**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15  (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-----------------------------------------------------------------------------------------------|

 

**For thequarterly period ended September 28, 2004**

 

**OR**

 
| **o** | **TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------------------------------------------------------------------------------------|

 

**CommissionFile Number 0-27148**

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

 

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

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theSecurities Exchange Act of 1934).  Yes o  No ý

 

As of November 8, 2004,9,842,385 shares of Common Stock of the registrant were outstanding.

 

 

----

 

**NEWWORLD RESTAURANT GROUP, INC.**

 

September 28, 2004

 

TABLE OF CONTENTS

 
| **Part I**. **Financial Information** |
|---------------------------------------|
|                                  |   |   |   |   |
| Item 1.                               |   | Financial Statements: |   |   |
|                                  |   |   |   |   |
|                                  |   | Consolidated Balance Sheets, September 28, 2004 (unaudited) and December 30,  2003 |   |   |
|                                  |   |   |   |   |
|                                  |   | Consolidated Statements of Operations  (unaudited), for the thirteen and thirty-nine weeks ended September 28,  2004 and September 30, 2003 |   |   |
|                                  |   |   |   |   |
|                                  |   | Consolidated Statements of Cash Flows  (unaudited), for the thirty-nine weeks ended September 28, 2004 and September 30,  2003 |   |   |
|                                  |   |   |   |   |
|                                  |   | Consolidated Statement of Changes in  Stockholders’ Equity (Deficit), for the thirty-nine weeks ended September 28,  2004 (unaudited) |   |   |
|                                  |   |   |   |   |
|                                  |   | 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 SHEETSAS OF SEPTEMBER 28, 2004 AND DECEMBER 30, 2003**

(in thousands, except share information)

 
| ** **                                                                                                                                                                 | ** ** | **September 28,  2004** | ** ** | **December 30,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                 | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current  assets:                                                                                                                                                           |       |                         |       |                        |       |
| Cash and  cash equivalents                                                                                                                                                 |       | $                            | 1,862      |                        | $          | 9,575 |   |
| Restricted  cash                                                                                                                                                           |       | 1,267                        |       | 1,815                       |       |
| Franchise  and other receivables, net of allowance of $2,904 and $3,310                                                                                                    |       | 6,372                        |       | 5,842                       |       |
| Inventories                                                                                                                                                                |       | 4,682                        |       | 4,831                       |       |
| Prepaid  expenses and other current assets                                                                                                                                 |       | 2,039                        |       | 2,650                       |       |
| Total  current assets                                                                                                                                                      |       | 16,222                       |       | 24,713                      |       |
|                                                                                                                                                                       |       |                         |       |                        |       |
| Restricted  cash long-term                                                                                                                                                 |       | 2,925                        |       | 3,036                       |       |
| Property,  plant and equipment, net                                                                                                                                        |       | 61,419                       |       | 67,800                      |       |
| Trademarks  and other intangibles, net                                                                                                                                     |       | 79,304                       |       | 85,431                      |       |
| Goodwill                                                                                                                                                                   |       | 4,875                        |       | 4,875                       |       |
| Debt  issuance costs and other assets                                                                                                                                      |       | 7,813                        |       | 9,170                       |       |
| Total assets                                                                                                                                                               |       | $                            | 172,558    |                        | $          | 195,025 |   |
|                                                                                                                                                                       |       |                         |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**                                                                                                                            | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                                      |       |                         |       |                        |       |
| Cash overdraft                                                                                                                                                             |       | $                            | 1,978      |                        | $          | — |   |
| Accounts  payable                                                                                                                                                          |       | 7,867                        |       | 8,189                       |       |
| Accrued  expenses                                                                                                                                                          |       | 27,071                       |       | 37,871                      |       |
| Short term  debt and current portion of long-term debt                                                                                                                     |       | 280                          |       | 2,105                       |       |
| Current  portion of obligations under capital leases                                                                                                                       |       | 5                            |       | 180                         |       |
| Total  current liabilities                                                                                                                                                 |       | 37,201                       |       | 48,345                      |       |
|                                                                                                                                                                       |       |                         |       |                        |       |
| Senior notes  and other long-term debt                                                                                                                                     |       | 161,120                      |       | 161,120                     |       |
| Obligations  under capital leases                                                                                                                                          |       | 10                           |       | 29                          |       |
| Other  liabilities                                                                                                                                                         |       | 9,819                        |       | 10,397                      |       |
| 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                                                                                                                                                         |       | 265,150                      |       | 276,891                     |       |
|                                                                                                                                                                       |       |                         |       |                        |       |
| Stockholders’  deficit:                                                                                                                                               |       |                         |       |                        |       |
| Common  stock, $.001 par value; 15,000,000 shares authorized; 9,842,385 and 9,841,828  shares issued and outstanding                                                       |       | 10                           |       | 10                          |       |
| Additional  paid-in capital                                                                                                                                                |       | 175,791                      |       | 175,585                     |       |
| Unamortized  stock compensation                                                                                                                                            |       | (154                         | )          | —                      |       |
| Accumulated  deficit                                                                                                                                                       |       | (268,239                     | )          | (257,461                    | )          |
| Total  stockholders’ deficit                                                                                                                                          |       | (92,592                      | )          | (81,866                     | )          |
| Total  liabilities and stockholders’ deficit                                                                                                                          |       | $                            | 172,558    |                        | $          | 195,025 |   |

 

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

 

3

----

 

**NEW WORLD RESTAURANT GROUP, INC.CONSOLIDATED STATEMENTS OFOPERATIONSFOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2004 AND SEPTEMBER 30,2003**

 

**(UNAUDITED)**

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

 
| ** **                                                        | ** ** | **Thirteen weeks ended:**    | ** ** | **Thirty-nine weeks ended:** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                        | ** ** | **September 28,  2004** | ** ** | **September 30,  2003** | ** ** | **September 28,  2004** | ** ** | **September 30,  2003** | ** ** |
| Revenues:                                                         |       |                         |       |                         |       |   |   |   |   |
| Retail sales                                                      |       | $                            | 84,763     |                         | $          | 86,975 |   | $ | 256,982 |   | $ | 266,302 |   |
| Manufacturing  revenues                                           |       | 4,913                        |       | 4,798                        |       | 15,270 |   | 15,976 |   |
| Franchise  and license related revenues                           |       | 1,503                        |       | 1,454                        |       | 4,287 |   | 3,909 |   |
|                                                              |       |                         |       |                         |       |   |   |   |   |
| Total  revenues                                                   |       | 91,179                       |       | 93,227                       |       | 276,539 |   | 286,187 |   |
|                                                              |       |                         |       |                         |       |   |   |   |   |
| Cost of  sales:                                                   |       |                         |       |                         |       |   |   |   |   |
| Retail costs                                                      |       | 70,315                       |       | 74,277                       |       | 213,805 |   | 224,616 |   |
| Manufacturing  costs                                              |       | 4,603                        |       | 4,436                        |       | 13,623 |   | 14,559 |   |
|                                                              |       |                         |       |                         |       |   |   |   |   |
| Total cost  of sales                                              |       | 74,918                       |       | 78,713                       |       | 227,428 |   | 239,175 |   |
|                                                              |       |                         |       |                         |       |   |   |   |   |
| Gross profit                                                      |       | 16,261                       |       | 14,514                       |       | 49,111 |   | 47,012 |   |
|                                                              |       |                         |       |                         |       |   |   |   |   |
| Operating  expenses:                                              |       |                         |       |                         |       |   |   |   |   |
| General and  administrative expenses                              |       | 8,442                        |       | 9,716                        |       | 25,260 |   | 30,574 |   |
| Depreciation  and amortization                                    |       | 5,182                        |       | 7,128                        |       | 15,764 |   | 21,425 |   |
| Adjustment  of integration and reorganization cost                |       | (44                          | )          | (153                         | )          | (843 | ) | (153 | ) |
| Impairment  charges and other related costs                       |       | 402                          |       | —                       |       | 402 |   | — |   |
|                                                              |       |                         |       |                         |       |   |   |   |   |
| Income  (loss) from operations                                    |       | 2,279                        |       | (2,177                       | )          | 8,528 |   | (4,834 | ) |
|                                                              |       |                         |       |                         |       |   |   |   |   |
| Other  expense (income):                                          |       |                         |       |                         |       |   |   |   |   |
| Interest  expense, net                                            |       | 5,723                        |       | 10,188                       |       | 17,426 |   | 28,458 |   |
| Cumulative  change in the fair value of derivatives               |       | —                       |       | (1,063                       | )          | — |   | (993 | ) |
| Loss (gain)  on sale, disposal or abandonment of assets, net      |       | 273                          |       | (390                         | )          | 1,985 |   | (592 | ) |
| Loss on  exchange of Series F Preferred Stock due to Equity Recap |       | —                       |       | 23,007                       |       | — |   | 23,007 |   |
| Other                                                             |       | (98                          | )          | 255                          |       | (197 | ) | (113 | ) |
|                                                              |       |                         |       |                         |       |   |   |   |   |
| Loss before  income taxes                                         |       | (3,619                       | )          | (34,174                      | )          | (10,686 | ) | (54,601 | ) |
|                                                              |       |                         |       |                         |       |   |   |   |   |
| Benefit  (provision) for state income taxes                       |       | 147                          |       | —                       |       | (92 | ) | (430 | ) |
|                                                              |       |                         |       |                         |       |   |   |   |   |
| Net loss                                                          |       | (3,472                       | )          | (34,174                      | )          | (10,778 | ) | (55,031 | ) |
| Dividends  and accretion on Preferred Stock                       |       | —                       |       | —                       |       | — |   | (14,423 | ) |
|                                                              |       |                         |       |                         |       |   |   |   |   |
| Net loss  available to common stockholders                        |       | $                            | (3,472     | )                            | $          | (34,174 | ) | $ | (10,778 | ) | $ | (69,454 | ) |
|                                                              |       |                         |       |                         |       |   |   |   |   |
| Net loss per  common share – Basic and Diluted               |       | $                            | (0.35      | )                            | $          | (13.55 | ) | $ | (1.10 | ) | $ | (36.87 | ) |
|                                                              |       |                         |       |                         |       |   |   |   |   |
| Weighted  average number of common shares outstanding:            |       |                         |       |                         |       |   |   |   |   |
| Basic and  Diluted                                                |       | 9,842,385                    |       | 2,521,491                    |       | 9,842,169 |   | 1,883,770 |   |

 

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

 

4

----

 

**NEW WORLD RESTAURANT GROUP, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2004 AND SEPTEMBER 30,2003**

 

**(UNAUDITED)**

(in thousands)

 
| ** **                                                                   | ** ** | **Thirty-nine weeks ended:** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                   | ** ** | **September 28,  2004** | ** ** | **September 30,  2003** | ** ** |
| CASH FLOWS  FROM OPERATING ACTIVITIES:                                       |       |                         |       |   |   |
| Net loss                                                                     |       | $                            | (10,778    | ) | $ | (55,031 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                         |       |   |   |
| Depreciation  and amortization                                               |       | 15,764                       |       | 21,425 |   |
| Stock based  compensation expense                                            |       | 51                           |       | — |   |
| Loss (gain)  on disposal of assets and impairment charges                    |       | 2,215                        |       | (592 | ) |
| Adjustments  of integration and reorganization costs                         |       | (843                         | )          | (153 | ) |
| Cumulative  change in fair value of derivatives                              |       | —                       |       | (993 | ) |
| Amortization  of debt issuance and debt discount costs                       |       | 1,387                        |       | 2,675 |   |
| Notes issued  as paid in kind for interest on Bridge Loan                    |       | —                       |       | 510 |   |
| Issuance of  standstill warrants                                             |       | —                       |       | 3,132 |   |
| Greenlight  interest                                                         |       | —                       |       | 1,025 |   |
| Loss on  exchange of Series F Preferred Stock due to Equity Recap            |       | —                       |       | 23,007 |   |
| Reduction in  Bridge Loan due to Equity Recap                                |       | —                       |       | (615 | ) |
| Changes in  operating assets and liabilities:                                |       |                         |       |   |   |
| Franchise  and other receivables                                             |       | (530                         | )          | (46 | ) |
| Cash  overdraft                                                              |       | 1,978                        |       | — |   |
| Accounts  payable and accrued expenses                                       |       | (10,279                      | )          | 2,289 |   |
| Other assets  and liabilities                                                |       | 617                          |       | (2,999 | ) |
|                                                                         |       |                         |       |   |   |
| Net cash used  in operating activities                                       |       | (418                         | )          | (6,366 | ) |
|                                                                         |       |                         |       |   |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES:                                       |       |                         |       |   |   |
| Purchase of  property and equipment                                          |       | (5,605                       | )          | (5,838 | ) |
| Proceeds  from the sale of equipment                                         |       | 134                          |       | 546 |   |
|                                                                         |       |                         |       |   |   |
| Net cash  used in investing activities                                       |       | (5,471                       | )          | (5,292 | ) |
|                                                                         |       |                         |       |   |   |
| CASH FLOWS  FROM FINANCING ACTIVITIES:                                       |       |                         |       |   |   |
| Proceeds  (repayments) of line of credit, net                                |       | (1,000                       | )          | (1,500 | ) |
| Repayment of  notes payable                                                  |       | (825                         | )          | (801 | ) |
| Proceeds  from issuance of $160 Million Indenture                            |       | —                       |       | 160,000 |   |
| Repayment of  $140 Million Facility                                          |       | —                       |       | (140,000 | ) |
| Advance  funding of NJEDA (restricted cash)                                  |       | —                       |       | (2,028 | ) |
| Debt  issuance costs                                                         |       | —                       |       | (8,538 | ) |
| Common stock  issued upon warrant exercise                                   |       | 1                            |       | — |   |
|                                                                         |       |                         |       |   |   |
| Net cash  provided by (used in) financing activities                         |       | (1,824                       | )          | 7,133 |   |
|                                                                         |       |                         |       |   |   |
| Net decrease  in cash                                                        |       | (7,713                       | )          | (4,525 | ) |
| Cash and  cash equivalents, beginning of period                              |       | 9,575                        |       | 10,705 |   |
| Cash and  cash equivalents, end of period                                    |       | $                            | 1,862      |   | $ | 6,180 |   |
|                                                                         |       |                         |       |   |   |
| SUPPLEMENTAL  CASH FLOW INFORMATION:                                         |       |                         |       |   |   |
| Cash paid  for interest                                                      |       | $                            | 20,958     |   | $ | 16,993 |   |
| Cash paid  for income taxes                                                  |       | $                            | 572        |   | $ | 430 |   |

 

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

 

5

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**NEW WORLD RESTAURANT GROUP, INC.CONSOLIDATED STATEMENT OF CHANGESIN STOCKHOLDERS’ EQUITY (DEFICIT)FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2004**

 

**(UNAUDITED)**

(in thousands, except share information)

 
| ** **                                     | ** ** | **Common Stock** | ** ** | **Additional  Paid In** | ** ** | **Unamortized  Stock** | ** ** | **Accumulated  Deficit** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------------|------------|-------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| ** **                                     | ** ** | **Shares**       | ** ** | **Amount**              | ** ** | **Capital**            | ** ** | **Compensation**         | ** ** | **Amount** | ** ** | **Total** | ** ** |
|                                           |       |             |       |                    |       |                   |       |                     |       |       |       |   |   |
| Balance, December 30,  2003               |       | 9,841,828        |       | $                       | 10         |                   | $          | 175,585                  |       | $          | —     |   | $ | (257,461 | ) | $ | (81,866 | ) |
| Net loss                                       |       | —           |       | —                  |       | —                 |       | —                   |       | (10,778    | )          | (10,778 | ) |
| Stock  compensation expense of options granted |       | —           |       | —                  |       | 205                    |       | (205                     | )          | —     |       | — |   |
| Amortization  of stock compensation expense    |       | —           |       | —                  |       | —                 |       | 51                       |       | —     |       | 51 |   |
| Common stock  issued upon warrant exercise     |       | 557              |       | —                  |       | 1                      |       | —                   |       | —     |       | 1 |   |
|                                           |       |             |       |                    |       |                   |       |                     |       |       |       |   |   |
| Balance, September 28,  2004              |       | 9,842,385        |       | $                       | 10         |                   | $          | 175,791                  |       | $          | (154       | ) | $ | (268,239 | ) | $ | (92,592 | ) |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

6

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**NEW WORLD RESTAURANT GROUP, INC.**

 

Notes to Consolidated Financial Statements(Unaudited)

 

Thirteen and thirty-nine weeks ended September 28, 2004 and September 30,2003

 

**1.****            ****Basis ofPresentation**

 

Theaccompanying consolidated financial statements of New World Restaurant Group,Inc. and its wholly-owned subsidiaries (collectively, “the Company”) have beenprepared pursuant to the rules and regulations of the Securities and ExchangeCommission (“SEC”). As of September 28, 2004, the Company owns, franchisesor licenses various restaurant concepts under the brand names of Einstein Bros.Bagels (“Einstein Bros.”), Noah’s New York Bagels (“Noah’s”), Manhattan BagelCompany (“Manhattan”), Chesapeake Bagel Bakery (“Chesapeake”), New World Coffee(“New World”), and Willoughby’s Coffee and Tea (“Willoughby’s”). Ourbusiness is subject to seasonal trends. Generally, our revenues in the firstfiscal quarter are somewhat lower than in the other three fiscal quarters.

 

The accompanying consolidated financial statements as of September 28, 2004 and December 30,2003 and for the thirteen and thirty-nine weeks ended September 28, 2004and September 30, 2003 havebeen prepared without audit (except for the balance sheet information as of December 30,2003, which is derived from our audited financial statements). Theinformation furnished herein reflects all adjustments (consisting only ofnormal recurring accruals and adjustments), which are, in our opinion,necessary to fairly state the interim operating results for the respectiveperiods.  However, these operating results are not necessarily indicativeof the results expected for the full fiscal year.  Certain information andfootnote disclosures normally included in annual financial statements preparedin accordance with generally accepted accounting principles in the UnitedStates have been omitted pursuant to SEC rules and regulations. The notes tothe consolidated financial statements (unaudited) should be read in conjunctionwith the notes to the consolidated financial statements contained in our annualreport on Form 10-K for the fiscal year ended December 30, 2003. Webelieve that the disclosures are sufficient for interim financial reportingpurposes.

 

Certainreclassifications have been made to conform previouslyreported data to the current presentation. Thesereclassifications have no effect on net income or financial position aspreviously reported.

 

7

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

 

Statement of Financial Accounting Standards(SFAS) No. 142 provides that goodwill and other indefinite-livedintangibles should not be amortized, but be subject toan annual assessment for impairment, or more frequently if circumstancesindicate potential impairment, through a comparison of fair value to itscarrying amount. The two-step approach to assess goodwill impairment requiresthat we first compare the estimated fair value of each reporting unit thathouses goodwill to the carrying amount of the unit’s assets and liabilities,including its goodwill and intangible assets. If the fair value of thereporting unit is below its carrying amount, then the second step of theimpairment test is performed, in which the current fair value of the unit’sassets and liabilities will determine the current implied fair value of theunit’s goodwill. The impairment tests relating to goodwill and indefinite-livedtrademarks are performed as of year-end, unless events and circumstancesindicate otherwise. During the thirteen weeks ended June 29, 2004, webegan an evaluation of whether each of our brands should be a part of ouroverall strategic business plan. As a result of this evaluation, we determinedthat certain brands may no longer fit strategically. Accordingly, we performedan impairment analysis and determined that no impairment of these brandsexisted at June 29, 2004. We also performed a longevity analysis ofcertain brands and determined that certain trademarks had an estimatedremaining useful life of 4 years. These trademarks were previously treated as anon-amortizing intangible and accordingly, were reclassified as an amortizingintangible at June 29, 2004. During the thirteen weeks ended September 28,2004, no additional impairment indicators were present and accordingly noadditional interim tests for impairment of goodwill, trademarks or amortizingintangibles were performed.

 

Goodwillrepresents the excess of cost over fair value of net assets acquired in theacquisition of Manhattan Bagel Company, Inc.

 

Trademarksand other intangibles consists of the following (inthousands of dollars):

 
| ** **                                   | ** ** | **September 28,  2004** | ** ** | **December 30,  2003** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Amortizing  intangibles:                     |       |                         |       |                        |       |
| Trade  secrets                               |       | $                            | 5,385      |                        | $          | 5,385 |   |
| Trademarks                                   |       | 2,062                        |       | —                      |       |
| Patents-manufacturing  process               |       | 33,741                       |       | 33,741                      |       |
|                                         |       | 41,188                       |       | 39,126                      |       |
| Less  accumulated amortization               |       | (25,690                      | )          | (19,563                     | )          |
| Total  amortizing intangibles, net           |       | $                            | 15,498     |                        | $          | 19,563 |   |
|                                         |       |                         |       |                        |       |
| Non-amortizing  intangibles:                 |       |                         |       |                        |       |
| Trademarks                                   |       | 63,806                       |       | 65,868                      |       |
|                                         |       |                         |       |                        |       |
| Total  trademarks and other intangibles, net |       | $                            | 79,304     |                        | $          | 85,431 |   |

 

8

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**3.****            ****Debt**

 

Debtconsists of the following (in thousands of dollars):

 
| ** **                                                  | ** ** | **September 28,  2004** | ** ** | **December 30,  2003** | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                        |       |                         |       |                        |       |
| $ 160 Million Indenture (a)                            |       | $                            | 160,000    |                        | $          | 160,000 |   |
| AmSouth Revolver (b)                                        |       | 3⁄4                       |       | 1,000                       |       |
| Chesapeake Bagel Bakery Note Payable (c)                    |       | 3⁄4                       |       | 825                         |       |
| New Jersey Economic Development Authority  Note Payable (d) |       | 1,400                        |       | 1,400                       |       |
|                                                        |       | 161,400                      |       | 163,225                     |       |
| Less current portion of debt                                |       | (280                         | )          | (2,105                      | )          |
|                                                        |       |                         |       |                        |       |
| Long-term debt                                              |       | $                            | 161,120    |                        | $          | 161,120 |   |

 

**(a)****  ****$160 Million Indenture**

 

OnJuly 8, 2003, we issued $160 million of 13% senior secured notes maturingon July 1, 2008 (“$160 Million Indenture”) in a private placement.

 

The$160 Million Indenture is guaranteed, fully and unconditionally, jointly andseverally, by us and all present and future subsidiaries of ours and is collateralizedby substantially all of our assets in which we have an interest. Pursuant to anIntercreditor Agreement, the $160 Million Indenture is subordinate to theAmSouth Revolver as described below.

 

The $160Million Indenture contains certain covenants, which, among others, includecertain financial covenants such as limitations on capital expenditures andminimum EBITDA as defined in the agreement. These covenants are measured on arolling twelve-month period and fiscal quarter basis, respectively. This debtcontains usual and customary default provisions. As of September 28, 2004,we were in compliance with all our financial and operating covenants.

 

Interestpayments under the $160 Million Indenture are payable in arrears at the rate of13% per year on July 1 and January 1, commencing January 1,2004. The notes are redeemable, at our option, in whole or in part at any timeafter July 1, 2004 at the following redemption prices (as expressed inpercentages of the principal amount):

 

| **Year**             | ** ** | **Percentage** | ** ** |
|----------------------|------------|----------------|------------|
| 2004                 |       | 104.0          | %          |
| 2005                 |       | 103.0          | %          |
| 2006                 |       | 102.0          | %          |
| 2007                 |       | 101.0          | %          |
| 2008 and  thereafter |       | 100.0          | %          |

 

Debt issuancecosts are capitalized and amortized using the effective interest method overthe term of the $160 Million Indenture.

 

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**(b)****  ****AmSouth Revolver**

 

Alsoon July 8, 2003, we entered into a three-year, $15 million senior securedrevolving credit facility with AmSouth Bank (“AmSouth Revolver”). The AmSouthRevolver has been subsequently amended to make technical corrections, clarifyambiguous terms and provide for increased limits with respect to letters ofcredit.

 

TheAmSouth Revolver is collateralized by substantially all of our assets in whichwe have an interest and is senior to the $160 Million Indenture pursuant to anIntercreditor Agreement.

 

The AmSouthRevolver contains certain covenants, which, among others, include certainfinancial covenants such as limitations on capital expenditures, operatinglease obligations, minimum EBITDA as defined in the agreement, operating cashflow coverage ratio and minimum net worth. These covenants are measured on arolling twelve-month period at each fiscal quarter or annually at year-end.Additional covenant restrictions exist if the total borrowings, includingoutstanding letters of credit exceed $10.0 million. This debt alsocontains usual and customary default provisions. As of September 28, 2004,we are in compliance with all of our financial and operating covenants.

 

Interestpayments under the AmSouth Revolver are payable in arrears on the first of eachmonth. The net borrowings under the AmSouth Revolver bear an interest rateequal to the base rate plus an applicable margin with the base rate being theAmSouth Bank “prime rate” and the applicable margin being based on our fixedcharge coverage ratio with a minimum and maximum applicable margin of 0.5% and2.5% respectively. As of September 28, 2004, the prime interest rate underthe AmSouth Revolver was 4.5%.

 

We arerequired to pay an unused credit line fee of 0.50% per annum on the averagedaily unused amount. The unused line fee is payable monthly in arrears.Additionally, we are required to pay a letter of credit fee based on theaverage daily undrawn face amount for each letter of credit issued, of anapplicable margin being based on our fixed charge coverage ratio with a minimumand maximum applicable margin of 2.0% and 4.5% respectively. Letters of creditreduce our availability under the AmSouth Revolver. At September 28, 2004,we had $5.0 million of letters of credit outstanding. The letters of creditexpire on various dates during 2005, are automatically renewable for oneadditional year and are payable upon demand in the event that we fail to paycertain workers compensation claims. Our availability under the AmSouthRevolver was $10.0 million at September 28, 2004.

 

Debt issuancecosts are capitalized and amortized using the effective interest method overthe term of the AmSouth Revolver.

 

**(c)****   Chesapeake Bagel Bakery Note Payable**

 

As a part ofthe acquisition of the assets of Chesapeake Bagel Bakery, we entered into anote payable to the seller. The note provided for quarterly payments ofinterest only at 10%. The note was paid in full on August 31, 2004according to its terms.

 

**(d)****   New Jersey Economic Development Authority NotePayable**

 

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

 

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On July 3,2003, we placed an advanced funding of the note in escrow to enact a debtdefeasance as allowed for in the agreement. This advanced funding is shown asrestricted cash and the note is included in both current portion and long-termportion of debt in the September 28, 2004 and December 30, 2003consolidated balance sheets in accordance with the payment terms. Thisclassification will continue until the note is fully paid from the escrowamount proceeds.

 

**4.             Net Loss Per Common Share**

 

We compute basic net loss per common share bydividing the net loss for the period by the weighted average number of sharesof common stock outstanding (which includes shares contingently issuable forlittle or no consideration) during the period.

 

Diluted net loss per share is computed by dividingthe net loss for the period by the weighted average number of shares of commonstock and potential common stock equivalents outstanding during the period, ifdilutive. Potential common stock equivalents include incremental shares ofcommon stock issuable upon the exercise of stock options. The effects ofpotential common stock equivalents have not been included in the computation ofdiluted net loss per share as their effect is anti-dilutive.

 

The following table summarizes the weighted averagenumber of common shares outstanding, as well as sets forth the computation ofbasic and diluted net loss per common share for the periods indicated (inthousands, except per share data):

 

| ** **                                                                                                                       | ** ** | **Thirteen weeks ended:**    | ** ** | **Thirty-nine weeks ended:** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                       | ** ** | **September 28,  2004** | ** ** | **September 30,  2003** | ** ** | **September 28,  2004** | ** ** | **September 30,  2003** | ** ** |
|                                                                                                                             |       |                         |       |                         |       |   |   |   |   |
| Weighted average shares outstanding                                                                                              |       | 9,842,385                    |       | 2,521,491                    |       | 9,842,169 |   | 1,883,770 |   |
|                                                                                                                             |       |                         |       |                         |       |   |   |   |   |
| Net loss available to common stockholders  (in thousands of dollars)                                                             |       | $                            | (3,472     | )                            | $          | (34,174 | ) | $ | (10,778 | ) | $ | (69,454 | ) |
|                                                                                                                             |       |                         |       |                         |       |   |   |   |   |
| Basic and diluted net loss per share                                                                                             |       | $                            | (0.35      | )                            | $          | (13.55 | ) | $ | (1.10 | ) | $ | (36.87 | ) |
|                                                                                                                             |       |                         |       |                         |       |   |   |   |   |
| Shares  contingently issuable included in the weighted average number of shares of  common stock                                 |       | 3⁄4                       |       | 982,200                      |       | 3⁄4 |   | 805,731 |   |
|                                                                                                                             |       |                         |       |                         |       |   |   |   |   |
| Outstanding options and warrants that were  not included in the diluted calculation because their effect would be  anti-dilutive |       | 1,802,120                    |       | 99,438                       |       | 1,802,120 |   | 17,829 |   |

 

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**5.****            ****Stock Based Compensation**

 

We apply the intrinsic value-based method ofaccounting prescribed by Accounting Principles Board (APB) OpinionNo. 25, *Accounting for Stock Issued toEmployees*, and related interpretations, in accounting for our fixedaward stock options to our employees. As such, compensation expense is recordedonly if the current market price of the underlying common stock exceeded theexercise price of the option on the date of grant. We apply the fairvalue-basis of accounting as prescribed by Statements of Financial AccountingStandards (SFAS) Nos. 123and 148, *Accounting for Stock-BasedCompensation*in accounting for our fixed award stock options to ourconsultants. Under SFAS Nos. 123 and 148, compensation expense is recognizedbased on the fair value of stock options granted.  Had compensation cost for stock optionsgranted to employees been determined on the basis of fair value as computedusing the assumptions herein, net loss and loss per share would have beenincreased to the following pro forma amounts (in thousands of dollars, exceptper share amounts):

 

| ** **                                                               | ** ** | **Thirteen weeks ended:**    | ** ** | **Thirty-nine weeks ended:** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                               | ** ** | **September 28,  2004** | ** ** | **September 30,  2003** | ** ** | **September 28,  2004** | ** ** | **September 30,  2003** | ** ** |
|                                                                     |       |                         |       |                         |       |   |   |   |   |
| Net loss available to common stockholders,  as reported                  |       | $                            | (3,472     | )                            | $          | (34,174 | ) | $ | (10,778 | ) | $ | (69,454 | ) |
| Deduct: stock based compensation determined  under the fair value method |       | (183                         | )          | (48                          | )          | (628 | ) | (138 | ) |
| Pro forma net loss available to common  stockholders                     |       | $                            | (3,655     | )                            | $          | (34,222 | ) | $ | (11,406 | ) | $ | (69,592 | ) |
|                                                                     |       |                         |       |                         |       |   |   |   |   |
| Basic and diluted loss per common share:                                 |       |                         |       |                         |       |   |   |   |   |
| As reported                                                              |       | $                            | (0.35      | )                            | $          | (13.55 | ) | $ | (1.10 | ) | $ | (36.87 | ) |
| Pro forma                                                                |       | $                            | (0.37      | )                            | $          | (13.57 | ) | $ | (1.16 | ) | $ | (36.94 | ) |

 

Compensation cost of options granted for the SFASNo. 123 pro forma amounts disclosed above was estimated using theBlack-Scholes option-pricing model with the following assumptions:

 

| ** **                                  | ** ** | **Thirteen weeks ended:**    | ** ** | **Thirty-nine weeks ended:** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                  | ** ** | **September 28,  2004** | ** ** | **September 30,  2003** | ** ** | **September 28,  2004** | ** ** | **September 30,  2003** | ** ** |
| Expected life of options from date of grant |       | 3⁄4                       |       | 4.0 years                    |       | 4.0 years |   | 4.0 years |   |
| Risk-free interest rate                     |       | 3⁄4                       |       | 3.0                          | %          | 3.1 | % | 3.0 | % |
| Volatility                                  |       | 3⁄4                       |       | 100.0                        | %          | 100.0 | % | 100.0 | % |
| Assumed dividend yield                      |       | 3⁄4                       |       | 0.0                          | %          | 0.0 | % | 0.0 | % |

 

There were no options granted during the thirteen weeks ended September 28,2004. 

 

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

 

Werecord deferred tax assets and liabilities based on the difference between thefinancial statement and income tax basis of assets and liabilities using theenacted statutory tax rate. Deferred income tax expenses or credits are basedon the changes in the asset or liability from period to period. The recordeddeferred tax assets are reviewed for impairment on a quarterly basis byreviewing our internal estimates for future net income. If we determine it tobe more likely than not that the recovery of the asset is in question in theimmediate, foreseeable future, we record a valuation allowance. On September 28,2004 and September 30, 2003, we recorded a full valuation allowanceagainst our net deferred tax asset. We will continue to record valuationallowances against additional deferred tax assets until such time thatrecoverability of such assets is demonstrated.

 

Duringthe thirteen weeks ended September 28, 2004, we recorded a state incometax benefit of $147,000 as a result of finalization of our 2003 tax returns,representing the difference between our original estimates and actual taxespayable. The state income taxes recorded for the thirty-nine weeks ended September 28,2004 represent our estimate of minimum state franchise taxes payable for 2004.

 

**7.****            ****Adjustment of Integration and Reorganization Cost**

 

The adjustmentof integration and reorganization cost primarily represents adjustments topreviously recorded liabilities associated with the closing and corporateconsolidation of our Eatontown facilities during 2002. During April 2004,we reached an agreement with the landlord of our Eatontown facility to settleoutstanding litigation. Previously recorded integration and reorganizationestimates associated with closing this facility were adjusted down by $700,000during the thirteen weeks ended March 30, 2004 as a result of thissettlement.

 

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

 

Inaccordance with Statement of Financial Accounting Standard No. 144, *Accounting for the Impairment or Disposal of LongLived Assets*, impairment losses are recorded on long-lived assets ona restaurant-by-restaurant basis whenever impairment indicators are determinedto be present. We consider a history of cash flow losses to be the primaryindicator of potential impairment for individual restaurant locations. Wedetermine whether a restaurant location is impaired based on expectedundiscounted future cash flows, considering location, local competition,current store management performance, existing pricing structure andalternatives available for the site. If impairment exists, the amount ofimpairment is measured as the excess of the carrying amount of the asset overits fair value as determined utilizing the estimated discounted future cashflows or the expected proceeds, net of costs to sell, upon sale of the asset.

 

Forthe thirteen and thirty-nine weeks ended September 28, 2004, we recorded$402,000 in impairment charges for long-lived asset impairments and exit costsfrom the decision to close two restaurants and to write down the assets of fourunder-performing restaurants.

 

**9.****            ****Loss on Disposal or Abandonment of Assets**

 

For the thirteen and thirty-nine weeks ended September 28,2004, we recorded a loss on disposal or abandonment of assets of approximately$0.3 million and $2.0 million, respectively, primarily due to the disposal ofmenu boards as a result of our new menu offerings and due to the abandonment ofleasehold improvements related to closed restaurants and our administrativefacilities located in New Jersey.

 

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**10.****         ****Third Quarter 2003Financings**

 

DebtFinancing – As further described in Note 3, on July 8, 2003, we issued$160 million in aggregate principal amount of 13% senior secured notes due in2008 to replace our $140 million in aggregate principal amount of seniorsecured increasing rate notes due in 2003. On that same date, we also enteredinto a three-year, $15 million senior secured revolving credit facility with AmSouth Bank.

 

EquityRecapitalization – In September 2003, we completed an equityrecapitalization with our preferred stockholders, who held a substantialportion of our common stock. Among other things, our Mandatorily RedeemableSeries F Preferred Stock was eliminated. In exchange, we issued 57,000 sharesof our Mandatorily Redeemable Series Z Preferred Stock to Halpern Denny FundIII, L.P. (“Halpern Denny”) and we issued 9,380,843 shares of our common stockto Greenlight Capital and affiliates (“Greenlight”).

 

Theexchange of the Halpern Denny interest resulted in a reduction of our effectivedividend rate and as a result of this and other factors, we accounted for thistransaction as troubled debt restructuring. This exchange did not result in again from troubled debt restructuring. The exchange of the Greenlight interestinto common shares was recorded at fair value, which resulted in a loss uponexchange of approximately $23.0 million. Refer to our annualreport on Form 10-K for the fiscal year ended December 30, 2003 for more information regarding thistransaction.

 

**11.****         ****Litigation,Commitments and Contingencies**

 

*Guarantees*

 

In the past, we would sometimes guarantee leases forthe benefit of certain of our franchisees. The lease guarantees extend through2008. Under the 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. As of September 28, 2004, our maximum exposureunder these contingent liabilities was approximately $1.7 million.

 

*Employment Related*

 

On July 31, 2002, Tristan Goldstein, aformer store manager, and Valerie Bankhordar, a current store manager, filed aputative class action against Einstein and Noah Corp. (“ENC”) in the SuperiorCourt for the State of California, County of San Francisco. The plaintiffs allegethat ENC failed to pay overtime wages to managers and assistant managers of itsCalifornia stores who were improperly designated as exempt employees inviolation of California wage and hour laws and Business Profession Code Section 17200.During April 2004, we reached an agreement in principle for the settlementof litigation with the plaintiffs, subject to court approval. Amountsrepresenting our estimate to settle this litigation were previously recordedduring the quarter ended December 30, 2003.

 

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On March 31, 2003, Jerold E. Novack, ourformer Chief Financial Officer and Secretary, filed a complaint in the UnitedStates District Court for the District of New Jersey against us, Anthony D.Wedo, our former Chairman and Chief Executive Officer, and William J. Nimmo, aformer member of our board of directors. The plaintiff claims breach of employment contract, breach of Messrs.Wedo and Nimmo’s fiduciary duties to plaintiff, defamation, violation of theNew Jersey Conscientious Employee Protection Act, and for a declaration thatthe termination of plaintiff “for cause” was invalid.  We have answered and asserted counterclaimsagainst Mr. Novack. On January 20, 2004, the Court granted our motion todismiss the breach of fiduciary duty claims. On October 4, 2004, the Courtgranted the motion for summary judgment dismissing the plaintiff’s defamationclaims against Messrs. Nimmo and Wedo, and denied the plaintiff’s and defendant’s remaining motions for summary judgment. We haveaccrued an estimate of the loss, but do not believe the resolution of thisissue will have a material adverse effect on our consolidated financialcondition or results of operations.

 

On June 4, 2003, R. Ramin Kamfar, ourformer Chairman of the Board and Chief Executive Officer, filed an action inthe United States District Court for the Southern District of New York againstus and Anthony D. Wedo, our former Chairman and Chief Executive Officer,alleging causes of action for breach of contract, defamation, declaratoryrelief and punitive damages. We believe that the claims of Mr. Kamfar arewithout merit. We have answered and filed counterclaims against Mr. Kamfar,including claims for breach of fiduciary duty, fraud, and breach of contract.  Motions for summary judgment were filed on July 15,2004. At this time, it is not possible to reasonably estimate the loss or rangeof loss, if any.

 

*Investigations*

 

On April 3,2002, the Securities and Exchange Commission notified us that the Commissionwas conducting an investigation into the resignation of our former Chairman, R.Ramin Kamfar, and the termination for cause of our former Chief FinancialOfficer, Jerold Novack, and the delay in filing our Form 10-K for 2001. Wehave cooperated fully with the investigation as well as with a Department ofJustice inquiry relating to these issues. Further, several of the former andpresent officers and directors have requested that, under applicable law andour by-laws, we advance reasonable legal expenses on their respective behalvesto the extent any of them is or has been requested to provide information tothe Commission in connection with its investigation. We have advanced certainexpenses in connection with these requests. At this time, it is not possible toreasonably estimate the loss or range of loss, if any.

 

*Financial Impact ofLitigation*

 

We are engaged in various other legalproceedings and have certain unresolved claims pending. The ultimate liability,if any, for the aggregate amounts claimed cannot be determined at this time.However, we believe based upon consultation with legal counsel that there areno other matters pending or threatened which are expected to have a materialadverse effect, individually or in the aggregate, on our consolidated financialcondition or results of operations.

 

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*InsurancePrograms*

 

We are self-insured for a substantial portionof our current and prior years’ coverage including workers’ compensation,employment practices liability and general liability (collectively, “insurancelosses”). To mitigate the potential cost of our exposures for certain of theinsurance losses, we make annual decisions to self-fund the risks of loss up todefined maximum per occurrence retentions on a policy-by-policy basis. We thenpurchase insurance coverage, up to a certain limit, for losses that exceed theself-insurance per occurrence or aggregate retention. The insurers’ maximumaggregate loss limits are significantly above our actuarially determinedprobable losses; therefore, we believe the likelihood of losses exceeding theinsurers’ maximum aggregated loss limits is remote. We are also self-insuredfor healthcare claims for eligible participating employees subject to certaindeductibles and limitations. We have accounted for our liabilities related tothe insurance losses and healthcare claims, including reported and incurred butnot reported claims, based on information provided by actuaries.

 

We believe that we have recorded reservesadequate to cover our insurance losses based upon information we have today.Due to the inherent volatility of actuarially determined insurance lossestimates, it is reasonably possible that we could experience changes inestimated losses, which could be material to our consolidated financialposition or results of operations.

 

**12.****         ****Recent AccountingPronouncements**

 

We have evaluated all recently issued but not yet effective accounting pronouncements and believe such pronouncements will not have a material effect on our financial statements.

 

**13.****         ****Subsequent Event -Sale of Assets of Willoughby’s Coffee & Tea**

 

EffectiveOctober 6, 2004, we executed an Asset Purchase Agreement and sold theassets of Willoughby’s to the original founders.  The Willoughby’s business consisted of acoffee roasting plant, three retail locations and an office space. Componentsof the asset sale included, but were not limited to:

 

•          The “Willoughby’s Coffee & Tea” trade name, trademark andlogo,

•          The “Serious Coffee” trademark,

•          The willoughbyscoffee.com domain name and existing website,

•          All property and equipment of Willoughby’s, and

•          Cash in drawer, accounts receivable, and inventory at allWilloughby’s locations.

 

Underthe terms of agreement, we sold the assets for a total sales price ofapproximately $400,000, which was received in cash. In connection with the saleof Willoughby’s, we also executed a two-year supply agreement to purchasecoffee from the buyer for our New World stores.

 

We have considered Statement of Financial Accounting Standard No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets.*We have determined that the revenues, cost of sales, other operating expenses and the net book value of the assets related to the sale of the coffee roasting plant and three retail locations included in the Willoughby’s business were immaterial in relation to our Einstein Bros., Noah, Chesapeake and Manhattan restaurants, as well as the financial statements taken as a whole. Accordingly, we have not presented discontinued operations in the accompanying consolidated statements of operations for the thirteen and thirty-nine weeks ended September 28, 2004 and September 30, 2003, respectively, nor have we reflected assets as held for sale in the accompanying consolidated balance sheet as of September 28, 2004.  We have determined that net book value of the assets is less than the sales price and accordingly, no impairment existed at September 28, 2004.

 

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

 

The following discussion and analysis supplements themanagement’s discussion and analysis in our Annual Report on Form 10-K for theyear ended December 30, 2003 and presumes that readers have read or haveaccess to the discussion and analysis in our Annual Report. The followingdiscussion and analysis includes historical and certain forward-lookinginformation that should be read together with the accompanying ConsolidatedFinancial Statements, related footnotes and the discussion below of certainrisks and uncertainties that could cause future operating results to differmaterially from historical results or from the expected results indicated byforward looking statements.

 

**Business Overview**

 

We are a leader in the quick casual segmentof the restaurant industry. With 707 locations in 33 states and in the Districtof Columbia as of September 28, 2004, we operate and license locationsprimarily under the Einstein Bros. and Noah’s brand names, and franchiselocations primarily under the Manhattan and Chesapeake brand names. We alsooperate a dough production facility. We operate as a single business segmentwith a focus on our company-operated restaurants. Our manufacturing andfranchise operations are either supportive or ancillary to our main businessfocus.

 

Our financial focus is on long term,sustainable growth in free cash flow. Free cash flow represents net cashprovided by operations less purchases of fixed assets. In achieving free cashflow, we are more capable of paying down debt, saving cash for future use andbuilding shareholder equity. We also believe free cash flow will allow us theopportunity to pursue new opportunities, acquire other businesses, or paydividends. Increasing our operating profit and efficiently managing workingcapital and capital expenditures primarily drive free cash flow.

 

The restaurant industry, in which we compete,is intensely competitive with respect to food quality, price, service,convenience, location and concept. The industry is often affected by changes inconsumer tastes, economic conditions, demographic trends, traffic patterns, thetype, number and location of competing food retailers and products anddisposable purchasing power.

 

In measuring our overall growth and progress,we focus on various key performance indicators. Such key performance indicatorsinclude: same-store sales growth, number of restaurant openings and closings,number of franchise and licensed locations opened, restaurant level and conceptlevel margins, cash generated from operations and free cash flow. Our progressagainst some of these key performance indicators is discussed throughout theManagement’s Discussion and Analysis.

 

**Current Events**

 

Effective October 6, 2004, we completedthe sale of theWilloughby’s Coffee & Tea business in Connecticut. Thebusiness was sold to the original founders for a total sales price ofapproximately $400,000, which was received in cash. In connection with the transaction, we also executed a two-year supplyagreement to purchase coffee from the buyer for our New World stores. The transaction allowed us to place anon-core asset in the hands of experienced operators and, concurrently, assurea quality source of supply for our New World Coffee shops.

 

On October 13, 2004, we announced thatE. Nelson Heumann was named Chairman of the Board of Directors. Paul Murphy,Chief Executive Officer, who had been serving as Acting Chairman since October 2003,will continue on the Board as a Director. Additionally, Michael W. Arthur waselected as a Director to our Board expanding the panel to seven members. Mr.Arthur will also serve on the Audit Committee and has been designated as the “financialexpert.” Other members of the Audit Committee are Directors Leonard Tannenbaumand Frank Meyer.

 

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Also on October 13, 2004, we announcedthat Susan Daggett, who had been Chief Operating Officer since October 2003,was named to the new position of Chief Strategy Officer.  Mike Mrlik, formerly the Executive VicePresident of Operations, was promoted to Chief Operating Officer.

 

On October 14, 2004, we announced theintroduction of our new test concept, Einstein Bros. Café. In addition to ourcore bagel offerings and expanded breakfast menu, the new concept offers a lunch and dinner menu with aculinary focus on innovative items using fresh and high quality ingredients.The first unit of the quick casual restaurant, located within Denver’s Stapletonneighborhood, opened on October 18, 2004. On November 1, 2004,we retrofitted one additional Einstein Bros. restaurant in the Denver, Coloradomarket and by the end of fiscal year 2004, we intendto retrofit all three of our Einstein Bros. restaurants in the ColoradoSprings, Colorado market.  Conversion of the remaining Einstein Bros.Bagel locations will be rolled out on a market-by-market basis.

 

**Significant KnownEvents, Trends or Uncertainties Expected to Impact 2004 Results**

 

The following factors impact comparability ofoperating performance or could impact comparisons for the remainder of 2004.

 

*Economic Trends*

 

We anticipate that our business will beaffected by general economic trends that affect retailers in general. While wehave not operated during a period of high inflation, we believe based onindustry experience that we would generally be able to pass on increased costsresulting from inflation to our consumers. Our business may be affected byother factors, including increases in the commodity prices of flour, butterand/or fresh produce, energy costs, existing and additional competition,marketing programs, weather and variations in the number of company-owned orlicensed location openings.

 

Although few, if any, employees are paid atthe minimum wage, an increase in the minimum wage may create pressure toincrease the pay scale for our employees, which would increase our labor costsand those of our franchisees and licensees.

 

*Revenue Trends*

 

**Due to the increasing competitive pressure ofthe restaurant industry, we continued to experience lower retail sales duringthe thirteen weeks ended September 28, 2004. Additionally, recent dietarytrends and negative publicity on products high in carbohydrate content may havehad and may continue to have an adverse impact on our sales. We believe that weare addressing these trends with modifications to our menus via pricingincreases, as well as limited time offerings of seasonal menu items. Weanticipate that these planned price changes will have the effect of increasingour average check in future periods. We have also begun implementation ofmodifications to our customer service system of our company-operatedrestaurants. We believe that, as a result of these modifications, we have begunto experience little to no further deterioration in October 2004comparable store sales as compared to the same period in the prior year.**

 

Aspreviously discussed, we opened our first Einstein Bros. Café on October 18,2004 in the Denver, Colorado market. On November 1, 2004, we retrofittedone additional Einstein Bros. restaurant in the Denver, Colorado market and bythe end of fiscal year 2004, we intend to retrofit allthree of our Einstein Bros. restaurants in the Colorado Springs, Coloradomarket.

 

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We will operate the new concept restaurantsfor approximately 90 days after which we intend to study the financial andoperating performance of the restaurants in order to determine modificationsnecessary, if any, to our menu offerings and/or the physical layout of ourrestaurants before commencing a staggered rollout to additional markets in2005.

 

We believe that by retrofitting existingrestaurants on a market-by-market basis, we can ensure minimal supply chaindisruption and send a consistent marketing message within each market. 

 

*Expense Trends*

 

Commodities - Currently, the restaurantindustry is experiencing increases in the cost of dairy and other rawingredients, as well as increases in fuel and energy costs. During the currentfiscal quarter, we saw the impact of such increases in our food costs,packaging materials, utility bills and transportation charges and we believethis trend will continue through the remainder of the year. For the quarter andyear-to-date period ended September 28, 2004, we experienced a negativeimpact of approximately $0.5 million and $1.8 million, respectively, in ourmargins due to increases in commodity costs.

 

These increases directly impact theprofitability of company-owned locations, manufacturing operations anddistribution channels. While we have purchase commitments for our dairy andother raw ingredients that mitigate immediate increases in food costs, ourpurchase commitments are not long-term in nature. Accordingly, in the nearfuture we may experience degradation in our profit margins until such time aswe are able to pass on increased costs to our consumers.

 

Weather  - Adverse weatherexperienced in the southeastern United States during September and October 2004significantly destroyed crops already in the ground, as well as delayed fallplantings. The result of delayed plantings and expected lower yields/quality isanticipated to be increased costs and added pressure on suppliers from thedesert regions and Mexico throughout the fall season, early winter and possiblybeyond depending on the future weather. Additionally, hurricanes caused many ofour restaurants in Florida to be closed for a short period of time due toevacuations and power shortages. During the quarter ended September 28,2004, we estimate a loss of approximately $0.5 million in revenue due to thetemporary closures. The loss of revenue resulted in a negative impact to ourmargins of approximately $0.3 million. We have filed a claim under our businessinterruption insurance coverage. At this time, we have not recorded any gaincontingency associated with the estimated losses that we believe our coveredunder our business interruption insurance policy.

 

 

 

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*Store PortfolioStrategy*

 

From time to time, we close restaurants thatare performing poorly, we relocate restaurants to a new site within the sametrade area or we consolidate two or more of our existing units into a singleunit. Generally, the closures coincide with the expiration of an existing leaseand result in little or no impairment charges.

 

The following table details the totalrestaurants open at the end of the respective third quarter:

 
| ** **                               | ** ** | **Company  owned** | ** ** | **Licensed** | ** ** | **Franchised** | ** ** | **Total**  | ** ** |
|------------------------------------------|------------|--------------------|------------|--------------|------------|----------------|------------|------------|------------|
| **Einstein Bros.:**                      | ** ** | ** **         | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
| 2004                                     |       | 371                |       | 53           |       | —         |       | 424        |       |
| 2003                                     |       | 373                |       | 30           |       | —         |       | 403        |       |
| **Noah’s:**                         |       |               |       |         |       |           |       |       |       |
| 2004                                     |       | 78                 |       | 3            |       | —         |       | 81         |       |
| 2003                                     |       | 83                 |       | 3            |       | —         |       | 86         |       |
| **Manhattan:**                           |       |               |       |         |       |           |       |       |       |
| 2004                                     |       | —             |       | —       |       | 154            |       | 154        |       |
| 2003                                     |       | —             |       | —       |       | 188            |       | 188        |       |
| **Chesapeake:**                          |       |               |       |         |       |           |       |       |       |
| 2004                                     |       | —             |       | —       |       | 32             |       | 32         |       |
| 2003                                     |       | —             |       | —       |       | 44             |       | 44         |       |
| **New  World Coffee/Willoughby’s:** |       |               |       |         |       |           |       |       |       |
| 2004                                     |       | 7                  |       | —       |       | 9              |       | 16         |       |
| 2003                                     |       | 8                  |       | —       |       | 11             |       | 19         |       |
| **Total  Restaurants:**                  |       |               |       |         |       |           |       |       |       |
| 2004                                     |       | 456                |       | 56           |       | 195            |       | 707        |       |
| 2003                                     |       | 464                |       | 33           |       | 243            |       | 740        |       |

 

20

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We believe we have a strong platform forgrowth through store licensing of our Einstein and Noah’s brands. During thelatter half of 2003, we began expansion of our licensed stores. During thethirty-nine weeks ended September 28, 2004, we added 15 new licensedstores. We anticipate opening an additional 1 - 3 licensed stores during thefourth quarter of 2004.

 

The licensing program is available toqualified foodservice operators and typically requires an upfront license feethat is fully earned at the time when we have substantially performed ourrequired services in accordance with the license agreement, which generallycoincides with the commencement of licensee operations. Stores are developed oncollege campuses, hospitals, airports, military installations and otherlocations. The licensed stores are generally opened during the third and fourthcalendar quarters consistent with the timing of many government and highereducation projects and federal funding. We typically receive continuingroyalties on sales from each licensed store location. Our licensees are notrequired to buy all of their proprietary products directly from us, but rathertheir product sources must be approved by us.

 

Our Manhattan and Chesapeake brands primarilyrepresent our franchise base. Our franchised locations generate a recurringrevenue stream through royalty payments on sales from each franchised locationand create a built-in customer base for our manufacturing operations.

 

We continually evaluate the rationale for each of our brands with aview toward determining whether the brand should be a part of our overallstrategic business plan.

 

21

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**Results ofOperations**

 
| ** **                                                       | ** ** | **For the thirteen weeks ended** | ** ** | **Increase (Decrease)**  | ** ** | **For the thirty-nine weeks ended** | ** ** | **Increase (Decrease)** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------|------------|-------------------------------------|------------|-------------------------|------------|
| ** **                                                       | ** ** | **(in thousands)**               | ** ** | **(percent of revenue)** | ** ** | ** **                          | ** ** | **(in thousands)**      | ** ** | **(percent of revenue)** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **Sept 28,  2004**               | ** ** | **Sept 30,  2003**       | ** ** | **Sept 28,  2004**                  | ** ** | **Sept 30,  2003**      | ** ** | **2004  vs. 2003** | ** ** | **Sept 28,  2004** | ** ** | **Sept 30,  2003** | ** ** | **Sept 28,  2004** | ** ** | **Sept 30,  2003** | ** ** | **2004  vs. 2003** | ** ** |
| **Revenues:**                                                    |       |                             |       |                     |       |                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Retail sales**                                                 |       | 84,763                           |       | 86,975                   |       | 93.0                                | %          | 93.3                    | %          | -2.5 | % | 256,982 |   | 266,302 |   | 92.9 | % | 93.1 | % | -3.5 | % |
| **Manufacturing revenues**                                       |       | 4,913                            |       | 4,798                    |       | 5.4                                 | %          | 5.1                     | %          | 2.4 | % | 15,270 |   | 15,976 |   | 5.5 | % | 5.6 | % | -4.4 | % |
| **Franchise and license related revenues**                       |       | 1,503                            |       | 1,454                    |       | 1.6                                 | %          | 1.6                     | %          | 3.4 | % | 4,287 |   | 3,909 |   | 1.6 | % | 1.4 | % | 9.7 | % |
|                                                             |       |                             |       |                     |       |                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total revenues**                                               |       | 91,179                           |       | 93,227                   |       | 100.0                               | %          | 100.0                   | %          | -2.2 | % | 276,539 |   | 286,187 |   | 100.0 | % | 100.0 | % | -3.4 | % |
|                                                             |       |                             |       |                     |       |                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Cost of sales:**                                               |       |                             |       |                     |       |                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Retail costs**                                                 |       | 70,315                           |       | 74,277                   |       | 77.1                                | %          | 79.7                    | %          | -5.3 | % | 213,805 |   | 224,616 |   | 77.3 | % | 78.5 | % | -4.8 | % |
| **Manufacturing costs**                                          |       | 4,603                            |       | 4,436                    |       | 5.0                                 | %          | 4.8                     | %          | 3.8 | % | 13,623 |   | 14,559 |   | 4.9 | % | 5.1 | % | -6.4 | % |
|                                                             |       |                             |       |                     |       |                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total cost of sales**                                          |       | 74,918                           |       | 78,713                   |       | 82.2                                | %          | 84.4                    | %          | -4.8 | % | 227,428 |   | 239,175 |   | 82.2 | % | 83.6 | % | -4.9 | % |
|                                                             |       |                             |       |                     |       |                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Gross profit:**                                                |       |                             |       |                     |       |                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Retail**                                                       |       | 14,448                           |       | 12,698                   |       | 15.8                                | %          | 13.6                    | %          | 13.8 | % | 43,177 |   | 41,686 |   | 15.6 | % | 14.6 | % | 3.6 | % |
| **Manufacturing**                                                |       | 310                              |       | 362                      |       | 0.3                                 | %          | 0.4                     | %          | -14.4 | % | 1,647 |   | 1,417 |   | 0.6 | % | 0.5 | % | 16.2 | % |
| **Franchise and license**                                        |       | 1,503                            |       | 1,454                    |       | 1.6                                 | %          | 1.6                     | %          | 3.4 | % | 4,287 |   | 3,909 |   | 1.6 | % | 1.4 | % | 9.7 | % |
| **Total gross profit**                                           |       | 16,261                           |       | 14,514                   |       | 17.8                                | %          | 15.6                    | %          | 12.0 | % | 49,111 |   | 47,012 |   | 17.8 | % | 16.4 | % | 4.5 | % |
|                                                             |       |                             |       |                     |       |                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **General and administrative expenses**                          |       | 8,442                            |       | 9,716                    |       | 9.3                                 | %          | 10.4                    | %          | -13.1 | % | 25,260 |   | 30,574 |   | 9.1 | % | 10.7 | % | -17.4 | % |
| ** **                                                       |       |                             |       |                     |       |                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Depreciation and amortization**                                |       | 5,182                            |       | 7,128                    |       | 5.7                                 | %          | 7.6                     | %          | -27.3 | % | 15,764 |   | 21,425 |   | 5.7 | % | 7.5 | % | -26.4 | % |
| **Adjustment of integration and  reorganization cost**           |       | (44                              | )          | (153                     | )          | 0.0                                 | %          | -0.2                    | %          | -71.2 | % | (843 | ) | (153 | ) | -0.4 | % | -0.1 | % |   | * |
| **Impairment charges and other related costs**                   |       | 402                              |       | —                   |       | 0.4                                 | %          | 0.0                     | %          |   | * | 402 |   | — |   | 0.1 | % | 0.0 | % |   | * |
|                                                             |       |                             |       |                     |       |                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Income (loss) from operations**                                |       | 2,279                            |       | (2,177                   | )          | 2.5                                 | %          | -2.3                    | %          |   | * | 8,528 |   | (4,834 | ) | 3.1 | % | -1.7 | % |   | * |
|                                                             |       |                             |       |                     |       |                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other expense (income):**                                      |       |                             |       |                     |       |                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest expense, net**                                        |       | 5,723                            |       | 10,188                   |       | 6.3                                 | %          | 10.9                    | %          | -43.8 | % | 17,426 |   | 28,458 |   | 6.3 | % | 9.9 | % | -38.8 | % |
| **Cumulative change in the fair value of  derivatives**          |       | —                           |       | (1,063                   | )          | 0.0                                 | %          | -1.1                    | %          |   | * | — |   | (993 | ) | 0.0 | % | -0.3 | % |   | * |
| **Loss (gain) on sale, disposal or  abandonment of assets, net** |       | 273                              |       | (390                     | )          | 0.3                                 | %          | -0.4                    | %          |   | * | 1,985 |   | (592 | ) | 0.7 | % | -0.2 | % |   | * |
| **Loss on exchange of Series F Preferred  Stock**                |       | —                           |       | 23,007                   |       | 0.0                                 | %          | 24.7                    | %          |   | * | — |   | 23,007 |   | 0.0 | % | 8.0 | % |   | * |
| **Other**                                                        |       | (98                              | )          | 255                      |       | -0.1                                | %          | 0.3                     | %          |   | * | (197 | ) | (113 | ) | -0.1 | % | 0.0 | % | 74.3 | % |
|                                                             |       |                             |       |                     |       |                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Loss before income taxes**                                     |       | (3,619                           | )          | (34,174                  | )          | -4.0                                | %          | -36.7                   | %          | -89.4 | % | (10,686 | ) | (54,601 | ) | -3.9 | % | -19.1 | % | -80.4 | % |

 

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*** not meaningful**

 

This tablesets forth, for the periods indicated, certain amounts included in ourConsolidated Statements of Operations, the relative percentage that thoseamounts represent to total revenue (unless otherwise indicated), and thepercentage change in those amounts from period to period. All percentages arecalculated using actual amounts rounded to the nearest thousand.

 

We operate asa single business segment with a focus on our company-operated restaurants. Ourmanufacturing and franchise operations are either supportive or ancillary toour main business focus.

 

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***Revenues***

 

**Totalrevenues for the thirteen and thirty-nine weeks ended September 28, 2004 wereconsistent with our expectations. Our total revenues decreased 2.2% and 3.4%for the thirteen and thirty-nine weeks ended September 28, 2004, respectively,when compared to the same periods in fiscal 2003. The decreases primarilyresulted from the dollar decline in retail sales (e.g. company-operated storesales which represents the most significant componentof revenue).  Our retail comparable storesales decrease of 1.6% and 3.4% for the thirteen and thirty-nine weeks endedSeptember 28, 2004, respectively, consisted of a 6.3% and 6.3% reduction intransactions partially offset by a 5.0% and 3.1% increase in average check primarilyrelated to both an increase in menu pricing and a shift in product mix tohigher priced items. Comparable store sales represent sales at stores that wereopen for one full year and have not been relocated or closed during the currentyear. Comparable store sales are also referred to as “same-store” sales and as“comp sales” within the restaurant industry.**

 

***Gross Profit***

 

Our totalgross profit improved 12.0% and 4.5% for the thirteen and thirty-nine weeksended September 28, 2004, respectively, when compared to the same periods infiscal 2003. The improvement was primarily due to improvements in our retailcosts of sales. Our retail margins improved by 13.8% for the thirteen weeksended September 28, 2004 when compared to the same period in fiscal 2003. Allstore-level operating expenses other than depreciation, amortization and taxesimpact our retail margins. For the thirteen weeks ended September 28, 2004,approximately $1.9 million of the improvement we have experienced isattributable to our decision to reduce marketing expenditures as we focus onmodifications to our customer service system, menu offerings and the “look andfeel” of our company-operated restaurants. Additionally we have experienced animprovement in labor utilization and reductions in group insurance claims ofapproximately $2.4 million, offset by increases of approximately $0.5 millionin commodity costs. We will continue to implement solutions that improve ourmargins but expect this trend to level out during the next quarter, as many ofour store-level cost reduction initiatives will have been in place forapproximately one year.

 

**Hurricanescaused many of our restaurants in Florida to be closed for a short period oftime due to evacuations and power shortages. During the quarter ended September28, 2004, we estimate a loss of approximately $0.5 million in revenue due tothe temporary closures. The loss of revenue resulted in a negative impact toour margins of approximately $0.3 million. We have filed a claim under ourbusiness interruption insurance coverage. At this time, we have not recordedany gain contingency associated with the estimated losses that we believe arecovered under our business interruption insurance coverage.**

 

***Other Expenses***

 

**Our generaland administrative expenses decreased 13.1% and 17.4% for the thirteen andthirty-nine weeks ended September 28, 2004, respectively, when compared to thesame periods in fiscal 2003. The decline in general and administrative expensesis primarily due to reduced spending of $0.7 million and $2.2 million,respectively, for the thirteen and thirty-nine weeks ended September 28, 2004,for non-capitalizable legal and consulting expenses associated with our debtrefinancing and equity recapitalization, and the re-audit of our 2000 and 2001financial results that occurred during 2003.**

 

Ourdepreciation and amortization expenses decreased 27.3% and 26.4% for thethirteen and thirty-nine weeks ended September 28, 2004, respectively, whencompared to the same periods in fiscal 2003. The decreases in depreciation andamortization expense are primarily due to a portion of our asset base becomingfully depreciated during the fiscal year 2004. In the near future, weanticipate spending additional capital on existing stores, which would result ina corresponding increase in our depreciable asset base, and thus depreciationexpense. Over the past several years, former management did not investsignificant capital in our store equipment due to limited availability ofresources and covenant restrictions under our former credit facilities. Duringthe current year, we have placed greater emphasis on the requirements of ourexisting company-operated stores. For additional information, see thediscussion under “Liquidity and Capital Resources.”

 

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The adjustmentof integration and reorganization cost primarily represents adjustments topreviously recorded liabilities associated with the closing and corporateconsolidation of our Eatontown facilities during 2002. During April 2004, wereached an agreement with the landlord of our Eatontown facility to settleoutstanding litigation. Previously recorded integration and reorganizationestimates associated with closing this facility were adjusted down by $700,000 duringthe thirteen weeks ended March 30, 2004 as a result of this settlement.

 

For the thirteen and thirty-nine weeks ended September 28, 2004, werecorded $402,000 in impairment charges for long-lived asset impairments andexit costs from the decision to close two restaurants and to write down theassets of four under-performing restaurants.

 

Interestexpense decreased 43.8% and 38.8% for the thirteen and thirty-nine weeks endedSeptember 28, 2004, respectively, when compared to the same periods in fiscal2003. The primary cause of the decline in interest expense is the result of thedebt refinancing that occurred during the third quarter of fiscal 2003. As aresult of the debt refinancing, our interest rate on our primary debt facilitydeclined from 19% to 13% per year.

 

For thethirty-nine weeks ended September 28, 2004, we recorded a loss on disposal orabandonment of assets of approximately $2.0 million, primarily due to thedisposal of menu boards as a result of our new menu offerings and due to the abandonmentof leasehold improvements related to closed restaurants and our administrativefacilities located in New Jersey.

 

In September 2003, we completed an equity recapitalization with ourpreferred stockholders, who held a substantial portion of our common stock.Among other things, our Mandatorily Redeemable Series F Preferred Stock waseliminated. In exchange, we issued 57,000 shares of Series Z Preferred Stock toHalpern Denny Fund III, L.P. and we issued 9,380,843 shares of our common stockto Greenlight Capital and affiliates. The exchange of the Halpern Denny interest resulted in a reduction ofour effective dividend rate and as a result of this and other factors, weaccounted for this transaction as troubled debt restructuring. This exchangedid not result in a gain from troubled debt restructuring. The exchange of theGreenlight interest into common shares was recorded at fair value, whichresulted in a loss upon exchange of approximately $23.0 million. Refer to our annualreport on Form 10-K for the fiscal year ended December 30, 2003 for more information regarding thistransaction.

 

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**Liquidity and Capital Resources**

 

We havehistorically relied upon our major preferred and common stockholders to provideus with supplemental financing at times when our cash flows from operationshave been insufficient to cover our capital requirements or the requirements ofother debt. The restaurant industry is predominantly a cash business where cashis received at the time of the transaction. We have a minimal amount ofaccounts receivable, which are predominantly from our franchisees, licenseesand distributors. Additionally, our investment in inventory is minimal sinceour products are perishable. Our accounts payable are on terms that we believeare consistent with those of other companies within the industry.

 

The primarydriver of our operating cash flow is our restaurant operations, specificallythe gross margin from our company-operated restaurants. Therefore, we focus onthe elements of those operations including comparable store sales to ensure asteady stream of operating profits that enable us to meet our cash obligations.On a weekly basis, we review our company-operated store performance comparedwith the same period in the prior year and our operating plan. We arecontinuously identifying and implementing cost reduction initiatives, not onlyat the store operations level, but also within other disciplines such as supplychain, manufacturing operations and overhead. Examples of these cost reductioninitiatives include:

 

•      Menu optimization to remove and/or modifyinefficient products and thus reduce waste;

 

•      Upgrade/deployment of technology to enablemore accurate sales identification and tracking of daily volumes and cost ofproducts sold thereby identifying opportunities to improve store margins andreduce waste;

 

•      Reduction of the various elements of cost that were historically non-recurring in nature.

 

For theremainder of fiscal year 2004, we anticipate the majority of our capitalexpenditures will be focused on the following: (1) requirements of our existing company-operated stores, primarilyequipment replacement and new computer hardware, (2) upgrades and remodelingcosts associated with the openings of Einstein Bros. Café , (3) capital spenton our manufacturing operations and upgrades to our bagel manufacturingequipment located at our contract manufacturer’s site and (4) additionalcapital for our support center in Golden, Colorado, primarily related tospending on information technology upgrades and maintenance.

 

Based upon ourprojections for fiscal 2004 and beyond, we believe that the cash flow fromoperations coupled with the continued availability of our AmSouth Revolver willbe adequate to fund our operations, capital expenditures and required debt andinterest repayments for the foreseeable future.

 

Our AmSouthRevolver is a $15million senior secured revolving credit facility, which matures on July 8,2006. On September 28, 2004, our unused credit facility totaled $10.0 million,net of outstanding letters of credit of $5.0 million. Our credit facilitycontains financial covenants relating to the maintenance of leverage andcoverage ratios. The credit facility also contains affirmative and negativecovenants including, among other things, limitations on certain additionalindebtedness, capital expenditures and minimum EBITDA as defined in theagreement. We were in compliance with all covenants at September 28, 2004 anddo not anticipate that the covenants will impact our ability to borrow underour credit facility for its remaining term.

 

We are currently indiscussions with AmSouth to increase the amount of our senior secured revolvingcredit facility and potentially convert some portion of the facility to a termloan. Such modifications would assist in increasing our letter of creditcapacity, as well as, increasing limits on capital spending for future years.

 

25

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If at some point in the futurewe require additional financing, no assurance can be given that any additionalfinancing would be available on acceptable terms, or at all.  If weare unable to obtain additional financing, we may be required to further reducecosts associated with our current infrastructure, decrease spending onmarketing and advertising campaigns, curtail research and development programsand/or halt all other discretionary spending programs, any of which couldfurther reduce sales and adversely affect liquidity and operations.

 

On September28, 2004, we had unrestricted cash of $1.9 million and short-term restrictedcash of $1.3 million. We reduced our working capital deficit to $21.0million on September 28, 2004 compared with a working capital deficit of$23.6 million on December 30, 2003. Additionally, we experienced animprovement of $13.4 million in our cash operating performance (defined as netloss as adjusted for non-cash charges). We believe this improvement is a directresult of our ability to better manage fixed and variable elements of our costof sales and an overall reduction in spending dollars for general andadministrative purposes. We also improved our free cash flow deficit by $6.0million during the thirty-nine weeks ended September 28, 2004 compared to thesame period in the prior year.

 

Cash operatingperformance and free cash flow are not intended to represent cash flow fromoperations in accordance with accounting principles generally accepted in theUnited States (GAAP) and should not be used as an indicator of operatingperformance or to cash flow as a measure of liquidity. Rather, our cashoperating performance and free cash flow are a basis upon which we measure ourfinancial performance, as well as our ability to pay down debt, save cash for futureuse and build shareholder equity. We also believe that the presentation ofthese calculations provides meaningful non-GAAP financial measures to helpinvestors understand and compare business trends among different reportingperiods on a consistent basis. Cash operating performance and free cash floware not necessarily comparable to other similarly titled measures of othercompanies due to the potential inconsistencies in the method of calculation.

 

26

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| ** **                                                        | ** ** | **Thirty-nine weeks ended:** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                        | ** ** | **Sept 28, 2004**            | ** ** | **Sept 30, 2003** | ** ** |
| **Reconciliation of Net Loss to Cash  Operating Performance:**    |       |                         |       |   |   |
| Net loss                                                          |       | $                            | (10,778    | ) | $ | (55,031 | ) |
| Adjustments for non-cash charges:                                 |       |                         |       |   |   |
| Depreciation and amortization                                     |       | 15,764                       |       | 21,425 |   |
| Stock-based compensation expense                                  |       | 51                           |       | — |   |
| Loss (gain) on disposal of assets and  impairment charges         |       | 2,215                        |       | (592 | ) |
| Adjustments of integration and  reorganization costs              |       | (843                         | )          | (153 | ) |
| Cumulative change in fair value of  derivatives                   |       | —                       |       | (993 | ) |
| Amortization of debt issuance and debt  discount costs            |       | 1,387                        |       | 2,675 |   |
| Notes issued as paid in kind for interest  on Bridge Loan         |       | —                       |       | 510 |   |
| Issuance of standstill warrants                                   |       | —                       |       | 3,132 |   |
| Greenlight non-cash interest                                      |       |                         |       | 1,025 |   |
| Loss on exchange of Series F Preferred  Stock due to Equity Recap |       |                         |       | 23,007 |   |
| Reduction in Bridge Loan due to Equity  Recap                     |       | —                       |       | (615 | ) |
| Cash Operating Performance                                        |       | $                            | 7,796      |   | $ | (5,610 | ) |

 
| ** **                                                                      | ** ** | **Thirty-nine weeks ended:** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                      | ** ** | **Sept 28, 2004**            | ** ** | **Sept 30, 2003** | ** ** |
| **Reconciliation of Net Cash Used in  Operating Activities to Free Cash Flow:** |       |                         |       |   |   |
| Net cash used in operating activities                                           |       | $                            | (418       | ) | $ | (6,366 | ) |
| Less: purchases of fixed assets                                                 |       | (5,605                       | )          | (5,838 | ) |
| Free Cash Flow                                                                  |       | $                            | (6,023     | ) | $ | (12,204 | ) |
|                                                                                 |            |                              |            |  |  |  |  |  |

 

During thethirty-nine weeks ended September 28, 2004, operations consumed $0.4 million ofcash, primarily attributable to two semi-annual interest payments ofapproximately $20.4 million in the aggregate under our $160 Million Indenture,compared to consumption of $6.4 million during the thirty-nine weeks endedSeptember 30, 2003. We believe we will continue to see improvements in our cashoperating performance during the next quarter. Due to the timing of the cashinterest payment under our $160 Million Indenture, which is due each January 1and July 1, we generally consume cash from operations during the first andthird fiscal quarters of each year. During the second and fourth fiscalquarters 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. We believe the cash generated fromour company-operated stores, along with the availability under our AmSouthRevolver will be adequate to satisfy our cash obligations in the future.

 

During thethirty-nine weeks ended September 28, 2004, we used $5.6 million of cashto purchase additional property and equipment which included $1.0 million fornew stores, $3.5 million for replacement and new equipment at our existingcompany-operated stores, $0.3 million for our manufacturing operations and$0.8 million for general corporate purposes.

 

During thethirty-nine weeks ended September 28, 2004, we used $1.0 million of cashto reduce our debt outstanding on the AmSouth Revolver and approximately $0.8million to repay our obligations under the Chesapeake Bagel Bakery NotePayable.

 

27

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***ContractualObligations***

 

There were nomaterial changes to our contractual obligations during the thirty-nine weeksended September 28, 2004. For information regarding our contractual obligationsat December 30, 2003, see our Annual Report on Form 10-K for the fiscal yearended December 30, 2003.

 

***Guarantees***

 

In the past, we would sometimes guaranteeleases for the benefit of certain of our franchisees. The lease guaranteesextend through 2008. Under the guarantees, we may be required by the lessor tomake all of the remaining monthly rental payments or property tax and commonarea maintenance payments if the franchisee does not make the required paymentsin a timely manner. However, we believe that most, if not all, of thefranchised locations could be subleased to third parties minimizing ourpotential exposure. Additionally, we have indemnification agreements with ourfranchisees under which the franchisees would be obligated to reimburse us forany amounts paid under such guarantees. As of September 28, 2004, our maximumexposure under this contingent liability was approximately $1.7 million.

 

###### ***Insurance Programs***

 

We are self-insured for asubstantial portion of our current and prior years’ coverage including workers’compensation, employment practices liability and general liability(collectively, “insurance losses”). To mitigate the potential cost of ourexposures for certain of the insurance losses, we make annual decisions toself-fund the risks of loss up to defined maximum per occurrence retentions ona policy-by-policy basis. We then purchase insurance coverage, up to a certainlimit, for losses that exceed the self-insurance per occurrence or aggregateretention. The insurers’ maximum aggregate loss limits are significantly aboveour actuarially determined probable losses; therefore, we believe thelikelihood of losses exceeding the insurers’ maximum aggregated loss limits isremote.

 

We are also self-insured forhealthcare claims for eligible participating employees subject to certaindeductibles and limitations. We have accounted for our liabilities related tothe insurance losses and healthcare claims, including reported and incurred butnot reported claims, based on information provided by actuaries.

 

We believe that we haverecorded reserves adequate to cover our insurance losses based upon informationwe have today. Due to the inherent volatility of actuarially determined insuranceloss estimates, it is reasonably possible that we could experience changes inestimated losses, which could be material to our consolidated financialposition or results of operations.

 

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### ***Risk Factors***

####  

You should consider each of thefollowing factors as well as other information in the Quarterly Report inevaluating our business and prospects. The risks and uncertainties describedbelow are not the only ones we face. Additional risks and uncertainties notpresently known to us or that we currently consider immaterial may also impairour business operations. If any of these risks actually occur, our business andfinancial results could be harmed and the trading price of our common stockcould decline. You should also refer to the other information set forth in theQuarterly Report and in our Annual Report on Form 10-K for the fiscal yearended December 30, 2003, including our consolidated financial statements andthe related notes.

 

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

 

Our success depends in part on our ability tounderstand and satisfy our customers’ needs. We believe successful deploymentof our current business strategy will address customers’ needs and contributeto overall company growth.  While webelieve our new Einstein Bros. Cafe concept will revitalize this brand, itssuccess is dependent upon various factors, including customer acceptance of newmenu offerings, the new look and feel of the restaurant, and new servicesystem. In addition, the availability of capital and opportunities to makemodifications to existing stores will be significant factors in the success ofour business strategy. If we improperly perceive customers’ needs and/or arenot successful in implementing any or all of the initiatives of our businessstrategy, it could have a material adverse effect on our business, results ofoperations, and financial condition.

 

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

 

We have a highlevel of debt and are highly leveraged. In addition, we may, subject to certainrestrictions, incur substantial additional indebtedness in the future. Our highlevel of debt, among other factors, could:

 

•      make it difficult for us to satisfy ourobligations under our indebtedness;

 

•      limit our ability to obtain additionalfinancing for working capital, capital expenditures, acquisitions and generalcorporate purposes;

 

•      increase our vulnerability to downturns inour business or the economy generally;

 

•      limit our ability to withstand competitivepressures from our less leveraged competitors; and

 

•      harm us because a failure by us to complywith the covenants in the instruments and agreements governing our indebtednesscould result in an event of default that, if not cured or waived, could resultin all of our indebtedness becoming immediately due and payable, which couldrender us insolvent.

 

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

 

Economic,financial, competitive, legislative and other factors beyond our control mayaffect our ability to generate cash flow from operations to make payments onour indebtedness and to fund necessary working capital. A significant reductionin operating cash flow would likely increase the need for alternative sourcesof liquidity. If we are unable to generate sufficient cash flow to makepayments on our debt, we will have to pursue one or more alternatives, such asreducing or delaying capital expenditures, refinancing our debt, selling assetsor raising equity. We may not be able to accomplish any of these alternativeson satisfactory terms, if at all, and even if accomplished, they may not yieldsufficient funds to service our debt.

 

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

 

Food service businesses are often affected by changes in consumertastes, dietary trends, national, regional and local economic conditions anddemographic trends. Factors such as traffic patterns, local demographics andthe type, number and location of competing restaurants may adversely affect theperformance of individual locations. Shifts in consumer preferences away fromour type of cuisine and/or the quick casual dining style could have a materialadverse affect on our results of operations. We believe that the trend towardconsumption of food low in carbohydrate content may have had and may continue tohave a negative impact on our sales and revenues. In addition, inflation andincreased food and energy costs may harm the restaurant industry in general andour 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.

 

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

 

Our industry is intensely competitive and there are manywell-established competitors with substantially greater financial and otherresources than we have. In addition to current competitors, one or more newmajor competitors with substantially greater financial, marketing and operatingresources could enter the market at any time and compete directly against us.In addition, in virtually every major metropolitan area in which we operate orexpect to enter, local or regional competitors already exist. This may make itmore difficult to obtain real estate, advertising space, and retain customersand personnel.

 

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

 

The cost, availability and quality of the ingredients we use to prepareour food are subject to a range of factors, many of which are beyond ourcontrol. Fluctuations in economic and political conditions, weather and demandcould adversely affect the cost of our ingredients. We have limited controlover fluctuations in the price of commodities, and we may not be able to passthrough any cost increases to our customers. We are dependent on frequentdeliveries of fresh ingredients, thereby subjecting us to the risk of shortagesor interruptions in supply. All of these factors could adversely affect ourbusiness and financial results.

 

*We heavily depend on our suppliers anddistributors.*

 

We currently purchase our raw materials from various suppliers. Wepurchase a majority of our frozen bagel dough from one supplier. Though to datewe have not experienced significant difficulties with our suppliers, ourreliance 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 onour network of six regional custom distributors to distribute frozen bageldough and other materials to our locations. If any one or more of thesedistributors fails to perform as anticipated, or if there is any disruption inany of our distribution relationships for any reason, it could have a materialadverse effect on our business, financial condition and results of operations.

 

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*Increasing labor costs could adversely affectour continued profitability.*

 

We are dependent upon an available labor pool of employees, many ofwhom are hourly employees whose wages may be affected by an increase in thefederal or state minimum wage. Numerous proposals have been made 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, an increase in the minimumwage may create pressure to increase the pay scale for our employees, whichwould increase our labor costs and those of our franchisees and licensees. Ashortage in the labor pool or other general inflationary pressures or changescould also increase labor costs. In addition, changes in labor laws orreclassifications of employees from management to hourly employees could affectour labor cost. For example, new federal overtime regulations under the FairLabor Standards Act, which went into effect on August 23, 2004, may impact theclassification of several of our positions. We are continuing to evaluate thespecific impact of these changes. An increase in labor costs 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.

 

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

 

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

 

*We rely in part on our franchisees.*

 

We rely in part on our franchisees and the manner in which they operatetheir locations to develop and promote our business. Although we have developedcriteria to evaluate and screen prospective franchisees, franchisees may nothave the business acumen or financial resources necessary to operate successfulfranchises in their franchise areas. The failure of franchisees to operatefranchises successfully could have a material adverse effect on us, our abilityto collect royalties, our reputation, our brands and our ability to attractprospective franchisees.

 

*We face risks associated with governmentregulation.*

 

Each of our locations is subject to licensing and regulation by thehealth, sanitation, safety, labor, building and fire agencies of the respectivestates and municipalities in which it is located. A failure to comply with oneor more regulations could result in the imposition of sanctions, including theclosing of facilities for an indeterminate period of time, or third-partylitigation, any of which could have a material adverse effect on us and ourresults of operations.

 

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

 

Under variousfederal, state and local laws, an owner or operator of real estate may beliable for the costs of removal or remediation of certain hazardous or toxicsubstances on or in such property. Such liability may be imposed without regardto whether the owner or operator knew of, or was responsible for, the presenceof such hazardous or toxic substances. Although we are not aware of anyenvironmental conditions that require remediation by us under federal, state orlocal law at our properties, we have not conducted a comprehensiveenvironmental review of our properties or operations. We may not haveidentified all of the potential environmental liabilities at our properties,and any such liabilities that are identified in the future may have a materialadverse effect on our financial condition.

 

*We may not be able to protect our trademarks,service marks and other proprietary rights.*

 

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

 

*We have a majority stockholder.*

 

Greenlight Capital, L.L.C. and its affiliates beneficially ownapproximately 97 percent of our common stock. As a result, Greenlight hassufficient voting power, without the vote of any other stockholders, todetermine what matters will be submitted for approval by our stockholders, toapprove actions by written consent without the approval of any otherstockholders, to elect all of our board of directors, and to determine whethera change in control of our company occurs. Greenlight’s interests on matterssubmitted to stockholders may be different from those of other stockholders.Greenlight is not involved in our day-to-day operations, but Greenlight has votedits shares to elect our current board of directors. The chairman of our boardof directors is a current employee of Greenlight. The remaining six directorsare not affiliated with Greenlight.

 

Our common stock is not currently listed on any stock exchange or Nasdaq. As a result, we are not subject to corporategovernance rules recently adopted by the New York Stock Exchange, AmericanStock Exchange and Nasdaq requiring a majority ofdirectors to be independent and requiring compensation and nominatingcommittees that are composed solely of independent directors. However, we aresubject to rules requiring that the audit committee consist entirely ofindependent directors. Under the rules of these stock exchanges and Nasdaq, ifa single stockholder holds more that 50% of the voting power of a listedcompany, that company is considered a controlled company, and except for therules relating to independence of the audit committee, is exempt from theabove-mentioned independence rules. Since Greenlight beneficially ownsapproximately 97% of our common stock, we may take advantage of the controlledcompany exemption if our common stock becomes listed on an exchange or Nasdaq in the future. As a result, our stockholders do nothave, and may never have the protections that these rules are intended toprovide.

 

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*Future sales of shares of our common stock by ourstockholders could cause our stock price to fall.*

 

If a substantial number of shares of our common stock are sold in thepublic market, the market price of our common stock could fall.  The perception among investors that thesesales 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 recentlyregistered 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.*

 

Ourcommon stock is currently trading on the “pink sheets” under the symbol“NWRG.PK.”  Before changing our symbol onOctober 20, 2003, our common stock traded on the “pink sheets” under thesymbol “NWCI.PK.”  Since our common stockis not listed on Nasdaq, Amex or the New York Stock Exchange, holders of ourcommon stock may find that the liquidity of our common stock is impaired – notonly in the number of securities that can be bought and sold, but also throughdelays in the timing of transactions, reduction in security analysts’ and thenews media’s coverage of us, and lower prices for our securities than mightotherwise be attained.

 

Securitiesthat are not listed on a stock exchange, the Nasdaq National Market or theNasdaq SmallCap Market are subject to an SEC rule that imposes special requirementson broker-dealers who sell those securities to persons other than theirestablished customers and accredited investors. The broker-dealer mustdetermine that the security is suitable for the purchaser and must obtain thepurchaser’s written consent prior to the sale. These requirements may make itmore difficult for you to sell our stock than the stock of some othercompanies. It may also affect our ability to raise more capital if and whennecessary.

 

Before May 22, 2002, our common stock was quoted on the OTCBulletin Board under the symbol “NWCI.OB.” On May 22, 2002, our commonstock was removed from the eligible list on the OTC Bulletin Board for afailure to comply with NASD Rule 6530, which resulted from our failure totimely file our Form 10-K for the year ended January 1, 2002.  Before November 27, 2001, our commonstock was quoted on the Nasdaq National Market under the symbol “NWCI.”  Effective November 27, 2001, NASDAQdelisted our common stock from the Nasdaq National Market due to corporategovernance violations and public interest concerns.

 

**Item 3.****  Qualitativeand Quantitative Disclosures About Market Risk**

 

ThroughSeptember 28, 2004, our results of operations, financial position and cashflows have not been materially affected by changes in the relative values ofnon-U.S. currencies to the U.S. dollar. We do not use derivative financialinstruments to limit our foreign currency risk exposure since virtually all ofour business is conducted in the United States.

 

Our debt as ofSeptember 28, 2004 is principally comprised of the $160 Million Indenture dueJuly 1, 2008 and the AmSouth Revolver. A 100 basis point increase in marketinterest rates would have an immaterial effect on our borrowing costs, sincethe interest rate on the $160 Million Indenture is fixed. The interest rate onthe AmSouth Revolver does fluctuate with changes in the prime rate, but isminor in relation to interest expense in our results of operations andfinancial condition.

 

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**Item 4.****  Controlsand Procedures**

 

Our chiefexecutive officer and our principal financial officer have evaluated theeffectiveness of our “disclosure controls and procedures” (as defined inRules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 28,2004. Based on that evaluation, our chief executive officer and our principalfinancial officer have concluded that our disclosure controls and procedureswere effective to provide reasonable assurance that information that we arerequired to disclose in reports that we file with the SEC is recorded,processed, summarized and reported within the time periods specified by theExchange Act rules.

 

It should benoted that any system of controls, however well designed and operated, canprovide only reasonable assurance regarding management’s control objectives. Inaddition, the design of any control system is based in part upon certainassumptions about the likelihood of future events. Because of these and otherinherent limitations of control systems, there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions, regardless of how remote.

 

During thefiscal quarter ended September 28, 2004, there were no changes to our internalcontrol over financial reporting which were identified in connection with theevaluation of our disclosure controls and procedures required by the ExchangeAct rules and which have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

**NEW WORLDRESTAURANT GROUP, INC.**

 

**Item 1.****    Legal Proceedings.**

 

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

 

**Item 6.****  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 to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 
|   |              | NEW WORLD RESTAURANT GROUP,  INC.                         |
|--------|-------------------|-----------------------------------------------------------|
|   |              |                                                      |
|   |              |                                                      |
| Date:  | November 11, 2004 | By:                                                       | /s/ PAUL J. B. MURPHY, III |
|   |              | Paul J.B. Murphy, III                                     |
|   |              | Chief Executive Officer                                   |
|   |              |                                                      |
| Date:  | November 11, 2004 | By:                                                       | /s/ RICHARD P. DUTKIEWICZ |
|   |              | Richard P. Dutkiewicz                                     |
|   |              | Chief Financial Officer and  Principal Accounting Officer |

 

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