and among
          Ritter Farms and Grainger Tomato Company and for Company (4/30/97 10-Q
          Exhibit 10.40)

 *10.44   Redemption Agreement dated as of November 3, 1997 between PFCI and the
          Company (11/20/97 8-K Exhibit 10.41)

 *21      Subsidiaries of the Registrant (1993 Form 10-K Exhibit 21)

  23      Consent of Grant Thornton LLP

  27      Financial Data Schedule

                                      -34-
<PAGE>
 
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.



                          HARRY'S FARMERS MARKET, INC.

Dated:  May 3, 1999        By: /S/ HARRY A. BLAZER
                               --------------------------------
                                   HARRY A. BLAZER
                                   Chairman,  President and Chief Executive
                                   Officer (principal executive officer)


Dated:  May 3, 1999        By: /S/ HAROLD C. WEISSMAN
                               --------------------------------
                                   HAROLD C. WEISSMAN
                                   Treasurer and Chief Financial Officer
                                   (principal financial and accounting officer)

     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:



May 3, 1999           By:  /S/ HARRY A. BLAZER
                           -------------------------------------
                              HARRY A. BLAZER, Chairman, President,
                              Chief Executive Officer and Director

May 3, 1999           By:  /S/ ROBERT C. GLUSTROM
                           ----------------------
                              ROBERT C. GLUSTROM, Director


May 3, 1999           By:  /S/ JOHN D. BRANCH
                           --------------------------
                              JOHN D. BRANCH, Director


May 3, 1999           By:  /S/ CHARLES W. SAPP
                           -------------------
                              CHARLES W. SAPP, Director

                                      -35-
<PAGE>
 
                       CONSOLIDATED FINANCIAL STATEMENTS
                           AND REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS
                          HARRY'S FARMERS MARKET, INC.
                                AND SUBSIDIARIES
                     February 3, 1999 and January 28, 1998



                                        
                                        
<PAGE>
 
               Report of Independent Certified Public Accountants
               --------------------------------------------------



Board of Directors
Harry's Farmers Market, Inc.

     We have audited the accompanying consolidated balance sheets of Harry's
Farmers Market, Inc. and Subsidiaries as of February 3, 1999 and January 28,
1998, and the related consolidated statements of operations, changes in  equity,
and cash flows for each of the three years in the period ended February 3, 1999.
These financial statements are the responsibility of management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.

     We conducted our audits in accordance with generally accepted auditing
standards.  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 consolidated financial position of Harry's Farmers
Market, Inc. and Subsidiaries as of February 3, 1999 and January 28, 1998, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended February 3, 1999, in conformity
with generally accepted accounting principles.

     We have also audited Schedule II of Harry's Farmers Market, Inc. and
Subsidiaries, for each of the three years in the period ended February 3, 1999.
In our opinion, this schedule presents fairly, in all materials respects, the
information required to be set forth therein.


                                                            GRANT THORNTON LLP


Atlanta, Georgia
April 2, 1999

                                      F-1
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

                          CONSOLIDATED BALANCE SHEETS

                                        



                                     ASSETS
<TABLE>
<CAPTION>
 
                                                    February 3,    January 28,
                                                       1999           1998
                                                   -------------  -------------
<S>                                                <C>            <C>
 
CURRENT ASSETS
 Cash                                              $  1,696,903   $  1,479,413
 Trade accounts receivable, net of an allowance
  for doubtful accounts of $8,118 in 1999
  and $60,000 in 1998                                   525,969        108,860
 Inventories                                          7,138,004      8,568,329
 Prepaid expenses                                       431,143        697,698
 Assets held for sale                                   280,407              -
 Other current assets                                    76,143        642,688
                                                   ------------   ------------
 
     Total current assets                            10,148,569     11,496,988
 
PROPERTY AND EQUIPMENT
 Buildings                                           31,327,502     28,561,748
 Equipment                                           30,437,678     25,509,902
 Vehicles                                               191,275        190,692
                                                   ------------   ------------
                                                     61,956,455     54,262,342
 Accumulated depreciation                           (27,860,256)   (23,440,200)
                                                   ------------   ------------
                                                     34,096,199     30,822,142
 Land                                                 7,223,891      7,223,891
                                                   ------------   ------------
                                                     41,320,090     38,046,033
 
OTHER ASSETS
 Assets held for sale                                 4,900,000      7,080,303
 Deposits on equipment                                  240,457        303,435
 Loan costs, net of accumulated amortization of
  $43,866 in 1999 and $32,572 in 1998                   109,563        120,857
 Other                                                  268,406        199,585
                                                   ------------   ------------
                                                      5,518,426      7,704,180
                                                   ------------   ------------
 



                                                   $ 56,987,085   $ 57,247,201
                                                   ============   ============
</TABLE>

       The accompanying notes are an integral part of these statements.

                                      F-2
<PAGE>
 
                     LIABILITIES  AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
 
                                                February 3,   January 28,
                                                   1999          1998
                                               -------------  -------------
<S>                                               <C>             <C>
CURRENT LIABILITIES
 Current maturities of
  long-term obligations                         $    991,320   $    459,340
 Accounts payable - trade                          8,728,721      5,849,159
 Workers' compensation and           
  general liability                  
  insurance                                          252,949        636,395
 Accrued payroll and                 
  payroll taxes payable                              624,463        639,761
 Sales taxes payable                                 127,513         77,104
 Other accrued liabilities                           870,403        732,706
                                                ------------   ------------
                                     
     Total current liabilities                    11,595,369      8,394,465
                                     
LONG-TERM OBLIGATIONS, net           
 of current maturities                            14,202,474     13,358,803
                                     
CONVERTIBLE DEBT                                  15,159,895     13,042,403
                                     
OTHER NON-CURRENT                    
 LIABILITIES                                         478,358        489,067
                                     
REDEEMABLE PREFERRED STOCK,          
 $9 stated value, 3,000,000 Series AA                
  shares authorized; issued and                  
  outstanding, 1,222,221 Series AA in 1999        
  and 1998                                        10,581,960     10,434,420   

STOCKHOLDERS' EQUITY
 Common stock:
  Class A, No par value, 22,000,000 shares
   authorized; issued and outstanding,
    4,139,375 in 1999 and 4,132,257
    in 1998                                       34,681,075     34,673,512   
  Class B, No par value, 3,000,000 shares
   authorized; issued and outstanding,
    2,050,701 in 1999 and 1998                     3,936,337      3,936,337
 Additional paid-in capital                        1,379,852      1,527,392
 Accumulated deficit                             (35,028,235)   (28,609,198)
                                                ------------   ------------
     Total stockholders'
      equity                                       4,969,029     11,528,043
                                                ------------   ------------
                                                $ 56,987,085   $ 57,247,201
                                                ============   ============
</TABLE>

                                      F-3
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                                  Years ended
<TABLE>
<CAPTION>
 
  
                              February 3,   January 28,    January 29,
                                 1999           1998           1997
                              -----------   ------------   ------------ 
<S>                          <C>            <C>            <C>        
Net sales                    $136,146,144   $136,998,758   $140,162,273
Cost of goods sold             99,974,334    102,320,051    104,362,838
                             ------------   ------------   ------------
     Gross profit              36,171,810     34,678,707     35,799,435
Operating expenses
 Direct store expenses         22,508,289     23,284,118     21,644,509
 Selling, general and
  administrative expenses      13,446,620     12,719,407     10,916,774
 Depreciation and other
  amortization                  4,085,566      3,446,653      3,441,254
 Impairment loss                1,376,017      2,867,651              -
                             ------------   ------------   ------------
                               41,416,492     42,317,829     36,002,537
                             ------------   ------------   ------------
     Operating loss            (5,244,682)    (7,639,122)      (203,102)
 
Other income (expense)
 Interest expense              (2,407,014)    (2,253,987)    (2,599,552)
 Loss on writedown of note
  receivable                            -       (914,471)             -
 Sale of intellectual
  property rights                       -      1,422,391              -
 Redemption of ownership
  interest in PFCI                      -      2,500,000              -   
 Other income                   1,232,659      1,018,239      1,320,498  
                             ------------   ------------   ------------
                               (1,174,355)     1,772,172     (1,279,054)
                             ------------   ------------   ------------
      NET LOSS                 (6,419,037)    (5,866,950)    (1,482,156)
Provision for accretion of
 warrants                         147,540        147,540        228,540
                             ------------   ------------   ------------
     Loss applicable to
      common shareholders    $ (6,566,577)  $ (6,014,490)  $ (1,710,696)
                             ============   ============   ============
 
Net loss per common share
 Basic                       $      (1.06)  $      (0.97)  $      (0.28)
                             ============   ============   ============
 Diluted                     $      (1.06)  $      (0.97)  $      (0.28)
                             ============   ============   ============
</TABLE>
       The accompanying notes are an integral part of these  statements.

                                      F-4
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

                  CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

      Years ended  February 3, 1999, January 28, 1998 and January 29, 1997
<TABLE>
<CAPTION>
 
 
                                                  Common       Common     Additional
                                                   stock        stock       paid-in     Accumulated      Total
                                                  Class A      Class B      capital       deficit        equity
                                                -----------  -----------  -----------  -------------  ------------
<S>                                             <C>          <C>          <C>          <C>            <C>
 
Balance, January 31, 1996                       $34,578,303  $3,975,889   $  371,555   $(21,260,092)  $17,665,655
 
Issuance of  1,863 shares of Class A
 stock for employee stock purchase
 plan                                                 4,751           -            -              -         4,751
Conversion of 20,600 shares of Class B
 shares to Class A shares                            39,552     (39,552)           -              -             -
Repricing of existing warrants and
 issuance of new warrants                                 -           -      370,206              -       370,206
Accretion of warrant value                                -           -     (228,540)             -      (228,540)
Net loss                                                  -           -            -     (1,482,156)   (1,482,156)
                                                -----------  ----------   ----------   ------------   -----------
 
Balance, January 29, 1997                        34,622,606   3,936,337      513,221    (22,742,248)   16,329,916
 
Issuance of 13,793 shares of Class A
 stock for consulting services                       50,000           -            -              -        50,000
Issuance of 591 shares of Class A stock
 for employee stock purchase plan                       906           -            -              -           906
Sale of 2,000,000 warrants                                -           -    1,000,000              -     1,000,000
Stock options issued for consulting services              -           -       75,000              -        75,000
Repricing of warrants                                     -           -       86,711              -        86,711
Accretion of warrant value                                -           -     (147,540)             -      (147,540)
Net loss                                                  -           -            -     (5,866,950)   (5,866,950)
                                                -----------  ----------   ----------   ------------   -----------
 
Balance, January 28, 1998                        34,673,512   3,936,337    1,527,392    (28,609,198)   11,528,043
 
Issuance of  7,118 shares of Class A
 stock for employee stock purchase plan               7,563           -            -              -         7,563
Accretion of warrant value                                -           -     (147,540)             -      (147,540)
Net loss                                                  -           -            -     (6,419,037)   (6,419,037)
                                                -----------  ----------   ----------   ------------   -----------
 
Balance, February 3, 1999                       $34,681,075  $3,936,337   $1,379,852   $(35,028,235)  $ 4,969,029
                                                ===========  ==========   ==========   ============   ===========
 
</TABLE>

        The accompanying notes are an integral part of this statement.

                                      F-5
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  Years ended
<TABLE>
<CAPTION>
 
                                February 3,       January 28,     January 29,
                                    1999              1998            1997
                             ------------------  --------------  --------------
<S>                          <C>                 <C>             <C>         
 
Cash flows from operating
 activities:
 Cash received from
  customers                      $ 135,729,035   $ 137,143,941   $ 139,788,795
 Cash paid for purchases
  and operating expenses          (129,295,271)   (134,541,209)   (134,860,053)
 Interest paid                      (2,122,569)     (2,090,682)     (2,913,833)
 Interest received                         174          69,047           9,679
 Proceeds from consulting
  agreement                                  -         500,000               -
                                 -------------   -------------   -------------
     Net cash provided by
      operating activities           4,311,369       1,081,097       2,024,588
                                 -------------   -------------   -------------
 
Cash flows from investing
 activities:
 Capital expenditures               (5,784,317)     (4,739,930)     (1,414,716)
 Increase in notes
  receivable                                 -      (1,209,111)              -
 Proceeds from sale of
  intellectual property                      -       1,422,391               -
 Proceeds from sale of
  interest in PFCI                           -       2,500,000               -  
 Proceeds from sale of property       
  equipment                            716,784          95,000       5,414,212 
 Payments on notes
  receivable                            83,334         104,063           8,975
                                 -------------   -------------   -------------
     Net cash provided by
      (used in)              
      investing activities          (4,984,199)     (1,827,587)      4,008,471
                                 -------------   -------------   -------------
  
Cash flows from financing
 activities:
 Proceeds from issuance of
  convertible debt                   2,000,000      13,059,802               -   
 Line of credit                        664,575        (581,595)        510,000
 Principal payments on
  long-term obligations             (1,781,818)    (12,573,000)     (6,263,871)
 Proceeds from employee
  stock purchases                        7,563             906           4,751
 Proceeds from warrants                      -         994,295               -
                                 -------------   -------------   -------------
      Net cash provided by
       (used in)
       financing activities            890,320         900,408      (5,749,120)
                                 -------------   -------------   -------------
 
Net increase in cash                   217,490         153,918         283,939
Cash at beginning of year            1,479,413       1,325,495       1,041,556
                                 -------------   -------------   -------------
 
Cash at end of year              $   1,696,903   $   1,479,413   $   1,325,495
                                 =============   =============   =============
 
Supplemental Schedule of
 Noncash Investing and
 Financing Activities:
---------------------------
 
 Capital leases                  $   2,384,918   $           -   $     203,737
                                 =============   =============   =============
</TABLE>

                                      F-6
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

               CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                                  Years ended
<TABLE>
<CAPTION>
 
 
                             February 3,   January 28,   January 29,
                                 1999          1998          1997
                             ------------  ------------  ------------
<S>                          <C>           <C>           <C>          
 
Reconciliation of Net Loss
 to Cash
 Provided By Operating
 Activities:
  Net loss                   $(6,419,037)  $(5,866,950)  $(1,482,156)
  Adjustments to reconcile
   net loss to cash
   provided by (used in)
   operations:
     Depreciation and
      amortization             4,770,531     4,706,471     4,862,195
     Amortization of debt
      discount                   225,468             -             -
     Loss (gain) on sale
      of property and
      equipment                      933       (32,055)     (456,542)
     Impairment loss           1,376,017     2,867,643             -
     Decrease (increase)
      in trade accounts
      receivable                (417,109)      145,183      (122,390)
     Loss on writedown of
      notes receivable           162,114       914,471             -
     Decrease (increase)
      in other receivables       321,097      (141,359)      (90,828)  
     Decrease (increase)
      in inventories           1,430,325       541,494    (1,215,227)  
     Decrease (increase)
      in prepaid expenses        266,555      (112,425)      447,071
     Decrease (increase)
      in deposits on
      equipment                   62,978       182,206       (31,369)
     Decrease (increase)
      in other assets           (126,718)       13,475      (226,539)  
     Increase in trade         
      accounts payable         2,879,562        62,304       882,935 
     Increase (decrease)
      in accrued
      liabilities                (76,347)    1,323,030      (542,562)
     Increase (decrease)
      in unearned revenue       (145,000)      400,000             -
     Gain on sale of PFCI
      ownership interest               -    (2,500,000)            -
     Gain on sale of
      intellectual
      property, net of
      costs paid of $77,609            -    (1,422,391)            -
                             -----------   -----------   -----------
 
                             $ 4,311,369   $ 1,081,097   $ 2,024,588
                             ===========   ===========   ===========
 
</TABLE>



       The accompanying notes are an integral part of these statements.

                                      F-7
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     February 3, 1999 and January 28, 1998



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 Harry's Farmers Market, Inc. (the Company) is a corporation formed pursuant to
 the laws of the State of Georgia. The Company is a retailer in the Atlanta,
 Georgia metropolitan area for fresh fruits and produce, seafood, poultry and
 meat, dairy products, baked goods, beer and wine and other assorted grocery
 items.

 1.   Principles of Consolidation
      ---------------------------

 The financial statements include the accounts of Harry's Farmers Market, Inc.,
 and its three wholly-owned subsidiaries, Karalea, Inc., Marthasville Trading
 Company, Inc., and Roman Properties, Inc.  All material intercompany balances
 and transactions have been eliminated in consolidation.

 2.  Inventories
     -----------

 Inventories consist primarily of grocery items and are stated at the lower of
 cost or market.  Cost is determined under the first-in, first-out (FIFO)
 valuation method.

 3.  Property and Equipment
     ----------------------

 Property and equipment are stated at cost.  Depreciation is provided for in
 amounts sufficient to relate the cost of depreciable assets to operations over
 their estimated service lives, principally on a straight-line basis. The
 estimated lives used in determining depreciation are: buildings, 31-39 years;
 equipment and vehicles, 3 to 10 years.  The portion of depreciation expense
 attributed to product cost is included with cost of goods sold in the
 statements of operations.  This depreciation expense amounted to $684,965,
 $1,259,818 and $1,431,501, for the years ended February 3, 1999, January 28,
 1998 and January 29, 1997, respectively.

 The Company capitalizes purchased software which is ready for service and
 software development costs incurred from the time technological feasibility of
 the software is established until the software is ready for use.  Other
 computer software maintenance costs related to software development are
 expensed as incurred.  Software development costs are amortized using the
 straight-line method generally over three to five years after being placed in
 service.  The carrying value of software and development costs at February 3,
 1999 and January 28, 1998 were $769,135 and $664,879, respectively.

                                      F-8
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     February 3, 1999 and January 28, 1998


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

 4.  Loan Costs
     ----------

 Costs of obtaining financing are being amortized over the term of the related
 loans.

 5.  Advertising Expense
     -------------------

 All advertising costs are expensed in the period incurred.  Advertising expense
 for the years ended February 3, 1999, January 28, 1998 and January 29, 1997 was
 approximately $1,553,000, $1,128,000 and $1,088,000, respectively.

 6.  Income Taxes
     ------------

 The Company accounts 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 amounts of existing assets and liabilities and their
 respective tax bases.  Deferred tax assets and liabilities are measured using
 enacted tax rates applied to taxable income.  The effect on deferred tax assets
 and liabilities of a change in tax rates is recognized in income in the period
 that includes the enactment date.  A valuation allowance is provided for
 deferred tax assets when it is more likely than not that the asset will not be
 realized.

 7.  Stock Based Compensation
     ------------------------

 The Company's stock option plans are accounted for under the intrinsic value
 method in which compensation expense is recognized for the amount, if any, that
 the fair value of the underlying common stock exceeds the exercise price at the
 date of grant.

 8.  Fiscal Year
     -----------

 The Company is on a 52/53 week fiscal year ending on the Wednesday nearest
 January 31.  Fiscal year 1999 included 53 weeks, while fiscal years 1998 and
 1997 included 52 weeks.

 9.  Earnings Per Share
     ------------------

 The Company has adopted Statement of Financial Accounting Standards No. 128
 (SFAS 128), Earnings Per Share.  Basic net earnings per common share is based
 upon the weighted average number of common shares outstanding during the
 period.  Diluted net earnings per common share is based upon the weighted
 average number of common shares outstanding plus dilutive potential common
 shares, including options and warrants outstanding during the period.  All
 comparative earnings per share data for prior periods presented has been
 restated.

                                      F-9
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     February 3, 1999 and January 28, 1998

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

 10.  Use of Estimates in the Preparation of Financial Statements
      -----------------------------------------------------------

 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, the disclosure of
 contingent 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.

 11.  New Accounting Standards
      ------------------------

 In June 1998, the Financial Accounting Standards Board issued Statement of
 Financial Accounting Standards No. 133, Accounting for Derivative Instruments
 and Hedging Activities.  The new statement requires all derivatives to be
 recorded on the balance sheet at fair value and establishes new accounting
 rules for hedging instruments.  The statement is effective for years beginning
 after June 15, 1999.

 Also, in June 1998, the American Institute of Certified Public Accountants
 issued Statement of Position (SOP) 98-5, Reporting on the Costs of Start-Up
 Activities.  SOP 98-5 requires costs of start-up activities and organizational
 costs, as defined, to be expensed as incurred.

 Management does not expect the adoption of these new standards to have a
 material impact on the Company's consolidated financial statements.

 12.  Segment Information
      -------------------

 In June 1997, the Financial Accounting Standards Board issued Statement of
 Financial Accounting Standard No. 131, Disclosures about Segments of an
 Enterprise and Related Information, (SFAS No. 131) effective for fiscal years
 beginning after December 15, 1997.  SFAS No. 131 provides accounting guidance
 for reporting information about operating segments and requires interim segment
 reporting.  The Company operates in a single segment of business.  Therefore,
 there was no effect on the Company's financial statements from the adoption of
 SFAS No. 131.

 13.  Reclassifications
      -----------------

 Certain reclassifications have been made to the 1998 and 1997 financial
 statements to conform to the 1999 presentation.

                                      F-10
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     February 3, 1999 and January 28, 1998


NOTE B - ASSETS HELD FOR SALE

 Assets held for sale includes the following at estimated net realizable value:
<TABLE>
<CAPTION>
 
                                            February 3,  January 28,
                                               1999         1998
                                            -----------  -----------
<S>                                         <C>          <C>
 
        Land held for sale                   $  686,000   $  806,267
        Buildings and improvements 
         held for sale                        4,214,000    4,774,574
        Equipment not in service                280,407    1,499,462
                                             ----------   ----------
 
                                             $5,180,407   $7,080,303
                                             ==========   ==========
</TABLE>

 The land, buildings and improvements held for sale represent the Company's
 former bakery and warehouse facility. The Company has moved the bakery and
 warehouse operations to another location. The Company recorded a non-cash
 impairment loss on these assets of $680,841 in the fourth quarter of 1999 and
 $2,867,651 in the third quarter of 1998. These assets were written down to
 their fair value based on the estimated sales price of the facility less
 reasonable estimates of additional costs to sell the facility. The recognition
 of this impairment was in accordance with the provisions of  Statement of
 Financial Accounting Standards No. 121 - Accounting for the Impairment of Long-
 Lived Assets and for Long-Lived Assets to Be Disposed Of.

 The equipment taken out of service was removed from a store which was closed
 during fiscal 1996.  During 1999, a portion of this equipment was placed in
 service at new stores opened during the year and $695,176 was recorded as a
 non-cash impairment loss on these assets.  Subsequent to year-end, the Company
 sold, at auction, the remaining equipment taken out of service for book value
 as of February 3, 1999.  No additional losses were recognized during the
 subsequent year-end.


NOTE C - LONG-TERM OBLIGATIONS

 Notes Payable
 --------------

 The Company has a working capital line of credit agreement with a bank
 providing a maximum of $12,000,000 reduced by amounts converted to a term note
 and other outstanding borrowings under the line. On January 28, 1998, the
 Company converted $5,358,000 of this credit facility to a term note.  The
 average borrowings under the line of credit portion of this credit facility for
 the years ended February 3, 1999 and January 28, 1998 were $4,292,505 and
 $3,328,000, respectively.  The weighted average interest rate during these
 periods was 9.95% and 9.98%, respectively.  The maximum borrowings outstanding
 under the line of credit at any month end during the periods totaled $5,841,405
 and $4,918,405, respectively.

                                      F-11
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     February 3, 1999 and January 28, 1998


NOTE C - LONG-TERM OBLIGATIONS - Continued

 In connection with restructuring of the bank credit facilities in fiscal 1995,
 the Company issued its lenders 240,000 warrants to purchase 240,000 shares of
 Class A common stock at $10 per share.  The value of these warrants was
 recorded as a discount on debt and is being amortized to interest expense over
 the term of the loans. During fiscal 1997, the Company again restructured its
 bank credit facilities. In connection with this restructuring, the Company
 repriced the warrants to $3 per share and issued an additional 120,000 warrants
 to purchase 120,000 shares of Class A common stock. The value of these warrants
 was recorded as a discount on debt and is being amortized to interest expense
 over the term of the loans. Pursuant to the PFCI agreement on January 31, 1997,
 144,000 of the outstanding warrants were cancelled, leaving 216,000 warrants at
 $3 per share at January 28, 1998.

 As of February 3, 1999, the Company entered into an amendment to the term loan
 and line of credit agreement which repriced the 216,000 outstanding warrants to
 equal the lowest public market trading price per share for the Company's Class
 A common stock at the close of trading any day during the period beginning on
 May 4, 1999 and ending on May 18, 1999. In addition, the Company issued 50,000
 new warrants to purchase 50,000 shares of Class A common stock with an exercise
 price equal to the lowest public market trading price per share for the
 Company's Class A common stock at the close of trading on any day during the
 period beginning on May 4, 1999 and ending on May 18, 1999. The Company also
 agreed to issue 150,000 additional warrants to purchase 150,000 shares of Class
 A common stock upon the occurrence of certain events. These warrants will be
 priced in the same manner as the new 50,000 warrants issued. As a result, at
 February 3, 1999, there were 266,000 warrants outstanding to purchase 266,000
 shares of Class A common stock.

 Notes payable at year end consisted of:

<TABLE>
<CAPTION>
                                                                         February 3,        January 28,
                                                                            1999               1998
                                                                          ----------         ---------- 
<S>                                                              <C>                       <C>
  Term note payable to a bank, bearing interest at
   LIBOR rate plus 3.5% or prime rate plus 1.5%
   (effective rate of 8.9% at February 3, 1999),
   due and  payable January 29, 2001.  This term note is
   collateralized by substantially all assets of the Company.             $5,358,000         $5,358,000

  Line of credit agreement with a bank bearing interest
   at prime plus 1.5% maturing January 29, 2001.
   The weighted average interest rate during the period
   was  9.95%.  The line of credit is collateralized by
   substantially all assets of the Company.                                5,841,405          4,918,405

  Mortgage note payable, bearing interest at
   8.5%; interest and principal paid monthly with
   full payment due January 10, 2012, collateralized
   by land, buildings and improvements with a net
   book value of $4,900,000.                                               2,505,512          2,606,872
</TABLE>

                                      F-12
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     February 3, 1999 and January 28, 1998



NOTE C - LONG-TERM OBLIGATIONS - Continued
<TABLE>
<CAPTION>
 
   Notes Payable - Continued
   -------------------------
<S>                                                            <C>           <C>
 
                                                               February 3,   January 28,
                                                                  1999          1998
                                                               -----------   -----------
 
   Note payable to a bank, bearing interest at a
     variable rate not to exceed 11.9%.                                  -        67,304
 
   Other                                                            54,678        82,264
                                                               -----------   -----------
                                                                13,759,595    13,032,845
 
   Capital lease obligations                                     1,540,894       999,969
 
   Discount on debt                                               (106,695)     (214,671)
                                                               -----------   -----------
                                                                15,193,794    13,818,143
     Less current maturities                                      (991,320)     (459,340)
                                                               -----------   -----------
                                                               $14,202,474   $13,358,803
                                                               ===========   ===========
 
  Future maturities of notes payable as of February 3, 1999,
    are as follows:
 
             Years ending:
               2000                                      $   123,069
               2001                                       11,332,225
               2002                                          143,434
               2003                                          154,985
               2004                                          158,485
               Thereafter                                  1,847,397
                                                         -----------
                                                          13,759,595
       Capital lease obligations                           1,540,894
       Discount on debt                                     (106,695)
                                                         -----------
                                      
                                                         $15,193,794
                                                         ===========
</TABLE>

   The bank loan agreements include covenants requiring a specified minimum
   interest coverage and a minimum tangible net worth. As of February 3, 1999,
   the Company entered into an amendment to the term loan and line of credit
   agreement which provides for an extension of the maturity date to January 29,
   2001 and revision of certain financial covenants.

                                      F-13
<PAGE>
 
                  Harry's Farmers Market, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     February 3, 1999 and January 28, 1998


NOTE C - LONG-TERM OBLIGATIONS - Continued

 Capital Lease Obligations
 -------------------------

 The Company leases certain equipment under agreements which are classified as
 capital leases. Most equipment leases have purchase options at the end of
 the original lease term.  The effective interest rate on these leases range
 from 9.5% to 12.7%.  Property and equipment includes the following amounts for
 leases that have been capitalized:
<TABLE>
<CAPTION>
 
                                                       February 3,   January 28,
                                                          1999          1998
                                                       ------------  -----------
<S>                                                     <C>           <C> 
 
  Equipment                                             $ 4,092,721   $1,813,664
  Accumulated depreciation                               (1,630,646)    (847,075)
                                                         ----------   ----------
                                                        $ 2,462,075   $  966,589
                                                         ==========   ==========
 
 Future minimum payments of capital leases as of February 3, 1999, are as
 follows:
 
 Years ending
   2000                                                  $  976,733         
   2001                                                     512,973
   2002                                                     247,377
                                                         ----------
   Total minimum lease payments                           1,737,083
   Less amount representing interest                       (196,189)
                                                         ----------
 
   Present value of net minimum lease payments           $1,540,894
                                                         ==========
 
</TABLE>

NOTE D - COMMITMENTS AND CONTINGENCIES

 Operating Leases
 ----------------

 The Company leases certain facilities and equipment under agreements classified
 as operating leases.  Total rental expense under all operating lease
 arrangements was approximately $2,215,000, $3,265,000 and $3,027,000 for the
 years ended February 3, 1999, January 28, 1998 and January 29, 1997,
 respectively. Terms of the equipment leases range from four to five years and
 include an option to terminate at the end of two or three years.  At the end of
 the maximum term, the Company has the option to continue renting the equipment
 or purchase the equipment at fair market value. Following is a summary of
 approximate future minimum lease payments due under operating lease agreements
 as of February 3, 1999:

                                      F-14
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     February 3, 1999 and  January 28, 1998


NOTE D - COMMITMENTS AND CONTINGENCIES - Continued

Operating Leases - Continued
----------------------------
<TABLE>
<CAPTION>
 
  Fiscal year ending
<S>                   <C> 
        2000          $ 2,178,286  
        2001            2,040,097
        2002            1,826,062
        2003            1,691,592
        2004              838,820
        Thereafter      3,834,357
                      -----------
                      $12,409,214
                      ===========
</TABLE>
 Claims and Litigation
 ---------------------

 The Company is involved in various claims and litigation which arise in the
 ordinary course of business.  In the opinion of management, the amount of
 ultimate liability with respect to these actions will not materially affect the
 financial position of the Company.

 Year 2000 Issue
 ---------------

 The Year 2000 issue relates to limitations in computer systems and applications
 that may prevent proper recognition of the Year 2000.  The potential effect of
 the Year 2000 issue on the Company and its business partners will not be fully
 determinable until the Year 2000 and thereafter.  If year 2000 modifications
 are not properly completed either by the Company or entities with which the
 Company conducts business, the Company's revenues and financial condition could
 be adversely impacted.


NOTE E - CONVERTIBLE DEBT

 On January 31, 1997, the Company entered into a series of agreements with
 Progressive Food Concepts, Inc. (PFCI) pursuant to which PFCI loaned the
 Company $12,000,000 which is exchangeable for 300,000 shares of Series B
 convertible preferred stock of the Company, convertible into 3,000,000 shares
 of the Company's Class A common stock.  Pursuant to this agreement, PFCI loaned
 the Company an additional $1,500,000 on August 11, 1997 and an additional
 $2,000,000 on May 4, 1998.  These additional amounts of $3,500,000 are
 exchangeable for shares of convertible preferred stock of the Company
 convertible into an aggregate of 1,375,000 shares of Class A common stock.  If
 not earlier paid or accelerated for payment, the outstanding principal of both
 these loans become an amortized term loan on January 31, 2002. Both loans may
 be prepaid at any time without penalty or premium.  The Company owed PFCI
 $15,159,895 and $13,042,403 at February 3, 1999 and January 28, 1998,
 respectively, in connection with these agreements.

                                      F-15
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     February 3, 1999 and January 28, 1998
                                        


NOTE E - CONVERTIBLE DEBT - Continued

 Interest accrues on the convertible debt at 5% per annum and is payable on the
 first day of each quarter. No principal is due on the debt until January 31,
 2002 at which time the outstanding principal becomes an amortized term loan
 payable in 20 equal quarterly installments.

 Costs associated with obtaining the debt are recorded as discount on
 convertible debt and are being amortized to interest expense over the term of
 the loans. At February 3, 1999 and January 28, 1998, the unamortized discount
 on convertible debt was $340,105 and $457,597, respectively.


NOTE F - REDEEMABLE PREFERRED STOCK

 During fiscal 1995, the Company issued 1,222,221 shares of Series A redeemable,
 convertible preferred stock with a stated value of $9 per share.  The preferred
 stock was mandatorily redeemable on December 1, 1999 at its stated value (total
 redemption value of $11,000,000).  In January 1997, pursuant to the PFCI
 agreement, the Series A preferred shares were exchanged by the shareholders for
 an equal number of the Company's newly issued Series AA redeemable, convertible
 preferred stock.

 The Series AA redeemable, convertible preferred stock has a stated value of $9
 per share and is mandatorily redeemable on December 1, 2001. At any time prior
 to redemption, each share of Series AA preferred stock is convertible into the
 number of Class A common stock calculated by dividing the aggregate redemption
 value by $6.50.

 In connection with the original issuance of the Series A preferred stock, the
 Company issued 412,500 transferable warrants to purchase 412,500 shares of
 Class A common stock at $10 per share.  In January 1997, these warrants were
 repriced at $4 per share. These warrants expire in December 2001.

 The Company also issued transferable warrants to purchase an additional 61,111
 shares of Class A common stock. These warrants were exercisable June 15, 1998
 and expire in December 2001. These warrants are subject to repurchase by the
 Company for a nominal purchase price prior to the exercise date upon the
 occurrence of certain events.

 The preferred stock and warrants are recorded at their relative fair values,
 net of issuance costs.  The excess of redemption value over the carrying value
 of the preferred stock is being accreted by periodic charges to paid-in capital
 over the life of the issue.

                                      F-16
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     February 3, 1999 and January 28, 1998



NOTE G - CONCENTRATION OF CREDIT RISK

 The Company operates retail grocery stores in the metropolitan Atlanta area.
 The Company also sells to a limited number of commercial entities and carries
 trade accounts receivable for these customers.  Management continually monitors
 these receivables to minimize the risk of loss.


NOTE H - NET LOSS PER COMMON SHARE

 The following table sets forth the computation of basic and diluted loss per
 share.
<TABLE>
<CAPTION>
 
                                                  February 3,   January 28,   January 29,
                                                      1999          1998          1997
                                                  ------------  ------------  ------------
<S>                                               <C>           <C>           <C>
 
  Numerator for basic and diluted net loss per
   common share-loss attributable to
   common stockholders                            $(6,566,577)  $(6,014,490)  $(1,710,696)
                                                  ===========   ===========   ===========
 
  Denominator for basic net loss per common
   share-weighted average shares outstanding        6,183,650     6,182,788     6,168,264
 
  Effect of dilutive options and warrants                   -             -             -
                                                  -----------   -----------   -----------
 
  Denominator for diluted net loss per common
   share-adjusted weighted average shares
   outstanding                                      6,183,650     6,182,788     6,168,264
                                                  ===========   ===========   ===========
 
  Basic net loss per share                        $     (1.06)  $     (0.97)  $     (0.28)
                                                  ===========   ===========   ===========
 
  Diluted net loss per share                      $     (1.06)  $     (0.97)  $     (0.28)
                                                  ===========   ===========   ===========
 
</TABLE>
NOTE I - EMPLOYEE BENEFIT PLANS

 Stock Option Plans
 ------------------

 The Company's board of directors has approved stock option plans which cover up
 to 675,000 shares of common stock.  The plans provide for the expiration of
 options five to ten years from the date of grant and require the exercise price
 of the options granted to be at least equal to 100% of market value on the date
 granted.  Stock option transactions for each of the three years in the period
 ended February 3, 1999 are summarized below:

                                      F-17
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     February 3, 1999 and  January 28, 1998


NOTE I - EMPLOYEE BENEFIT PLANS - Continued

 Stock Option Plans - Continued
 ------------------------------
<TABLE>
<CAPTION>
 
                                           February 3, 1999      January 28, 1998   January 29, 1997
                                          -----------------      -----------------  -----------------
                                                       Weighted           Weighted           Weighted
                                                        Average            Average           Average
                                                       Exercise           Exercise           Exercise
                                            Shares      Price    Shares    Price    Shares    Price
                                         -------------  ------  ---------  ------  ---------  ------
<S>                                  <C>                <C>     <C>        <C>     <C>        <C>
 
   Outstanding, beginning of year             583,475    $4.87   384,200    $5.30   170,500   $13.64
   Granted                                    331,320     2.50   314,700     4.67   400,500     5.33
   Exercised                                        -        -         -        -         -        -
   Forfeited                                 (350,855)    4.63  (115,425)    5.74  (186,800)   12.97
                                             --------    -----  --------    -----  --------   ------
   Outstanding, end of year                   563,940    $3.63   583,475    $4.87   384,200   $ 5.30
                                             ========    =====  ========    =====  ========   ======
 
</TABLE>
  The following table summarizes information about stock options outstanding at
February 3, 1999:
<TABLE>
<CAPTION>
 
                                         Options Outstanding                Options Exercisable
                            -------------------------------------------  --------------------------
                                                   Weighted
                                                   Average     Weighted                    Weighted
                                  Number           Remaining   Average      Number         Average
Exercise                      Outstanding at     Contractual   Exercise   Exercisable at   Exercise
Price                        February 3, 1999    Life (Years)   Price    February 3, 1999   Price
--------------------------  -------------------  ------------  --------  ----------------  --------
<S>                         <C>                  <C>           <C>       <C>               <C>
 
  $2.50-3.00                            372,540         8.74      $2.63            75,000     $3.00
   4.00                                  40,000         8.37       4.00            20,000      4.00
   6.00                                 151,400         7.38       6.00            63,655      6.00
                                        -------         ----      -----           -------     -----
 
                                        563,940         8.35      $3.63           158,655     $4.33
                                        =======         ====      =====           =======     =====
</TABLE>

 The Company uses the intrinsic value method in accounting for its stock option
 plans.  In applying this method, no compensation cost has been recognized in
 the accompanying financial statements.  Had compensation cost for the Company's
 stock option plans been determined based on the fair value at the grant dates
 for awards under those plans, the Company's net loss and loss per share would
 have resulted in the pro forma amounts indicated below:

                                      F-18
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     February 3, 1999 and January 28, 1998



NOTE I - EMPLOYEE BENEFIT PLANS - Continued

 Stock Option Plans - Continued
 ------------------------------
<TABLE>
<CAPTION>
 
                                       February 3, 1999   January 28,1998
                                       -----------------  ----------------
<S>                       <C>                 <C>                <C>
 
  Net loss                As reported       $(6,566,577)      $(6,014,490)
                          Pro forma          (6,647,075)       (6,506,805)
 
  Basic net loss per
   common share           As reported       $     (1.06)      $     (0.97)
                          Pro forma               (1.07)            (1.05)
  Diluted net loss per    As reported       $     (1.06)      $     (0.97)
   common share           Pro forma               (1.07)            (1.05)
</TABLE>

 For purposes of the pro forma amounts above, the fair value of each option
 grant was estimated on the date of grant using the Black-Scholes options-
 pricing model with the following weighted-average assumptions used for grants
 in the year ended February 3, 1999; expected volatility of 78.5%, risk-free
 interest rate of 6.5%; and expected life of 2 years.

 Health Care Plan
 ----------------

 The Company has a fully insured health care plan which covers all employees who
 elect to participate.  Expenses for this plan charged to operations for the
 years ended February 3, 1999, January 28, 1998 and January 29, 1997, totaled
 $1,059,140, $946,953 and $1,014,329, respectively.

 Qualified Retirement Plan
 -------------------------

 The Company has a qualified retirement plan whereby all employees meeting
 eligibility requirements based on number of hours worked and length of service
 may elect to make tax-deferred contributions under Internal Revenue Code
 Section 401(k). The Company's contribution is determined at the discretion of
 the board of directors. There were no contributions made by the Company during
 the years ended February 3, 1999, January 28, 1998 and January 29, 1997.

                                      F-19
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     February 3, 1999 and January 28, 1998



NOTE I - EMPLOYEE BENEFIT PLANS - Continued

 Stock Purchase Plan
 -------------------

 The Company has an employee stock purchase plan which covers up to 300,000
 shares of common stock whereby all employees meeting eligibility requirements
 based on number of hours worked and length of service may elect to make
 contributions which are used to purchase shares of the Company's common stock.
 The purchase price for shares is 85% of the fair market value of common stock
 at the end of the purchasing cycle. Employees purchased 7,118 and 591 shares
 under this plan during fiscal 1999 and 1998, respectively.


NOTE J - INCOME TAXES

 The Company's temporary differences result in a net deferred income tax asset
 which is reduced to zero by a related valuation allowance summarized as
 follows:
<TABLE>
<CAPTION>
 
                                                       Estimated deferred
                                                        income tax effect
                                                    ---------------------------
                                                      February 3,  January 28,
                                                         1999        1998
                                                    -------------  ------------ 
<S>                                                     <C>          <C>
Deferred income tax assets
 Net operating loss carryforward                    $ 12,315,000   $  9,033,000
 Inventories                                              72,000         87,000
 Notes receivable allowance                                    -        352,000
 Allowance for decrease in market value of asset         568,000        300,000
 Impairment loss                                       1,332,000      1,104,000
 Charitable contributions carryforward                   102,000         93,000
 Accrued liabilities not deductible until paid           204,000        205,000 
 Other                                                     3,000         23,000
                                                    -------------  ------------ 
  Gross deferred income tax assets                    14,596,000     11,197,000
 Deferred income tax asset valuation allowance       (13,713,000)   (10,214,000)
                                                    -------------  ------------ 
  Net deferred income tax assets                         883,000        983,000
                                                    ------------   ------------
Deferred income tax liabilities
 Property and equipment                                 (883,000)      (983,000)
                                                    ------------   ------------
                                                    $          -   $          -
                                                    ============   ============
</TABLE>

                                      F-20
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     February 3, 1999 and January 28, 1998
                                        


NOTE J - INCOME TAXES - Continued
 
 At February 3, 1999, the Company had net operating loss carryforwards of
 approximately $31,987,000 available to reduce future taxable income which
 expire as follows:
<TABLE>
<CAPTION>
 
                                           Net
          Fiscal                         Operating
          Year                             Loss
          --------                      -----------
          <S>                           <C>
                                      
           2009                         $ 5,965,000
           2010                           6,766,000
           2011                           9,822,000
           2012                           2,564,000
           2013                           1,051,000
           2018                           5,819,000
                                        -----------
                                        $31,987,000
                                        ===========
</TABLE>
 Reconciliations of statutory Federal tax rates to the effective tax rate for
 the years ended February 3, 1999, January 28, 1998 and January 29, 1997 are as
 follows:
<TABLE>
<CAPTION>
 
                                February 3,   January 28,   January 29,
                                   1999          1998          1997
                                -----------   -----------   -----------
<S>                          <C>           <C>                <C>   
  Income tax benefit at 34%       (34.0)%       (34.0)%       (34.0)%  
  State taxes, net of Federal                          
    income tax effect              (4.5)         (4.5)         (4.5)
  Tax benefit of losses                                
   not recognized                  38.5          38.5          38.5
                                  -----         -----         -----
                                                       
   Effective tax rate                 - %           - %           - %
                                  =====         =====         =====
 
</TABLE>

                                      F-21
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     February 3, 1999 and January 28, 1998



NOTE K - FINANCIAL INSTRUMENTS

 The Company's financial instruments recorded on the balance sheet include cash,
 accounts receivable, accounts payable, debt and redeemable preferred stock.
 Because of their short maturities, the carrying amount of cash, accounts
 receivable and accounts payable approximates fair market value.  The fair value
 of the Company's long-term debt approximates carrying value based on quoted
 market prices of similar issues or on the current rates offered to the Company
 for debt of similar terms.

 The Company believes that it is not practical to estimate a fair value
 different from the redeemable preferred stock's carrying value as this security
 has numerous unique features as described in Note E.


NOTE L - PLANS FOR FUTURE OPERATIONS AND FINANCING

 Management believes that internally generated funds and its available credit
 facilities will provide the Company with sufficient sources of funds to satisfy
 its anticipated cash requirements in the upcoming fiscal year.  The Company is
 taking steps to reduce its losses. For the upcoming fiscal year, the Company
 will continue to implement its plans for new merchandising initiatives, new
 prepared food products, strengthened controls on product waste, improvements in
 manufacturing and distribution efficiencies, and reductions in selling, general
 and administrative costs.

                                      F-22
<PAGE>
 
                     HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
                                  SCHEDULE II
           CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE> 
<CAPTION> 
<S>                   <C>                            <C>              <C>               <C>            <C>
                                                                                                  
                                                   Balance at                                       Balance at
                                                    Beginning                                         End of
For the year ended  Description                     of Period        Additions       Deductions       Period
------------------  -----------                     ---------        ---------       ----------       ------ 

February 3, 1999  Allowance for doubtful
                  accounts receivable            $    60,000         $       -          $51,882    $     8,118

                  Valuation allowance -
                  Deferred tax asset             $10,214,000         $3,499,000         $     -    $13,713,000
                                                 ===========         ==========         =======    ===========


January 28, 1998  Allowance for doubtful
                  accounts receivable            $    25,000         $   35,000         $     -    $    60,000

                  Valuation allowance -
                  Deferred tax asset             $ 8,055,000         $2,159,000         $     -    $10,214,000
                                                 ===========         ==========         =======    ===========
 

January 29, 1997  Allowance for doubtful
                  accounts receivable            $    25,000         $        -         $     -    $    25,000
 
                  Valuation allowance -
                  Deferred tax asset             $ 7,834,000         $  221,000         $     -    $ 8,055,000
                                                 ===========         ==========         =======    ===========
 
</TABLE> 

                                      F-23