**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

**ý**** QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 28, 2005**

 

**OR**

** **

**o**** TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGEACT OF 1934**

 

**Commission File Number 0-27148**

 

**New WorldRestaurant Group, Inc**.

(Name of Registrant as Specified in itsCharter)

 
| **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, includingarea code)

 

Securities registered pursuant to Section 12(b)of the Act:

**None**

 

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

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes o  No ý

 

As of August 2, 2005, 9,868,623 shares of CommonStock of the registrant were outstanding.

 

 

----

 

**NEW WORLD RESTAURANT GROUP, INC.**

 

June 28, 2005

 

TABLE OF CONTENTS

 
| **Part I**. **Financial  Information** |
|----------------------------------------|
|                                   |   |   |
| Item 1.                                | Financial Statements: |   |
|                                   |   |   |
|                                   | Consolidated Balance Sheets (unaudited), June 28, 2005 and December  28, 2004 |   |
|                                   |   |   |
|                                   | Consolidated Statements of Operations (unaudited), for the second  quarter and year to date periods ended  June 28, 2005 and June 29, 2004 |   |
|                                   |   |   |
|                                   | Consolidated Statements of Cash Flows (unaudited), for the year to  date periods ended  June 28, 2005 and June 29, 2004 |   |
|                                   |   |   |
|                                   | Consolidated Statement of Changes in Stockholders’ Equity (Deficit)  (unaudited), for the year to date period  ended June 28, 2005 |   |
|                                   |   |   |
|                                   | Notes to the Consolidated Financial Statements |   |
|                                   |   |   |
| Item 2.                                | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|                                   |   |   |
| Item 3.                                | Quantitative and Qualitative Disclosures  about Market Risk |   |
|                                   |   |   |
| Item 4.                                | Controls and Procedures |   |
|                                   |   |   |
| **Part II. Other Information**         |
|                                   |   |   |
| Item 1.                                | Legal Proceedings |   |
|                                   |   |   |
| Item 6.                                | Exhibits |   |

 

2

----

 

**NEW WORLD RESTAURANT GROUP, INC.**

**CONSOLIDATED BALANCE SHEETS**

**AS OF JUNE 28, 2005 AND DECEMBER 28, 2004**

**(in thousands, except share information)**

**(unaudited)**

 
| ** **                                                                                                                                                                 | ** ** | **June 28,** | ** ** | **December 28,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **2005**     | ** ** | **2004**         | ** ** |
| **ASSETS**                                                                                                                                                                 | ** ** | ** **   | ** ** | ** **       | ** ** |
| Current assets:                                                                                                                                                            |       |         |       |             |       |
| Cash and cash equivalents                                                                                                                                                  |       | $            | 13,823     |             | $          | 9,752 |   |
| Restricted cash                                                                                                                                                            |       | 854          |       | 1,269            |       |
| Franchise and other receivables, net of  allowance of $1,338 and $2,475                                                                                                    |       | 5,689        |       | 7,123            |       |
| Inventories                                                                                                                                                                |       | 5,163        |       | 4,941            |       |
| Prepaid expenses and other current assets                                                                                                                                  |       | 3,049        |       | 1,643            |       |
| Total current assets                                                                                                                                                       |       | 28,578       |       | 24,728           |       |
|                                                                                                                                                                       |       |         |       |             |       |
| Restricted cash long-term                                                                                                                                                  |       | 901          |       | 2,526            |       |
| Property, plant and equipment, net                                                                                                                                         |       | 35,992       |       | 41,855           |       |
| Trademarks and other intangibles, net                                                                                                                                      |       | 71,940       |       | 77,219           |       |
| Goodwill                                                                                                                                                                   |       | 4,875        |       | 4,875            |       |
| Debt issuance costs and other assets                                                                                                                                       |       | 6,260        |       | 7,253            |       |
| Total assets                                                                                                                                                               |       | $            | 148,546    |             | $          | 158,456 |   |
|                                                                                                                                                                       |       |         |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIT**                                                                                                                             | ** ** | ** **   | ** ** | ** **       | ** ** |
| Current liabilities:                                                                                                                                                       |       |         |       |             |       |
| Accounts payable                                                                                                                                                           |       | $            | 6,443      |             | $          | 8,243 |   |
| Accrued expenses                                                                                                                                                           |       | 35,722       |       | 34,836           |       |
| Short term debt and current portion of  long-term debt                                                                                                                     |       | 280          |       | 295              |       |
| Current portion of obligations under  capital leases                                                                                                                       |       | 19           |       | 16               |       |
| Total current liabilities                                                                                                                                                  |       | 42,464       |       | 43,390           |       |
|                                                                                                                                                                       |       |         |       |             |       |
| Senior notes and other long-term debt                                                                                                                                      |       | 160,840      |       | 160,840          |       |
| Obligations under capital leases                                                                                                                                           |       | 19           |       | 31               |       |
| Other liabilities                                                                                                                                                          |       | 9,132        |       | 9,678            |       |
| Mandatorily redeemable, Series Z Preferred  Stock, $.001 par value, $1,000 per share liquidation value; 2,000,000 shares authorized;  57,000 shares issued and outstanding |       | 57,000       |       | 57,000           |       |
| Total liabilities                                                                                                                                                          |       | 269,455      |       | 270,939          |       |
|                                                                                                                                                                       |       |         |       |             |       |
| Commitments and contingencies                                                                                                                                              |       |         |       |             |       |
|                                                                                                                                                                       |       |         |       |             |       |
| Stockholders’ deficit:                                                                                                                                                |       |         |       |             |       |
| Common stock, $.001 par value; 15,000,000  shares authorized; 9,868,623 and 9,848,713 shares issued and outstanding                                                        |       | 10           |       | 10               |       |
| Additional paid-in capital                                                                                                                                                 |       | 175,818      |       | 175,797          |       |
| Unamortized stock compensation                                                                                                                                             |       | (103         | )          | (137             | )          |
| Accumulated deficit                                                                                                                                                        |       | (296,634     | )          | (288,153         | )          |
| Total stockholders’ deficit                                                                                                                                           |       | (120,909     | )          | (112,483         | )          |
| Total liabilities and stockholders’ deficit                                                                                                                           |       | $            | 148,546    |             | $          | 158,456 |   |

 

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

 

3

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**NEW WORLD RESTAURANT GROUP, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THESECOND QUARTER AND YEAR TO DATE PERIODS ENDED JUNE 28, 2005 AND JUNE 29, 2004**

**(in thousands, except earnings per share and related shareinformation)**

**(unaudited)**

 
| ** **                                                    | ** ** | **Second quarter ended:** | ** ** | **Year to date ended:** | ** ** |
|---------------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                                    | ** ** | **June 28,**              | ** ** | **June 29,**            | ** ** | **June 28,** | ** ** | **June 29,** | ** ** |
| ** **                                                    | ** ** | **2005**                  | ** ** | **2004**                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                     |       |                      |       |                    |       |   |   |   |   |
| Retail sales                                                  |       | $                         | 91,116     |                    | $          | 87,596 |   | $ | 177,975 |   | $ | 172,219 |   |
| Manufacturing revenues                                        |       | 4,641                     |       | 4,944                   |       | 9,635 |   | 10,357 |   |
| Franchise and license related revenues                        |       | 1,356                     |       | 1,624                   |       | 2,798 |   | 2,784 |   |
| Total revenues                                                |       | 97,113                    |       | 94,164                  |       | 190,408 |   | 185,360 |   |
|                                                          |       |                      |       |                    |       |   |   |   |   |
| Cost of sales:                                                |       |                      |       |                    |       |   |   |   |   |
| Retail costs                                                  |       | 73,770                    |       | 73,403                  |       | 145,200 |   | 143,490 |   |
| Manufacturing costs                                           |       | 4,193                     |       | 4,442                   |       | 8,900 |   | 9,020 |   |
|                                                          |       |                      |       |                    |       |   |   |   |   |
| Total cost of sales                                           |       | 77,963                    |       | 77,845                  |       | 154,100 |   | 152,510 |   |
|                                                          |       |                      |       |                    |       |   |   |   |   |
| Gross profit                                                  |       | 19,150                    |       | 16,319                  |       | 36,308 |   | 32,850 |   |
|                                                          |       |                      |       |                    |       |   |   |   |   |
| Operating expenses:                                           |       |                      |       |                    |       |   |   |   |   |
| General and administrative expenses                           |       | 9,309                     |       | 8,000                   |       | 17,989 |   | 16,818 |   |
| Depreciation and amortization                                 |       | 7,077                     |       | 7,058                   |       | 13,785 |   | 13,877 |   |
| Loss (gain) on sale, disposal or  abandonment of assets, net  |       | 161                       |       | 1,472                   |       | 165 |   | 1,466 |   |
| Charges (adjustments) of integration and  reorganization cost |       | —                    |       | (39                     | )          | 5 |   | (799 | ) |
| Impairment charges and other related costs                    |       | 1,182                     |       | —                  |       | 1,279 |   | — |   |
|                                                          |       |                      |       |                    |       |   |   |   |   |
| Income (loss) from operations                                 |       | 1,421                     |       | (172                    | )          | 3,085 |   | 1,488 |   |
|                                                          |       |                      |       |                    |       |   |   |   |   |
| Other expense (income):                                       |       |                      |       |                    |       |   |   |   |   |
| Interest expense, net                                         |       | 5,773                     |       | 5,904                   |       | 11,692 |   | 11,703 |   |
| Other                                                         |       | (69                       | )          | (36                     | )          | (126 | ) | (100 | ) |
| Loss before income taxes                                      |       | (4,283                    | )          | (6,040                  | )          | (8,481 | ) | (10,115 | ) |
|                                                          |       |                      |       |                    |       |   |   |   |   |
| Provision for state income taxes                              |       | —                    |       | 184                     |       | — |   | 239 |   |
| Net loss                                                      |       | $                         | (4,283     | )                       | $          | (6,224 | ) | $ | (8,481 | ) | $ | (10,354 | ) |
|                                                          |       |                      |       |                    |       |   |   |   |   |
| Net loss per common share – Basic and  Diluted           |       | $                         | (0.43      | )                       | $          | (0.63 | ) | $ | (0.86 | ) | $ | (1.05 | ) |
|                                                          |       |                      |       |                    |       |   |   |   |   |
| Weighted average number of common shares  outstanding:        |       |                      |       |                    |       |   |   |   |   |
| Basic and Diluted                                             |       | 9,860,886                 |       | 9,842,293               |       | 9,854,799 |   | 9,842,061 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

4

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**NEW WORLDRESTAURANT GROUP, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THEYEAR TO DATE PERIODS ENDED JUNE 28, 2005 AND JUNE 29, 2004**

**(inthousands)**

**(unaudited)**

 
| ** **                                                                       | ** ** | **June 28,** | ** ** | **June 29,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|
| ** **                                                                       | ** ** | **2005**     | ** ** | **2004**     | ** ** |
| **OPERATING ACTIVITIES:**                                                        |       |         |       |         |       |
| Net loss                                                                         |       | $            | (8,481     | )            | $          | (10,354 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |         |       |         |       |
| Depreciation and amortization                                                    |       | 13,785       |       | 13,877       |       |
| Stock based compensation expense                                                 |       | 34           |       | 35           |       |
| Loss, net of gains, on disposal of assets                                        |       | 165          |       | 1,466        |       |
| Impairment charges and other related costs                                       |       | 1,279        |       | —       |       |
| Charges (adjustments) of integration and  reorganization costs                   |       | 5            |       | (799         | )          |
| Provision for (recovery of) losses on  accounts receivable, net                  |       | (138         | )          | 94           |       |
| Amortization of debt issuance and debt  discount costs                           |       | 924          |       | 908          |       |
| Changes in operating assets and  liabilities:                                    |       |         |       |         |       |
| Franchise and other receivables                                                  |       | 1,572        |       | (247         | )          |
| Accounts payable and accrued expenses                                            |       | (1,016       | )          | (162         | )          |
| Other assets and liabilities                                                     |       | (64          | )          | 617          |       |
|                                                                             |       |         |       |         |       |
| Net cash provided by operating activities                                        |       | 8,065        |       | 5,435        |       |
|                                                                             |       |         |       |         |       |
| **INVESTING ACTIVITIES:**                                                        |       |         |       |         |       |
| Purchase of property and equipment                                               |       | (4,082       | )          | (3,687       | )          |
| Proceeds from the sale of equipment                                              |       | 92           |       | —       |       |
|                                                                             |       |         |       |         |       |
| Net cash used in investing activities                                            |       | (3,990       | )          | (3,687       | )          |
|                                                                             |       |         |       |         |       |
| **FINANCING ACTIVITIES:**                                                        |       |         |       |         |       |
| Proceeds from line of credit                                                     |       | 5,430        |       | 7,030        |       |
| Repayments of line of credit                                                     |       | (5,445       | )          | (8,030       | )          |
| Repayment of other borrowings                                                    |       | (10          | )          | —       |       |
| Proceeds upon warrant exercise                                                   |       | 21           |       | —       |       |
|                                                                             |       |         |       |         |       |
| Net cash used in financing activities                                            |       | (4           | )          | (1,000       | )          |
|                                                                             |       |         |       |         |       |
| Net increase in cash                                                             |       | 4,071        |       | 748          |       |
| Cash and cash equivalents, beginning of  period                                  |       | 9,752        |       | 9,575        |       |
| Cash and cash equivalents, end of period                                         |       | $            | 13,823     |         | $          | 10,323 |   |
|                                                                             |       |         |       |         |       |
| **SUPPLEMENTAL CASH FLOW INFORMATION:**                                          |       |         |       |         |       |
| Cash paid for interest                                                           |       | $            | 10,809     |         | $          | 10,280 |   |
| Cash paid for income taxes                                                       |       | $            | —     |         | $          | 165 |   |

 

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

 

5

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**NEW WORLD RESTAURANT GROUP, INC.**

**CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY(DEFICIT)**

**FOR THE YEAR TO DATE PERIOD ENDED JUNE 28, 2005**

(inthousands, except share information)

(unaudited)

 
| ** **                                     | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | **Unamortized**  | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|------------------|------------|-----------------|------------|------------|------------|
| ** **                                     | ** ** | **Common Stock** | ** ** | **Paid In** | ** ** | **Stock**      | ** ** | **Deficit**      | ** ** | ** **      | ** ** |
| ** **                                     | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Compensation** | ** ** | **Amount**      | ** ** | **Total**  | ** ** |
|                                           |       |             |       |        |       |           |       |             |       |            |       |       |       |
| Balance, December 28, 2004                     |       | 9,848,713        |       | $           | 10         |           | $          | 175,797          |       | $               | (137       | )          | $          | (288,153 | ) | $ | (112,483 | ) |
| Net loss                                       |       | —           |       | —      |       | —         |       | —           |       | (8,481          | )          | (8,481     | )          |
| Common stock issued upon exercise of  warrants |       | 19,910           |       | —      |       | 21             |       | —           |       | —          |       | 21         |       |
| Amortization of stock compensation expense     |       | —           |       | —      |       | —         |       | 34               |       | —          |       | 34         |       |
|                                           |       |             |       |        |       |           |       |             |       |            |       |       |       |
| Balance, June 28, 2005                         |       | 9,868,623        |       | $           | 10         |           | $          | 175,818          |       | $               | (103       | )          | $          | (296,634 | ) | $ | (120,909 | ) |

 

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

 

6

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**NEW WORLD RESTAURANT GROUP, INC.**

 

Notes to ConsolidatedFinancial Statements (Unaudited)

 

Second Quarter and Year toDate Periods Ended June 28, 2005 and June 29, 2004

 

**1.****    ****Basis of Presentation**

 

The accompanyingconsolidated financial statements of New World Restaurant Group, Inc. and itswholly-owned subsidiaries (collectively, “the Company”) have been preparedpursuant to the rules and regulations of the Securities and Exchange Commission(“SEC”). As of June 28, 2005, the Company owns, franchises or licenses variousrestaurant concepts under the brand names of Einstein Bros. Bagels (“EinsteinBros.”), Einstein Bros. Café, Noah’s New York Bagels (“Noah’s”), ManhattanBagel Company (“Manhattan”), Chesapeake Bagel Bakery (“Chesapeake”) and NewWorld Coffee (“New World”). Our business is subject to seasonaltrends. Generally, our revenues in the first fiscal quarter are somewhat lowerthan in the other three fiscal quarters.

 

The accompanying consolidated financial statements as of June 28, 2005 and for thesecond quarter and year to date periods ended June 28, 2005 and June 29, 2004 havebeen prepared without audit. The balance sheet information as of December 28,2004 has been derived from our audited financial statements. The informationfurnished herein reflects all adjustments (consisting only of normal recurringaccruals and adjustments), which are, in our opinion, necessary to fairly statethe interim operating results for the respective periods.  However, theseoperating results are not necessarily indicative of the results expected forthe full fiscal year.  Certain information and footnote disclosuresnormally included in annual financial statements prepared in accordance withgenerally accepted accounting principles in the United States have been omittedpursuant to SEC rules and regulations. The notes to the consolidated financialstatements (unaudited) should be read in conjunction with the notes to theconsolidated financial statements contained in our annual report on Form 10-Kfor the fiscal year ended December 28, 2004. We believe that the disclosuresare sufficient for interim financial reporting purposes.

 

Certain reclassifications have been made to conform previously reporteddata to the current presentation. These reclassifications have no effect on ournet loss or financial position as previously reported.

 

**2.****    ****Stock Based Compensation**

 

We apply the intrinsic value-based method of accounting prescribed byAccounting Principles Board (APB) Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedinterpretations, in accounting for our fixed award stock options to ouremployees. As such, compensation expense is recorded only if the current marketprice of the underlying common stock exceeded the exercise price of the optionon the date of grant. We apply the fair value-basis of accounting as prescribedby Statements of Financial Accounting Standard (SFAS) No. 123, *Accounting for Stock-Based Compensation* (SFAS No. 123)**in accounting for our fixed award stock options to ourconsultants. Under SFAS No. 123, compensation expense is recognized based onthe fair value of stock options granted. 

 

7

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Had compensation cost for stock options granted to employees beendetermined on the basis of fair value using the following assumptions, net lossand loss per share would have been increased to the following pro forma amounts(in thousands of dollars, except per share amounts):

 
| ** **                                     | ** ** | **Second quarter ended:** | ** ** | **Year to date ended:** | ** ** |
|------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                     | ** ** | **June 28,**              | ** ** | **June 29,**            | ** ** | **June 28,** | ** ** | **June 29,** | ** ** |
| ** **                                     | ** ** | **2005**                  | ** ** | **2004**                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss, as reported                          |       | $                         | (4,283     | )                       | $          | (6,224 | ) | $ | (8,481 | ) | $ | (10,354 | ) |
| Deduct: fair value based compensation  expense |       | (296                      | )          | (222                    | )          | (449 | ) | (444 | ) |
| Pro forma net loss                             |       | (4,579                    | )          | (6,446                  | )          | (8,930 | ) | (10,798 | ) |
| Basic and diluted loss per common share:       |       |                      |       |                    |       |   |   |   |   |
| As reported                                    |       | $                         | (0.43      | )                       | $          | (0.63 | ) | $ | (0.86 | ) | $ | (1.05 | ) |
| Pro forma                                      |       | $                         | (0.46      | )                       | $          | (0.65 | ) | $ | (0.91 | ) | $ | (1.10 | ) |
|                                           |       |                      |       |                    |       |   |   |   |   |
| Assumptions:                                   |       |                      |       |                    |       |   |   |   |   |
| Expected life of options from date of grant    |       | 4.0 years                 |       | 4.0 years               |       | 4.0 years |   | 4.0 years |   |
| Risk-free interest rate                        |       | 3.7 - 3.9                 | %          | 3.00                    | %          | 3.6 - 3.9 | % | 3.00 | % |
| Volatility                                     |       | 100.0                     | %          | 100.0                   | %          | 100.0 | % | 100.0 | % |
| Assumed dividend yield                         |       | 0.0                       | %          | 0.0                     | %          | 0.0 | % | 0.0 | % |

 

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

 

Intangible assets includeboth goodwill and identifiable intangibles arising from the allocation of thepurchase prices of assets acquired. Goodwill represents the excess of cost overfair value of net assets acquired in the acquisition of Manhattan. Otherintangibles consist mainly of trademarks, trade secrets and patents.

 

Goodwill and otherintangible assets with indefinite lives are not subject to amortization but aretested for impairment annually or more frequently if events or changes incircumstances indicate that the asset might be impaired. SFAS No. 142, “Goodwilland Other Intangible Assets” requires a two-step approach for testingimpairment. First, the estimated fair value of each reporting unit is comparedto its carrying value to determine whether an indication of impairment exists.If impairment is indicated, then the second step of the impairment test isperformed; the fair value of the reporting unit’s goodwill is determined byallocating the unit’s fair value to its assets and liabilities (including anyunrecognized intangible assets) as if the reporting unit had been acquired in abusiness combination. The amount of impairment for goodwill and otherintangible assets is measured as the excess of its carrying amount over itsfair value. Intangible assets not subject to amortization consist primarily ofthe Einstein Bros. and Manhattan trademarks.

 

8

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Intangible assets withlives restricted by contractual, legal or other means are amortized over theiruseful lives and consist primarily of patents used in our manufacturingprocess. Amortization expense is calculated using the straight-line method overthe estimated useful lives of approximately 5 years.  Intangible assets subject to amortization arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable, in accordance withSFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”Intangible assets subject to amortization consist of the Chesapeake trademarks.

 

During the second quarterended 2004, we began an evaluation of whether each of our brands should be apart of our overall strategic business plan. As a result of this evaluation, wedetermined that the Chesapeake brand did not fit within our long-term businessmodel. Accordingly, we performed an interim impairment analysis and determinedthat no impairment existed. We also performed a longevity analysis anddetermined that the brand had an estimated useful life of four years. Thetrademarks were previously treated as a non-amortizing intangible and werereclassified to an amortizing intangible at June 29, 2004. During the secondquarter ended 2005, we re-visited the long term strategic fit of Chesapeakeutilizing the recommendations of a third party consultant previously engaged topresent viable alternatives for the brand. Based upon the consultant’srecommendations, we decided to form an exit strategy that we believe could becompleted within approximately one year. Because there had been a change incircumstances, it became necessary to review the asset for impairment. Theanalysis indicated that the carrying amount of the assets was greater than itsfair value and accordingly we recorded an impairment charge of approximately$1.2 million for the quarter ended June 28, 2005. Additionally, we determinedthat the brand had a remaining useful life of one year.

 

Trademarks and otherintangibles consist of the following (in thousands of dollars):

 
| ** **                                  | ** ** | **June 28,** | ** ** | **December 28,** | ** ** |
|---------------------------------------------|------------|--------------|------------|------------------|------------|
| ** **                                  | ** ** | **2005**     | ** ** | **2004**         | ** ** |
| Amortizing intangibles:                     |       |         |       |             |       |
| Trade secrets                               |       | $            | 5,385      |             | $          | 5,385 |   |
| Trademarks                                  |       | 880          |       | 2,062            |       |
| Patents-manufacturing process               |       | 33,741       |       | 33,741           |       |
|                                        |       | 40,006       |       | 41,188           |       |
| Less accumulated amortization:              |       |         |       |             |       |
| Trade secrets                               |       | 4,299        |       | 3,770            |       |
| Trademarks                                  |       | 644          |       | 387              |       |
| Patents-manufacturing process               |       | 26,929       |       | 23,618           |       |
|                                        |       | 31,872       |       | 27,775           |       |
| Total amortizing intangibles, net           |       | $            | 8,134      |             | $          | 13,413 |   |
|                                        |       |         |       |             |       |
| Non-amortizing intangibles:                 |       |         |       |             |       |
| Trademarks                                  |       | 63,806       |       | 63,806           |       |
| Total trademarks and other intangibles, net |       | $            | 71,940     |             | $          | 77,219 |   |

 

9

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**4.****    ****Debt**

 

Debt consists of thefollowing (in thousands of dollars):

 
| ** **                                              | ** ** | **June 28,** | ** ** | **December 28,** | ** ** |
|---------------------------------------------------------|------------|--------------|------------|------------------|------------|
| ** **                                              | ** ** | **2005**     | ** ** | **2004**         | ** ** |
| $ 160 Million Notes                                |       | $            | 160,000    |             | $          | 160,000 |   |
| AmSouth Revolver                                        |       | —       |       | 15               |       |
| New Jersey Economic Development Authority  Note Payable |       | 1,120        |       | 1,120            |       |
|                                                    |       | 161,120      |       | 161,135          |       |
| Less current portion of debt                            |       | 280          |       | 295              |       |
| Long-term debt                                          |       | $            | 160,840    |             | $          | 160,840 |   |

 

**$160Million Notes**

 

On July 8, 2003, we issued$160 million of 13% senior secured notes maturing on July 1, 2008 (“$160Million Notes”).

 

The $160 Million Notes areguaranteed, fully and unconditionally, jointly and severally, by us and allpresent and future subsidiaries of ours and are collateralized by substantiallyall of our assets in which we have an interest. Pursuant to an IntercreditorAgreement, the $160 Million Notes are subordinate to the AmSouth Revolver asdescribed below.

 

The $160 Million Notes contain certaincovenants, which, among others, include certain financial covenants such aslimitations on capital expenditures and minimum EBITDA as defined in theagreement. The covenants also preclude the declaration and payment of dividendsor other distributions to holders of our common stock. These covenants aremeasured on a rolling twelve-month period and fiscal quarter basis,respectively. This debt contains usual and customary default provisions. As ofJune 28, 2005, we were in compliance with all our financial and operatingcovenants.

 

Interest payments under the $160 MillionNotes are payable in arrears at the rate of 13% per year on July 1 and January1, commencing January 1, 2004. The notes are redeemable, at our option, inwhole or in part at any time after July 1, 2004 at the following redemptionprices (as expressed in percentages of the principal amount):

 
| **Commencing on July 1,** | ** ** | **Percentage** | ** ** |
|---------------------------|------------|----------------|------------|
| 2004                      |       | 104.0          | %          |
| 2005                      |       | 103.0          | %          |
| 2006                      |       | 102.0          | %          |
| 2007                      |       | 101.0          | %          |
| 2008 and thereafter       |       | 100.0          | %          |

 

Debt issuance costs are capitalized andamortized using the effective interest method over the term of the $160 MillionNotes.

 

10

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**AmSouthRevolver**

 

On July 8, 2003, weentered into a three-year, $15 million senior secured revolving credit facilitywith AmSouth Bank (“AmSouth Revolver”). The AmSouth Revolver was subsequentlyamended to make technical corrections, clarify ambiguous terms and provide forincreased limits with respect to letters of credit. EffectiveFebruary 11, 2005, the AmSouth Revolver was amended again to increase ourletter of credit sub-facility from $5 million to $7.5 million.

 

The AmSouth Revolver iscollateralized by substantially all of our assets in which we have an interestand is senior to the $160 Million Notes pursuant to an Intercreditor Agreement.

 

The AmSouth Revolver contains certaincovenants, which, among others, include certain financial covenants such aslimitations on capital expenditures, operating lease obligations, minimumEBITDA as defined in the agreement, operating cash flow coverage ratio andminimum net worth. The covenants also preclude the declaration and payment ofdividends or other distributions to holders of our common stock. Thesecovenants are measured on a rolling twelve-month period at each fiscal quarteror annually at year-end. Additional covenant restrictions exist if the totalborrowings, including outstanding letters of credit exceed $10.0 million.This debt also contains usual and customary default provisions. As of June 28,2005, we are in compliance with all of our financial and operating covenants.

 

Interest payments under the AmSouth Revolverare payable in arrears on the first of each month. The net borrowings under theAmSouth Revolver bear an interest rate equal to the base rate plus anapplicable margin with the base rate being the AmSouth Bank “prime rate” andthe applicable margin being based on our fixed charge coverage ratio with aminimum and maximum applicable margin of 0.5% and 2.5% respectively. As of June28, 2005, the interest rate under the AmSouth Revolver was 7.0%.

 

We are required to pay an unused credit linefee of 0.50% per annum on the average daily unused amount. The unused line feeis payable monthly in arrears. Additionally, we are required to pay a letter ofcredit fee based on the average daily undrawn face amount for each letter ofcredit issued, of an applicable margin being based on our fixed charge coverageratio with a minimum and maximum applicable margin of 2.0% and 4.5%respectively. Letters of credit reduce our availability under the AmSouthRevolver. At June 28, 2005, we had $7.1 million of letters of creditoutstanding. The letters of credit expire on various dates during 2006, areautomatically renewable for one additional year and are payable upon demand inthe event that we fail to pay certain workers compensation claims. Ouravailability under the AmSouth Revolver was $7.9 million at June 28, 2005.

 

Debt issuance costs are capitalized andamortized using the effective interest method over the term of the AmSouthRevolver.

 

**New Jersey Economic Development AuthorityNote Payable**

 

In December 1998, Manhattan BagelCompany, Inc. entered into a note payable in the principal amount of $2,800,000with the New Jersey Economic Development Authority (“NJEDA”) at an interestrate of 9% per annum. Principal is paid annually and interest is paidquarterly. The note matures on December 1, 2008 and is secured by the assets ofManhattan Bagel Company, Inc.

 

On July 3, 2003, we placed an advancedfunding of the note in escrow to enact a debt defeasance as allowed for in theagreement. This advanced funding is shown as restricted cash and the note isincluded in both current portion and long-term portion of debt in the June 28,2005 and December 28, 2004 consolidated balance sheets in accordance withthe payment terms. This classification will continue until the note is fullypaid from the escrow amount proceeds.

 

11

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**5.****    ****Net Loss Per Common Share**

 

In accordance with SFAS No. 128, “Earnings per Share,” we compute basicnet loss per common share by dividing the net loss for the period by theweighted average number of shares of common stock outstanding during theperiod.

 

Diluted net loss per share is computed by dividing the net loss for theperiod by the weighted average number of shares of common stock and potentialcommon stock equivalents outstanding during the period, if dilutive. Potentialcommon stock equivalents include incremental shares of common stock issuableupon the exercise of stock options. The effects of potential common stockequivalents have not been included in the computation of diluted net loss pershare as their effect is anti-dilutive.

 

The following table summarizes the weighted average number of commonshares outstanding, as well as sets forth the computation of basic and dilutednet loss per common share for the periods indicated (in thousands of dollars,except per share data):

 
| ** **                           | ** ** | **Second quarter ended:** | ** ** | **Year to date ended:** | ** ** |
|--------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | **June 28,**              | ** ** | **June 29,**            | ** ** | **June 28,** | ** ** | **June 29,** | ** ** |
| ** **                           | ** ** | **2005**                  | ** ** | **2004**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                 |       |                      |       |                    |       |   |   |   |   |
| Weighted average shares outstanding  |       | 9,860,886                 |       | 9,842,293               |       | 9,854,799 |   | 9,842,061 |   |
|                                 |       |                      |       |                    |       |   |   |   |   |
| Net loss                             |       | $                         | (4,283     | )                       | $          | (6,224 | ) | $ | (8,481 | ) | $ | (10,354 | ) |
|                                 |       |                      |       |                    |       |   |   |   |   |
| Basic and diluted net loss per share |       | $                         | (0.43      | )                       | $          | (0.63 | ) | $ | (0.86 | ) | $ | (1.05 | ) |

 

Stock options and warrants to purchase an aggregate of 2,200,243 and1,856,125 shares of common stock were outstanding as of June 28, 2005 and June29, 2004, respectively. These stock options and warrants were not included inthe computation of diluted earnings per share because their effect would havebeen anti-dilutive.

 

**6.****    ****Income Taxes**

 

We record deferred taxassets and liabilities based on the difference between the financial statementand income tax basis of assets and liabilities using the enacted statutory taxrate. Deferred income tax expenses or credits are based on the changes in theasset or liability from period to period. The recorded deferred tax assets arereviewed for impairment on a quarterly basis by reviewing our internalestimates for future net income. If we determine it to be more likely than notthat the recovery of the asset is in question in the immediate, foreseeablefuture, we record a valuation allowance. On June 28, 2005 and December 28,2004, we recorded a full valuation allowance against our net deferred taxasset. We will continue to record valuation allowances against additionaldeferred tax assets until such time that it is more likely than not that someportion or all of the deferred tax assets will be realized.

 

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**7.****    ****Loss (Gain) on Sale, Disposal or Abandonment ofAssets**

 

During the second quarterended 2004, we recorded a loss of approximately $1.3 million primarily due tothe disposal of menu boards as a result of new product offerings and due to theabandonment of leasehold improvements related to closed restaurants and ouradministrative facilities located in New Jersey.

 

**8.****    ****Charges (Adjustments) of Integration and ReorganizationCost**

 

Charges (adjustments) of integration andreorganization cost primarily represents adjustments to previously recordedliabilities associated with the closing and corporate consolidation of ourEatontown facilities during 2002. During April 2004, we reached an agreementwith the landlord of our Eatontown facility to settle outstanding litigation.Previously recorded integration and reorganization estimates associated withclosing this facility resulted in a benefit of $700,000 during the firstquarter ended 2004 as a result of this settlement.

 

**9.****    ****Impairment Charges and Other Related Costs**

 

In accordance withStatement of Financial Accounting Standard No. 144, *Accountingfor the Impairment or Disposal of Long Lived Assets*, impairmentlosses are recorded on long-lived assets on a restaurant-by-restaurant basiswhenever impairment indicators are determined to be present. We consider ahistory of cash flow losses to be the primary indicator of potential impairmentfor individual restaurant locations. We determine whether a restaurant locationis impaired based on expected undiscounted future cash flows, consideringlocation, local competition, current store management performance, existingpricing structure and alternatives available for the site. If impairmentexists, the amount of impairment is measured as the excess of the carryingamount of the asset over its fair value as determined utilizing the estimateddiscounted future cash flows or the expected proceeds, net of costs to sell,upon sale of the asset.

 

During the first quarterended 2005, we recorded $97,000 in exit costs from the decision to close onerestaurant. The assets associated with the closure of this restaurant werepreviously impaired. Additionally, as further explained in Note 3, we recordedapproximately $1.2 million in impairment charges related to the Chesapeaketrademarks during the second quarter ended 2005.

 

**10.**** ****Litigation and Contingencies**

 

We are subject to claims and legal actions in the ordinary course ofour business, including claims by our franchisees, licensees and employees orformer employees. We do not believe that an adverse outcome in any currentlypending or threatened matter would have a material adverse effect on ourbusiness, results of operations or financial condition.

 

On July 31, 2002, Tristan Goldstein, a former store manager, andValerie Bankhordar, a current store manager, filed a putative class actionagainst Einstein and Noah Corp. (“ENC”) in the Superior Court for the State ofCalifornia, County of San Francisco. The plaintiffs alleged that ENC failed topay overtime wages to managers and assistant managers of its California storeswho were improperly designated as exempt employees. In April 2004, we reachedan agreement in principle to settle the litigation, subject to final courtapproval. Notice to members of the class was mailed on or about May 25, 2005.The final hearing on the fairness of the settlement has been scheduled forSeptember 21, 2005. Amounts representing our estimate to settle this litigationwere previously recorded in general and administrative expenses during fiscal2003 and did not have a material adverse effect on our consolidated financialcondition or results of operations.

 

13

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On September 14, 2004, Atlantic Mutual Insurance Company brought anaction in the Superior Court of New Jersey Law Division: Morris County, againstthe Company, Wedo, Nimmo, Novack, Kamfar, Lexington Insurance Company, and XLSpecialty Insurance Company seeking declaratory judgment on insurance coverageissues in previously resolved litigation against Jerold E. Novack, our formerChief Financial Officer, and Ramin Kamfar, our former Chairman of the Board andChief Executive Officer. Mr. Kamfar has cross-claimed against us, claiming aright to be indemnified as to the costs and attorneys fees incurred by him inconnection with the SEC investigation of him. He further claimed a right tohave those costs and fees advanced to him prior to a determination as to whetheror not he had a right of indemnification. The Court ordered us to advance toMr. Kamfar his reasonable costs and fees incurred by him to date in connectionwith the SEC investigation, as well as his attorney’s fees and costs incurredto establish his alleged right to advancement. We are evaluating whether toappeal that order. Discovery is being conducted and we are having verypreliminary settlement discussions. The Company has put National Union, theCompany’s officers and directors liability insurer for the applicable timeperiod, on notice that the Company believes that Kamfar’s advancement andindemnity claims are an insured loss under the Company’s policy with NationalUnion. If National Union does not agree that Kamfar’s claims are a covered loss,the Company will need to commence arbitration against National Union. At thistime, we cannot predict the outcome of these matters. There can be no assurancethat we will prevail in these matters, that a determination will be made thatwe have insurance coverage for expenses that we have already incurred or havebeen ordered to pay, or that damages or other relief will not be awardedagainst us. However, we believe resolution of this issue will not have amaterial adverse effect on our consolidated financial condition or results ofoperations.

 

*Guarantees*

 

Prior to 2001, we would occasionally guarantee leases for the benefitof certain of our franchisees. None of the guarantees have been modified sincetheir inception and we have since discontinued this practice. Currentfranchisees are the primary lessees under the vast majority of these leases.Under the lease guarantees, we may be required by the lessor to make all of theremaining monthly rental payments or property tax and common area maintenancepayments if the franchisee does not make the required payments in a timelymanner. However, we believe that most, if not all, of the franchised locationscould be subleased to third parties minimizing our potential exposure.Additionally, we have indemnification agreements with our franchisees underwhich the franchisees would be obligated to reimburse us for any amounts paidunder such guarantees. Historically, we have not been required to make suchpayments in significant amounts. We record a liability for our exposure underthe guarantees in accordance with SFAS No. 5, “Accounting for Contingencies,”following a probability related approach. In the event that trends change inthe future, our financial results could be impacted. As of June 28, 2005, wehad outstanding guarantees of indebtedness under certain leases ofapproximately $1.1 million. Approximately $330,000 has been recorded and isincluded in accrued expenses in our consolidated balance sheets.

 

*Insurance*

 

We are insured for losses related to health, general liability andworkers’ compensation under large deductible policies. The insurance liabilityrepresents an estimate of the ultimate cost of claims incurred and unpaid as ofthe balance sheet date. The estimated liability is established based on actuarialestimates, is discounted at 10% based upon a discrete analysis of actual claimsand historical data and is reviewed on a quarterly basis to ensure that theliability is appropriate. If actual trends, including the severity or frequencyof claims differ from our estimates, our financial results could be favorablyor unfavorably impacted.

 

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**11.**** ****Recent Accounting Pronouncements**

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004) entitled “Share-BasedPayment” that addresses the accounting for share-based payment transactions inwhich an enterprise receives employee services in exchange for a) equityinstruments of the enterprise or b) liabilities that are based on the fairvalue of the enterprise’s equity instruments or that may be settled by theissuance of such equity instruments. The Statement eliminates the ability toaccount for share-based compensation transactions using APB Opinion No. 25, “Accountingfor Stock Issued to Employees,” and generally would require instead that suchtransactions be accounted for using a fair-value-based method. This Statementis to be implemented at the beginning of the next fiscal year that begins afterJune 15, 2005. We have not fully completed our evaluation of the impact thisStatement will have on our financial position and results of operations. Basedon options granted and various assumptions used to calculate stock basedcompensation expense as of June 28, 2005, we do not believe that the adoptionwill result in a material adverse effect to our financial statements taken as awhole.

 

 

**12.**** ****Related Party Transactions**

 

Greenlight Capital, L.L.C.and its affiliates beneficially own approximately 97 percent of our commonstock on a fully diluted basis. As a result, Greenlight has sufficient votingpower without the vote of any other stockholders to determine what matters willbe submitted for approval by our stockholders, to approve actions by writtenconsent without the approval of any other stockholders, to elect all of ourboard of directors, and among other things, to determine whether a change incontrol of our company occurs.

 

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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Thefollowing discussion and analysis supplements the management’s discussion andanalysis in our Annual Report on Form 10-K for the year ended December 28, 2004and presumes that readers have read or have access to the discussion andanalysis in our Annual Report. The following discussion and analysis includeshistorical and certain forward-looking information that should be read togetherwith the accompanying consolidated financial statements, related footnotes andthe discussion below of certain risks and uncertainties that could cause futureoperating results to differ materially from historical results or from theexpected results indicated by forward looking statements.

 

**BusinessOverview**

 

We are a leader in the quick casual segment of the restaurant industry.With 658 locations in 34 states and the District of Columbia as of June 28,2005, we operate and license locations primarily under the Einstein Bros. andNoah’s brand names, and franchise locations primarily under the Manhattan andChesapeake brand names. We also operate a dough production facility. We viewour business as a single segment with a focus on our company-operatedrestaurants. Our manufacturing and franchise operations are either supportiveor ancillary to our main business focus.

 

The restaurant industry, in which we operate, is intensely competitive.The industry is often affected by changes in demographics, consumers’ eatinghabits and preferences, local and national economic conditions affectingconsumer spending habits, population trends and local traffic patterns. Keyelements of competition in the industry are price, quality and value ofproducts offered, quality and speed of service, advertising effectiveness,brand name identification, restaurant locations and attractiveness offacilities.

 

Our financial focus is on long term, sustainable growth in free cashflow. Free cash flow represents net cash provided by operations less the investmentin our facilities and fixed assets. By achieving free cash flow, we will bemore capable of paying down debt, saving cash for future use and buildingshareholder value. We also believe free cash flow may give us the ability topursue new opportunities and/or acquire other businesses. Increasing ouroperating profit and efficiently managing working capital and capitalexpenditures primarily drive free cash flow.

 

In measuring our overall growth and progress, we focus on various keyperformance indicators. Such key performance indicators include:

 

•              same-storesales growth, comprised of average check and transactions,

•              restaurantlevel and concept level margins,

•              cashgenerated by operations,

•              AdjustedEBITDA (as defined in our loan agreements),

•              numberof company-owned restaurant openings and closings,

•              numberof franchise and licensed restaurant openings and closings,

 

Our progress against some of these key performance indicators isdiscussed throughout the Management’s Discussion and Analysis.

 

16

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**Significant Known Events, Trends orUncertainties Expected to Impact 2005 Results**

 

The following factors represent currently known trends or uncertaintiesthat may impact the comparability of operating performance or could causereported financial information not to be necessarily indicative of futureoperating results or future financial condition.

 

*Revenue Trends*

 

In an effort to strengthen the performance of our company-operatedEinstein Bros. locations, we have developed a brand enhancement strategy thatwill include updates of restaurant interiors and improvements to servicethrough new menu boards and a “pay first” ordering system. Some of theseenhancements reflect learning from our new Einstein Bros. Café concept,comprising eight restaurants in the Denver and Colorado Springs, Coloradomarkets.

 

**We believe that dietary trends and negative publicity on products highin carbohydrate content may have had an adverse impact on our saleshistorically. Accordingly, we began addressing the issue with modifications toour menu beginning in 2004. Additionally, we introduced limited time offeringsfeaturing seasonal menu items and implemented modifications to our customerservice system. We strengthened our catering programs in certain markets andinitiated advertising campaigns during the fourth quarter ended 2004. Webelieve that changes in the products sold at our restaurants, price increasesand shifts in product mixes to higher priced items coupled with initiatives incustomer service and overall appearance at our restaurants, and advertisingprograms that build consumer awareness, have recently contributed to positivecomparable store sales.**

 

*Expense Trends*

 

Our expense trends are generally affected by the following majorcategories:

 

•      Changingprices for agricultural commodities;

•      Risingenergy costs and increasing costs of other natural resources;

•      Increasinglabor costs; and

•      Increasingtax rates and costs of compliance with regulatory requirements.

 

In fiscal 2004, prices for agricultural commodities such as dairy,cheese and butter increased substantially. We have experienced slight decreasesin dairy prices during 2005, but the decrease has been offset by increases incommodity costs for coffee, flour and packaging. Because flour represents themost significant raw ingredient we purchase, we are continually identifyingcost reduction solutions to offset the impact of increases in commodity costsand we have begun to see the benefit of those solutions when comparingconsecutive quarter’s performance.

 

Rising energy costs and the increasing costs of other natural resourcesaffect our utility bills, the cost of packaging that is derived from petroleumproducts and the cost of distribution to our restaurants. Our distributionpartners and common freight carriers passed on fuel surcharges to us duringfiscal 2004. We have experienced increases in the cost for energy and packagingmaterials during 2005 and believe such costs will continue to increase on averagefor the remainder of 2005. Packaging contracts are generally negotiated and setprices on an annual basis. We have also begun to see significant increases inour utility costs due to the heat wave impacting most of the United States. Webelieve this trend will negatively impact retail sales and costs during thethird quarter of 2005.

 

Due to competition for personnel, limited availability in the laborpool, and changes in the federal overtime regulations of the Fair LaborStandards Act, which went into effect on August 23, 2004, we anticipate that wemay experience an increase in hourly wages during the remainder of 2005contingent upon the number of overtime hours worked.

 

Certain states and local governments have increased both the rate andnature of taxes on businesses in their regions in an effort to offset budgetshortfalls. These increased taxes include real estate and property taxes, stateand local income taxes, and various employment taxes.

 

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Changes in any of the aforementioned categories could directly impactthe profitability of our company-owned locations, manufacturing operations ordistribution channels. Increases in any of these expense trends in the nearfuture may contribute to degradation in our profit margins until such time aswe are able to pass on increased costs to our consumers.

 

*Impact of Inflation*

 

We have not experienced a significant overall impact from inflation. Asoperating expenses increase, we recover increased costs through pricingincreases, to the extent permitted by competition. We also review and implementalternative products or processes.

 

*Store Portfolio Strategy*

 

In mid-2004, we began an in-depth strategic review of all brands andthe likelihood of providing additional capital and other resources to grow eachindependent brand. Additionally, we focused on individual store performance andcompliance at each of our company operated, franchised and licensed stores. Forthe Einstein Bros. Brand, we engaged Birchwood Resultants to build market leveland individual site level models to allow for strategic growth and portfoliorationalization decisions based on sound metrics. These models were built basedon consumer research conducted at our company operated Einstein Bros. locationsand external demographic, psychographic and competitive databases. Weconsidered various factors such as local market conditions, distribution andsupply chain channels, competition, comparable store sales, store-level cashflows and existing lease terms. Based on the store-level considerations, wethen reviewed the economic and financial costs of exiting poorly performinglocations (where the leases permitted cessation of operations) or sub-leasingthe location to a third party. We also considered the long-term options oflocations that perform at break-even or slightly above break-even.  As a result of our strategic review, we havedeliberately reduced our store count based on prudent business decisions supportedby quantitative data in an effort to improve our overall profitability. We alsobelieve these efforts will identify markets for future store growth, allow usto better focus our time and resources, re-invest in our existing business andcontribute to long-term sustainable growth in free cash flow.

 

We believe we have a solid platform for growth through store licensingof our Einstein Bros. and Noah’s brands. The licensing program is available toqualified foodservice operators and typically requires an upfront license feethat is fully earned at the time the licensee commences operations. Stores aredeveloped on college campuses, hospitals, airports, military installations andother locations. The licensed stores are generally opened during the third andfourth calendar quarters consistent with the timing of many government andhigher education projects and federal funding. We typically receive continuingroyalties on sales from each licensed store location. Our licensees are notrequired to buy all of their non-proprietary products directly from us, butrather their product sources must be approved by us.

 

We have a franchise base primarily in our Manhattan brand thatgenerates a recurring revenue stream through fee and royalty payments. Ourfranchise base provides us with the ability to grow our brand with minimalcommitment of capital by us, and creates a built-in customer base for ourmanufacturing operations. We continue to look for franchisee candidates withappropriate operational experience and financial stability, including specificnet worth and liquidity requirements. During 2004, we worked to improve ourrelationship and communication with performing franchisees. In an effort tostrengthen the brand, we terminated certain relationships with franchisees thatwere not performing in accordance with their franchise agreements. We believethat active involvement in and management of restaurant operations will resultin a successful franchise strategy.

 

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We continually assess the financial and operational alignment of ourManhattan, Chesapeake and New World brands. As the Manhattan brand representsthe majority of our franchise operations, revitalizing and strengthening thisbrand remains a challenge for our management team. We recognize that ourhistoric franchise model is not consistent with future operating plans for allof our brands due to geographic separation from core markets. As a result, weexited certain markets during the second quarter ended 2005. We believe that byfocusing on core markets, we will continue to build stronger brand awareness,consistent levels of performance and customer loyalty.

 

We recently filled the position of Senior Vice President of FranchiseOperations. We believe the addition of this position will help to build ourbusiness and accelerate the growth of the franchise system.

 

During the second quarter ended 2005, we reviewed the long term strategicfit of Chesapeake utilizing the recommendations of a third party consultantpreviously engaged to present viable alternatives for the brand. Based upon theconsultant’s recommendations, we decided to form an exit strategy thatwe believe could be completed within approximately one year. Because there hadbeen a change in circumstances, it became necessary to review the asset forimpairment. The analysisindicated that the carrying amount of the assets was greater than its fairvalue and accordingly we recorded an impairment charge of approximately $1.2million for the quarter ended June 28, 2005. Additionally, we determined thatthe brand had a remaining useful life of one-year.

 

The following table details the total restaurants open at the end ofthe respective second quarter:

 
| ** **                               | ** ** | **Company** | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
|------------------------------------------|------------|-------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                               | ** ** | **owned**   | ** ** | **Licensed** | ** ** | **Franchised** | ** ** | **Total**  | ** ** |
| **Einstein Bros Bagels:**                | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
| 2005                                     |       | 357         |       | 57           |       | —         |       | 414        |       |
| 2004                                     |       | 371         |       | 46           |       | —         |       | 417        |       |
| **Einstein Bros Cafe:**                  | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
| 2005                                     |       | 8           |       | —       |       | —         |       | 8          |       |
| 2004                                     |       | —      |       | —       |       | —         |       | —     |       |
| **Noah’s:**                         |       |        |       |         |       |           |       |       |       |
| 2005                                     |       | 75          |       | 3            |       | —         |       | 78         |       |
| 2004                                     |       | 80          |       | 3            |       | —         |       | 83         |       |
| **Manhattan:**                           |       |        |       |         |       |           |       |       |       |
| 2005                                     |       | —      |       | —       |       | 127            |       | 127        |       |
| 2004                                     |       | —      |       | —       |       | 165            |       | 165        |       |
| **Chesapeake:**                          |       |        |       |         |       |           |       |       |       |
| 2005                                     |       | —      |       | —       |       | 24             |       | 24         |       |
| 2004                                     |       | —      |       | —       |       | 37             |       | 37         |       |
| **New World Coffee/Willoughby’s*:** |       |        |       |         |       |           |       |       |       |
| 2005                                     |       | 2           |       | —       |       | 5              |       | 7          |       |
| 2004                                     |       | 8           |       | —       |       | 10             |       | 18         |       |
| **Total Restaurants:**                   |       |        |       |         |       |           |       |       |       |
| 2005                                     |       | 442         |       | 60           |       | 156            |       | 658        |       |
| 2004                                     |       | 459         |       | 49           |       | 212            |       | 720        |       |

 

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* On October 6, 2004, we sold Willoughby’s. The Willoughby’sbusiness consisted of a coffee roasting plant, three retail locations andoffice space.

 

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**Results ofOperations**

 

This table sets forth, for the periods indicated, certain amountsincluded in our consolidated statements of operations, the relative percentagethat those amounts represent to total revenue (unless otherwise indicated), andthe percentage change in those amounts from period to period. All percentagesare calculated using actual amounts rounded to the nearest thousand.

 
| ** **                                                    | ** ** | ** **                     | ** ** | ** **     | ** ** | **Increase**                   | ** ** | ** **     | ** ** | ** **  | ** ** | **Increase** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------|------------|----------------|------------|--------------------------------|------------|----------------|------------|-------------|------------|--------------|------------|
| ** **                                                    | ** ** | **Second quarter ended:**      | ** ** | **(Decrease)** | ** ** | **Year to date ended:**        | ** ** | **(Decrease)** | ** ** |
| ** **                                                    | ** ** | **(percent of total revenue)** | ** ** | **2005**       | ** ** | **(percent of total revenue)** | ** ** | **2005**       | ** ** |
| ** **                                                    | ** ** | **6/28/05**                    | ** ** | **6/29/04**    | ** ** | **vs. 2004**                   | ** ** | **6/28/05**    | ** ** | **6/29/04** | ** ** | **vs. 2004** | ** ** |
| Revenues:                                                     |       |                           |       |           |       |                           |       |           |       |        |       |         |       |
| Retail sales                                                  |       | 93.8                           | %          | 93.0           | %          | 4.0                            | %          | 93.5           | %          | 92.9        | %          | 3.3          | %          |
| Manufacturing revenues                                        |       | 4.8                            | %          | 5.3            | %          | (6.1                           | )%         | 5.1            | %          | 5.6         | %          | (7.0         | )%         |
| Franchise and license related revenues                        |       | 1.4                            | %          | 1.7            | %          | (16.5                          | )%         | 1.5            | %          | 1.5         | %          | 0.5          | %          |
| Total revenues                                                |       | 100.0                          | %          | 100.0          | %          | 3.1                            | %          | 100.0          | %          | 100.0       | %          | 2.7          | %          |
|                                                          |       |                           |       |           |       |                           |       |           |       |        |       |         |       |
| Cost of sales (percentage of corresponding  revenue stream):  |       |                           |       |           |       |                           |       |           |       |        |       |         |       |
| Retail costs                                                  |       | 81.0                           | %          | 83.8           | %          | 0.5                            | %          | 81.6           | %          | 83.3        | %          | 1.2          | %          |
| Manufacturing costs                                           |       | 90.3                           | %          | 89.8           | %          | (5.6                           | )%         | 92.4           | %          | 87.1        | %          | (1.3         | )%         |
| Total cost of sales                                           |       | 80.3                           | %          | 82.7           | %          | 0.2                            | %          | 80.9           | %          | 82.3        | %          | 1.0          | %          |
|                                                          |       |                           |       |           |       |                           |       |           |       |        |       |         |       |
| Gross profit (percentage of corresponding  revenue stream):   |       |                           |       |           |       |                           |       |           |       |        |       |         |       |
| Retail                                                        |       | 19.0                           | %          | 16.2           | %          | 22.2                           | %          | 18.4           | %          | 16.7        | %          | 14.1         | %          |
| Manufacturing                                                 |       | 9.7                            | %          | 10.2           | %          | (10.8                          | )%         | 7.6            | %          | 12.9        | %          | (45.0        | )%         |
| Franchise and license                                         |       | 100.0                          | %          | 100.0          | %          | (16.5                          | )%         | 100.0          | %          | 100.0       | %          | 0.5          | %          |
| Total gross profit                                            |       | 19.7                           | %          | 17.3           | %          | 17.3                           | %          | 19.1           | %          | 17.7        | %          | 10.5         | %          |
|                                                          |       |                           |       |           |       |                           |       |           |       |        |       |         |       |
| General and administrative expenses                           |       | 9.6                            | %          | 8.5            | %          | 16.4                           | %          | 9.4            | %          | 9.1         | %          | 7.0          | %          |
| Depreciation and amortization                                 |       | 7.3                            | %          | 7.5            | %          | 0.3                            | %          | 7.2            | %          | 7.5         | %          | (0.7         | )%         |
| Loss (gain) on sale, disposal or  abandonment of assets, net  |       | 0.2                            | %          | 1.6            | %          | (89.1                          | )%         | 0.1            | %          | 0.8         | %          | (88.7        | )%         |
| Charges (adjustments) of integration and  reorganization cost |       | (0.0                           | )%         | (0.0           | )%         |                           | *     | (0.0           | )%         | (0.4        | )%         | *            |       |
| Impairment charges and other related costs                    |       | 1.2                            | %          | 0.0            | %          |                           | *     | 0.7            | %          | 0.0         | %          | *            |       |
| Income (loss) from operations                                 |       | 1.5                            | %          | (0.2           | )%         |                           | *     | 1.6            | %          | 0.8         | %          | *            |       |
| Other expense (income):                                       |       |                           |       |           |       |                           |       |           |       |        |       |         |       |
| Interest expense, net                                         |       | 5.9                            | %          | 6.3            | %          | (2.2                           | )%         | 6.1            | %          | 6.3         | %          | (0.1         | )%         |
| Other                                                         |       | (0.1                           | )%         | (0.0           | )%         | 91.7                           | %          | (0.1           | )%         | (0.1        | )%         | 26.0         | %          |
| Loss before income taxes                                      |       | (4.4                           | )%         | (6.4           | )%         | (29.1                          | )%         | (4.5           | )%         | (5.5        | )%         | (16.2        | )%         |

 

----

*not meaningful

 

*Revenues*

 

**Total revenues for the second quarter and year to date period endedJune 28, 2005 were consistent with our expectations. Our total revenuesincreased 3.1% and 2.7% when compared to the second quarter and year to dateperiod ended 2004, respectively. This increase primarily resulted from anincrease in retail sales (e.g. company-operated store sales, which representthe most significant component of revenue). Our retail comparable store sales increase of 6.3% consisted of a 6.0%increase in average check and a 0.3% increase in transactions during the secondquarter ended 2005. We also experienced a 5.5% increase in comparable storesales for the year to date period ended June 28, 2005 which consisted of 6.2%increase in average check partially offset by 0.6% decrease in transactions.The increases experienced in average check were primarily related to a priceincrease coupled with a shift in product mix to higher priced items. Comparablestore sales represent sales at stores that were open for one full year and havenot been relocated or closed during the current year. Comparable store salesare also referred to as “same-store” sales and as “comp sales” within therestaurant industry.**

 

20

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**Throughout fiscal 2004, the trend of lower comparable store sales beganto reverse and ultimately became positive during the fourth quarter of 2004.The following table summarizes the elements of comparable store sales for eachquarter in fiscal 2004 and 2005:**

 
| ** **                  | ** ** | **Comparable**  | ** ** | **Average** | ** ** | ** **       | ** ** |
|-----------------------------|------------|-----------------|------------|-------------|------------|------------------|------------|
| **Period**                  | ** ** | **Store Sales** | ** ** | **Check**   | ** ** | **Transactions** | ** ** |
| First quarter, fiscal 2004  |       | (4.8            | )%         | 0.7         | %          | (5.5             | )%         |
| Second quarter, fiscal 2004 |       | (3.7            | )%         | 3.9         | %          | (7.3             | )%         |
| Third quarter, fiscal 2004  |       | (1.6            | )%         | 5.0         | %          | (6.3             | )%         |
| Fourth quarter, fiscal 2004 |       | 2.6             | %          | 5.2         | %          | (2.5             | )%         |
| First quarter, fiscal 2005  |       | 4.6             | %          | 6.4         | %          | (1.7             | )%         |
| Second quarter, fiscal 2005 |       | 6.3             | %          | 6.0         | %          | 0.3              | %          |

** **

**We believe the positive trend in comparable store sales is a result ofprice increases coupled with a shift in the product mix to higher priced items,improvements in the operation of our restaurants including initiatives incustomer service and overall store appearance, the introduction of new menuitems, further development of catering programs in selected markets, andadvertising campaigns that were initiated in the fourth quarter ended 2004 andsecond quarter ended 2005 that strengthened consumer awareness.**

 

*Gross Profit*

 

Our total gross profit increased 17.3% and 10.5% for the second quarterand year to date period ended 2005 when compared to the same periods in 2004,respectively. This increase was primarily due to an improvement of 22.2% and14.1%, respectively, in our retail margins. Our retail margins are impacted byvarious store-level operating expenses such as the cost of products sold,salaries and benefits, insurance, supplies, repair and maintenance expenses,advertising, rent, utilities and property taxes. Similarly, our manufacturingmargins are impacted by various manufacturing-level operating expenses such asthe cost of products sold, salaries and benefits, insurance, supplies, repairand maintenance expenses, rent, utilities and property taxes. Depreciation,amortization and income taxes do not impact our retail or manufacturingmargins.

 

For the second quarter ended 2005, the increase in retail sales overthe comparable quarter contributed approximately $1.8 million in additionalgross profit. Because certain elements of cost of sales are fixed in naturesuch as rent, utilities, property taxes and manager salaries, incremental salespositively impact gross profit. Our retail margins also improved byapproximately $1.0 million due to improvements in labor utilization andreductions in group insurance and workers’ compensation claims. The increasesin retail margins were offset by approximately $0.8 million in additionaladvertising spend and $0.5 million in increased real estate taxes and a realestate dispute.

 

For the year to date period ended June 28, 2005, the increase in retailsales over the comparable quarter contributed approximately $2.9 million inadditional gross profit. Because certain elements of cost of sales are fixed innature such as rent, utilities, property taxes and manager salaries,incremental sales positively impact gross profit. Our retail margins alsoimproved by approximately $1.6 million due to improvements in labor utilizationand reductions in group insurance and workers’ compensation claims. Theseimprovements were offset by approximately $0.8 million in additionaladvertising spend, approximately $0.7 in increased real estate taxes and anincrease of approximately $0.5 million in bonuses payable to various levels ofrestaurant managers due to improved operating performance.

 

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Our manufacturing operations are ancillary to our company-operatedstores. For the second quarter and year to date periods ended 2005 and 2004,our manufacturing margins represented less than 1.0% of total revenues. Ourmanufacturing margins decreased 10.8% and 45.0% for the second quarter and yearto date periods ended 2005, respectively, when compared to the same periods in2004. Manufacturing margins for the year to date period ended June 28, 2005were predominately impacted by increases in labor and commodity costs. We haveidentified cost reduction solutions to offset the impact of increases incommodity costs and have begun to see the benefit when comparing consecutivequarter’s performance.

 

*Other Operating Expenses*

 

**Our general and administrative expenses increased 16.4% for the secondquarter ended 2005 when compared to the same period in 2004. Approximately $0.7million was the result of an increase in bonuses payable to corporate officestaff and management due to improved operating performance. Also contributing tothe increase was approximately $0.3 million in severance wages payable, offsetby approximately $0.3 million in reduced legal spending related to formeremployee matters that were resolved in early 2005.**

** **

**Our general and administrative expenses increased 7.0% for the year todate period ended 2005 when compared to the same period in 2004. For the yearto date period ended 2005, approximately $1.6 million was the result of anincrease in bonuses payable to corporate office staff and management due toimproved operating performance. Also contributing to the increase wasapproximately $0.3 million in severance wages payable, offset by approximately$0.9 million in reduced legal spending related to former employee matters thatwere resolved in early 2005.**

** **

Depreciation and amortization expenses increased 0.3% for the secondquarter and decreased 0.7% for the year to date period ended 2005, whencompared to the same periods in 2004. The slight decrease for the year to dateperiod is primarily due to a portion of our asset base becoming fullydepreciated.

 

During the second quarterended 2004, we recorded a loss of approximately $1.3 million primarily due tothe disposal of menu boards as a result of new product offerings and due to theabandonment of leasehold improvements related to closed restaurants and ouradministrative facilities located in New Jersey.

 

The adjustment of integration and reorganization cost primarilyrepresents adjustments to previously recorded liabilities associated with theclosing and corporate consolidation of our Eatontown facilities during 2002.During April 2004, we reached an agreement with the landlord of our Eatontownfacility to settle outstanding litigation. Previously recorded integration andreorganization estimates associated with closing this facility resulted in abenefit of $700,000 during the first quarter ended 2004 as a result of thissettlement.

 

As more fully discussed in note 3 to our consolidated financialstatements,we recorded approximately $1.2 million in impairment charges related to theChesapeake trademarks during the second quarter ended 2005. Additionally,during the first quarter ended 2005, we recorded $97,000 in exit costs from thedecision to close one restaurant. The assets associated with the closure of thisrestaurant were previously impaired.

 

22

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**Liquidity and Capital Resources**

 

The restaurant industry is predominantly a cash business where cash isreceived at the time of the transaction. We currently generate sufficient cashflow to fund operations, capital expenditures and required debt and interestpayments. We have a minimal amount of accounts receivable, which arepredominantly from our franchisees, licensees and distributors. Additionally,our investment in inventory is minimal since our products are perishable. Ouraccounts payable are on terms that we believe are consistent with those ofother companies within the industry.

 

The primary driver of our operating cash flow is our restaurantoperations, specifically the gross margin from our company-operatedrestaurants. Therefore, we focus on the elements of those operations includingcomparable store sales and cash flows to ensure a steady stream of operatingprofits that enable us to meet our cash obligations. On a weekly basis, wereview our company-operated store performance compared with the same period inthe prior year and our operating plan. We are continuously identifying andimplementing cost reduction initiatives, not only at the store operationslevel, but also within other disciplines such as supply chain, manufacturingoperations and overhead.  During 2005, wehave continued to identify cost reduction initiatives, including but notlimited to: menu optimization to remove and/or modify slow moving products andthus reduce waste, reductions in cost of goods sold through purchasingefficiencies and further refinement of programs that monitor theoretical foodcost.

 

*Credit Facility*

 

Our AmSouth Revolver is a $15 million senior secured revolving creditfacility, which matures on July 8, 2006. On June 28, 2005, our unused creditfacility totaled approximately $7.9 million, net of outstanding letters ofcredit of $7.1 million. Our credit facility contains financial covenantsrelating to the maintenance of leverage and coverage ratios. The creditfacility also contains affirmative and negative covenants including, amongother things, limitations on certain additional indebtedness, capitalexpenditures and minimum EBITDA as defined in the AmSouth agreement. We were incompliance with all covenants at June 28, 2005 and do not anticipate that thecovenants will impact our ability to borrow under our credit facility for itsremaining term.

 

Based upon our projections for fiscal 2005 and beyond, we believe thatthe cash flow from operations coupled with the continued availability of ourAmSouth Revolver will be adequate to fund our operations, capital expendituresand required debt and interest repayments for the foreseeable future.

 

In the first quarter of 2005, we announced the engagement of BearStearns, investment bankers, to assist in the potential refinancing of our $160Million Notes and AmSouth Revolver. Due to the current instability of the highyield market and under advisement from Bear Stearns, we have decided thatcompleting a refinancing at this time would not result in the favorableinterest savings that were initially contemplated and have suspended furtherrefinancing activity until market conditions improve.

 

*Operating Activities*

 

For the year to date period ended June 28, 2005, operations generated$8.1 million of cash. We continue to see improvements in our cash flow fromoperations and believe that such cash flow will be adequate to fund operatingcosts. Due to the timing of interest payments under our $160 Million Notes,which are due January 1 and July 1, we generally consume cash from operationsduring the first and third fiscal quarters of each year. During the second andfourth fiscal quarters of each year, we generally generate cash from operations.Historically, our fourth quarter is our strongest quarter for generating cashdue to seasonality and gift card promotions.

 

23

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*Investing Activities*

 

For the year to date period ended June 28, 2005, we used approximately$4.0 million of cash to purchase additional property and equipment whichincluded $0.5 million for new stores, $0.3 million for retrofit of existingstores to the Café concept, $2.2 million for replacement and new equipment atour existing company-operated stores, $0.6 million for our manufacturingoperations and less than $0.4 million for general corporate purposes.

 

*ContractualObligations*

 

There were no material changes to our contractual obligations duringthe second quarter ended 2005. For information regarding our contractualobligations at December 28, 2004, see our Annual Report on Form 10-K for thefiscal year ended December 28, 2004.

 

*Guarantees*

 

Prior to 2001, we would occasionally guarantee leases for the benefitof certain of our franchisees. None of the guarantees have been modified sincetheir inception and we have since discontinued this practice. Currentfranchisees are the primary lessees under the vast majority of these leases.Under the lease guarantees, we may be required by the lessor to make all of theremaining monthly rental payments or property tax and common area maintenancepayments if the franchisee does not make the required payments in a timelymanner. However, we believe that most, if not all, of the franchised locationscould be subleased to third parties minimizing our potential exposure.Additionally, we have indemnification agreements with our franchisees underwhich the franchisees would be obligated to reimburse us for any amounts paidunder such guarantees. Historically, we have not been required to make suchpayments in significant amounts. We record a liability for our exposure underthe guarantees in accordance with SFAS No. 5, “Accounting for Contingencies,”following a probability related approach. In the event that trends change inthe future, our financial results could be impacted. As of June 28, 2005, wehad outstanding guarantees of indebtedness under certain leases ofapproximately $1.1 million. Approximately $330,000 has been recorded and isincluded in accrued expenses in our consolidated balance sheets.

 

*Insurance*

 

We are insured for losses related to health, general liability andworkers’ compensation under large deductible policies. The insurance liabilityrepresents an estimate of the ultimate cost of claims incurred and unpaid as ofthe balance sheet date. The estimated liability is established based onactuarial estimates, is discounted at 10% based upon a discrete analysis ofactual claims and historical data and is reviewed on a quarterly basis toensure that the liability is appropriate. If actual trends, including theseverity or frequency of claims differ from our estimates, our financialresults could be favorably or unfavorably impacted.

 

24

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*Non-GAAP Financial Measures*

 

Adjusted EBITDA is a typical non-GAAP measurement for companies thatissue debt and a measure used by our lenders. Adjusted EBITDA, as defined inour Indenture Agreement relating to the $160 Million Notes and the revolvingcredit facility with AmSouth Bank (collectively referred to herein as our loanagreements) represents earnings before interest, taxes, depreciation andamortization, and is further adjusted by various items including: (1)integration and reorganization charges and credits, (2) cumulative change infair value of derivatives, (3) gain/loss on the investment, sale, disposal orexchange of assets, (4) impairment and other related charges and (5) otherincome. Adjusted EBITDA may also be further adjusted by certain legal,financing and advisory fees, acquisition and integration expenses, and othercharges. Our loan agreements require that Adjusted EBITDA be measured on atwelve month period ending on the last day of each fiscal quarter and begreater than $33 million. We present Adjusted EBITDA because it relates to acovenant contained in each of our loan agreements which are material to us, ourfinancial condition and liquidity. If we do not comply with the Adjusted EBITDAcovenant, an Event of Default (as defined in our loan agreements) would occurand, subject to the applicable notice and cure periods, the lenders coulddeclare all amounts outstanding immediately due and payable and pursue allavailable remedies for payment of such amounts. As of June 28, 2005, we were in compliance with the Adjusted EBITDAcovenant and we do not anticipate that the covenant will impact our ability toborrow under the AmSouth revolving credit facility.

 

Data regarding Adjusted EBITDA is provided as additional information tohelp our bondholders understand our compliance with the Adjusted EBITDAcovenant. We also believe Adjusted EBITDA is useful to our bondholders as anindicator of earnings available to service debt.  Adjusted EBITDA is not a recognized termunder GAAP and does not purport to be an alternative to income (loss) fromoperations, an indicator of cash flow from operations or a measure ofliquidity. Because not all companies calculate Adjusted EBITDA identically,this presentation may not be comparable to similarly titled measures of othercompanies. We believe Adjusted EBITDA is a more meaningful indicator ofearnings available to service debt when certain charges (such as the gain orloss from the disposal of assets, impairment of assets and cumulative change inthe fair value of derivatives) are excluded from income (loss) from continuingoperations. Adjusted EBITDA is not intended to be a measure of free cash flowfor management’s discretionary use, as it does not consider certain cashrequirements such as interest expense, income taxes, debt service payments andcash costs arising from integration and reorganization activities.

 

25

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Thefollowing tables reconcile Adjusted EBITDA to net loss and cash flows used inoperating activities, respectively:

 
| ** **                                                    | ** ** | **First quarter ended:** | ** ** | **Second quarter ended:** | ** ** | **Year to date:** | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|---------------------------|------------|-------------------|------------|
| ** **                                                    | ** ** | **March 29,**            | ** ** | **March 30,**             | ** ** | **June 28,**      | ** ** | **June 29,** | ** ** | **June 28,** | ** ** | **June 29,** | ** ** |
|                                                          | ** ** | **2005**                 | ** ** | **2004**                  | ** ** | **2005**          | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Reconciliation of Net Loss to Adjusted EBITDA:**            |       |                     |       |                      |       |              |       |   |   |   |   |   |   |
| Net loss                                                      |       | $                        | (4,198     | )                         | $          | (4,130            | )          | $ | (4,283 | ) | $ | (6,224 | ) | $ | (8,481 | ) | $ | (10,354 | ) |
| Adjustments as defined in the loan  agreements:               |       |                     |       |                      |       |              |       |   |   |   |   |   |   |
| Interest expense, net                                         |       | 5,919                    |       | 5,799                     |       | 5,773             |       | 5,904 |   | 11,692 |   | 11,703 |   |
| Taxes                                                         |       | —                   |       | 55                        |       | —            |       | 184 |   | — |   | 239 |   |
| Depreciation and amortization                                 |       | 6,708                    |       | 6,819                     |       | 7,077             |       | 7,058 |   | 13,785 |   | 13,877 |   |
| Loss (gain) on sale, disposal or  abandonment of assets, net  |       | 4                        |       | (6                        | )          | 161               |       | 1,472 |   | 165 |   | 1,466 |   |
| Charges (adjustments) of integration and  reorganization cost |       | 5                        |       | (760                      | )          | —            |       | (39 | ) | 5 |   | (799 | ) |
| Impairment charges and other related costs                    |       | 97                       |       | —                    |       | 1,182             |       | — |   | 1,279 |   | — |   |
| Other expense (income)                                        |       | (57                      | )          | (64                       | )          | (69               | )          | (36 | ) | (126 | ) | (100 | ) |
| Certain legal, financing and advisory fees                    |       | —                   |       | 75                        |       | 526               |       | 688 |   | 526 |   | 763 |   |
| Certain corporate expenses                                    |       | —                   |       | 225                       |       | —            |       | — |   | — |   | 225 |   |
| Certain other charges                                         |       | —                   |       | 25                        |       | 700               |       | — |   | 700 |   | 25 |   |
| Adjusted EBITDA                                               |       | $                        | 8,478      |                      | $          | 8,038             |       | $ | 11,067 |   | $ | 9,007 |   | $ | 19,545 |   | $ | 17,045 |   |

 
| ** **                                                                       | ** ** | **First quarter ended:** | ** ** | **Second quarter ended:** | ** ** | **Year to date:** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------|------------|---------------------------|------------|-------------------|------------|
| ** **                                                                       | ** ** | **March 29,**            | ** ** | **March 30,**             | ** ** | **June 28,**      | ** ** | **June 29,** | ** ** | **June 28,** | ** ** | **June 29,** | ** ** |
|                                                                             | ** ** | **2005**                 | ** ** | **2004**                  | ** ** | **2005**          | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Reconciliation of Net Cash Used in Operating Activities  to Adjusted EBITDA:** |       |                     |       |                      |       |              |       |   |   |   |   |   |   |
|                                                                             |       |                     |       |                      |       |              |       |   |   |   |   |   |   |
| Net cash generated by (used in) operating  activities                            |       | $                        | (6,288     | )                         | $          | (4,175            | )          | $ | 14,353 |   | $ | 9,610 |   | $ | 8,065 |   | $ | 5,435 |   |
| Adjustments as defined in the loan  agreements:                                  |       |                     |       |                      |       |              |       |   |   |   |   |   |   |
| Changes in operating assets and liabilities                                      |       | 9,292                    |       | 6,560                     |       | (9,784            | )          | (6,768 | ) | (492 | ) | (208 | ) |
| Provision for (recovery of) losses on accts  receivable                          |       | 91                       |       | —                    |       | 47                |       | (94 | ) | 138 |   | (94 | ) |
| Amortization of debt issue costs                                                 |       | (462                     | )          | (462                      | )          | (462              | )          | (446 | ) | (924 | ) | (908 | ) |
| Stock based compensation expense                                                 |       | (17                      | )          | —                    |       | (17               | )          | (35 | ) | (34 | ) | (35 | ) |
| Interest expense, net                                                            |       | 5,919                    |       | 5,799                     |       | 5,773             |       | 5,904 |   | 11,692 |   | 11,703 |   |
| Other income                                                                     |       | (57                      | )          | (64                       | )          | (69               | )          | (36 | ) | (126 | ) | (100 | ) |
| Provision (benefit) for state income taxes                                       |       | —                   |       | 55                        |       | —            |       | 184 |   | — |   | 239 |   |
| Certain legal, financing and advisory fees                                       |       | —                   |       | 75                        |       | 526               |       | 688 |   | 526 |   | 763 |   |
| Certain corporate expenses                                                       |       | —                   |       | 225                       |       | —            |       | — |   | — |   | 225 |   |
| Certain other charges                                                            |       | —                   |       | 25                        |       | 700               |       | — |   | 700 |   | 25 |   |
| Adjusted EBITDA                                                                  |       | $                        | 8,478      |                      | $          | 8,038             |       | $ | 11,067 |   | $ | 9,007 |   | $ | 19,545 |   | $ | 17,045 |   |

 

26

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### ***Risk Factors***

####  

We caution our readers that the following important factors, amongothers, could cause the actual results to differ materially from thoseindicated by forward-looking statements made in this report and from time totime in news releases, reports, proxy statements, registration statements andother written communications, as well as verbal forward-looking statements madefrom time to time by representatives of the company. Such forward-lookingstatements involve risks and uncertainties that may cause our actual results,performance or achievements to be materially different from any futureperformance or achievements expressed or implied by these forward-lookingstatements. Factors that might cause actual events or results to differmaterially from those indicated by these forward-looking statements include,but are not limited to (i) future economic performance, (ii) success of costreduction initiatives, (iii) the possibility of refinancing of our debt, (iv)restaurant openings or closings, (v) our ability to identify new markets andlocations, (vi) retrofits of our existing locations, (vii) our ability toincorporate elements of Einstein Bros. Café to improve performance of existingEinstein Bros. Bagels, (viii) our ability to execute our franchise strategy,(ix) operating margins, (x) the availability of acceptable real estatelocations, (xi) the success and consumer acceptance of our innovations andchanges to our restaurants, (xii) our ability to appropriately allocate capitalexpenditures to our restaurants, (xiii) the sufficiency of our cash balances,(xiv) cash generated from operating and financing activities for our futureliquidity and capital resource needs, (xv) the reliability of our distributionchannels, (xvi) costs of utilities; costs and availability of commodities andproducts and (xvii) other matters, and are generally accompanied by words suchas: believes, anticipates, estimates, predicts, expects, projects, and similarexpressions that convey the uncertainty of future events or outcomes. Anexpanded discussion of some of these risks factors follows. You should alsorefer to the other information set forth in our Annual Report on Form 10-K forthe fiscal year ended December 28, 2004, including our consolidated financialstatements and the related notes.

 

*We may not be successful in implementing any or all of the initiativesof our business strategy.*

 

Our success depends in part on our ability to understand our customers’needs. We believe successful deployment of our current business strategy willaddress customers’ needs and contribute to overall company growth. While webelieve elements of the Einstein Bros. Café concept will strengthen theperformance of our Einstein Bros. brand, their success is dependent uponvarious factors, including customer acceptance of new menu offerings andpricings, the look and feel of the restaurants, and the new service system. Inaddition, the availability of capital and opportunities to make modificationsto existing stores will be significant factors in the success of our business strategy.If we improperly perceive customers’ needs and/or are not successful inimplementing any or all of the initiatives of our business strategy, it couldhave a material adverse effect on our business, results of operations, andfinancial condition.

 

*We have and expect to continue to have asubstantial amount of debt.*

 

We have a high level of debt and are highly leveraged. In addition, wemay, subject to certain restrictions, incur substantial additional indebtednessin the future. Our high level of debt, among other factors, could:

 

•      makeit difficult for us to satisfy our obligations under our indebtedness;

•      limitour ability to obtain additional financing for working capital, capitalexpenditures, acquisitions and general corporate purposes;

•      increaseour vulnerability to downturns in our business or the economy generally; and

•      limitour ability to withstand competitive pressures from our less leveragedcompetitors.

 

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Our AmSouthRevolver and $160 Million Notes expire in July 2006 and July 2008,respectively. In first quarter 2005, we engaged Bear Stearns, investmentbankers, to assist us in refinancing our $160 Million Notes and the AmSouthRevolver. Due to the current instability of the high yield market and underadvisement from Bear Stearns, we have decided that completing a refinancing atthis time would not result in the favorable interest savings that wereinitially contemplated and have suspended further refinancing activity untilmarket conditions improve. We cannot provide any assurance that we will besuccessful in refinancing this debt at a later time or that any refinancingwill be on terms more favorable to us.

 

*We have certain covenants inherent in our debt agreementswith which we must* *be in* *compliance*.

 

Ourdebt agreements contain certain covenants, which, among others, includecertain financial covenants such as limitations on capital expenditures,maintenance of the business, use of proceeds on sales of assets andminimum Adjusted EBITDA as defined in the agreements. The covenantsalso preclude the declaration and payment of dividends or other distributionsto holders of our common stock.

 

Weare subject to multiple economic, financial, competitive, legal and other risksthat are beyond our control and could harm our future financial results.Any adverse effect on our business or financial results could affectour ability to maintain compliance with our debt covenants. A failure byus to comply with the covenants in the instruments and agreements governing ourindebtedness could result in an event of default that, if not cured or waived,could result in all of our indebtedness becoming immediately due and payable,which could render us insolvent.

 

*We may not be able to generate sufficientcash flow to make payments on our indebtedness.*

 

Economic, financial, competitive, legislative and other factors beyondour control may affect our ability to generate cash flow from operations tomake payments on our indebtedness, including the $160 Million Notes, and tofund necessary working capital. A significant reduction in operating cash flowwould likely increase the need for alternative sources of liquidity. If we areunable to generate sufficient cash flow to make payments on our debt, we will haveto pursue one or more alternatives, such as reducing or delaying capitalexpenditures, refinancing our debt on terms that are not favorable to us,selling assets or raising equity. We may not be able to accomplish any of thesealternatives on satisfactory terms, if at all, and even if accomplished, theymay not yield sufficient funds to service our debt.

 

*We are vulnerable to changes in consumerpreferences and economic conditions that could harm our financial results.*

 

Food service businesses are often affected bychanges in consumer tastes, dietary trends, national, regional and localeconomic conditions and demographic trends. Factors such as traffic patterns,local demographics and the type, number and location of competing restaurantsmay adversely affect the performance of individual locations. Shifts inconsumer preferences away from our type of cuisine and/or the quick casualstyle could have a material adverse affect on our results of operations. Webelieve that the trend toward consumption of food low in carbohydrate contentmay have had a negative impact on our sales and revenues. In addition,increased food, labor and energy costs have affected our results and may, inthe future, together with inflation, harm the restaurant industry in generaland our locations in particular. Adverse changes in any of these factors couldreduce consumer traffic or impose practical limits on pricing, which could harmour business prospects, financial condition, operating results and cash flow.Our continued success will depend in part on our ability to anticipate,identify and respond to changing consumer preferences and economic conditions.

 

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*There is intense competition in therestaurant industry for personnel, real estate, advertising space, andcustomers, among other things.*

 

Our industry is intensely competitive andthere are many well-established competitors with substantially greaterfinancial and other resources than we have. In addition to current competitors,one or more new major competitors with substantially greater financial,marketing and operating resources could enter the market at any time andcompete directly against us. In addition, in virtually every major metropolitanarea in which we operate or expect to enter, local, regional or nationalcompetitors already exist. This may make it more difficult to obtain realestate, advertising space, and retain customers and personnel.

 

*We are vulnerable to fluctuations in thecost, availability and quality of our raw ingredients.*

 

The cost, availability and quality of theingredients we use to prepare our food are subject to a range of factors, manyof which are beyond our control. Fluctuations in economic and politicalconditions, weather and demand could adversely affect the cost of ouringredients. We have limited control over fluctuations in the price and qualityof commodities, and we may not be able to pass through any cost increases toour customers. We are dependent on frequent deliveries of fresh ingredients,thereby subjecting us to the risk of shortages or interruptions in supply. Allof these factors could adversely affect our business and financial results.

 

*We heavily depend on our suppliers anddistributors.*

 

We currently purchase our raw materials fromvarious suppliers. We purchase a majority of our frozen bagel dough from onesupplier (who utilizes our proprietary processes), which we are dependent uponin the short-term. Additionally, we purchase all of our cream cheese from asingle source. Though to date we have not experienced significant difficultieswith our suppliers, our reliance on our suppliers subjects us to a number ofrisks, including possible delays or interruption in supplies, diminishedcontrol over quality and a potential lack of adequate raw material capacity.Any disruption in the supply or degradation in the quality of the materialsprovided by our suppliers could have a material adverse effect on our business,operating results and financial condition. In addition, such disruptions insupply or degradations in quality could have a long-term detrimental impact onour efforts to develop a strong brand identity and a loyal consumer base.

 

We depend on our network of six regional custom distributors todistribute frozen bagel dough and other materials to our locations. If any oneor more of these distributors fails to perform as anticipated, or if there isany disruption in any of our distribution relationships for any reason, itcould have a material adverse effect on our business, financial condition andresults of operations.  We arecontinually evaluating our distribution network to ensure it meets our internalcriteria with respect to improved quality and service. In the event that certaindistributors fail to meet our internal criteria, we could incur an increase indistribution costs.

 

*Increasing labor costs could adversely affectour continued profitability.*

 

We are dependent upon an available labor poolof employees, many of whom are hourly employees whose wages may be affected byan increase in the federal or state minimum wage. Numerous proposals have beenmade on federal, state and local levels to increase minimum wage levels.Although few, if any, of our employees are paid at the minimum wage level, anincrease in the minimum wage may create pressure to increase the pay scale forour employees, which would increase our labor costs and those of ourfranchisees and licensees. A shortage in the labor pool or other generalinflationary pressures or changes could also increase labor costs. In addition,changes in labor laws or reclassifications of employees from management tohourly employees could affect our labor cost. For example, federal overtimeregulations under the Fair Labor Standards Act, which went into effect on August23, 2004, impacted the classification of several of our positions. Asignificant increase in the number of overtime hours worked could have amaterial adverse effect on our income from operations and decrease ourprofitability and cash available to service our debt obligations if we areunable to recover these increases by raising the prices we charge ourcustomers.

 

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*We face the risk of adverse publicity andlitigation in connection with our operations.*

 

We are from time to time the subject ofcomplaints or litigation from our consumers alleging illness, injury or otherfood quality, health or operational concerns. Adverse publicity resulting fromthese allegations may materially adversely affect us, regardless of whether theallegations are valid or whether we are liable. In addition, employee claimsagainst us based on, among other things, discrimination, harassment or wrongfultermination may divert financial and management resources that would otherwisebe used to benefit our future performance. We have been subject to claims fromtime to time, and although these claims have not historically had a materialimpact on our operations, a significant increase in the number of these claimsor the number that are successful could materially adversely affect ourbusiness, prospects, financial condition, operating results or cash flows.

 

*We rely in part on our franchisees andlicensees.*

 

We rely in part on our franchisees andlicensees and the manner in which they operate their locations to develop andpromote our business. Although we have developed criteria to evaluate andscreen prospective candidates, the candidates may not have the business acumenor financial resources necessary to operate successful locations in theirrespective areas. In addition, franchisees and licensees are subject tobusiness risks similar to what we face such as competition, consumeracceptance, fluctuations in the cost, availability and quality of rawingredients, and increasing labor costs. The failure of franchisees orlicensees to operate successfully could have a material adverse effect on us,our ability to collect royalties, our reputation, our brands and our ability toattract prospective candidates.

 

*We face risks associated with governmentregulation.*

 

Each of our locations is subject to licensingand regulation by the health, sanitation, safety, labor, building and fireagencies of the respective states and municipalities in which it is located. Afailure to comply with one or more regulations could result in the impositionof sanctions, including the closing of facilities for an indeterminate periodof time, or third-party litigation, any of which could have a material adverseeffect on us and our results of operations.

 

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

 

Under various federal, state and local laws, an owner or operator ofreal estate may be liable for the costs of removal or remediation of certainhazardous or toxic substances on or in such property. Such liability may beimposed without regard to whether the owner or operator knew of, or wasresponsible for, the presence of such hazardous or toxic substances. Althoughwe are not aware of any environmental conditions that require remediation by usunder federal, state or local law at our properties, we have not conducted acomprehensive environmental review of our properties or operations. We may nothave identified all of the potential environmental liabilities at ourproperties, and any such liabilities that are identified in the future may havea material adverse effect on our financial condition.

 

*We may notbe able to protect our trademarks, service marks and other proprietary rights.*

 

We believe that our trademarks, service marksand other proprietary rights are important to our success and our competitiveposition. Accordingly, we devote substantial resources to the establishment andprotection of our trademarks, service marks and proprietary rights. However,the actions we take may be inadequate to prevent imitation of our products andconcepts by others or to prevent others from claiming violations of theirtrademarks and proprietary rights by us. In addition, others may assert rightsin our trademarks, service marks and other proprietary rights.

 

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*We have amajority stockholder.*

 

Greenlight Capital, L.L.C. and its affiliatesbeneficially own approximately 97 percent of our common stock on a fullydiluted basis. As a result, Greenlight has sufficient voting power, without thevote of any other stockholders, to determine what matters will be submitted forapproval by our stockholders, to approve actions by written consent without theapproval of any other stockholders, to elect all of our board of directors, andamong other things, to determine whether a change in control of our companyoccurs. Greenlight’s interests on matters submitted to stockholders may bedifferent from those of other stockholders. Greenlight is not involved in ourday-to-day operations, but Greenlight has voted its shares to elect our currentboard of directors. The chairman of our board of directors is a currentemployee of Greenlight.

 

Our common stock is not currently listed onany stock exchange or Nasdaq. As a result, we are not subject to corporategovernance rules adopted by the New York Stock Exchange, American StockExchange and Nasdaq requiring a majority of directors to be independent andrequiring compensation and nominating committees that are composed solely ofindependent directors. However, we are subject to rules requiring that theaudit committee consist entirely of independent directors. Under the rules ofthese stock exchanges and Nasdaq, if a single stockholder holds more that 50%of the voting power of a listed company, that company is considered acontrolled company, and except for the rules relating to independence of theaudit committee, is exempt from the above-mentioned independence rules. BecauseGreenlight beneficially owns approximately 97 percent of our common stock, wemay take advantage of the controlled company exemption if our common stockbecomes listed on an exchange or Nasdaq in the future. As a result, ourstockholders currently do not have, and may never have, the protections thatthese rules are intended to provide.

 

*Future sales of shares of our common stock by our stockholders couldcause our stock price to fall.*

 

If a substantial number of shares of ourcommon stock are sold in the public market, the market price of our commonstock could fall.  The perception amonginvestors that these sales will occur could also produce this effect.  Our majority stockholder Greenlightbeneficially owns approximately 97 percent of our common stock and sales byGreenlight or a perception that Greenlight will sell could cause a decrease inthe market price of our common stock. Additionally, holders of outstandingwarrants may convert and sell the underlying shares in the public market.Pursuant to our obligations under registration rights agreements, we haveregistered 957,872 shares of common stock underlying certain warrants, of whichGreenlight owns warrants to purchase approximately 493,683 shares of our commonstock. Sales of shares or a perception that there will be sales of theunderlying shares could also cause a decrease in the market price of our commonstock.

 

*Holders may find it difficult to effecttransactions in our common stock.*

 

Our common stock is currently quoted on the “pink sheets” under thesymbol “NWRG.PK.” Since our common stock is not listed on Nasdaq, the AmericanStock Exchange or the New York Stock Exchange, holders of our common stock mayfind that the liquidity of our common stock is impaired – not only in thenumber of securities that can be bought and sold, but also through delays inthe timing of transactions, reduction in security analysts’ and the news media’scoverage of us, and lower prices for our securities than might otherwise beattained.

 

Securities that are not listed on a stock exchange, the Nasdaq NationalMarket or the Nasdaq SmallCap Market are subject to an SEC rule that imposesspecial requirements on broker-dealers who sell those securities to personsother than their established customers and accredited investors. Thebroker-dealer must determine that the security is suitable for the purchaserand must obtain the purchaser’s written consent prior to the sale. Theserequirements may make it more difficult for stockholders to sell our stock thanthe stock of some other companies. It may also affect our ability to raise morecapital if and when necessary.

 

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**Item 3.  Qualitative and Quantitative Disclosures AboutMarket Risk**

 

During the second quarter ended 2005 and 2004, our results ofoperations, financial position and cash flows were not affected by changes inthe relative values of non-U.S. currencies to the U.S. dollar. We do not usederivative financial instruments to limit our foreign currency risk exposuresince virtually all of our business is conducted in the United States.

 

Our debt at June 28, 2005 and December 28, 2004 was principallycomprised of the $160 Million Notes due July 1, 2008 and the AmSouth Revolver.A 100 basis point increase in market interest rates would have an immaterialeffect on our borrowing costs, since the interest rate on the $160 MillionNotes is fixed. The interest rate on the AmSouth Revolver fluctuates withchanges in the prime rate, but is immaterial in relation to interest expenseunder the $160 Million Notes and to our results of operations and financialcondition.

 

We purchase certain commodities such as butter, cheese, coffee andflour. These commodities are generally purchased based upon market prices establishedwith vendors. These purchase arrangements may contain contractual features thatlimit the price paid by establishing certain price floors or caps. We do notuse financial instruments to hedge commodity prices because these purchasearrangements help control the ultimate cost paid and any commodity priceaberrations are generally short-term in nature.

 

This market risk discussion contains forward-looking statements. Actualresults may differ materially from this discussion based upon general market conditionsand changes in domestic and global financial markets.

 

**Item 4.  Controls and Procedures**

 

An evaluation was carried out under the supervision and with theparticipation of company management, including our chief executive officer andchief financial officer, of the effectiveness of the design and operation ofour disclosure controls and procedures (as defined in rule 13a-15(e) underthe Securities Exchange Act of 1934, as amended) as of June 28, 2005. Basedupon that evaluation, our chief executive officer and our chief financialofficer have concluded that the design and operation of our disclosure controlsand procedures were effective in timely making known to them materialinformation relating to the Company required to be disclosed in reports that wefile or submit under the Exchange Act rules.

 

It should be noted that any system of controls, however well designedand operated, can provide only reasonable assurance regarding management’scontrol objectives. In addition, the design of any control system is based inpart upon certain assumptions about the likelihood of future events. Because ofthese and other inherent limitations of control systems, there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions, regardless of how remote.

 

During the quarter ended June 28, 2005, there were no changes to ourinternal controls over financial reporting that were identified in connectionwith the evaluation of our disclosure controls and procedures required by theExchange Act rules and that have materially affected, or are reasonably likelyto materially affect, our internal controls over financial reporting.

 

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**PART II -OTHER INFORMATION**

**NEW WORLDRESTAURANT GROUP, INC.**

 

**Item 1.****    LegalProceedings.**

 

Informationregarding legal proceedings is incorporated by reference from Note 10 to ourConsolidated Financial Statements set forth in Part I of this report.

 

**Item6.  Exhibits**

 
| 31.1   |   | Certification  by Chief Executive Officer pursuant to Exchange Act Rule 13a-15(e), as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                     |
| 31.2   |   | Certification  by Chief Financial Officer pursuant to Exchange Act Rule 13a-15(e), as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                                                                                     |
| 32.1   |   | Certification  by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002      |
|   |   |                                                                                                                                                     |
| 32.2   |   | Certification  by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002      |

 

 

**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:  | August 9,  2005 | By: /s/ PAUL  J.B. MURPHY, III                            |
|   |            | Paul J.B.  Murphy, III                                    |
|   |            | Chief  Executive Officer                                  |
|   |            |                                                      |
| Date:  | August 9,  2005 | By: /s/  RICHARD P. DUTKIEWICZ                            |
|   |            | Richard P.  Dutkiewicz                                    |
|   |            | Chief  Financial Officer and Principal Accounting Officer |

 

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