**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark One)**                                                                                                            |
|---------------------------------------------------------------------------------------------------------------------------|
| **ý****  QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT  OF 1934** |
|                                                                                                                      |
| **For the quarterly period ended  September 30, 2003**                                                               |
|                                                                                                                      |
| **OR**                                                                                                                    |
|                                                                                                                      |
| **o****  TRANSITION  REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**            |
|                                                                                                                      |
| **Commission File Number 0-27148**                                                                                        |

 
| **New World Restaurant Group, Inc**.                              |
|-------------------------------------------------------------------|
| (Name of Registrant as Specified in its  Charter)                 |
|                                                              |
| **Delaware**                                                      |   | **13-3690261** |
| (State or other jurisdiction  of Incorporation or Organization)   |   | (I.R.S. Employer  Identification No.) |
|                                                              |   |   |
| **1687 Cole Blvd., Golden, Colorado  80401**                 |
| (Address of principal executive offices,  including zip code)     |
|                                                              |
| **(303) 568-8000**                                                |
| (Registrant’s telephone number, including  area code)        |
|                                                              |
| Securities registered pursuant to  Section 12(b) of the Act: |
| **None**                                                          |
|                                                              |
| Securities registered pursuant to  Section 12(g) of the Act: |
| **Common Stock, $.001 par value**                                 |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Securities Exchange Act of1934).  Yes o  No ý

 

As of October 31, 2003, 9,841,828 shares of Common Stock of theregistrant were outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

None.

 

 

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**NEW WORLD RESTAURANT GROUP, INC.**

 

**September 30, 2003**

 

**FORM 10-Q**

 

**INDEX**

 
| PART I.  | FINANCIAL INFORMATION                                                                                                                                                                     |      |
|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|
|     |                                                                                                                                                                                      |      |
| Item 1.  | Financial Statements                                                                                                                                                                      | 3         |
|     |                                                                                                                                                                                      |      |
|     | Consolidated Balance Sheets as of September 30, 2003 and  December 31, 2002                                                                                                     | 3         |
|     |                                                                                                                                                                                      |      |
|     | Consolidated Statements of Operations for  the three-months and nine-months ended September 30, 2003 and  October 1, 2002                                                       | 4

  |
|     |                                                                                                                                                                                      |      |
|     | Consolidated Statements of Cash Flows for  the nine-months ended September 30, 2003 and October 1, 2002                                                                         | 5         |
|     |                                                                                                                                                                                      |      |
|     | Notes to Consolidated Financial Statements                                                                                                                                                | 6         |
|     |                                                                                                                                                                                      |      |
| Item 2.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations for  the three-months and nine-months ended September 30, 2003 and  October 1, 2002 | 16        |
|     |                                                                                                                                                                                      |      |
| Item 3.  | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                               | 24        |
|     |                                                                                                                                                                                      |      |
| Item 4.  | Controls  and Procedures                                                                                                                                                                  | 24        |
|     |                                                                                                                                                                                      |      |
| PART II: | OTHER INFORMATION                                                                                                                                                                         | 25        |
|     |                                                                                                                                                                                      |      |
| Item 1.  | Legal  Proceedings                                                                                                                                                                        | 25        |
|     |                                                                                                                                                                                      |      |
| Item 2.  | Changes  in Securities and Use of Proceeds                                                                                                                                                | 26        |
|     |                                                                                                                                                                                      |      |
| Item 3.  | Defaults  upon Senior Securities                                                                                                                                                          | 28        |
|     |                                                                                                                                                                                      |      |
| Item 4.  | Submission  of Matters to a Vote of Security Holders                                                                                                                                      | 28        |
|     |                                                                                                                                                                                      |      |
| Item 5.  | Other  Information                                                                                                                                                                        | 29        |
|     |                                                                                                                                                                                      |      |
| Item 6.  | Exhibits  and Reports on Form 8-K                                                                                                                                                         | 30        |
|     |                                                                                                                                                                                      |      |
|     | SIGNATURES                                                                                                                                                                                |      |

 

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# **NEW WORLD RESTAURANT GROUP, INC.CONSOLIDATED BALANCE SHEETSAS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2002**(in thousands, except share information)

 
|                                                                                                                                                                                   |   | **September 30,  2003** |    | **December 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|-----------------------------|--------|
|                                                                                                                                                                                   |   | **(Unaudited)**              |    |                        |   |
| ASSETS                                                                                                                                                                                 |   |                         |    |                        |   |
| Current Assets:                                                                                                                                                                        |   |                         |    |                        |   |
| Cash and cash equivalents                                                                                                                                                              |   | $                            | 6,180   |                        | $      | 10,705 |   |
| Restricted cash                                                                                                                                                                        |   | 2,028                        |    | —                      |   |
| Franchise and other receivables, net of  allowance of $2,007 and $1,955                                                                                                                |   | 5,931                        |    | 5,775                       |   |
| Current maturities of notes receivables                                                                                                                                                |   | 84                           |    | 194                         |   |
| Inventories                                                                                                                                                                            |   | 4,805                        |    | 5,005                       |   |
| Prepaid expenses and other current assets                                                                                                                                              |   | 7,113                        |    | 3,180                       |   |
| Total  current assets                                                                                                                                                                  |   | 26,141                       |    | 24,859                      |   |
|                                                                                                                                                                                   |   |                         |    |                        |   |
| Property, plant and equipment, net                                                                                                                                                     |   | 70,990                       |    | 81,254                      |   |
| Trademarks and other intangibles, net                                                                                                                                                  |   | 92,265                       |    | 98,134                      |   |
| Goodwill, net                                                                                                                                                                          |   | 4,875                        |    | 4,875                       |   |
| Debt issuance costs and other assets                                                                                                                                                   |   | 8,826                        |    | 1,526                       |   |
| Total Assets                                                                                                                                                                           |   | $                            | 203,097 |                        | $      | 210,648 |   |
|                                                                                                                                                                                   |   |                         |    |                        |   |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                             |   |                         |    |                        |   |
| Current Liabilities:                                                                                                                                                                   |   |                         |    |                        |   |
| Accounts payable                                                                                                                                                                       |   | $                            | 9,893   |                        | $      | 6,766 |   |
| Accrued expenses                                                                                                                                                                       |   | 27,655                       |    | 31,872                      |   |
| Short term debt and current portion of  long-term debt                                                                                                                                 |   | 5,655                        |    | 150,872                     |   |
| Current portion of obligations under  capital leases                                                                                                                                   |   | 98                           |    | 100                         |   |
| Total current liabilities                                                                                                                                                              |   | 43,301                       |    | 189,610                     |   |
|                                                                                                                                                                                   |   |                         |    |                        |   |
| Senior notes and other long-term debt                                                                                                                                                  |   | 161,400                      |    | 11,011                      |   |
| Obligations under capital leases                                                                                                                                                       |   | 76                           |    | 360                         |   |
| Derivative liability                                                                                                                                                                   |   | —                       |    | 2,847                       |   |
| Other liabilities                                                                                                                                                                      |   | 10,509                       |    | 10,560                      |   |
| Mandatorily redeemable, Series Z Preferred  Stock, $.001 par value, $1,000 per share liquidation value; 2,000,000 and 0  shares authorized; 57,000 and 0 shares issued and outstanding |   | 57,000                       |    | —                      |   |
| Total liabilities                                                                                                                                                                      |   | 272,286                      |    | 214,388                     |   |
|                                                                                                                                                                                   |   |                         |    |                        |   |
| Series F Preferred Stock, $.001 par value,  $1,000 per share liquidation value; 0 and 116,000 shares authorized; 0 and  89,698 shares issued and outstanding                           |   | —                       |    | 84,932                      |   |
|                                                                                                                                                                                   |   |                         |    |                        |   |
| Stockholders’ deficit:                                                                                                                                                            |   |                         |    |                        |   |
| Common stock, $.001 par value; 15,000,000  and 2,491,567 shares authorized; 9,841,828 and 847,413 shares issued and  outstanding                                                       |   | 10                           |    | 1                           |   |
| Additional Paid-In capital                                                                                                                                                             |   | 175,586                      |    | 86,657                      |   |
| Accumulated deficit                                                                                                                                                                    |   | (244,785                     | )       | (175,330                    | )      |
| Total stockholders’ deficit                                                                                                                                                       |   | (69,189                      | )       | (88,672                     | )      |
| Total Liabilities and Stockholders’ Deficit                                                                                                                                       |   | $                            | 203,097 |                        | $      | 210,648 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**NEWWORLD RESTAURANT GROUP, INC. CONSOLIDATED STATEMENTS OFOPERATIONSFOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND OCTOBER 1,2002 AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND OCTOBER 1, 2002 (UNAUDITED)**(in thousands, except earnings per share and relatedshare information)

 
|                                                                           |   | **Three-month  Period Ended** |    | **Nine-month  Period Ended** |   |
|--------------------------------------------------------------------------------|--------|-------------------------------|---------|------------------------------|--------|
|                                                                           |   | **September 30,  2003**  |    | **October 1,  2002**    |   | **September 30,  2003** |   | **October 1,  2002** |   |
| Revenues:                                                                      |   |                          |    |                         |   |   |   |   |   |
| Retail sales                                                                   |   | $                             | 86,975  |                         | $      | 91,367 |   | $ | 266,302 |   | $ | 275,935 |   |
| Manufacturing  revenues                                                        |   | 4,798                         |    | 5,893                        |   | 15,976 |   | 17,903 |   |
| Franchise related revenues                                                     |   | 1,454                         |    | 1,437                        |   | 3,909 |   | 4,084 |   |
| Total revenues                                                                 |   | 93,227                        |    | 98,697                       |   | 286,187 |   | 297,922 |   |
| Cost of sales                                                                  |   | 79,780                        |    | 80,701                       |   | 242,456 |   | 241,833 |   |
| General and administrative expenses                                            |   | 8,649                         |    | 12,253                       |   | 27,293 |   | 34,898 |   |
| Depreciation and amortization                                                  |   | 7,128                         |    | 8,245                        |   | 21,425 |   | 23,240 |   |
| Charges and (adjustments) for integration  and reorganization cost             |   | (153                          | )       | 3,301                        |   | (153 | ) | 2,749 |   |
| Loss from operations                                                           |   | (2,177                        | )       | (5,803                       | )      | (4,834 | ) | (4,798 | ) |
| Interest expense, net                                                          |   | (10,187                       | )       | (9,943                       | )      | (28,458 | ) | (34,547 | ) |
| Cumulative change in the fair value of  derivatives                            |   | 1,063                         |    | 4,056                        |   | 993 |   | 198 |   |
| Loss on exchange of Series F Preferred  Stock due to Equity Recap              |   | (23,007                       | )       | —                       |   | (23,007 | ) | — |   |
| Other income                                                                   |   | 134                           |    | 2,366                        |   | 705 |   | 2,471 |   |
| Loss before income taxes                                                       |   | (34,174                       | )       | (9,324                       | )      | (54,601 | ) | (36,676 | ) |
| Provision for income taxes                                                     |   | —                        |    | 214                          |   | 430 |   | 366 |   |
| Net loss                                                                       |   | (34,174                       | )       | (9,538                       | )      | (55,031 | ) | (37,042 | ) |
| Dividends and accretion on Preferred Stock                                     |   | —                        |    | (6,926                       | )      | (14,424 | ) | (20,455 | ) |
| Net loss available to common stockholders                                      |   | $                             | (34,174 | )                            | $      | (16,464 | ) | $ | (69,455 | ) | $ | (57,497 | ) |
| Net loss per common share – Basic and  Diluted                            |   | $                             | (13.55  | )                            | $      | (11.47 | ) | $ | (36.87 | ) | $ | (45.12 | ) |
| Weighted average number of common shares  outstanding:  Basic and Diluted |   | 2,521,491                     |    | 1,435,892                    |   | 1,883,770 |   | 1,274,441 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**NEWWORLD RESTAURANT GROUP, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND OCTOBER 1,2002(UNAUDITED)**

**(in thousands)**

 
|                                                                         |   | **September 30,  2003** |    | **October 1,  2002** |   |
|------------------------------------------------------------------------------|--------|------------------------------|---------|---------------------------|--------|
|                                                                         |   |                         |    |                      |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                        |   |                         |    |                      |   |
| Net loss                                                                     |   | $                            | (55,031 | )                         | $      | (37,042 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                         |    |                      |   |
| Depreciation and amortization                                                |   | 21,425                       |    | 23,240                    |   |
| Charges and (adjustments) for integration  and reorganization                |   | (153                         | )       | 2,749                     |   |
| Cumulative change in fair value of  derivatives                              |   | (993                         | )       | (198                      | )      |
| Amortization of debt issuance costs                                          |   | 759                          |    | 1,726                     |   |
| Amortization of debt discount                                                |   | 1,916                        |    | 9,225                     |   |
| Notes issued as paid in kind for interest  on Bridge loan                    |   | 510                          |    | 3,282                     |   |
| Issuance of Standstill and other warrants                                    |   | 3,132                        |    | —                    |   |
| Greenlight interest                                                          |   | 1,025                        |    | 1,309                     |   |
| Stock issued for compensation and  consulting                                |   | —                       |    | 352                       |   |
| Gain on sale of debt securities                                              |   | —                       |    | (2,537                    | )      |
| Loss on exchange of Series F Preferred  Stock due to Equity Recap            |   | 23,007                       |    | —                    |   |
| Reduction in Bridge loan due to Equity  Recap                                |   | (615                         | )       | —                    |   |
| Changes in operating assets and  liabilities:                                |   |                         |    |                      |   |
| Franchisee and other receivables                                             |   | (46                          | )       | 4,357                     |   |
| Accounts payable and accrued expenses                                        |   | 2,289                        |    | (10,843                   | )      |
| Other assets and liabilities                                                 |   | (3,591                       | )       | (4,652                    | )      |
| Net cash used in operating activities                                        |   | (6,366                       | )       | (9,032                    | )      |
|                                                                         |   |                         |    |                      |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                        |   |                         |    |                      |   |
| Purchase of property and equipment                                           |   | (5,292                       | )       | (3,513                    | )      |
| Proceeds from the sale of assets held for  resale                            |   | —                       |    | 1,397                     |   |
| Proceeds from the sale of investment in  debt securities                     |   | —                       |    | 36,711                    |   |
| Net cash provided by (used in) investing  activities                         |   | (5,292                       | )       | 34,595                    |   |
|                                                                         |   |                         |    |                      |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                        |   |                         |    |                      |   |
| Proceeds from line of credit                                                 |   | 4,500                        |    | 3,000                     |   |
| Repayments of line of credit                                                 |   | (6,000                       | )       |                      |   |
| Repayment of notes payable                                                   |   | (801                         | )       | (36,721                   | )      |
| Proceeds from issuance of $160 Million  Facility                             |   | 160,000                      |    | —                    |   |
| Repayment of $140 Million Facility                                           |   | (140,000                     | )       | —                    |   |
| Advance refunding of NJEDA (restricted  cash)                                |   | (2,028                       | )       |                      |   |
| Debt issuance costs                                                          |   | (8,538                       | )       | —                    |   |
| Net cash provided by (used in) financing  activities                         |   | 7,133                        |    | (33,721                   | )      |
|                                                                         |   |                         |    |                      |   |
| Net decrease in cash                                                         |   | (4,525                       | )       | (8,158                    | )      |
| Cash and cash equivalents, beginning of  period                              |   | 10,705                       |    | 15,478                    |   |
| Cash and cash equivalents, end of period                                     |   | $                            | 6,180   |                      | $      | 7,320 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

5

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**NEW WORLDRESTAURANT GROUP, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

**1.  Basis of Presentation**

 

The accompanying unauditedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America andthe instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and notes required by accounting principles generally accepted inthe United States of America for complete financial statements. In the opinionof management, the unaudited interim consolidated financial statementsfurnished herein include all adjustments necessary for a fair presentation ofNew World Restaurant Group, Inc.’s (“the Company”) financial position atSeptember 30, 2003 and the results of its operations for the three-monthand nine-month periods ended September 30, 2003 and October 1, 2002and its cash flows for the nine-month periods ended September 30, 2003 andOctober 1, 2002.  All suchadjustments are of a normal recurring nature. Interim financial statements are prepared on a basis consistent with theCompany’s annual financial statements. Results of operations for thethree-month and nine-month periods ended September 30, 2003 are notnecessarily indicative of the operating results that may be expected for futureperiods.  The consolidated balance sheetas of December 31, 2002 has been derived from the audited consolidatedfinancial statements at that date but does not include all of the informationand notes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements.  For further information, refer to the consolidated financialstatements and notes thereto included in the Company’s annual report on Form10-K/A for the fiscal year ended December 31, 2002.

 

The unaudited informationincluded in the consolidated financial statements for the three months and ninemonths ended September 30, 2003 and October 1, 2002 includes theresults of operations of the Company for the 13 weeks and 39 weeks then ended.

 

Certain reclassificationshave been made to conform previously reported data to the current presentation.

 

**2.  Liquidity**

 

The accompanyingconsolidated financial statements have been prepared in conformity with accountingprinciples generally accepted in the United States of America, whichcontemplate continuation of the Company as a going concern.  However, the Company has sustainedsubstantial losses in recent years, and such losses have continued throughunaudited periods in 2003.  The Company also has a deficit instockholders’ equity of approximately $69,189,000 as of September 30,2003.

 

In view of the mattersdescribed in the preceding paragraph, recoverability of a major portion of therecorded asset amounts shown in the accompanying balance sheets is dependentupon continued operations of the Company, which in turn is dependent upon theCompany’s ability to meet its financing requirements on a continuing basis, toobtain new financing, and to succeed in its future operations.  The consolidated financial statements do notinclude any adjustments relating to the recoverability and classification ofrecorded asset amounts or amounts and classification of liabilities that mightbe necessary should the Company be unable to continue in existence.

 

The Company continues its on-going process of identifying, evaluatingand implementing cost reduction initiatives. The primary cost areas in which these initiatives are focused are supplychain, store level operations, manufacturing operations and overhead.  Examples of key initiatives that have beenrecently implemented or are currently in process include menu optimization toremove and/or modify inefficient products, upgrade/deployment of technology toenable more accurate identification and tracking of cost of products sold, andrealignment and consolidation of the executive team resulting in a reduction inoverhead.  The Company believes that itscurrent business plan will improve its operating results and cash flow in thefuture.

 

**3.  Background on Historic Financing Activitiesand the Equity Recapitalization**

 

In August 2000, the Company began raising funds with the intent ofacquiring Einstein Noah Bagel Corp. (“ENBC”), which had declared Chapter 11bankruptcy on April 27, 2000. Part of the acquisition strategy was toacquire ENBC bonds in the open market. In order to finance the bond purchases,the Company was required to raise capital through a series of debt and equityofferings. On June 19, 2001, the Company purchased substantially all theassets of ENBC for $160.0 million, along with the assumption of certainliabilities subject to adjustment to the extent they exceeded $30.0 million.

 

For the period August 2000 through June 19, 2001, the Companyengaged in several financing transactions with various entities to acquire thebonds of ENBC and consummate the purchase in the bankruptcy auction. The faceamount of these financings was $250.0 million, which consisted of $185.0million of debt and $65.0 million of preferred stock. The maturity date on thedebt ranged from one to two years. Preferred stock agreements required additional warrants and dividends inthe event that they were not redeemed within a certain period. Please refer tothe consolidated financial statements and notes thereto included in theCompany’s annual report on Form 10-K/A for the fiscal year endedDecember 31, 2002 for a complete summary of these transactions.

 

6

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Between June 2001 and May 2003, (1) the Company’s commonstock was delisted from the Nasdaq National Market as a result of violations oftwo rules relating to stockholder approval for equity issuances, (2)unauthorized bonus payments in the aggregate amount of $3.5 million were madeto certain former executive officers and employees, (3) the Company engagedGrant Thornton LLP to re-audit the Company’s financial statements for fiscal2001 and fiscal 2000 as a result of the accounting treatment applied primarilyto debt and preferred stock related effective interest and derivativeliabilities, and (4) the Company incurred non-recurring expenditures inconnection with the investigation of the unauthorized bonus payments, there-audit of its financial statements and proposed refinancing of its $140 Million of Senior IncreasingRate Notes (“$140 Million Facility”). In addition, the Company defaulted in the repayment of the $35 million assets-backed loan tothe Company’s non-restricted subsidiary, New World EnbcDeb Corp. (“BridgeLoan”), which matured on June 15, 2002.

 

 In October 2002, theCompany engaged CIBC World Markets Corp. (“CIBC”) as its exclusive financialadvisor in connection with its review of strategic alternatives to rationalizeits capital structure. From October 2002 to June 2003, the Companyreviewed a variety of transactions and alternatives for its business. OnJune 26, 2003, the Company’s board of directors approved an equityrestructuring (more fully described below) as being fair and in the bestinterest of the Company.

 

On July 8, 2003, the Company issued $160.0 million of 13% seniorsecured notes due 2008 (“$160 Million Facility”) to replace its $140 MillionFacility. The $160 Million Facility was offered by the Company and guaranteed,jointly and severally, by all present and all future subsidiaries of theCompany other than the Non-Restricted Subsidiaries (as defined in the Indenturegoverning the notes).  The Company usedthe net proceeds of the offering, among other things, to refinance the $140Million Facility.

 

On July 8, 2003, the Company entered into a three-year, $15.0million senior secured revolving credit facility with AmSouth Bank (“AmSouthRevolver”).

 

Halpern Denny Fund III, L.P. (“Halpern Denny”), Greenlight Capital,L.P. (“Greenlight Capital”), Greenlight Capital Qualified, L.P. (“GreenlightQualified”), Greenlight Capital Offshore, Ltd. (“Greenlight Offshore”),Brookwood New World Investors, L.L.C. (“Brookwood”) and NWCI Holdings, LLC(“NWCI”, and with Greenlight Capital, Greenlight Qualified, Greenlight Offshoreand Brookwood, “Greenlight”) and the Company entered into an equityrestructuring agreement pursuant to which the parties agreed to arecapitalization of the Company’s equity structure  The board of directors approved the equity restructuring onJune 26, 2003 and the Company’s stockholders approved the equityrestructuring on September 24, 2003. As contemplated by the equity restructuring agreement, the Companyeffected the following equity restructuring (the “Equity Recap”):

 

a) each stockholder received 0.6610444 new shares of common stock forevery share of common stock held by such stockholder pursuant to a1.6610444-for-one forward stock split in order to effect the transactionscontemplated by the equity restructuring agreement;

 

b) the per share exercise price and the number of shares of commonstock issuable upon the exercise of each outstanding option or warrant (otherthan the warrants that were issued in connection with the $140 Million Facilitypursuant to the Warrant Agreement dated June 19, 2001, as amended betweenThe Bank of New York, as warrant agent and us (the “Warrant Agreement”)) wereadjusted to reflect the forward stock split;

 

c) the Company issued Halpern Denny 57,000 shares of Series ZPreferred Stock, par value $0.001 per share in exchange for 56,237.994 sharesof Series F Preferred Stock, par value $0.001 per share (including accruedand unpaid dividends, which were payable in additional shares of Series FPreferred Stock), 23,264,107 shares of common stock and warrants to purchase13,711,054 shares of common stock (collectively, the “Halpern DennyInterests”); and

 

d) immediately following the forward stock split, the Company issuedGreenlight 938,084,289 shares of common stock in exchange for 61,706.237 sharesof Series F Preferred Stock.  Theseshares of Series F Preferred Stock include i) shares originally issued asSeries F Preferred Stock, ii) shares converted into Series F Preferred Stockfrom the $10.0 million contribution plus accreted interest resultingfrom the Bond Purchase Agreement (“Greenlight Obligation”) and iii)shares converted into Series F Preferred Stock from the Bridge Loan (which wasacquired by Greenlight from Jefferies & Company, Inc.).

 

In connection with the Equity Recap, the Company, Halpern Denny and Greenlightterminated the stockholders agreement dated January 18, 2001, as amended.

 

Immediately following the completion of the Equity Recap, the Companyhad 984,182,839 shares of common stock, no shares of Series F Preferred Stock,57,000 shares of Series Z Preferred Stock, and 105,925,675 shares of commonstock reserved for issuance pursuant to outstanding options and warrants.

 

The Company then completed a 1-for-100 reverse stock split.  Upon completion of the 1-for-100 reversestock split, the Company had 9,841,828 outstanding shares of common stock,57,000 shares of Series Z Preferred Stock and 1,059,257 shares of common stock 

 

7

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reserved for issuance pursuant to outstanding options and warrants.Taking into account both the forward and reverse stock splits, shareholders nowhave one share of common stock for every 60.20309 shares previously held.  For comparative purposes, unless otherwisestated, share and per share amounts for all historical periods presented in thefinancial statements have been restated to give effect to both of these splits.

 

Following the closing of the Equity Recap, Greenlight beneficiallyowned approximately 92% of the Company’s common stock on a fully diluted basisand the warrants issued pursuant to the Warrant Agreement representedapproximately 4.3% of the Company’s common stock on a fully diluted basis.

 

The exchange of the Halpern Denny Interests for Series Z PreferredStock resultedin a reduction of the Company’s effective dividend rate relative to thatrequired by the Series F Preferred Stock, and as a result of this and otherfactors, the Company accounted for this transaction as troubled debtrestructuring as required by Statement of Financial Accounting Standard (“SFAS”)No. 15 , Accounting by Debtors and Creditors for Troubled DebtRestructurings.  The Series Z PreferredStock is recorded in the accompanying balance sheet (Note 5) at its full facevalue of $57.0 million, which represents the total required future cash paymentsgiven that the Series Z Preferred Stock does not require dividends.  Given that a portion of this exchangeincluded the receipt of the Company’s common stock and warrants previously heldby the Halpern Denny Interests, the Company did not recognize a gain fromtroubled debt restructuring.

 

The Greenlight exchange ofthe Series F Preferred Stock into common shares was recorded at fair value(which was based on the underlying stock price of the Company’s stock as ofSeptember 24, 2003), which resulted in a loss on exchange of approximately$23.0 million.

 

**4.   Earnings Per Share**

 

In accordance with SFAS128, Earnings Per Share, basic earnings per common share amounts (basic EPS)are computed by dividing net earnings by the weighted average number of commonshares outstanding (which include warrants exercisable for a nominal price of$1.00 or less per share; substantially all of these warrants were previouslydeemed to have a nominal exercise price given their pre-split exercise price of$.01 per share) and exclude any potential dilution.  Diluted earnings per common share amounts assuming dilution(diluted EPS) are computed by reflecting potential dilution of the Company’scommon stock equivalents.  Common stockequivalents are not reflected in diluted EPS if their effect would beanti-dilutive.  The following tablesummarizes the weighted average shares used in the basic and diluted EPScomputations:

 
|                                                     |   | **For the  Three-month Period  Ended** |   | **For the  Nine-month Period  Ended** |   |
|----------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                     |   | **September 30,  2003**           |   | **October 1,  2002**             |   | **September 30,  2003** |   | **October 1,  2002** |   |
| Weighted average shares outstanding                      |   | 1,539,291                              |   | 297,526                               |   | 1,078,039 |   | 292,758 |   |
| Weighted average warrants exercisable for  $1.00 or less |   | 982,200                                |   | 1,138,366                             |   | 805,731 |   | 981,683 |   |
|                                                     |   | 2,521,491                              |   | 1,435,892                             |   | 1,883,770 |   | 1,274,441 |   |

 

All stock options andwarrants outstanding (excluding those exercisable for $1.00 or less ) duringthe three-month and nine-month periods ended September 30, 2003 andOctober 1, 2002 were excluded from the computation because of their anti-dilutiveeffect.  The excluded options andwarrants for the three-month and nine-month periods ended September 30,2003 and October 1, 2002 were 99,438 and 17,829 respectively.

 

Due to the nature andtiming of the Equity Recap, weighted average shares outstanding are notindicative of shares outstanding at the end of the period.

 

**5.  Recent Pronouncements**

 

In April 2003, the Financial Accounting Standards Board (“FASB”)issued SFAS 149, Amendment of Statement 133 on Derivative Instruments andHedging Activities.  SFAS 149 amends andclarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts(collectively referred to as derivatives) and for hedging activities.  The accounting and reporting requirementswere effective for contracts entered into or modified after June 30, 2003and for hedging relationships designated after June 30, 2003.  SFAS 149 did not have a significant impacton the Company’s financial statements.

 

In May 2003, the FASB issued SFAS 150, Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities and Equity.  SFAS 150 changes the classification in thestatement of financial position of certain common financial instruments fromeither equity or mezzanine presentation to liabilities and requires an issuerof those financial statements to recognize changes in fair value or redemptionamount within the statement of operations. This statement takes effect with this filing.  The adoption of this new standard resulted in the Company’spre-existing Series F Preferred Stock subject to mandatory redemptionrequirements being reclassified as a liability on July 2, 2003 rather thanthe historical mezzanine presentation. There was no impact on the Company’s 

 

8

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statement of operations upon adoption of SFAS 150 given that the SeriesF Preferred Stock had been previously stated at the present value of itsredemption amount.  The Series ZPreferred Stock exchanged for the remaining Series F Preferred Stock in theEquity Recap (Note 3) has also been classified as a liability since itsinception.  Dividends and accretion ofdiscount or amortization of premiums, if any, will be recognized as interestexpense.

 

The Company has consideredall other recently issued accounting pronouncements and does not believe thatthe adoption of such pronouncements will have a material impact on itsfinancial statements.

 

**6.  Stock-Based Compensation**

 

The Company currentlyfollows the intrinsic value method of Accounting Principles Board Opinion No.25 (“APB 25”) to account for its employee stock compensation, and does notintend to change to the fair value method to account for employee stock-basedcompensation, unless otherwise required by future accounting pronouncements.

 

Had compensation cost for the Company’s two stock option plans (the1994 Stock Plan and 1995 Directors’ Plan) been recognized under the fair valuemethod specified in SFAS 123, the Company’s net loss and loss per share wouldhave been increased to the following pro forma amounts:

 
|                                                                                                             |   | **For the  Three-month Period Ended** |    | **For the  Nine-month Period Ended** |   |
|------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|--------------------------------------|--------|
|                                                                                                             |   | **September 30,  2003**          |    | **October 1,  2002**            |   | **September 30,  2003** |   | **October 1,  2002** |   |
| As reported                                                                                                      |   | $                                     | (34,174 | )                                    | $      | (16,464 | ) | $ | (69,455 | ) | $ | (57,497 | ) |
| Deduct: total stock-based employee  compensation expense determined under fair value based method for all awards |   | (48                                   | )       | (49                                  | )      | (138 | ) | (147 | ) |
| Pro forma                                                                                                        |   | $                                     | (34,222 | )                                    | $      | (16,513 | ) | $ | (69,593 | ) | $ | (57,644 | ) |
| Basic and diluted net loss available to  common stockholders per common share:                                   |   |                                  |    |                                 |   |   |   |   |   |
| As reported                                                                                                      |   | $                                     | (13.55  | )                                    | $      | (11.47 | ) | $ | (36.87 | ) | $ | (45.12 | ) |
| Pro forma                                                                                                        |   | $                                     | (13.57  | )                                    | $      | (11.50 | ) | $ | (36.94 | ) | $ | (45.23 | ) |

 

**7.  Goodwill, Trademarks and Other Intangibles**

 

Goodwill represents theexcess of cost over fair value of net assets acquired in the acquisition ofManhattan Bagel Company.

 

The Company uses atwo-step approach to assess its goodwill impairment.  This requires that the Company first compare the estimated fairvalue of each reporting unit that houses goodwill to the carrying amount of theunit’s assets and liabilities, including its goodwill and intangible assets. Ifthe fair value of the reporting unit is below its carrying amount, then thesecond step of the impairment test is performed, in which the current fairvalue of the unit’s assets and liabilities will determine the current impliedfair value of the unit’s goodwill.  Theannual impairment tests relating to goodwill and trademarks are performed as ofyear-end, unless events and circumstances indicate a potential impairment,which would require an interim impairment test.

 

The Company’s managementhas determined that no impairment indicators were present during thethree-month and nine-month periods ended September 30, 2003, andaccordingly no interim tests for impairment of goodwill, trademarks oramortizing intangibles were performed.

 

In accordance with SFAS142, goodwill and indefinite-lived trademarks are not amortized and otherintangibles are being amortized on a straight-line basis consistent with theassociated estimated future cash flows.

 
|                                   |   | **Unaudited  September 30, 2003** |   | **December 31,  2002** |   |
|----------------------------------------|--------|----------------------------------------|--------|-----------------------------|--------|
|                                   |   | **(amounts  in thousands)**            |   |
| Non-amortizing intangibles:            |   |                                   |   |                        |   |
| Trademarks                             |   | $                                      | 70,746 |                        | $      | 70,746 |   |
| Amortizing intangibles (5 year lives): |   |                                   |   |                        |   |
| Trade Secrets                          |   | 5,385                                  |   | 5,385                       |   |
| Patents-manufacturing process          |   | 33,741                                 |   | 33,741                      |   |
|                                   |   | 39,126                                 |   | 39,126                      |   |
| Less accumulated amortization          |   | (17,607                                | )      | (11,738                     | )      |
| Total amortizing intangibles           |   | 21,519                                 |   | 27,388                      |   |
| Total intangibles                      |   | $                                      | 92,265 |                        | $      | 98,134 |   |

 

9

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**8.  Accrued Expenses**

 

Accrued expenses consistof the following:

 
|                                                                  |   | **Unaudited  September 30, 2003** |       | **December 31, 2002** |       |
|-----------------------------------------------------------------------|--------|----------------------------------------|------------|----------------------------|------------|
|                                                                  |   | **(amounts in thousands)**             |       |
|                                                                  |   |                                   | ** ** |                       | ** ** |
| Accrued  payroll and related                                          |   | $                                      | 11,741     |                       | $          | 14,832 |   |
| Accrued  reorganization (primarily related to the Eatontown facility) |   | 1,987                                  |       | 2,768                      |       |
| Accrued  taxes                                                        |   | 2,507                                  |       | 2,310                      |       |
| Accrued  interest                                                     |   | 5,209                                  |       | 4,342                      |       |
| Accrued  utilities                                                    |   | 1,182                                  |       | 1,115                      |       |
| Gift  certificates liability                                          |   | 1,705                                  |       | 1,789                      |       |
| Accrued  vendor payments                                              |   | 3,191                                  |       | 4,062                      |       |
| Other                                                                 |   | 133                                    |       | 654                        |       |
|                                                                  |   | $                                      | 27,655     |                       | $          | 31,872 |   |

 

**9.  Debt and Equity Instruments:**

 

The major components ofthe Company’s short-term and long-term debt are included in the accompanyingbalance sheets as follows:

 
|                             |   | **Unaudited  September 30, 2003** |    | **December 31,  2002** |   |
|----------------------------------|--------|----------------------------------------|---------|-----------------------------|--------|
|                             |   | **(amounts  in thousands)**            |    |
|                             |   |                                   |    |                        |   |
| Greenlight Obligation            |   | $                                      | —  |                        | $      | 10,000 |   |
| Bridge Loan                      |   | —                                 |    | 4,443                       |   |
| $140 Million  Facility (Note 14) |   | —                                 |    | 138,084                     |   |
| $160 Million  Facility (Note 15) |   | 160,000                                |    | —                      |   |
| BET Revolver                     |   | —                                 |    | 6,000                       |   |
| AmSouth Revolver                 |   | 4,500                                  |    | —                      |   |
| NJEDA                            |   | 1,680                                  |    | 1,680                       |   |
| All other debt                   |   | 875                                    |    | 1,676                       |   |
|                             |   | 167,055                                |    | 161,883                     |   |
| Less current portion             |   | (5,655                                 | )       | (150,872                    | )      |
| Long-term debt                   |   | $                                      | 161,400 |                        | $      | 11,011 |   |

 

The Series F PreferredStock, Greenlight Obligation, the $7.5 million Loan and Security agreement withBET Associates (“BET Revolver’), Bridge Loan, and $140 Million Facility wererefinanced as part of the Equity Recap (Note 3).

 

**RevolvingLine of Credit**

 

On May 30, 2002, theCompany entered into a Loan and Security Agreement with one of the Company’sprincipal stockholders, BET Associates, L.P. (“BET”), which provided for a$7,500,000 revolving loan facility.  Thefacility was secured by substantially all of the Company’s assets.  At the time the Company entered into thisfacility, the Company terminated its prior revolving loan facility.  Borrowings under the facility bore interestat the rate of 11% per annum until February 2003.  The facility originally expired onMarch 31, 2003.  InFebruary 2003, the Company extended the maturity of the revolving loanfacility to June 1, 2003.  FromFebruary 1, 2003 to June 1, 2003, the facility bore interest at therate of 13%.  On June 18, 2003, the Company enteredinto a 30-day standstill agreement with its senior lender with respect to theBET revolving line of credit.  The interest rate on the revolving line ofcredit increased from 13% to 15% starting June 1, 2003.  This facility was repaid with proceeds from the $160 MillionFacility (Note 15) on July 8, 2003.

 

On July 8, 2003, the Company entered into the AmSouth Revolver, athree-year, $15 million senior secured revolving credit facility.  The net borrowings under the AmSouthRevolver shall bear an interest rate equal to the base rate plus an applicablemargin with the base rate being the AmSouth Bank “prime rate” and theapplicable margin being based on the Company’s fixed charge coverage ratio witha minimum and maximum applicable margin of 0.5% and 2.5% respectively.  As of the third quarter endedSeptember 30, 2003, the interest rate on the net borrowings under theAmSouth Revolver was 5.0%.  The AmSouthRevolver contains certain covenants, which, among others, include certainfinancial covenants such as limitations on capital expenditures, operatinglease obligations, minimum EBITDA, operating cash flow coverage ratio andminimum net worth.  As of the fiscalquarter ended September 30, 2003, the Company is in compliance with allsuch financial covenants.

 

10

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## **Series ZPreferred Stock**

On September 24, 2003, the Company’s shareholders approved theconversion of the Halpern Denny Interests into 57,000 shares of Series ZPreferred Stock pursuant to the terms of the Equity Recap (Note 3).  Certain characteristics of the Series ZPreferred Stock include the following: a) the Series Z Preferred Stock has a par value per share of $0.001, b)holders of the Series Z Preferred Stock shall not be entitled to receive anydividends (except as provided in respect to a failed discharge of anyredemption obligation), c) the Series Z Preferred Stock has a liquidationamount of $1,000 per share, d) optional in whole or partial redemption based onthe Company’s election with proper notification, e) mandatory redemption inwhole on the earlier of June 30, 2009 or the effective time of a merger orchange of control, f) certain protective rights which prohibit certain eventsfrom occurring without the consent from the holders of the majority of the thenoutstanding Series Z Preferred Stock and g) holders of the Series Z PreferredStock shall not be entitled or permitted to vote on any matter required orpermitted to be voted upon by the stockholders of the Company.

 

## **New JerseyEconomic Development Authority Bonds**

On July 8, 2003, theCompany placed in escrow an advanced funding of the New Jersey Economic Development Authority Bonds (“NJEDA”) datedDecember 1, 1998 to enact a debt defeasance as allowed for in theagreement.  This advanced funding isshown as restricted cash and the NJEDA is included in both current portion andlong-term portion of debt in the accompanying balance sheet in accordance withthe payment terms.  The Companyanticipates this classification will continue until the NJEDA is fully settledfrom the escrow amount proceeds, which has the maturity date ofDecember 1, 2008.

 

**10.  Contingencies**

 

The Company is subject to claims and legal actions in the ordinarycourse of business, including claims by franchisees.  The Company does not believe that an adverse outcome in anycurrently pending or threatened matter, other than described below, would havea material adverse effect on its business, results of operations or financialcondition.

 

On February 23, 2000, New World Coffee of Forest Hills, Inc., afranchisee, filed a demand for arbitration with the American ArbitrationAssociation (*American Arbitration Association, New York, New York, Case No.13-114-237-00*) against the Company alleging fraudulent inducementand violations of New York General Business Law Article 33.  The franchisee seeks damages in the amountof $750,000.  New World disputes thefranchisee claims and has asserted a counterclaim in the arbitration seekingamounts owed under the franchisee’s franchise agreement and monies owed forgoods purchased by the franchisee in the amount of $200,000.  An arbitrator has been selected and documentexchange is complete.  Hearings werescheduled for June 2002 but have been postponed by order of thearbitrator.  No new hearing dates haveyet been set.

 

On April 3, 2002, the Company was notified by the Securities andExchange Commission that the Commission is conducting an investigation into theresignation of the former Chairman, R. Ramin Kamfar, and the termination forcause of the former Chief Financial Officer, Jerold Novack, and the delay infiling the Form 10-K for 2001.  TheCompany is cooperating fully with the investigation.  The Company is also cooperating fully with a Department ofJustice inquiry relating to these issues. Further, several of the former and present officers and directors haverequested that the Company advance reasonable legal expenses on theirrespective behalves to the extent any of them is or has been requested toprovide information to the Commission in connection with its investigation.  The Company is fulfilling its obligations asrequired by applicable law and the Company’s By-Laws.

 

In July 2002, the New Jersey Division of Taxation entered judgmentin the amount of $5,744,902, plus costs, against Manhattan Bagel ConstructionCompany, a wholly owned subsidiary of Manhattan Bagel Company.  This judgment represents amounts forcorporate income taxes for the period from 1996 to 2000, and sales and usetaxes for the period from 1995 to 1997. At that same time, the Division of Taxation provided Manhattan BagelConstruction Company with a Notice and Demand for Payment of Tax in theadditional amount of $130,200, for corporate income taxes and sales and usetaxes for the period from October 2001 through June 2002.  Manhattan Bagel Construction Company ceasedoperations in or about early 1997 and has existed since that time only as anon-operating entity with no assets. Therefore, the Company is currently working with the New Jersey Divisionof Taxation to have all tax assessments for the period after Manhattan BagelConstruction Company ceased operations removed, and that portion of thejudgment deemed satisfied.  With regardto taxes imposed for the period prior to early 1997, the Company believes thoseamounts are barred from being asserted against Manhattan Bagel Company, to theextent they otherwise could have been, because they were not asserted inManhattan Bagel Company’s November 1997 bankruptcy proceeding.

 

On July 31, 2002, Tristan Goldstein, a former store manager, andValerie Bankhordar, a current store manager, filed a purported class actioncomplaint against Einstein and Noah Corp. (“ENC”) in the Superior Court for theState of California, County of San Francisco. The plaintiffs allege that ENC failed to pay overtime wages to managersand assistant managers of its California stores, whom it is alleged wereimproperly designated as exempt employees in violation of California andBusiness Profession Code Section 17200. As a result of subsequent communications regarding the circumstancesunder which the Company purchased certain assets of ENBC out of bankruptcy, theplaintiffs filed a first amended complaint disclaiming back wages for theperiod prior to June 19, 2001. However, the first amended complaint added as defendants certain formerdirectors and officers of ENC.  Thefirst amended complaint also added a second cause of action seeking toinvalidate releases obtained from ENC’s assistant managers pursuant to thesettlement of a Department of Labor investigation.  ENC filed a demurrer to the first amended complaint, which theplaintiffs opposed.  Subsequent 

 

11

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to the filing of that demurrer, ENC procured a dismissal withoutprejudice of the claims brought against Paul J. B. Murphy III, the Company’scurrent Chief Executive Officer, the only individual defendant ENC employedsubsequent to its acquisition by the Company. The plaintiffs subsequently stipulated to the severance of the claimsagainst ENC and those against the remaining individual defendants.  Plaintiffs filed a motion in the UnitedStates Bankruptcy Court, seeking leave to assert their claims against any ofthe individuals, including Mr. Murphy, despite the injunction provisions of thePlan of Reorganization previously confirmed by that Court.  The Bankruptcy Court denied the Plaintiff’srequest and barred the claims against Mr. Murphy and the otherindividuals.  Plaintiffs subsequentlyfiled a second amended complaint against ENC only, reasserting the claimsagainst it contained in the first amended complaint.  ENC filed a demurrer to that second amended complaint.  A hearing on the demurrer took place onOctober 1, 2003 at which time the Court took the demurrer undersubmission.  As of November 7,2003, the Court had not yet ruled on ENC’s demurrer.

 

On October 28, 2002, Sansim Patel, Inc., a subfranchisee ofManhattan Bagel Company, filed suit against Manhattan Bagel Company, the masterfranchisee, and others in Orange County (Orlando, Florida).  The plaintiff alleges claims of civilconspiracy and unjust enrichment against Manhattan Bagel Company and seeksrescission of its franchise agreement with Manhattan Bagel Company.  The plaintiff also seeks damages in anunspecified amount.  InDecember 2002, the Company filed a motion to dismiss all of the claimsasserted against it by the plaintiff, based in part on a general release theplaintiff had previously executed in favor of Manhattan Bagel Company.  That motion remains pending with the Court.

 

On March 18, 2003, Industrial Way, LLC, owner of premises leasedby Manhattan Bagel Company, Inc. in Eatontown, NJ, filed a lawsuit against theCompany and Manhattan Bagel Company, Inc. in the Superior Court of New Jersey,Law Division, Monmouth County.  In itsamended complaint dated May 5, 2003, the plaintiff alleges causes ofaction for wrongful conversion of personal property (consisting of fixtures andequipment), damage to leasehold property, and breach of the lease.  The landlord seeks to recover compensatorydamages in an unspecified amount, which damages purportedly include amountsrelating to outstanding rents, acceleration of rent through the balance of theterm, interest on outstanding payments due, costs to repair physical damage tothe premises, expenses incurred in reletting the property, court costs andattorneys’ fees.  Plaintiff has alsoraised an alternative theory of damages based on diminution in value of thebuilding of which the premises are a part. On June 19, 2003, the Company filed its answer to the amendedcomplaint and counterclaim.  OnAugust 15th, the court disqualified the plaintiff’s attorney (the law firmof Gibbons, Del Deo, Dolan, Griffinger & Vecchione) from this matter,ruling that a conflict of interest existed because of Gibbons’ priorrepresentation of the Company.  TheCompany believes that the equipment claimed by landlord to be wrongfullyconverted was, in fact, owned by the Company, and that the damages alleged bylandlord are unreasonable and contrary to the terms of the lease and applicablelaw.

 

On March 31,2003, Jerold E. Novack, the former Chief Financial Officer, Secretary, andshareholder of the Company, filed a complaint in the United States DistrictCourt for the District of New Jersey against the Company, Anthony D. Wedo, itsformer Chairman and Chief Executive Officer, and William J. Nimmo, a formermember of the board of directors.  Thecomplaint purports to state claims for breach of plaintiff’s employmentcontract with the Company, breach of the Company’s fiduciary duties toplaintiff, defamation, and violation of the New Jersey Conscientious EmployeeProtection Act, and in addition seeks a declaration that the termination ofplaintiff “for cause” was invalid.  As abasis for his purported claims, the plaintiff alleges that the Company wrongfullycontended certain bonuses he received were unauthorized and that he waswrongfully terminated for cause in order to deny him certain other benefitsallegedly owed under his employment agreement. Furthermore, the plaintiff asserts that he was defamed by certain ofdefendants’ public statements regarding his dismissal and also that histermination was in retaliation for certain actions he believes were protectedby the New Jersey Conscientious Employee Protection Act.  The Company intends to vigorously oppose theplaintiff’s purported claims.  OnJune 23, 2003, the Company filed its answer and counterclaims andconcurrently filed a motion to dismiss certain of the claims against it.  The motion to dismiss remains pending withthe court.

 

On June 4, 2003, R. Ramin Kamfar, the Company’s former Chairman ofthe Board and Chief Executive Officer, filed an action in the United StatesDistrict Court for the Southern District of New York against the Company andAnthony D. Wedo, the Company’s former Chairman and Chief Executive Officer,alleging causes of action for breach of contract, defamation, declaratoryrelief and punitive damages.  In thisaction, Mr. Kamfar alleges that the Company breached confidentiality and non-disparagementprovisions in his separation agreement with us by disclosing certain financialand other terms contained therein.  OnSeptember 9, 2003, the Company and Mr. Wedo answered Mr. Kamfar’scomplaint and asserted affirmative defenses, and the Company filed variouscounterclaims against Mr. Kamfar, including claims for breach of fiduciaryduty, fraud, and breach of contract. Mr. Kamfar answered those counterclaims on October 27, 2003.  The Company believes that the claims of Mr.Kamfar are without merit.

 

On August 7, 2003, the Company received a subpoena for documentsfrom the Office of the Attorney General of the State of New York.  The subpoena primarily requests informationbearing upon whether a net worth exemption from franchise registration,which was granted to New World in April 2000 pursuant to the New YorkFranchise Act, Article 33 of New York’s General Business Law, remains inforce.   The Company has completeddocument production and is cooperating fully with the Attorney General’srequests under the subpoena, and the Company’s discussions with the AttorneyGeneral are ongoing.

 

12

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Given the early stage of the matters discussed above, the Companycannot predict their outcome.  However,there can be no assurance that the Company will not be subject to regulatorysanctions, civil penalties and/or claims for monetary damages or other relief.

 

**11.  Derivative Instruments**

 

SFAS 133, Accounting for Derivative Instruments and Hedging Activities,requires that all derivatives be recognized in the balance sheet at their fairvalue.  Changes in the fair values ofderivatives that did not qualify for hedge accounting under SFAS 133 wererecognized through earnings.  TheCompany determined certain contingently-issuable warrants could not be classifiedwithin stockholders’ equity based on the application of the criteria in EITFIssue 00-19, Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock, and accordingly havehistorically classified those warrants as a liability in the balance sheet.

 

Contingently-issuable warrants classified as liabilities were recordedat fair value based on quoted market prices of the underlying common stock andconsidering the probability of issuance, the Company’s assessments of theprobability of refinancing its debt, and other pertinent factors.  Changes in the fair value of derivativeliabilities were recorded within the statement of operations.  If reclassification from liability topermanent equity was required under EITF 00-19, prior to reclassification theliability was adjusted to fair value, with the change recorded in cumulativechange in derivative fair value within the statement of operations.

 

As a result of the Equity Recap, the Companyno longer has contingently issuable warrants and all issued warrants areclassified as permanent equity. Consequently, the Company no longer has a warrant derivative liabilityat September 30, 2003.

 

**12.  Additional Paid-In Capital**

 

Additional paid-in capitalincreased from $86.7 million as of December 31, 2002, to $175.6 million asof September 30, 2003 due to the issuance of additional warrants under theterms of the Series F Preferred Stock and the $140 Million Facility agreements,that had previously been classified as derivative liabilities, and as a resultof the Equity Recap (Note 3).

 

**13.  Reorganization andIntegration**

 

The following tablesdisplay the activity for the three-month and nine-month periods endedSeptember 30, 2003 and October 1, 2002, respectively, and balances ofthe restructuring accrual accounts.

 
| **2002 Restructuring Accrual  (amounts in thousands)** |   |
|--------------------------------------------------------|--------|
| **2003 Activity**                                      |   | **Balance  at  Beginning  of Period** |   | **Initial  Accrual** |   | **Application  of Costs  Against  Accrual** |   | **Net Accrual  Adjustments** |   | **Balance at  End of Period** |   |
|                                                   |   |   |   |   |   |   |   |   |   |   |   |
| Three-month  Period Ended September 30, 2003      |   | $ | 1,461 |   | — |   | — |   | (68 | ) | $ | 1,393 |   |
| Nine-month  Period Ended September 30, 2003       |   | $ | 1,704 |   | — |   | (243 | ) | (68 | ) | $ | 1,393 |   |

 
| **2002 Restructuring Accrual  (amounts in thousands)**        |   |
|---------------------------------------------------------------|--------|
| **2002 Activity**                                             |   | **Balance  at  Beginning  of Period** |   | **Initial  Accrual** |   | **Application  of Costs  Against  Accrual** |   | **Net Accrual  Adjustments** |   | **Balance at  End of Period** |   |
|                                                          |   |   |   |   |   |   |   |   |   |   |   |
| Three-month  and Nine-month Period Ended October 1, 2002 |   | $ | — |   | 3,320 |   | (2,728 | ) | — |   | $ | 592 |   |
|                                                               |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

13

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| **2001 Restructuring Accrual  (amounts in thousands)** |   |
|--------------------------------------------------------|--------|
| **2003 Activity**                                      |   | **Balance  at  Beginning  of Period** |   | **Initial  Accrual** |   | **Application  of Costs  Against  Accrual** |   | **Net Accrual  Adjustments** |   | **Balance at  End of Period** |   |
|                                                   |   |   |   |   |   |   |   |   |   |   |   |
| Three-month  Period Ended September 30, 2003      |   | $ | 912 |   | — |   | (233 | ) | (85 | ) | $ | 594 |   |
| Nine-month  Period Ended September 30, 2003       |   | $ | 1,064 |   | — |   | (385 | ) | (85 | ) | $ | 594 |   |

 
| **2001 Restructuring  Accrual  (amounts in thousands)** |   |
|---------------------------------------------------------|--------|
| **2002 Activity**                                       |   | **Balance  at  Beginning  of Period** |   | **Initial  Accrual** |   | **Application  of Costs  Against  Accrual** |   | **Net Accrual  Adjustments** |   | **Balance at  End of Period** |   |
|                                                    |   |   |   |   |   |   |   |   |   |   |   |
| Three-month  Period Ended October 1, 2002     |   | $ | 1,701 |   | — |   | (414 | ) | (19 | ) | $ | 1,268 |   |
| Nine-month  Period Ended October 1, 2002      |   | $ | 2,936 |   | — |   | (1,097 | ) | (571 | ) | $ | 1,268 |   |

 

**14.  $140 Million Facility Refinancing**

 

At September 30,2003, Company had no remaining balance outstanding of the $140 MillionFacility, which matured on June 15, 2003. The Companycalled the $140 Million Facility for redemption on June 10,2003.  On June 18, 2003, the Company announced that it had enteredinto a 30-day standstill agreement with the holders of approximately $113.0million, or 80.7% of the $140 Million Facility, while continuing toactively pursue the refinancing of its debt as well as the rationalization ofits capital structure.  Under this initial accord, holders of those notesagreed not to take any action to enforce any of their rights and remediesagainst the Company until July 15, 2003, as a result of the Company’sfailure to repay the notes.  The interest rate and terms under thestandstill agreement stayed the same as the original agreement.  Inconsideration of the agreements by the holders of the $140 Million Facility,the Company agreed to issue to the holders of the $140 Million Facilityadditional $0.01 warrants to purchase an aggregate of up to 11,309,994 sharesof its Common Stock.  The Company recognized a charge to interest expenserelated to the warrants, over the 30-day standstill period and has recognized$1.2 million of this charge in the three-month period endedSeptember 30, 2003, and $2.4 million for the nine-month period endedSeptember 30, 2003.  This charge was based on the fair value of theCompany’s stock at June 18, 2003 less $0.01.  The $140 MillionFacility and related accrued interest was repaid with the proceeds from the$160 Million Facility (Note 15).

 

**15.  $160 Million Facility**

 

On July 8, 2003, the Company issued $160.0 million of 13% seniorsecured notes due 2008 to replace its $140 Million Facility. The $160 MillionFacility was offered by the Company and guaranteed, jointly and severally, byall present and all future subsidiaries of the Company other than theNon-Restricted Subsidiaries (as defined in the Indenture governing the notes).The Company is a holding company that conducts substantially all of itsbusiness operations through its subsidiaries. The Company is dependent upondistributions or other inter-company transfers from its subsidiaries to make paymentson the notes and service its other obligations. There are no significantrestrictions on the Company’s ability to obtain funds from its subsidiaries bydividend or loan.  The RegistrationRights Agreement associated with the $160 Million Facility required the Companyto a) file an exchange offer with the SEC within 90 days of the closing date,b) effect the exchange offer within 150 days of the closing date and c)commence that exchange offer within 30 days of its effective date.  Each of these requirements has beenfulfilled by the Company.  The Companyused the net proceeds of the offering, among other things, to refinance the$140 Million Facility.

 

The $160 Million Facility contains certain covenants, which, amongothers, include certain financial covenants such as limitations on capitalexpenditures and minimum EBITDA.  As ofthe fiscal quarter ended September 30, 2003, the Company is in compliancewith all such financial covenants.

 

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**16.  SubsequentEvents**

 

In October 2003, theCompany announced the resignation of its former Chairman and Chief ExecutiveOfficer, Anthony Wedo, as well as other officers and named a new executivemanagement team. The Company has reached amicable separation agreements withall former officers.  The board ofdirectors appointed Paul J.B. Murphy, III, 48, as Chief Executive Officer,Director and acting Chairman; Susan Daggett, 43, as Chief Operating Officer;Richard P. Dutkiewicz, 48, as Chief Financial Officer; and Carol Werner, 48, asGeneral Counsel.

 

On October 20, 2003,the Company’s post-split shares of common stock began trading on the PinkSheets under a new symbol “NWRG.PK”

 

On October 27, 2003, the Company was served with a summons andcomplaint filed in the US District Court for the Southern District of Floridaunder the Fair Labor Standards Act of 1938, as amended, filed by a formeremployee of the Company on behalf of himself and others similarlysituated.  The complaint alleges thatthe company should have paid overtime wages to the former employee and that hewas terminated in retaliation for requesting overtime pay.  The Company is investigating the merit ofthe claims and will retain counsel to defend the Company in this matter.  Given the early stage of this matter, theCompany cannot predict its outcome.

 

On October 28, 2003, the Company extended its offer toexchange $160 million aggregate principal amount of its 13% senior securednotes due 2008.  The exchange offer hadbeen due to expire at 5:00 p.m., Eastern Time on Monday, October 27,2003.  The revised expiration time was5:00 p.m., Eastern Time on Tuesday, November 4, 2003.

 

On November 4, 2003, the Company completed the exchange offerfor all of the Company’s outstanding 13% senior secured notes due 2008.  The entire $160 million principal amount of13% senior secured notes due 2008 were tendered prior to the expiration of theexchange offer and exchanged for an equal amount of the Company’s 13% seniorsecured notes due 2008 that have been registered under the Securities Act of1933.

 

On November 7, 2003, the Company was contacted by the Board ofEqualization for the State of California, which claims that approximately$221,000 is due on behalf of Manhattan Bagel Company for past sales and usetaxes, interest, and penalties.  TheCompany is currently investigating the validity of this claim.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements in this Form 10-Q under Management’s Discussionand Analysis of Financial Condition and Results of Operations constituteforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995 with respect to the Company’s financial conditionand business.  The words estimate, plan,intend, believe, expect and similar expressions are intended to identifyforward-looking statements.  Suchforward-looking statements involve and are subject to known and unknown risks,uncertainties, and other factors, which could cause the Company’s actualresults, performance and achievements to be materially different from anyfuture results, performance (financial or operating), or achievements expressedor implied by such forward-looking statements. Such factors include, among others, the following:  success of the integration of New World andacquired businesses; success of cost-saving strategies; competition; success ofoperating, franchising and licensing initiatives; development schedules;advertising and promotional efforts; adverse publicity; acceptance of newproduct offerings; availability of new locations, and terms of sites for storedevelopment; changes in business strategy or development plans; availabilityand terms of capital; food, labor, and employee benefit costs; changes ingovernment regulations; regional weather conditions; and other factorsreferenced in this Form 10-Q or in the Company’s Form 10-K/A.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS

 

**Overview**

 

The Company is a leader in the quick casual segment of therestaurant industry and the largest operator of bagel bakeries in the UnitedStates.  With 740 locations in 33states, the Company operates and licenses locations primarily under theEinstein Bros. Bagels and Noah’s New York Bagels brand names and franchiselocations primarily under the Manhattan Bagel and Chesapeake Bagel Bakery brandnames.  The Company specializes inhigh-quality foods for breakfast and lunch, including fresh baked goods,made-to-order sandwiches on a variety of breads and bagels, soups, salads,desserts, premium coffees and other cafe beverages, and offers a cafeexperience with a neighborhood emphasis. As of September 30, 2003, the Company’s retail system consisted of464 company-operated locations and 243 franchised and 33 licensedlocations.  The Company also operatesdough production and coffee roasting facilities.

 

In August 2000, the Company began raising funds with the intent ofacquiring Einstein Noah Bagel Corp. (“ENBC”), which had declared Chapter 11bankruptcy on April 27, 2000. Part of the acquisition strategy was toacquire ENBC bonds in the open market. In order to finance the bond purchases,the Company was required to raise capital through a series of debt and equityofferings. On June 19, 2001, the Company purchased substantially all theassets of ENBC for $160.0 million, along with the assumption of certainliabilities subject to adjustment to the extent they exceeded $30.0 million.

 

For the period August 2000 through June 19, 2001, the Companyengaged in several financing transactions with various entities to acquire thebonds of ENBC and consummate the purchase in the bankruptcy auction. The faceamount of these financings was $250.0 million, which consisted of $185.0 millionof debt and $65.0 million of preferred stock. The maturity date on the debtranged from one to two years.  Preferredstock agreements required additional warrants and dividends in the event thatthey were not redeemed within a certain period. Please refer to theconsolidated financial statements and notes thereto included in the Company’sannual report on Form 10-K/A for the fiscal year ended December 31, 2002for a complete summary of these transactions.

 

Between June 2001 and May 2003, (1) the Company’s commonstock was delisted from the Nasdaq National Market as a result of violations oftwo rules relating to stockholder approval for equity issuances, (2)unauthorized bonus payments in the aggregate amount of $3.5 million were madeto certain former executive officers and employees, (3) the Company engagedGrant Thornton LLP to re-audit the Company’s financial statements for fiscal2001 and fiscal 2000 as a result of the accounting treatment applied primarilyto debt and Preferred Stock related effective interest and derivativeliabilities, and (4) the Company incurred non-recurring expenditures inconnection with the investigation of the unauthorized bonus payments, there-audit of its financial statements and proposed refinancing of its $140 Million of Senior IncreasingRate Notes (“$140 Million Facility”). In addition, the Company defaulted in the repayment of the $35 million assets-backed loan tothe Company’s non-restricted subsidiary, New World EnbcDeb Corp. (“BridgeLoan”), which matured on June 15, 2002.

 

In October 2002, the Company engaged CIBC World Markets Corp.(“CIBC”) as its exclusive financial advisor in connection with its review ofstrategic alternatives to rationalize its capital structure. FromOctober 2002 to June 2003, the Company reviewed a variety oftransactions and alternatives for its business. On June 26, 2003, theCompany’s board of directors approved an equity restructuring (more fullydescribed below) as being fair and in the best interest of the Company.

 

On July 8, 2003, the Company issued $160.0 million of 13% seniorsecured notes due 2008 (“$160 Million Facility”) to replace its $140 MillionFacility. The $160 Million Facility was offered by the Company and guaranteed,jointly and severally, by all present and all future subsidiaries of theCompany other than the Non-Restricted Subsidiaries (as defined in the Indenturegoverning the notes).  The Company usedthe net proceeds of the offering, among other things, to refinance the $140Million Facility.

 

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On July 8, 2003, the Company entered into a three-year, $15million senior secured revolving credit facility with AmSouth Bank (“AmSouthRevolver”).

 

Halpern Denny Fund III, L.P. (“Halpern Denny”), Greenlight Capital,L.P. (“Greenlight Capital”), Greenlight Capital Qualified, L.P. (“GreenlightQualified”), Greenlight Capital Offshore, Ltd. (“Greenlight Offshore”),Brookwood New World Investors, L.L.C. (“Brookwood”) and NWCI Holdings, LLC(“NWCI”, and with Greenlight Capital, Greenlight Qualified, Greenlight Offshoreand Brookwood, “Greenlight”) and the Company entered into an equityrestructuring agreement pursuant to which the parties agreed to arecapitalization of the Company’s equity structure  The board of directors approved the equity restructuring onJune 26, 2003 and the Company’s stockholders approved the equityrestructuring on September 24, 2003. As contemplated by the equity restructuring agreement, the Company effectedthe following equity restructuring (the “Equity Recap”):

 

a) each stockholder received 0.6610444 new shares of common stock forevery share of common stock held by such stockholder pursuant to a1.6610444-for-one forward stock split in order to effect the transactionscontemplated by the Equity Restructuring Agreement;

 

b) the per share exercise price and the number of shares of commonstock issuable upon the exercise of each outstanding option or warrant (otherthan the warrants that were issued in connection with the $140 Million Facilitypursuant to the Warrant Agreement dated June 19, 2001, as amended betweenThe Bank of New York, as warrant agent and us (the “Warrant Agreement”)) wereadjusted to reflect the forward stock split;

 

c) the Company issued Halpern Denny 57,000 shares of Series Z PreferredStock, par value $0.001 per share in exchange for 56,237.994 shares ofSeries F Preferred Stock, par value $0.001 per share (including accruedand unpaid dividends, which were payable in additional shares of Series FPreferred Stock), 23,264,107 shares of common stock and warrants to purchase13,711,054 shares of common stock (collectively, the “Halpern DennyInterests”); and

 

d) immediately following the forward stock split, the Company issuedGreenlight 938,084,289 shares of common stock in exchange for 61,706.237 sharesof Series F Preferred Stock.  Theseshares of Series F Preferred Stock include i) shares originally issued asSeries F Preferred Stock, ii) shares converted into Series F Preferred Stock fromthe Greenlight Obligation and iii) shares converted into Series F PreferredStock from the Bridge Loan (which was acquired by Greenlight from Jefferies& Company, Inc.).

 

In connection with the Equity Recap, the Company, Halpern Denny andGreenlight terminated the stockholders agreement dated January 18, 2001,as amended.

 

Immediately following the completion of the Equity Recap, the Companyhad 984,182,839 shares of common stock, no shares of Series F Preferred Stock,57,000 shares of Series Z Preferred Stock, and 105,925,675 shares of common stockreserved for issuance pursuant to outstanding options and warrants.

 

The Company then completed a 1-for-100 reverse stock split.  Upon completion of the 1-for-100 reversestock split, the Company had 9,841,828 outstanding shares of common stock,57,000 shares of Series Z Preferred Stock and 1,059,257 shares of common stockreserved for issuance pursuant to outstanding options and warrants. Taking intoaccount both the forward and reverse stock splits, shareholders now have oneshare of common stock for every 60.20309 shares previously held.  For comparative purposes, unless otherwisestated, share and per share amounts for all historical periods presented in thefinancial statements have been restated to give effect to both of these splits.

 

Following the closing of the Equity Recap, Greenlight beneficiallyowned approximately 92% of the Company’s common stock on a fully diluted basisand the warrants issued pursuant to the Warrant Agreement representedapproximately 4.3% of the Company’s common stock on a fully diluted basis.

 

**Critical Accounting Policies and Estimates**

 

The Consolidated Financial Statements and Notes to the ConsolidatedFinancial Statements contain information that is pertinent to management’sdiscussion and analysis.  Thepreparation of financial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities.

 

The Company believes the following critical accounting policies involveadditional management judgment due to the sensitivity of the methods,assumptions, and estimates necessary in determining the related asset andliability amounts.

 

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RevenueRecognition

 

Manufacturingrevenues are recognized upon shipment to customers.  Retail sales are recognized when payment is tendered at the pointof sale.  Pursuant to the franchiseagreements, franchisees are generally required to pay an initial franchise feeand a monthly royalty payment equal to a percentage of the franchisees’ grosssales.  Initial franchise fees arerecognized as revenue when the Company performs substantially all of its initialservices as required by the franchise agreement.  Royalty fees from franchisees are accrued each month pursuant tothe franchise agreements.  Royaltyincome and initial franchise fees are included in franchise revenues.

 

# **AccountsReceivable**

# ** **

The majority of the Company’s accounts receivable are due from theCompany’s franchisees.  Accountsreceivable are due within 15 to 30 days and are stated at amounts due fromfranchisees and customers, net of an allowance for doubtful accounts.  Accounts outstanding longer than thecontractual payment terms are considered past due.  The Company determines its allowance by considering a number offactors, including the length of time trade accounts receivable are past due, paymenttrends, previous loss history, the customer’s current ability to pay itsobligation to us, and the condition of the general economy and the industry asa whole.  The Company writes offaccounts receivable when they become uncollectible, and payments subsequentlyreceived on such receivables are credited to the allowance for doubtfulaccounts.

 

# **Deferred TaxAssets**

# ** **

The Company has recorded a full valuation allowance to eliminate itsdeferred tax assets related to net operating loss carryforwards and otherdeductible temporary differences.  TheCompany limited the amount of tax benefits recognizable based on an evaluationof the benefits that are expected to be ultimately realized.  An adjustment to income could be required ifthe Company determined it could realize these deferred tax assets in excess ofthe net recorded amount.

 

# **Goodwill,Trademarks and Other Intangibles**

# ** **

The Company adopted SFAS 142, Goodwill and Other Intangible Assets,effective January 2, 2002.  SFAS142 provides that goodwill and other indefinite-lived intangibles should not beamortized, but be subject to an annual assessment for impairment, or morefrequently if circumstances indicate potential impairment, through a comparisonof fair value to its carrying amount. The two-step approach to assess its goodwill impairment requires thatthe Company first compare the estimated fair value of each reporting unit thathouses goodwill to the carrying amount of the unit’s assets and liabilities,including its goodwill and intangible assets. If the fair value of the reporting unit is below its carrying amount,then the second step of the impairment test is performed, in which the currentfair value of the unit’s assets and liabilities will determine the currentimplied fair value of the unit’s goodwill.

 

In conducting its annual impairment analyses, the Company utilizesindependent valuation experts to perform the analyses and tests of theCompany’s indefinite lived assets with respect to its reporting units.  The test methods employed involvedassumptions concerning useful lives of intangible assets, interest and discountrates growth projections and other assumptions of future businessconditions.  The assumptions employedwere based on management’s judgment using internal and external data.  The Company also utilized independent valuationexperts to assist it in determining useful lives for its intangibles other thangoodwill including the assessment that its Einstein trademarks have indefiniteuseful lives.  The Company’sdetermination that these trademarks have indefinite useful lives is based onthe fact that there are no legal, regulatory, competitive or other factors,which limit their useful lives.

 

The Company’s managementhas determined that no impairment indicators were present during thethree-month and nine-month periods ended September 30, 2003, andaccordingly no interim tests for impairment of goodwill, trademarks orintangibles were performed.

 

**Resultsof Operations**

 

**Three-monthperiod Ended September 30, 2003 Compared to Three-month period EndedOctober 1, 2002**

 

Revenues

 

Total revenuesdecreased 5.5% to $93.2 million for the three-month period endedSeptember 30, 2003 from $98.7 million for the comparable 2002 period. Theoverall $5.5 million decrease in revenues consists of decreases ofapproximately $4.4 million in retail sales (e.g., company-operated store sales)and $1.1 million in manufacturing sales (e.g., food and beverage sales tothird-party customers, franchisees and licensees).  The retail sales decline was primarily due to a 5% comparablestore sales decrease at Einstein Bros. and Noah’s company-owned units for thethree-month period ended September 30, 2003.  Thedecrease in manufacturing revenues results primarily from the decline inmanufacturing volume and the decline in average price per unit.

 

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Costs and Expenses

 

Cost of salesdecreased 1.1% to $79.8 million for the three-month period endedSeptember 30, 2003 from $80.7 million for the comparable 2002 period. Theoverall $0.9 million decrease was primarily comprised of a $0.2 milliondecrease in retail related and a $0.7 million decrease in manufacturing-relatedcosts. The overall decrease was primarily due to lower costs associated with adecline in revenues, partially offset by an erosion of margins.  Cost of sales, expressed as a percentage ofthe related retail and manufacturing sales, increased to 86.9% for thethree-month period ended September 30, 2003 from 83.0% for the comparable2002 period.  The percentage increasewas primarily attributable to the retail related costs associated with atransition in menu item mix in which customer’s purchases have migrated toitems with lower margins and higher labor demands for the Einstein Bros. andNoah’s company-owned units in 2003, a decline in manufacturing margins due to aprice decline, as well as a decline in operating leverage due to the salesdecrease.

 

General andadministrative expenses decreased to $8.6 million or 9.3% of total revenues forthe three-month period ended September 30, 2003 from $12.3 million or12.4% of total revenues for the comparable 2002 period. This decrease is theresult of a reduction in legal and consulting expense associated with prioryear refinancing and re-audit efforts and a current year reduction in theaccrual for bonus compensation.

 

Depreciation and amortization expensesdecreased by $1.1 million to $7.1 million for the three-month period endedSeptember 30, 2003 from $8.2 million for the comparable 2002 period.  The 2002 comparable period includeddepreciation expense adjustments related to recording the final asset valuationfor the Einstein acquisition being allocated to the individual assets withinthe Company’s asset management system.

 

Operating loss decreased $3.6 million to a $2.2 millionloss for the three-month period ended September 30, 2003 from a $5.8million loss for the comparable 2002 period. The decrease in operating loss wasdue to the matters described above.

 

Interest expense, net for the three-monthperiod ended September 30, 2003 increased to $10.2 million from $9.9million for the comparable 2002 period. The increase was primarily the result of both cash and non-cash interestexpense related to the extension and refinancing of the $140 Million Facility(Note 14).

 

The cumulative change in the fair value ofderivatives decreased $3.0 million to $1.1 million gain for the quarter endedSeptember 30, 2003 compared to a $4.1 million gain for the quarter endedOctober 1, 2002.  The change is dueto the change in the fair value of warrants classified as a derivativeliability based on the underlying fair value of Common Stock to which they areindexed and, for contingently-issuable warrants classified as a derivativeliability, the estimated probability of issuance and other pertinent factors.  As a result of the Equity Recap, the Companyno longer has contingently issuable warrants and all issued warrants areclassified as permanent equity. Consequently, the Company no longer has a warrant derivative liabilityat September 30, 2003.

 

Loss on exchange of Series F Preferred Stockdue to Equity Recap (Note 3) for the three-month period endedSeptember 30, 2003 was $23.0 million compared to no comparable item duringthe same period in the prior year.

 

Provision for income taxes was zero for thethree-month period ended September 30, 2003 compared to $0.2 million forthe comparable 2002 period.

 

Net loss for the three-month period endedSeptember 30, 2003 was $34.2 million compared to a net loss of $9.5million for the comparable 2002 period. The increase in net loss was the result of the reasons cited in thepreceding paragraphs.

 

**Nine-month Period Ended September 30, 2003Compared to the Nine-month Period Ended October 1, 2002**

 

Revenues

 

Total revenues decreased to $286.2 millionfor the nine-month period ended September 30, 2003 from $297.9 million forthe comparable 2002 period.  The overall$11.7 million decrease consists of decreases of approximately $9.6 million inretail sales (e.g., Company operated stores sales), $1.9 million inmanufacturing sales (e.g., food and beverage sales to third party customer,franchisees and licensees) and $0.2 million in franchise related revenues.  The decrease in retail sales was primarilyattributable to a 3.2% decrease in comparable store sales in Einstein Bros. andNoah’s company-owned units.  Thedecrease in manufacturing revenue results primarily from the decline inmanufacturing volume and the decline in average price per unit.  The decrease in royalty revenues isattributable to a smaller franchisee store base in 2003 compared to the sameperiod of 2002.

 

Costs and Expenses

 

Total cost of sales increased $0.7 million to $242.5 for thenine-month period ended September 30, 2003 from $241.8 million for thecomparable 2002 period.  The overallincrease was primarily due to an erosion of margins, partially offset by lowercosts associated 

 

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with a decline in revenues. Cost of sales expressed as a percentage of the related retail andmanufacturing sales increased to 85.9% for the fiscal nine-month period endedSeptember 30, 2003 from 82.3% for the comparable 2002 period.  The increase primarily resulted from adecline in operating leverage due to a sales decrease in addition to anincrease in costs associated with a transition in menu item mix in whichcustomer’s purchases have migrated to items with lower margins and an increase in controllable expenses from theretail business and declines in margins due to a price decrease for themanufacturing business.

 

General and administrative expenses decreased to $27.3 million or9.5% of total revenues for the nine-month period ended September 30, 2003from $34.9 million or 11.7% of total revenues, for the comparable 2002period.  General and administrativeexpenses in the 2002 period included approximately $2.5 million (inclusive ofrelated payroll tax expenses) in connection with the unauthorized bonuspayments to former officers and employees of the Company and legal expenses ofapproximately $1.7 million incurred in connection with the Company’s voluntaryinternal investigation of the unauthorized bonus payments.  Such unauthorized bonuses were offsetagainst payments to be made in connection with the separation of certainofficers and employees of the Company. In addition, general and administrative expenses in the 2002 period alsoinclude legal and consulting expenses associated with prior year refinancingand re-audit efforts.

 

Depreciation and amortization expensesdecreased by $1.8 million to $21.4 million for the 2003 period from $23.2million for the comparable 2002 period. The 2002 comparableperiod included depreciation expense adjustments related to recording the finalasset valuation for the Einstein acquisition being allocated to the individualassets within the Company’s asset management system.

 

Operating loss was $4.8 million for the nine-month periodended September 30, 2003 consistent with $4.8 million for the nine-monthperiod ended October 2, 2002.  Theoperating loss was due to the matters described above.

 

Interest expense, net for the nine-month period endedSeptember 30, 2003 decreased to $28.5 million from $34.5 million for thecomparable 2002 period.  The decreasewas primarily the result of assumptions regarding the expected maturity of the$140 Million Facility.  The Companyoriginally anticipated a refinancing would occur during 2002, which compressedthe time period over which the related effective interest was recognized.

 

The cumulative change in the fair value ofderivatives was income of $1.0 million for 2003 compared to income of $0.2million in 2002.  The change is due tothe change in the fair value of warrants classified as a derivative liabilitybased on the underlying fair value of Common Stock to which they are indexedand, for contingently-issuable warrants classified as a derivative liability,the estimated probability of issuance and other pertinent factors.  As a result of the Equity Recap, the Companyno longer has contingently issuable warrants and all issued warrants areclassified as permanent equity. Consequently, the Company no longer has a warrant derivative liabilityat September 30, 2003.

 

Loss on exchange of Series F Preferred Stockdue to Equity Recap (Note 3) for the nine-month period ended September 30,2003 was $23.0 million compared to no comparable item during the same period inthe prior year.

 

Provision for income taxes is consistent at $0.4 million for the2003 period compared to the 2002 period.

 

Net loss for the nine-month period ended September 30, 2003was $55.0 million compared to a net loss of $37.0 million for the comparable2002 period.  The increased loss in 2003resulted from the reasons cited in the preceding paragraphs.

 

**Liquidity and Capital Resources**

 

At September 30, 2003, the Company had a working capital deficitof $17.2 million compared to a working capital deficit at December 31,2002 of $164.8 million.  The workingcapital deficit at September 30, 2003 is due to the normal industrycharacteristics of having primarily cash based sales with immediate liquidityand the ability to leverage payables over normal payment terms.  The working capital deficit atDecember 31, 2002 is due primarily to the classification of the $140Million Facility as a current liability. The $140 Million Facility matured on June 15, 2003 and was repaidwith the proceeds of the $160 Million Facility as previously discussed.

 

The decrease in the working capital deficit of $147.6 million isprimarily due to the $160 Million Facility being classified as long-termliability, which was offset by cash used in operating activities and theincrease in certain current assets during the nine-month period endedSeptember 30, 2003.

 

The Company used net cash in operating activities of $6.4 millionfor the nine-month period ended September 30, 2003 compared with net cashused in operating activities of $9.0 million for the nine-month period endedOctober 1, 2002.  The decrease incash used by operating activities was primarily attributable to the prior yearcash contraction in accounts payable and accrued expenses partially offset by acurrent year decline in cash driven loss from operations.

 

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The Company used net cash in investing activities of $5.3 millionfor the nine-month period ended September 30, 2003 compared with net cashprovided by investing activities of $34.6 million for the nine-month periodended October 1, 2002.  The cashused in investing activities represented the purchase of property, plant andequipment.

 

The Company generated $7.1 million net cash by financingactivities for the nine-month period ended September 30, 2003 comparedwith net cash used in financing activities of $33.7 million for the nine-monthperiod ended October 1, 2002.  Thecash provided by financing activities was due to proceeds from the $160 MillionSenior Secured Notes offset by the repayment of the $140 Million SeniorIncreasing Rate Notes, other debt repayments and net line of credit activity.

 

As of September 30, 2003, the Company had approximately $6.2million in cash and cash equivalents. The Company believes it can fund its capital requirements for thebalance of fiscal 2003 through cash flow from operations and borrowings underits revolving loan facility.

 

**Seasonality and General Economic Trends**

 

The Company anticipates that its business will be affected bygeneral economic trends that affect retailers in general.  While the Company has not operated during aperiod of high inflation, management believes based on industry experience thatthe Company would generally be able to pass on increased costs resulting frominflation to its customers.  TheCompany’s business may be affected by other factors, including increases in thecommodity prices of green coffee and/or flour, acquisitions by the Company ofexisting stores, existing and additional competition, marketing programs,weather, and variations in the number of store openings.  Although the Company generally paysemployees above the minimum wage level, an increase in the minimum wage maycreate pressure to increase the pay scale for its employees, which wouldincrease its labor costs and those of the Company’s franchisees and licensees.

 

### ***Risk Factors***

### * *

#### *Risk Factors Relating to theCompany’s Financial Condition*

####  

*The Company has and expects to continue to havea substantial amount of debt.*

 

The Company has a high level of debt and ishighly leveraged.  In addition, theCompany may, subject to certain restrictions, incur substantial additionalindebtedness in the future.  TheCompany’s high level of debt could:

 

•                                          make itdifficult for the Company to satisfy its obligations under its indebtedness;

 

•                                          limit theCompany’s ability to obtain additional financing for working capital, capitalexpenditures, acquisitions and general corporate purposes;

 

•                                          increase theCompany’s vulnerability to downturns in its business or the economy generally;

 

•                                          limit theCompany’s ability to withstand competitive pressures from its less leveragedcompetitors; and

 

•                                          harm theCompany if it fails to comply with the covenants in the instruments andagreements governing its indebtedness, because a failure could result in anevent of default that, if not cured or waived, could result in all of theCompany’s indebtedness becoming immediately due and payable, which could renderthe Company insolvent.

 

#### *The Company may not be able togenerate sufficient cash flow to make payments under its indebtedness.*

####  

#### Economic, financial,competitive, legislative and other factors beyond the Company’s control mayaffect its ability to generate cash flow from operations to make payments onits indebtedness and to fund necessary working capital.  A significant reduction in operating cashflow would likely increase the need for alternative sources of liquidity.  If the Company is unable to generatesufficient cash flow to make payments on its debt, the Company will have topursue one or more alternatives, such as reducing or delaying capitalexpenditures, refinancing its debt, selling assets or raising equity.  The Company cannot assure you that any ofthese alternatives could be accomplished on satisfactory terms, if at all, orthat they would yield sufficient funds to service the Company’s debt.

 

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#### *Risk Factors Relating to theCompany’s Business*

####  

#### *The Company faces potentialregulatory sanctions and civil and criminal penalties and claims for monetarydamages and other relief.*

####  

The Securities and Exchange Commission hasinitiated an investigation relating to the reasons for the Company’s delay infiling its Form 10-K for fiscal 2001 and the resignation of the Company’sformer Chairman, R. Ramin Kamfar, and the termination for cause of its formerChief Financial Officer, Jerold E. Novack. The Company is cooperating fully with the Commission’sinvestigation.  The Company is alsocooperating fully with a Department of Justice inquiry relating to theabove-referenced issues.  Given theearly stage of these matters, the Company cannot predict the outcome, and itcannot assure you that the Company will not be subject to regulatory sanctions,civil penalties and/or claims for monetary damages and other relief that mayhave a material adverse effect on its business, prospects and financialcondition.

 

#### *The Company is vulnerable tofluctuations in the cost, availability and quality of its ingredients.*

####  

The cost, availability and quality of theingredients the Company uses to prepare its food are subject to a range offactors, many of which are beyond the Company’s control.  Fluctuations in economic and political conditions,weather and demand could adversely affect the cost of the Company’singredients.  The Company has no controlover fluctuations in the price of commodities, and no assurance can be giventhat the Company will be able to pass through any cost increases to itscustomers.  The Company is dependent onfrequent deliveries of fresh ingredients, thereby subjecting the Company to therisk of shortages or interruptions in supply. All of these factors could adversely affect the Company’s business andfinancial results.

 

#### *The Company heavily depends on itssuppliers and distributors.*

####  

The Company currently purchases its rawmaterials from various suppliers.  TheCompany purchases a majority of its frozen dough products from onesupplier.  Though to date the Companyhas not experienced significant difficulties with its suppliers, the Company’sreliance on its suppliers subjects the Company to a number of risks, includingpossible delays or interruption in supplies, diminished control over qualityand a potential lack of adequate raw material capacity.  Any disruption in the supply of ordegradation in the quality of the materials provided by the Company’s supplierscould have a material adverse effect on the Company’s business, operatingresults and financial condition.  Inaddition, such disruptions in supply or degradations in quality could have along-term detrimental impact on the Company’s efforts to develop a strong brandidentity and a loyal consumer base.

 

The Company depends on its distributors todistribute frozen dough and other materials to the Company’s locations.  The Company recently replaced a singlenational distributor with six regional custom distributors.  If any one or more of such distributorsfails to perform as anticipated, or if there is any disruption in any of theCompany’s distribution relationships for any reason, it could have a materialadverse effect on the Company’s business, financial condition and results ofoperations.

 

#### *The Company faces the risk ofincreasing labor costs that could adversely affect the Company’s continuedprofitability.*

####  

The Company is dependent upon an availablelabor pool of unskilled employees, many of whom are hourly employees whosewages may be impacted by an increase in the federal or state minimum wage.  Numerous proposals have been made on stateand federal levels to increase minimum wage levels.  Although few, if any, of the Company’s employees are paid at theminimum wage level, an increase in the minimum wage may create pressure toincrease the pay scale for the Company’s employees, which would increase itslabor costs and those of the Company’s franchisees and licensees.  A shortage in the labor pool or othergeneral inflationary pressures or changes could also increase labor costs.  An increase in labor costs could have amaterial adverse effect on the Company’s income from operations and decreasethe Company’s profitability and cash available to service its debt obligationsif the Company is unable to recover these increases by raising the prices theCompany charges its consumers.

 

#### *The Company is vulnerable to changesin consumer preferences and economic conditions that could harm its financialresults.*

####  

Food service businesses are often affected bychanges in consumer tastes, national, regional and local economic conditionsand demographic trends.  Factors such astraffic patterns, local demographics and the type, number and location ofcompeting restaurants may adversely affect the performance of individuallocations.  In addition, inflation andincreased food and energy costs may harm the restaurant industry in general andthe Company’s locations in particular. Adverse changes in any of these factors could reduce consumer traffic orimpose practical limits on pricing, which could harm the Company’s business, prospects,financial condition, operating results or cash flow.  The Company’s continued success will depend in part on itsability to anticipate, identify and respond to changing consumer preferencesand economic conditions.

 

#### *There is intense competition in therestaurant industry.*

####  

The Company’s industry is intenselycompetitive and there are many well established competitors with substantiallygreater financial and other resources. In addition to current competitors, one or more new major competitorswith substantially greater financial, 

 

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marketing and operating resources could enterthe market at any time and compete directly against the Company.  In addition, in virtually every majormetropolitan area in which the Company operates or expect to enter, local orregional competitors already exist.

 

#### *The Company faces the risk ofadverse publicity and litigation in connection with its operations.*

####  

The Company is from time to time the subjectof complaints or litigation from its consumers alleging illness, injury orother food quality, health or operational concerns.  Adverse publicity resulting from these allegations may materiallyadversely affect the Company, regardless of whether the allegations are validor whether the Company is liable.  Inaddition, employee claims against the Company based on, among other things,discrimination, harassment or wrongful termination may divert the Company’sfinancial and management resources that would otherwise be used to benefit thefuture performance of the Company’s operations.  The Company has been subject to claims from time to time, andalthough these claims have not historically had a material impact on theCompany’s operations, a significant increase in the number of these claims oran increase in the number of successful claims could materially adverselyaffect the Company’s business, prospects, financial condition, operatingresults or cash flows.

 

#### *The Company relies in part on itsfranchisees.*

####  

The Company relies in part on its franchiseesand the manner in which they operate their locations to develop and promote theCompany’s business.  Although theCompany has developed criteria to evaluate and screen prospective franchisees,there can be no assurance that franchisees will have the business acumen orfinancial resources necessary to operate successful franchises in theirfranchise areas.  The failure offranchisees to operate franchises successfully could have a material adverseeffect on the Company, its reputation, its brands and the Company’s ability toattract prospective franchisees.

 

#### *The Company faces risks associatedwith government regulation.*

####  

Each of the Company’s locations is subject tolicensing and regulation by the health, sanitation, safety, building and fireagencies of the respective states and municipalities in which they arelocated.  A failure to comply with oneor more regulations could result in the imposition of sanctions, including theclosing of facilities for an indeterminate period of time, or third-partylitigation, any of which could have a material adverse effect on the Companyand the results of its operations.

 

In addition, the Company’s franchiseoperations are subject to regulation by the Federal Trade Commission.  The Company’s franchisees and the Companymust also comply with state franchising laws and a wide range of other stateand local rules and regulations applicable to the Company’s business.  The failure to comply with federal, stateand local rules and regulations would have an adverse effect on the Company’sfranchisees and the Company.

 

Under various federal, state and local laws,an owner or operator of real estate may be liable for the costs of removal orremediation of certain hazardous or toxic substances on or in suchproperty.  Such liability may be imposedwithout regard to whether the owner or operator knew of, or was responsiblefor, the presence of such hazardous or toxic substances.  Although the Company is not aware of anyenvironmental conditions that require remediation by the Company under federal,state or local law at the Company’s properties, the Company has not conducted acomprehensive environmental review of its properties or operations and noassurance can be given that the Company has identified all of the potentialenvironmental liabilities at its properties or that such liabilities would nothave a material adverse effect on the Company’s financial condition.

 

*The Company may need additional financing inthe future.*

 

The Company may seek additional financing in the future to expand itsbusiness. If the Company is unable to obtain sufficient financing onsatisfactory terms and conditions, the Company may not be able to expand itsbusiness. The Company’s ability to obtain additional financing will depend upona number of factors, many of which are beyond its control. For example, theCompany may not be able to obtain additional financing because it already hassubstantial debt and because it may not have sufficient cash flow to service orrepay its existing or additional debt. In addition, any additional equityfinancing may not be available on satisfactory terms or at all.

 

#### *The Company may not be able toprotect its trademarks and other proprietary rights*.

####  

The Company believes that its trademarks andother proprietary rights are important to its success and the Company’scompetitive position.  Accordingly, theCompany devotes substantial resources to the establishment and protection ofits trademarks and proprietary rights. However, the actions taken by the Company may be inadequate to preventimitation of the Company’s products and concepts by others or to prevent othersfrom claiming violations of their trademarks and proprietary rights by theCompany.  In addition, others may assertrights in the Company’s trademarks and other proprietary rights.

 

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The Company has a Majority Stockholder.

** **

Greenlight Capital, L.L.C. owns approximately92 percent of the Company's common stock on a fully diluted basis.  As a result, Greenlight has sufficient votingpower, without the vote of any other stockholders, to determine matterssubmitted for approval by our stockholders, to elect all of our board ofdirectors, and to determine whether a change in control of our Companyoccurs.  Greenlight’s interests onmatters submitted to stockholders may be different from those of otherstockholders.  Greenlight is notinvolved in the day-to-day operations of the Company.  Greenlight has voted its shares to elect our current board ofdirectors, one of whom is an officer of Greenlight and the remainder are notaffiliated with Greenlight.

 

**Item3****.  Quantitative and Quantitative DisclosuresAbout Market Risk**

 

Through September 30, 2003, the Company’s results of operations,financial position and cash flows have not been materially affected by changesin the relative values of non-U.S. currencies to the U.S. dollar.  The Company does not use derivativefinancial instruments to limit its foreign currency risk exposure.

 

The Company’s accounts receivable are subject, in the normal courses ofbusiness, to collection risks.  TheCompany regularly assess these risks and have established policies and businesspractices to protect against the adverse effects of collection risks.

 

The Company’s debt at September 30, 2003 is principally comprisedof the $160 Million Facility due 2008 and the AmSouth Revolver .  A 100 basis point increase in marketinterest rates would have an immaterial effect on the Company’s borrowingcosts, as interest is paid at rates defined under the respectiveagreements.  However, an increase inprevailing market interest rates could negatively affect the market value ofits outstanding notes.

 

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

 

The Company’s management,including its Chief Executive Officer and its Chief Financial Officer,evaluated the effectiveness of the Company’s “disclosure controls andprocedures,” as that term is defined in Rule 13a-15(e) promulgated under theSecurities and Exchange Act of 1934, as amended (the “Exchange Act”), as ofSeptember 30, 2003.  Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the disclosure controls and procedures are effective to provide reasonableassurance that information required to be disclosed by the Company in thereports that the Company file or submit under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in theSEC’s rules and forms, and to ensure that such information is accumulated andcommunicated to the Company’s management, including the Chief Executive Officerand the Chief Financial Officer, as appropriate to allow timely decisionsregarding required disclosure.

 

There were no changes in the Company’s internal control over financialreporting during the quarter ended September 30, 2003 identified inconnection with the evaluation thereof by the Company’s management, includingthe Chief Executive Officer and the Chief Financial Officer, that hasmaterially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

**NEW WORLD RESTAURANT GROUP, INC.**

**SEPTEMBER 30, 2003**

 

**Item1****.  Legal Proceedings.**

 

On February 23, 2000, New World Coffee of Forest Hills, Inc., afranchisee, filed a demand for arbitration with the American ArbitrationAssociation (*American Arbitration Association, New York, New York, Case No.13-114-237-00*) against the Company alleging fraudulent inducementand violations of New York General Business Law Article 33.  The franchisee seeks damages in the amountof $750,000.  New World disputes thefranchisee claims and has asserted a counterclaim in the arbitration seekingamounts owed under the franchisee’s franchise agreement and monies owed forgoods purchased by the franchisee in the amount of $200,000.  An arbitrator has been selected and documentexchange is complete.  Hearings werescheduled for June 2002 but have been postponed by order of thearbitrator.  No new hearing dates haveyet been set.

 

On April 3, 2002, the Company was notified by the Securities andExchange Commission that the Commission is conducting an investigation into theresignation of the former Chairman, R. Ramin Kamfar, and the termination forcause of the former Chief Financial Officer, Jerold Novack, and the delay infiling the Form 10-K for 2001.  TheCompany is cooperating fully with the investigation.  The Company is also cooperating fully with a Department ofJustice inquiry relating to these issues. Further, several of the former and present officers and directors haverequested that the Company advance reasonable legal expenses on theirrespective behalves to the extent any of them is or has been requested toprovide information to the Commission in connection with itsinvestigation.  The Company isfulfilling its obligations as required by applicable law and the Company’sBy-Laws.

 

In July 2002, the New Jersey Division of Taxation entered judgmentin the amount of $5,744,902, plus costs, against Manhattan Bagel ConstructionCompany, a wholly owned subsidiary of Manhattan Bagel Company.  This judgment represents amounts forcorporate income taxes for the period from 1996 to 2000, and sales and usetaxes for the period from 1995 to 1997. At that same time, the Division of Taxation provided Manhattan BagelConstruction Company with a Notice and Demand for Payment of Tax in theadditional amount of $130,200, for corporate income taxes and sales and usetaxes for the period from October 2001 through June 2002.  Manhattan Bagel Construction Company ceasedoperations in or about early 1997 and has existed since that time only as anon-operating entity with no assets. Therefore, the Company is currently working with the New Jersey Divisionof Taxation to have all tax assessments for the period after Manhattan BagelConstruction Company ceased operations removed, and that portion of thejudgment deemed satisfied.  With regardto taxes imposed for the period prior to early 1997, the Company believes thoseamounts are barred from being asserted against Manhattan Bagel Company, to theextent they otherwise could have been, because they were not asserted inManhattan Bagel Company’s November 1997 bankruptcy proceeding.

 

On July 31, 2002, Tristan Goldstein, a former store manager, andValerie Bankhordar, a current store manager, filed a purported class actioncomplaint against Einstein and Noah Corp. (“ENC”) in the Superior Court for theState of California, County of San Francisco. The plaintiffs allege that ENC failed to pay overtime wages to managersand assistant managers of its California stores, whom it is alleged wereimproperly designated as exempt employees in violation of California andBusiness Profession Code Section 17200. As a result of subsequent communications regarding the circumstancesunder which the Company purchased certain assets of ENBC out of bankruptcy, theplaintiffs filed a first amended complaint disclaiming back wages for theperiod prior to June 19, 2001. However, the first amended complaint added as defendants certain formerdirectors and officers of ENC.  Thefirst amended complaint also added a second cause of action seeking toinvalidate releases obtained from ENC’s assistant managers pursuant to thesettlement of a Department of Labor investigation.  ENC filed a demurrer to the first amended complaint, which theplaintiffs opposed.  Subsequent to thefiling of that demurrer, ENC procured a dismissal without prejudice of theclaims brought against Paul J. B. Murphy III, the Company’s current ChiefExecutive Officer, the only individual defendant ENC employed subsequent to itsacquisition by the Company.  Theplaintiffs subsequently stipulated to the severance of the claims against ENCand those against the remaining individual defendants.  Plaintiffs filed a motion in the UnitedStates Bankruptcy Court, seeking leave to assert their claims against any ofthe individuals, including Mr. Murphy, despite the injunction provisions of thePlan of Reorganization previously confirmed by that Court.  The Bankruptcy Court denied the Plaintiff’srequest and barred the claims against Mr. Murphy and the otherindividuals.  Plaintiffs subsequentlyfiled a second amended complaint against ENC only, reasserting the claimsagainst it contained in the first amended complaint.  ENC filed a demurrer to that second amended complaint.  A hearing on the demurrer took place onOctober 1, 2003 at which time the Court took the demurrer undersubmission.  As of November 7,2003, the Court had not yet ruled on ENC’s demurrer.

 

On October 28, 2002, Sansim Patel, Inc., a subfranchisee ofManhattan Bagel Company, filed suit against Manhattan Bagel Company, the masterfranchisee, and others in Orange County (Orlando, Florida).  The plaintiff alleges claims of civilconspiracy and unjust enrichment against Manhattan Bagel Company and seeksrescission of its franchise agreement with Manhattan Bagel Company.  The 

 

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plaintiff also seeks damages in an unspecified amount.  In December 2002, the Company filed amotion to dismiss all of the claims asserted against it by the plaintiff, basedin part on a general release the plaintiff had previously executed in favor ofManhattan Bagel Company.  That motionremains pending with the Court.

 

On March 18, 2003, Industrial Way, LLC, owner of premises leasedby Manhattan Bagel Company, Inc. in Eatontown, NJ, filed a lawsuit against theCompany and Manhattan Bagel Company, Inc. in the Superior Court of New Jersey,Law Division, Monmouth County.  In itsamended complaint dated May 5, 2003, the plaintiff alleges causes ofaction for wrongful conversion of personal property (consisting of fixtures andequipment), damage to leasehold property, and breach of the lease.  The landlord seeks to recover compensatorydamages in an unspecified amount, which damages purportedly include amountsrelating to outstanding rents, acceleration of rent through the balance of theterm, interest on outstanding payments due, costs to repair physical damage tothe premises, expenses incurred in reletting the property, court costs andattorneys’ fees.  Plaintiff has alsoraised an alternative theory of damages based on diminution in value of thebuilding of which the premises are a part. On June 19, 2003, the Company filed its answer to the amendedcomplaint and counterclaim.  OnAugust 15th, the court disqualified the plaintiff’s attorney (the law firmof Gibbons, Del Deo, Dolan, Griffinger & Vecchione) from this matter,ruling that a conflict of interest existed because of Gibbons’ priorrepresentation of the Company.  TheCompany believes that the equipment claimed by landlord to be wrongfullyconverted was, in fact, owned by the Company, and that the damages alleged bylandlord are unreasonable and contrary to the terms of the lease and applicablelaw.

 

OnMarch 31, 2003, Jerold E. Novack, the former Chief Financial Officer,Secretary, and shareholder of the Company, filed a complaint in the UnitedStates District Court for the District of New Jersey against the Company,Anthony D. Wedo, its former Chairman and Chief Executive Officer, and WilliamJ. Nimmo, a former member of the board of directors.  The complaint purports to state claims for breach of plaintiff’semployment contract with the Company, breach of the Company’s fiduciary dutiesto plaintiff, defamation, and violation of the New Jersey ConscientiousEmployee Protection Act, and in addition seeks a declaration that thetermination of plaintiff “for cause” was invalid.  As a basis for his purported claims, the plaintiff alleges thatthe Company wrongfully contended certain bonuses he received were unauthorizedand that he was wrongfully terminated for cause in order to deny him certainother benefits allegedly owed under his employment agreement.  Furthermore, the plaintiff asserts that hewas defamed by certain of defendants’ public statements regarding his dismissaland also that his termination was in retaliation for certain actions hebelieves were protected by the New Jersey Conscientious Employee ProtectionAct.  The Company intends to vigorouslyoppose the plaintiff’s purported claims. On June 23, 2003, the Company filed its answer and counterclaimsand concurrently filed a motion to dismiss certain of the claims againstit.  The motion to dismiss remainspending with the court.

 

On June 4, 2003, Ramin Kamfar, the Company’s former Chairman ofthe Board and Chief Executive Officer, filed an action in the United StatesDistrict Court for the Southern District of New York against the Company andAnthony D. Wedo, the Company’s former Chairman and Chief Executive Officer,alleging causes of action for breach of contract, defamation, declaratoryrelief and punitive damages.  In thisaction, Mr. Kamfar alleges that the Company breached confidentiality andnon-disparagement provisions in his separation agreement with us by disclosingcertain financial and other terms contained therein.  On September 9, 2003, the Company and Mr. Wedo answered Mr.Kamfar’s complaint and asserted affirmative defenses, and the Company filedvarious counterclaims against Mr. Kamfar, including claims for breach offiduciary duty, fraud, and breach of contract. Mr. Kamfar answered those counterclaims on October 27, 2003.  The Company believes that the claims of Mr.Kamfar are without merit.

 

On August 7, 2003, the Company received a subpoena for documentsfrom the Office of the Attorney General of the State of New York.  Thesubpoena primarily requests information bearing upon whether a networth exemption from franchise registration, which was granted to NewWorld in April 2000 pursuant to the New York Franchise Act,Article 33 of New York’s General Business Law, remains inforce.   The Company has completeddocument production and is cooperating fully with the Attorney General’srequests under the subpoena, and the Company’s discussions with the AttorneyGeneral are ongoing.

 

On October 27, 2003, theCompany was served with a summons and complaint filed in the US District Courtfor the Southern District of Florida under the Fair Labor Standards Act of1938, as amended, filed by a former employee of the Company on behalf ofhimself and others similarly situated. The complaint alleges that the company should have paid overtime wagesto the former employee and that he was terminated in retaliation for requestingovertime pay.  The Company isinvestigating the merit of the claims and will retain counsel to defend theCompany in this matter.  Given the earlystage of this matter, the Company cannot predict its outcome.

 

On November 7, 2003, the Company was contacted by the Board ofEqualization for the State of California, which claims that approximately$221,000 is due on behalf of Manhattan Bagel Company for past sales and usetaxes, interest, and penalties.  TheCompany is currently investigation the validity of this claim.

 

**Item2****.  Changes inSecurities and Use of Proceeds.**

 

On June 27, 2003, the Company entered into an agreement withJefferies & Company, Inc. whereby the Company agreed to issue, andJefferies & Company, Inc. agreed to purchase, $160.0 million aggregateprincipal amount of notes (the “New Notes”). On July 8, 2003, the Company issued the New Notes to refinance itsexisting $140.0 million senior secured increasing rate notes due 2003.  The New Notes were offered by the Companyand guaranteed, jointly and severally, by all present and all futuresubsidiaries of the Company other than the non-restricted subsidiaries.  Pursuant to the terms of the Indenturegoverning the New Notes, the Company will not, and will not permit any of itssubsidiaries to, directly or indirectly declare or pay any dividend or make anydistribution on account of the Company’s or any of its subsidiaries’ equityinterests (other than dividends or distributions payable in equity interests(other than 

 

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disqualified capital stock) of the Company or dividends ordistributions payable to the Company or any wholly-owned subsidiary of theCompany).

 

Pursuant to the equity restructuring agreement dated June 26, 2003by and among the Company, Halpern Denny Fund III, L.P. (“Halpern Denny”),Greenlight Capital, L.P. (“Greenlight Capital”), Greenlight Capital Qualified,L.P. (“Greenlight Qualified”), Greenlight Capital Offshore, Ltd. (“GreenlightOffshore”), Brookwood New World Investors, L.L.C. (“Brookwood”) and NWCIHoldings, LLC (“NWCI”, and with Greenlight Capital, Greenlight Qualified,Greenlight Offshore and Brookwood, “Greenlight”), the Company filed a Certificateof Designation, Preferences and Rights of Series Z Preferred Stock with theSecretary of State of Delaware in order to create a new series of PreferredStock.  The rights and preferences ofthe Series Z Preferred Stock are summarized below.

 

*Dividends*. The Series Z Preferred Stock shall not be entitled to receive anydividends except as provided in “Redemption” below.

 

*Liquidation Preference*.  In the event of the Company’s liquidation orwinding up, the holders of the Series Z Preferred Stock shall be entitled toreceive, on a pro rata basis, such amount, paid prior to and in preference toany distribution of any of the Company’s assets or surplus funds to the holdersof the common stock or any other class of stock, an amount equal to $1,000 pershare of Series Z Preferred Stock then outstanding (as adjusted for any stockdividends, combinations or splits with respect to such shares, the “LiquidationPreference”) plus any accrued but unpaid dividends.

 

*Redemption*. All outstanding shares of Series Z Preferred Stock shall be redeemed(subject to legal availability of funds therefore) in whole on the earlier ofJune 30, 2009 or the effective time of any “Series Z Merger” or any“Series Z Change of Control” (each as hereinafter defined), at 100% of the LiquidationPreference (the “Redemption Price”), in each case, payable in cash.  In the event all outstanding shares ofSeries Z Preferred Stock are not redeemed in accordance with the redemptionobligations set forth above, the shares of Series Z Preferred Stock not soredeemed will, from and after such date, accrue a dividend at a rate per annumof the Liquidation Preference for such shares equal to 250 basis points higherthan the then highest rate paid by us on its funded indebtedness, payablequarterly in cash (provided such dividends may accrue to the extent there arenot funds legally available to pay such dividends) until the date such sharesare ultimately redeemed by us (and, in such event, the Redemption Price will beincreased by an amount of such accrued and unpaid dividends).  A “Series Z Merger” shall mean aconsolidation or merger of the Company or any of its direct or indirectsubsidiaries with or into any other entity, other than a merger (i) in whichthe Company is the surviving company, (ii) which will not result in more than50% of the Company’s capital stock being owned of record or beneficially bypersons other than the holders of such capital stock immediately prior to suchmerger and (iii) in which each share of Series Z Preferred Stock outstandingimmediately prior to such merger will be an identical outstanding share ofSeries Z Preferred Stock after such merger. A “Series Z Change of Control” means any transaction or event occurringon or after the date of the Certificate of Designation as a direct or indirectresult of which (a) any person or group (other than a permitted holder) shall(1) beneficially own (directly or indirectly) in the aggregate equity interestsof the Company having 50% or more of the aggregate voting power of all equityinterests of the Company at the time outstanding or (2) have the right or powerto appoint a majority of the board of directors of the Company; (b) during anyperiod of two consecutive years, individuals who at the beginning of suchperiod constituted the board of directors of the Company (together with any newdirectors (i) whose election by such board of directors or whose nomination forelection by the shareholders of the Company was approved by a vote of amajority of the directors of the Company then still in office who were eitherdirectors at the beginning of such period or whose election or nomination forelection was previously so approved and (ii) appointed to the board ofdirectors of the Company within eighteen months after the date hereof) ceasefor any reason to constitute at least a majority of the board of directors ofthe Company then in office; (c) any event or circumstance constituting a“change of control” under any documentation evidencing or governing any of theCompany’s indebtedness in a principal amount in excess of $10.0 million shalloccur which results in the company’s obligation to prepay (by acceleration orotherwise), purchase, offer to purchase, redeem or defease all or a portion ofsuch indebtedness; or (d) involves the sale of all of substantially all of theCompany’s assets or the assets of the Company’s subsidiaries.

 

*Protective Provisions*.  For so long as any shares of Series ZPreferred Stock remain outstanding, the Company shall not, and shall not permitany of its direct or indirect subsidiaries, in each case, without the vote orwritten consent by the holders of the Series Z Preferred Stock (such consent,in the case of clause (b) only, not to be unreasonably withheld) to:

 

(a)                                  amend,alter or repeal any provision of, or add any provision to, the Certificate ofDesignation, Preferences and Rights of the Series Z Preferred Stock, whether bymerger, consolidation or otherwise; provided, however, that no vote or writtenconsent of the holders of the Series Z Preferred Stock will be required by thisparagraph (a) or otherwise in the event of a Series Z Merger or Series Z Changeof Control that results in the full redemption of the Series Z Preferred Stockat the Redemption Price, in cash, at the effective time of such Series Z Mergeror Series Z Change of Control;

 

(b)                                 subjectto clause (a) above, amend, alter or repeal any provision of, or add anyprovision to, the Company’s restated certificate of incorporation or by-laws,whether by merger, consolidation or otherwise, except as may be required toauthorize a certificate of designation for junior stock or to increase theauthorized amount any junior stock, including junior stock issued to 

 

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management or employees underequity incentive plans; provided, however, that no vote or written consent ofthe holders of the Series Z Preferred Stock will be required by this paragraph(b) or otherwise in the event of a Series Z Merger or Series Z Change ofControl that results in the redemption of the Series Z Preferred Stock at theRedemption Price, in cash, at the effective time of such Series Z Merger orSeries Z Change of Control;

 

(c)                                  authorizeor issue shares of any class of stock having any preference or priority as todividends, assets or payments in liquidation superior to or on a parity withthe Series Z Preferred Stock, including without limitation, the Series ZPreferred Stock, whether by merger, consolidation or otherwise; provided,however, that no vote or written consent of the holders of the Series ZPreferred Stock will be required by this paragraph (c) or otherwise in theevent of a Series Z Merger or a Series Z Change of Control that results in thefull redemption of the Series Z Preferred Stock at the Redemption Price, incash, at the effective time of such Series Z Merger or Series Z Change ofControl;

 

(d)                                 takeany action that results in the Company or any of its direct or indirectsubsidiaries incurring or assuming indebtedness (including the guaranty of anyindebtedness) in excess of the greater of (i) $185 million and (ii) 3.75 ×EBITDA for the trailing 12-month period prior to such date;

 

(e)                                  consummateany Series Z Merger or Series Z Change of Control that does not result in theredemption of the Series Z Preferred Stock at the Redemption Price, payable incash, at the effective time of the Series Z Merger or Series Z Change ofControl transaction;

 

(f)                                    makeany Restricted Payment in violation of the Restricted Payments covenant in theIndenture dated July 8, 2003 among the Company, the Subsidiary Guarantorsas defined therein and the Bank of New York, as trustee (as in effect onJuly 8, 2003); and

 

(g)                                 enterinto any agreement to do any of the foregoing items set forth in paragraphs (a)through (f) above.

 

On September 24, 2003, at the Company’s annual meeting ofstockholders, the stockholders approved amendments to the Company’s restatedcertificate of incorporation to (1) increase the number of shares of commonstock authorized for issuance for 150,000,000 to 1,500,000,000 so that theCompany could effect the transactions contemplated by the equity restructuringagreement; (2) effect a 1.6610444-for-1 forward stock split so that the Companycould effect the transactions contemplated by the equity restructuring agreement;(3) effect a 1-for-100 reverse stock split that would take effect following theconsummation of the transactions contemplated by the equity restructuringagreement; (4) reduce the number of shares of common stock authorized forissuance following the effectiveness of the reverse stock split from1,500,000,000 to 15,000,000; (5) eliminate the classification of the board ofdirectors so that each of the Company’s directors will stand for re-electionannually; (6) allow the Company’s stockholders to take action by writtenconsent of the holders of 80% of the capital stock entitled to vote on suchaction.  Following the approval of thestockholders, the Company filed the amendments to its restated certificate ofincorporation with the Secretary of State of the State of Delaware.

 

**Item3****.  Defaults upon Senior Securities.**

 

Not applicable.

 

**Item4****.  Submission of Matters to a Vote ofSecurity Holders.**

 

On September 24, 2003, at the Company’s annual meeting ofstockholders, the stockholders were asked to consider and vote upon proposals(1) to elect two directors to serve until the 2006 annual meeting ofstockholders (or, if proposal 7 is approved and effectuated, until the 2004annual meeting of stockholders), and until their respective successors areelected and qualified; (2) to approve the equity restructuring agreement andthe transactions contemplated thereby; (3) to approve an amendment to theCompany’s restated certificate of incorporation to increase the number ofshares of common stock authorized for issuance from 150,000,000 to1,500,000,000; (4) to approve an amendment to the Company’s restatedcertificate of incorporation to effect a 1.6610444-for-1 forward stock split inorder to effect the transactions contemplated by the equity restructuring agreement;(5) to approve and amendment to the Company’s restated certificate ofincorporation to effect a 1-for 100 reverse stock split that will take effectfollowing the consummation of the transactions contemplated by the equityrestructuring agreement; (6) to approve an amendment to the Company’s restatedcertificate of incorporation to reduce the number of shares of common stockauthorized for issuance following the effectiveness of the reverse stock splitfrom 1,500,000,000 to 15,000,000; (7) to approve an amendment to the Company’srestated certificate of incorporation to eliminate the classification of theboard of directors; (8) to approve an amendment to the Company’s restatedcertificate of incorporation to allow the Company’s stockholders to take actionby written consent of the holders of 80% of the capital stock entitled to voteon such action; and (9) to ratify the appointment of Grant Thornton LLP as theCompany’s independent auditors for the fiscal year ending December 30,2003.

 

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In the proposal to elect Lawrence Gelfond to the board ofdirectors—34,114,456 shares were voted in favor of the election of LawrenceGelfond, 87,708 shares were voted against the election of Lawrence Gelfond andno shares were withheld from the vote.

 

In the proposal to elect Mark Kline to the board ofdirectors—34,114,456 shares were voted in favor of the election of Mark Kline,87,708 shares were voted against the election of Mark Kline and no shares werewithheld from the vote.

 

In the proposal (Proposal 2) to approve the equity restructuringagreement and the transactions contemplated thereby – 34,090,214 shares werevoted in favor of Proposal 2, 96,050 shares were voted against Proposal 2 and15,900 shares abstained from the vote.

 

In the proposal (Proposal 3) to amend the Company’s restatedcertificate of incorporation to increase the number of shares of common stockauthorized for issuance – 34,122,598 shares were voted in favor of Proposal 3,64,166 shares were voted against Proposal 3 and 15,400 shares abstained fromthe vote.

 

In the proposal (Proposal 4) to amend the Company’s restatedcertificate of incorporation to effect a 1.6610444-for-one forward stock splitin order to effect the transactions contemplated by the equity restructuringagreement – 34,131,798 shares were voted in favor of Proposal 4, 68,866 shareswere voted against Proposal 4 and 1,500 shares abstained from the vote.

 

In the proposal (Proposal 5) to amend the Company’s restatedcertificate of incorporation to effect a one-for-one hundred reverse stocksplit following the consummation of the transactions contemplated by the equityrestructuring agreement – 34,055,196 shares were voted in favor of Proposal 5,131,468 shares were voted against Proposal 5 and 15,500 shares abstained fromthe vote.

 

In the proposal (Proposal 6) to amend the Company’s restatedcertificate of incorporation to reduce the number of shares of common stockauthorized for issuance following the consummation of the effectiveness of thereverse stock split – 34,127,257 shares were voted in favor of Proposal 6,65,907 shares were voted against Proposal 6 and 9,000 shares abstained from thevote.

 

In the proposal (Proposal 7) to amend the Company’s restatedcertificate of incorporation to eliminate the classification of the board ofdirectors – 34,126,291 shares were voted in favor of Proposal 7, 52,973 shareswere voted against Proposal 7 and 22,900 shares abstained from the vote.

 

In the proposal (Proposal 8) to amend the Company’s restatedcertificate of incorporation to allow the Company’s stockholders to take actionby written consent of the holders of 80% of the Company’s capital stockentitled to vote on such action – 34,071,041 shares were voted in favor ofProposal 8, 115,691 shares were voted against Proposal 8 and 15,432 sharesabstained from the vote.

 

In the proposal (Proposal 9) to ratify the appointment of GrantThornton LLP, independent accountants, as the Company’s auditors for the fiscalyear ending December 30, 2003 – 34,177,674 shares were voted in favor ofProposal 9, 14,590 shares were voted against Proposal 9 and 9,900 sharesabstained from the vote.

 

**Item5****.  Other Information.**

 

Not applicable

 

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**Item6****.  Exhibits and Reports on Form 8-K.**

 

(a)          Exhibits

 

31.1                           Certificationby Chief Executive Officer pursuant to Exchange Act Rule 13a-15(e), as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2                           Certificationby Chief Financial Officer pursuant to Exchange Act Rule 13a-15(e), as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1                           Certificationby Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2                           Certificationby Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(b)         Reports on Form 8-K filedduring the quarter ended September 30, 2003

 

7/8/03 NewWorld Announces closing of $160 Million Senior Secured Notes

 

8/16/03 NewWorld Reports Results for the three and six-month periods ended July 1,2003

 

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**Signatures**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                                     | NEW WORLD  RESTAURANT GROUP, INC.                                                 |   |
|------------------------------------------|-----------------------------------------------------------------------------------|--------|
|                                     |                                                                              |
|                                     |                                                                              |
| Date:  November 14,  2003 | By:  /s/ PAUL J.B. MURPHY, III                                               |   |
|                                     | Paul J.B.  Murphy, III                                                            |
|                                     | Chairman and  Chief Executive Officer                                             |
|                                     |                                                                              |   |
| Date:  November 14,  2003 |  /s/  RICHARD P. DUTKIEWICZ                                                  |   |
|                                     | Richard P.  Dutkiewicz  Chief Financial Officer  and Principal Accounting Officer |
|                                          |                                                                                   |        |  |

 

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