<PAGE>
 
================================================================================


                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549


                        FORM 10-KSB/A (Amendment No. 1)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
     SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

     FOR THE FISCAL YEAR ENDED DECEMBER 29, 1996

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
     SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                            COMMISSION FILE NUMBER
                             --------------------

                            NEW WORLD COFFEE, INC.
                 (Name of Small Business Issuer in its Charter)

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

    379 WEST BROADWAY, 4TH FLOOR                               10012
            NEW YORK, NY                                    (Zip Code)
(Address of Principal Executive Offices)

                                 (212) 343-0552
                          (Issuer's Telephone Number)
 
Securities registered under 
Section 12(B) of the Exchange Act:
                                                    NAME OF EACH EXCHANGE ON
                                                        WHICH REGISTERED
                                                    ------------------------
    Common Stock, $.001 par value..............             NASDAQ

  Securities registered pursuant to Section 12(G) of the Exchange Act:  NONE

        Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(D) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES  X   NO 
    ---    ---   

        Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments of this Form 10-KSB. [X]

        State issuer's revenues for its most recent fiscal year.  $11,340,199
                                                                  -----------

        The aggregate market value of the voting stock held by non-affiliates
per the closing stock price as of March 14, 1997 is $13,927,461.
                                                     ----------

        As of March 14, 1997, 6,245,498 shares of common stock of the issuer
were outstanding.

================================================================================
<PAGE>
 
                                    PART I
 
ITEM 1.  BUSINESS

GENERAL
 
     New World Coffee, Inc. ("New World Coffee" or the "Company") currently owns
and operates 40 specialty coffee cafes, consisting of 28 in New York, seven in
Connecticut, three in Pennsylvania and two in New Jersey, making the Company the
second largest specialty coffee retail chain in the northeastern United States.
With its recent acquisition of Willoughby's Incorporated ("Willoughby's"), the
Company's coffee purveyor and roaster since its inception, the Company has
become vertically integrated in its operations, reduced its coffee costs,
improved its quality control, and entered into the mail order and wholesale
businesses. The Company seeks to differentiate itself from other specialty
coffee retailers by serving high quality, freshly roasted coffee (generally
delivered to its stores within 24 hours of roasting) and a variety of fresh,
high quality gourmet foods in a sophisticated, award-winning cafe design
environment.

     In recent years, the specialty coffee retail business has grown rapidly.
Industry sources estimate that total retail sales of specialty coffee through
all distribution channels will grow to $5.0 billion by 1999 from an estimated
$1.5 billion in 1989 and that coffee stores, including espresso carts and
kiosks, will be the fastest growing distribution channel.  The consumption of
specialty coffee drinks is also growing rapidly, with the percent of U.S.
population drinking cappuccino increasing 42% from 1995 to 1996.  Management
believes this growth has been driven by (i) the increasing demand for premium
food and drink items, (ii) the popularity of coffee bars as gathering places,
and (iii) greater awareness and appreciation of gourmet coffee drinks.

     In 1996, the Company restructured its operations and added senior
management personnel with significant experience in retailing and food service
as well as real estate development. Most importantly, the Company hired Bruce
Morningstar, previously the Director-Northeast Development of Starbucks
Corporation ("Starbucks"), as Vice President-Real Estate, and John DeNapoli,
previously Chief Operating Officer of Atlantic Foods Corporate, a Boston Market
franchisee, as Vice President-Operations. In addition, the Company deployed a
state-of-the-art, personal computer-based point-of-sale management information
system (the "POS System") which significantly enhanced its ability to track and
improve its store profitability. The Company also refocused its site selection
strategy to solely target high-traffic, high-visibility residential and shopping
locations. Such locations typically generate higher revenue since they are open
seven days per week and attract breakfast, lunch and afternoon and evening
traffic as compared to business district sites which are open five days per week
and do not attract afternoon and evening traffic. In order to better serve this
market, the Company developed a larger, more comfortable store concept designed
to create a neighborhood gathering place environment. In addition, the larger
store concept offers expanded retailing space to enable the Company to better
capture whole bean and merchandise sales. The Company's existing stores vary in
size from 225 to 2,670 retail square feet, with newer stores averaging
approximately 1,800 retail square feet.

     New World Coffee is a Delaware corporation and was organized in November
1992.

<PAGE>
 
INDUSTRY OVERVIEW

     The U.S. coffee market has broad and deep demographics. Fifty-six percent
of American adults drink coffee and on average they drink an average of 3.5 cups
per day, according to the National Coffee Association of U.S.A., Inc.'s 1996
Winter Coffee Study. The U.S. coffee market consists of two distinct product
categories: (i) commercial ground roast, mass-merchandised coffee, which
includes brands such as Folgers and Maxwell House and (ii) specialty coffees,
which include gourmet coffees (arabica coffees sold in whole bean and ground
form) and premium coffees (upscale coffees mass marketed by the leading coffee
companies).

     The Company believes that the market for specialty coffee is large, growing
and fragmented. The gourmet coffee segment of the industry has experienced
strong growth over the past decade and is expected to continue to grow through
the end of the century.  According to Avenues For Growth: A 20-Year Review of
the U.S. Specialty Coffee Market, January 1993, a report published by the
Specialty Coffee Association of America ("SCAA"), the market for gourmet coffee
nearly doubled during the 1980s, as retail sales grew from approximately $763
million in 1979 to $1.5 billion in 1989. The report predicts that the gourmet
coffee industry will approach $5.0 billion in retail sales by the year 2000. A
National Association of Specialty Food Trade survey in 1992 confirms the upward
trends in gourmet coffee consumption and notes that the percentage of coffee
consumers purchasing gourmet coffee increased from 22.1% in 1990 to 31.1% in
1992. The Company believes these are the most up to date reports available on
the specialty coffee industry.

BUSINESS STRATEGY

     The goal of New World Coffee is to become the premier high quality
specialty coffee cafe retailer in each market in which it operates.  Each
element of the Company's strategy is designed to differentiate and reinforce New
World Coffee's brand identity, to engender a high degree of customer loyalty and
to position the Company as a leading specialty coffee cafe retailer.  The key
elements of this strategy include:

     Sophisticated, Comfortable and Inviting Environment. New World Coffee's
specialty coffee cafes are designed to be more sophisticated and comfortable
than those of its competitors while creating an inviting atmosphere through the
use of natural materials and warm lighting. The Company's newer format stores
average approximately 1,800 square feet (compared to approximately 600 square
feet previously) and offer an expanded, more comfortable seating area which
enhances the stores use as neighborhood gathering places, along with expanded
retailing sections to enable the Company to capture additional whole bean and
merchandise sales. The Company's sales mix for the quarter ended December 29,
1996 was 62% beverages, 23% food, 12% beans and 3% merchandise, compared to 63%,
32%, 5% and 0%, respectively, for the comparable 1995 quarter. New World
Coffee's store design has won six design awards and, Management believes, in
conjunction with the Company's

                                      I-2
<PAGE>
 
quality brand image, provides a significant advantage in competing both for the
repeat coffee consumer and for prime retail space.

     High Quality, Guaranteed Fresh Roasted Coffee.   The Company pursues a
strategy of delivering high quality, guaranteed freshly roasted coffee to its
customers.  New World Coffee selects high quality arabica beans from throughout
the world which are then roasted by its roastmasters in small batches to ensure
a peak roasted product.  Coffee is delivered to each New World Coffee location
generally within 24 hours of roasting, enabling the Company to guarantee the
freshness of coffee sold in its stores.  Any coffee not sold within ten days of
roasting is donated to charity.  The Company believes this guaranteed freshness
strategy distinguishes New World Coffee from its competitors, most of whom
deliver vacuum- or valve-packed coffee to their stores.

     Superior Customer Service.   The friendliness, speed and consistency of the
service and the coffee knowledge of New World Coffee's employees is critical to
developing the Company's quality brand identity and to building a loyal customer
base.  To this end, the Company places strong emphasis on identifying, hiring
and retaining employees, invests substantial resources in training them in
customer service, sales skills, the knowledge of coffee and coffee beverage
preparation.

     Branded Marketing. The Company's marketing strategy is to differentiate its
concept based upon (i) promoting the Company's status as a roaster to establish
the Company's legitimacy as a high quality purveyor of award-winning fresh
roasted coffees, (ii) offering a broad and deep selection of food items to
establish the stores as specialty coffee cafes compared to espresso bars which
have a limited food selection, (iii) offering larger stores with comfortable
seating, and a warm environment to establish them as neighborhood gathering
places compared to espresso bars which have limited seating, and (iv) promoting
the distinctive qualities of the Company's new products such as the New World
Freezer and seasonal blends to position the Company as a unique and innovative
retailer. The Company also sponsors local and regional marketing events. New
World Coffee believes that these activities generate awareness and trial and
repeat purchases by reinforcing positive experiences with the Company's
products.

     Site Selection and Regional Expansion.  New World Coffee's site selection
strategy is to open stores in residential and shopping areas with strong
demographics, high traffic, high visibility, easy accessibility and parking,
with strong compatible retailers.  The Company's expansion strategy is to
rapidly expand its retail store base in both existing and new markets, through
new store openings or acquisitions, in order to secure a leading presence in
each of its markets and to enhance its brand awareness.  Along with expansion in
its existing markets, the Company plans to enter other markets along the
Atlantic seaboard, and has identified the Washington, D.C. and Boston
metropolitan markets as its next expansion markets.  

COFFEE

     New World Coffee is committed to roasting and marketing only the finest and
freshest coffee.  New World Coffee offers a revolving selection that includes
over 30 whole bean blended, unblended and decaffeinated coffees.  Rotating its
coffee selection allows the Company to provide its customers with a wider
variety including certain coffees which have limited availability.  The Company
typically offers up to 12 unblended and 8 blended coffees at any given time.

     Sourcing.  The Company focuses on purchasing only the highest grades of
coffee available from the best crops.  Barry Levine and Bob Williams, the
Company's Vice Presidents-Coffee, evaluate crop samples on an ongoing basis and
make purchase commitments on the basis of quality, taste and availability.  The
Company makes forward commitments for the purchase of all of its coffee to help
ensure adequate supply.  Since one pound of coffee is brewed to produce
approximately 40 cups of coffee, increases in the cost of green coffee
historically have not had a material adverse impact on the Company's per cup
cost of coffee. The Company has long-standing relationships with coffee brokers,
growers and exporters, allowing the Company access to the world's best green
coffee.

     New World Coffee purchases only the highest grades of arabica coffee as
these grades are the best available from each producing region.  These highest
grade arabica coffees are of superior quality to lower grade arabica varieties
or coffee beans of the robusta species.  Lower quality beans are typically found
in non-specialty or mass-merchandised coffees and even in many specialty coffee
outlets.

     Roasting.  The roasting of commercial coffee is often accomplished through
a uniform roasting process that does not differentiate between the types of
coffee.  Some specialty roasters also employ this commercial method.

                                      I-3
<PAGE>
 
New World Coffee's roasting process, however, varies based upon the variety,
origin and physical characteristics of the coffee and is designed to develop the
optimal flavor and aromatics of each coffee.  New World Coffee has several
roastmasters who are directly responsible for overseeing the roasting process.
The roastmasters learn the Company's unique roasting methods during an
apprenticeship with the Company's Vice Presidents-Coffee.

     New World Coffee believes that its roasting facility has sufficient
capacity for the Company's planned expansion within the next 12 months.  The
Company will continue to assess its roasting and distribution capacity in light
of its planned expansion and its commitment to provide guaranteed fresh roasted
product to all of its locations which it believes is an effective competitive
advantage.

     Freshness.  New World Coffee is committed to providing its customers with
freshly roasted whole bean coffee and beverages.  Freshness is important because
once coffee is roasted it becomes a highly perishable product, and within 2
weeks, loses a significant amount of flavor.  The Company's coffee is delivered
to each store at least twice a week, generally within 24 hours of roasting.
This enables the Company to guarantee the freshness of the coffee sold in its
stores.  The Company believes that its freshly roasted coffee is superior to its
competitors who deliver vacuum- or valve-packed coffee to their stores.

RETAIL STORES

     The Company operates 40 specialty coffee cafes, including 28 in New York,
seven in Connecticut, three in Pennsylvania, and two in New Jersey.  New World
Coffee stores feature an award-winning decor and are designed to have a
sophisticated, comfortable and inviting appearance through the use of natural
materials and warm lighting.  The Company's newer format stores average
approximately 1,800 square feet (compared to approximately 600 square feet
previously) and offer an expanded, more comfortable seating area which enhances
the stores use as neighborhood gathering places, along with expanded retailing
sections to enable the Company to capture additional whole bean and merchandise
sales.

     New World Coffee stores offer, over the course of any given year, more than
30 varieties and blends of fresh roasted coffee, in brewed and whole bean
format, from coffee producing countries around the world.  Regular and
decaffeinated "Coffees of the Day" are fresh brewed daily with strict brewing
and freshness standards.  The stores also offer a broad range of Italian-style
beverages such as espresso, cappuccino, caffe latte, caffe mocha and espresso
machiato.  All espresso based drinks are prepared to order which the Company
believes ensures quality and consistency.  New World Coffee offers freshly
squeezed orange and grapefruit juices and lemonade.  The tea menu includes a
selection of black, herbal and fruit teas, with one selection offered as the
fresh brewed "Iced Tea of the Day."

     New World Coffee stores also offer a broad and deep variety of fresh, high
quality food items.  Breakfast offerings include bagels, croissants, muffins,
danishes and scones, lunch offerings include Italian panini sandwiches and soups
and dessert items include various cakes and cookies, dessert muffins, brownies
and biscotti.  Management is consistently working with its suppliers to develop
a selection of quality food items which will complement beverage sales.

     Some of the Company's stores also carry selected coffee related merchandise
items including coffee making equipment, french presses, grinders and other
small equipment.  The Company's newer, larger format stores include expanded
retailing sections to enable the Company to better capture whole bean and
merchandise sales.  For the quarter ended December 29, 1996, the Company's sales
mix was 62% beverages, 23% food, 12% whole beans and 3% merchandise,
compared to 63%, 32%, 5% and 0%, respectively, for the comparable 1995 quarter.

     New World Coffee prices its coffees competitively with the prevailing high-
end coffee prices in each of its markets which the Company believes reflects the
high quality of the Company's coffees and its high level of customer service.

SITE SELECTION AND STORE LOCATIONS

     New World Coffee's site selection strategy is to open specialty coffee
cafes in high-traffic, high-visibility residential and shopping locations in
each of its target markets.  The Company's real estate selection process

                                      I-4
<PAGE>
 
evaluates sites based on a variety of factors including neighborhood
demographics, existing traffic patterns, site visibility, site accessibility,
availability of parking, proximity of compatible retailers and potential
competitors.  Following this analysis, each site must be approved by senior
management in each of the real estate, operations and finance areas.  In 1996,
the Company recruited Bruce Morningstar, previously Starbucks' Director-
Northeast Development, to oversee its development process as its Vice President-
Real Estate.

     In 1996, the Company focused its site selection strategy to solely target
residential and shopping area sites.  The Company's experience indicates that
residential and shopping area sites generally offer more attractive economics as
they typically are open seven days a week and capture breakfast, lunch and
afternoon and evening traffic, compared to business district sites which are
open five days and capture breakfast and lunch traffic only.  The residential
and shopping area units can also be staffed and operated more cost effectively
than business district sites due to lower peak traffic constraints.

     During fiscal 1996, the Company's average cost to open a store was
approximately $300,000, including all leasehold improvements, equipment,
beginning inventory, as well as all expenses for the store design, site
selection, lease negotiation, construction supervision and permitting.  The
eighteen residential and shopping area stores open for the entire period
achieved average sales per store of approximately $505,000 and average sales per
square foot of $710. For the quarter ended December 29, 1996, the Company
achieved a chainwide store operating margin of 20.6%.

                                      I-5
<PAGE>
 
CUSTOMER SERVICE AND TRAINING

     The Company believes that the training and knowledge of its employees and
the consistency and quality of the service they deliver are central to the
Company's success. Management believes that an employee oriented culture creates
a sense of personal responsibility among all employees, and pride in the
Company's products, resulting in a higher level of customer service.

     Once hired, store employees undergo training in coffee knowledge, beverage
preparation and customer service and sales skills. This training includes
written training materials, lectures, observation and simulation exercises. The
final stage of training is in-store training where employees work for a two week
period implementing their newly learned skills. Retail store managers receive
additional training in advanced coffee knowledge, communication skills and
performance appraisal techniques. The Company encourages its management and
employees to educate customers about the qualitative aspects of coffee and the
differences among each of the Company's blends, as well as the differences
between the Company's coffees and those offered by others.

     New World Coffee seeks to attract and retain qualified personnel by
offering an attractive package of compensation, benefits and career growth
potential. The Company's incentive compensation system rewards employees for
high quality service and productivity from a store-level bonus pool. The
Company's benefits package includes medical coverage for full-time and
qualifying part-time workers. In addition, as a rapidly growing business, New
World Coffee is able to offer career advancement opportunities and incentive
stock options to all management personnel. The Company has not experienced any
material difficulties in retaining qualified personnel.

STORE OPERATIONS

     The typical New World Coffee store is staffed with one manager, two
assistant managers and between 10 and 15 hourly employees, many of whom work
part-time.  The hours for each store are established based on location and
customer demand, but typically are from 7:00 a.m. to 9:00 p.m. or later in
residential and shopping area locations and from 7:00 a.m. to 6:00 p.m. in
business district locations.  The store managers are overseen by a district
manager, who is responsible for supervising the operations of up to 10 stores
and who reports to a regional manager.

     The Company maintains financial accounting controls for each of its stores
through the use of centralized accounting and management information systems to
track store-by-store performance, produce required management reports, and track
and manage consolidated inventory and purchasing requirements. The Company's
information system currently uses a central computer and state-of-the-art POS
System. At present the POS System is polled nightly via an interface to the
central computer, which then creates daily, weekly and monthly management
reports. Sales information is collected daily from each store and store managers
are provided with operating statements for their locations.

MARKETING

     The Company's marketing strategy is to differentiate its concept and build
a brand identity based upon (i) promoting the Company's status as a roaster to
establish the Company's legitimacy as a high quality purveyor of award-winning
fresh roasted coffees, (ii) offering a broad and deep selection of food items to
distinguish its specialty coffee cafes from espresso bars which have a limited
food selection, (iii) offering larger stores with comfortable seating, and a
warm environment to establish them as neighborhood gathering places compared to
espresso bars which have limited seating, and (iv) promoting the distinctive
qualities of the Company's new products such as the New World Freezer and
seasonal blends to position the Company as a unique and innovative retailer.

     New World Coffee believes that its ability to source and roast only the
highest quality beans and provide only fresh roasted coffee delivers a
distinguishable advantage in coffee flavor to the consumer.  The Company's
marketing materials and in-store decor package emphasize the Company's status as
a roaster and retailer and highlight the Company's efforts to source, roast and
sell only the finest, freshest coffees.  These materials also educate consumers
about New World Coffee's fresh roasted coffees as compared to vacuum- or valve-
packed coffee from other retailers.  The Company also promotes the fact that
its coffees have garnered numerous awards over the years.

                                      I-6
<PAGE>
 
     To date, the Company has relied primarily on the high visibility of its
real estate locations, word of mouth, public relations, and the inviting
atmosphere of its stores to attract first time customers.  The Company's focus
on larger, higher-visibility residential and shopping area sites enhances its
ability to develop a brand identity as they tend to be more visible, higher
traffic residential and shopping sites and also serve as neighborhood gathering
places.  In addition, the Company's strategy to offer breadth and depth of high
quality food items serves to distinguish it from other espresso bar competitors.

     The Company seeks to further develop its brand identity through
participation in targeted local events to enhance brand awareness.  For example,
in New York, New World Coffee served as the exclusive coffee provider to the
1993 and 1994 New York City Marathons, the 1995 Seventh on Sixth Fashion Week
shows, and Celebrate 125!, The Museum of Natural History's 125th Anniversary
Celebration, the 1996 Village Jazz Festival and the 1996 Race for the Arts.  The
Company also conducts local coffee tastings, samplings at neighborhood events
and frequent purchaser promotions, such as discounts on its "Coffee of the
Month" to generate trial purchases of its products.  The costs of these
promotions do not have a material impact on the Company's operating results.

     A steady introduction of new coffee, drink and food products is key to the
Company's marketing strategy to establish the Company as an innovative retailer,
keep the concept fresh and drive incremental sales volume.  For example, in
1995, the Company introduced the New World Freezer, an iced coffee and milk
"slush" drink as a seasonal offering.  The Company also develops seasonal blends
such as Summertime Blend, designed to be consumed iced or hot to complement
lighter, warm weather foods and Holiday Blend to complement richer wintery
foods.  In addition, "coffees of the day" are designed to encourage tasting
experimentation and enhance customer knowledge of unusual blends and varieties.

     As the Company attempts to enter new markets, it plans to tailor its
marketing strategy to the overall level of awareness and availability of
specialty coffee in that market. In markets which have a less developed
specialty coffee presence, the emphasis of the Company's promotions will
initially be on the fundamental distinctions between New World Coffee and
prepackaged ground coffee. In markets which are more knowledgeable about
specialty coffees, the Company's advertising will focus on the superiority of
New World Coffee's guaranteed freshly roasted products versus competitive
specialty brands. The Company plans to use direct mail, print and other mass
media advertising to expand brand awareness when the Company has achieved a
market penetration which, in the Company's judgment, would make such efforts
cost-effective. There can be no assurance that the Company will achieve such a
level of market penetration.

COMPETITION

     The Company's coffee beverages compete directly against all restaurant and
beverage outlets that serve coffee and a growing number of espresso stands,
carts and stores. The Company's whole bean coffees compete directly against
specialty coffees sold at retail through supermarkets, shoppers' clubs,
specialty retailers, and a growing number of specialty coffee stores. Both the
Company's whole bean coffees and its coffee beverages compete indirectly against
all other coffees on the market. The Company believes that its customers choose
among retailers primarily on the basis of quality and convenience and, to a
lesser extent, on price.

     The Company competes for beverages and whole bean coffee sales with
franchise operators and locally owned specialty coffee stores in the United
States. There are a number of competing specialty coffee retailers, such as:
Starbucks, a Seattle-based operator of gourmet coffee stores, with more than
1,100 locations; Timothy's Coffees of the World, Inc., a Toronto-based
franchisor, with approximately 75 locations; Caribou Coffee Inc., a Minneapolis-
based operator, with approximately 75 locations; and Pasqua's, Inc., a San
Francisco-based operator, with approximately 50 locations. In addition, in
virtually every major metropolitan area in which New World Coffee operates or
expects to enter, local or regional competitors already exist.

     Although competition in the specialty coffee market is currently
fragmented, the Company competes and, in the future will increasingly compete
with Starbucks, the market's leading retailer. Starbucks, and others, have
significantly greater financial, marketing and other resources than the Company.
In addition to Starbucks and other current competitors, the attractiveness of
the gourmet specialty coffee store market could draw one or more new major
competitors with substantially greater financial, marketing, and operating
resources than the Company at any time.

                                       I-7
<PAGE>
 
     The Company also expects that competition for suitable sites for new stores
will be intense. The Company competes against other specialty retailers and
restaurants for these sites, and there can be no assurance that management will
be able to continue to secure adequate sites at acceptable rent levels.

     Management believes that supermarkets pose the greatest competitive
challenge in the whole bean coffee market, in part because supermarkets offer
customers the convenience of not having to make a separate trip to the Company's
stores. A number of nationwide coffee manufacturers, such as Kraft General
Foods, Inc., Proctor & Gamble Co., and Nestle S.A., are distributing premium
coffee products in supermarkets, which products may serve as substitutes for the
Company's coffees. Regional specialty coffee companies, such as Millstone
Coffee, Inc., also sell whole bean coffees in supermarkets.


ITEM 2.  PROPERTIES

FACILITIES

     New World Coffee leases approximately 7,550 square feet in New York, New
York, approximately 1,600 square feet in Branford, Connecticut for
administrative offices and training facilities and 3,800 square feet for a
roasting plant. As of the date of this 10-KSB filing, New World Coffee operates
a total of 40 retail stores all of which are located in leased premises.

NEW WORLD COFFEE STORE LOCATIONS AND SIGNED LEASES
<TABLE>
<CAPTION>
                                                                                                   Approximate Retail
                      Store                             Location          Date Opened/Acquired       Square Footage
-------------------------------------------------  -------------------  -------------------------  -------------------
<S>                                                <C>                  <C>                        <C>
Sixth Avenue at 10th Street*.....................     New York, NY                          02/93                  270
 
Third Avenue at 67th Street*.....................     New York, NY                          07/93                  450
 
Madison Avenue at 47th Street*...................     New York, NY                          09/93                  650
 
Broad Street at Stone Street.....................     New York, NY                          02/94                  925
 
West Broadway at Spring Street*..................     New York, NY                          03/94                  750
 
Bell Atlantic Tower..............................   Philadelphia, PA                        04/94                1,150
 
Trump Plaza at 62nd Street*......................     New York, NY                          05/94                  475
 
Columbus Avenue at 80th Street*..................     New York, NY                          06/94                  500
 
Wall Street at Water Street......................     New York, NY                          08/94                  450
 
Seventh Avenue at 38th Street....................     New York, NY                          09/94                1,325
 
Third Avenue at 45th Street......................     New York, NY                          10/94                  450
 
57th Street at Lexington*........................     New York, NY                          10/94                  550
 
Saks Fifth Avenue at The Mall at Short Hills*....    Short Hills, NJ                        11/94                  400
 
Olympic Tower....................................     New York, NY                          11/94                  250
 
Third Avenue at 50th Street......................     New York, NY                          12/94                  625
 
One New York Plaza...............................     New York, NY                          12/94                  875
 
Market Street at 20th Street.....................   Philadelphia, PA                        12/94                  475
 
One Broadway at Battery Place....................     New York, NY                          12/94                  225
 
Lexington at 84th Street*........................     New York, NY                          02/95                  450
 
The Shops at Liberty Place*......................   Philadelphia, PA                        02/95                  275
 
Riverside Square Mall*...........................   Bergen County, NJ                       04/95                  900
 
Broadway at 40th Street..........................     New York, NY                          06/95                  800
 
Sixth Avenue at 12th Street*.....................     New York, NY                          06/95                  450
 
Madison Avenue at 43rd Street....................     New York, NY                          08/96                  975
 
125 Seventh Avenue*..............................     Brooklyn, NY                          06/96                1,925
 
Broadway at 75th Street*.........................     New York, NY                          06/96                  500
 
Columbus at 67th Street*.........................     New York, NY                          06/96                  860
 
Broadway at 114th Street*........................     New York, NY                          06/96                1,120
</TABLE> 

                                      I-8
<PAGE>
 
<TABLE>
<S>                                                <C>                  <C>                        <C> 
419 Main Street*.................................    Ridgefield, CT                         09/96                1,600
 
1006 Chapel Street*..............................     New Haven, CT                         10/96                  780
 
258 Church Street*...............................     New Haven,CT                          10/96                  790
 
276 York Street*.................................     New Haven, CT                         10/96                1,125
 
550 East Main Street*............................     Branford, CT                          10/96                  900
 
752 Boston Post Road*............................      Madison, CT                          10/96                  830
 
60 Temple Street.................................     New Haven, CT                         11/96                1,450
 
Route 59/Middletown*.............................      Nanuet, NY                           11/96                1,600
 
Third Avenue at 90th Street*.....................     New York, NY                          12/96                1,500
 
107-24 Continental*..............................   Forest Hills, NY                        12/96                2,670
 
1034 Willis Avenue*..............................     Albertson, NY                         12/96                1,350
 
Cross Roads Shopping Center*.....................    Greenburgh, NY                          1/97                1,980
 
400 Washington Street*...........................      Hoboken, NJ       Second Qtr. 1997 (est.)                 1,900
 
102 Westwood Avenue*.............................     Westwood, NJ       Second Qtr. 1997 (est.)                 1,750
 
162 Spring Street*...............................     New York, NY       Second Qtr. 1997 (est.)                 1,800
 
132 Seventh Avenue*..............................     New York, NY       Second Qtr. 1997 (est.)                 1,630
 
*  Specialty coffee stores located in residential or shopping areas.  Other stores listed are in business districts.
----------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 3.  LEGAL PROCEEDINGS

     The Company is not a party to any material legal proceedings.


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

     None

                                      I-9
<PAGE>
 
                                    PART II


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

 
     The Company's Common Stock has been quoted on the Nasdaq National Market
("Nasdaq") under the trading symbol "NWCI" since the Company commenced public
trading on February 1, 1996. Prior to such date there was no public market for
the Common Stock. The following table sets forth the range of high and low
closing sale prices (based on transaction data as reported by the Nasdaq) for
the Common Stock for each fiscal quarter during the periods indicated.
<TABLE>
<CAPTION>
 
 
                           1996-1997                             HIGH    LOW
---------------------------------------------------------------  -----  -----
 
 
<S>                                                              <C>    <C>
 
First Quarter (From February 1, 1996 to March 31, 1996)          $6.00  $3.00
 
Second Quarter (From April 1, 1996 to June 30, 1996)             $5.13  $3.38
 
Third Quarter (From August 1, 1996 to September 29, 1996)        $4.13  $2.50
 
Fourth Quarter (From September 30, 1996 to December 29, 1996)    $3.88  $1.75

First Quarter (From December 30, 1996 to March 14, 1997)         $3.13  $1.94
-----------------------------------------------------------------------------
</TABLE>

     On March 14, 1997, the closing price for the Company's Common Stock as
reported by Nasdaq was $2.23 a share.

     As of March 14, 1997, there were approximately 189 holders of record of the
Common Stock.  This number excludes individual stockholders holding stock under
nominee security listings.

     The Company has not declared or paid any cash dividends since its
inception, and does not intend to pay any cash dividends in the foreseeable
future.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 
GENERAL

     The Company opened its first specialty coffee cafe in February 1993 in New
York and has grown to 40 specialty coffee cafes in New York, Connecticut,
Pennsylvania and New Jersey since that date.

     In June 1996, the Company consummated the acquisition of Cooper's Coffee
stores, purchasing three residential and shopping area stores in Manhattan. In
August 1996, the Company consummated the acquisition of Ridgefield Coffee
Company, entering the Connecticut market with one residential and shopping area
store. In October 1996, the Company consummated the acquisition of Willoughby's,
its coffee purveyor and roaster since its inception, which consolidated its
presence in Connecticut with six additional stores, five of which are in
residential and shopping areas, and vertically integrated the Company with the
purchase of a roasting plant. The purchase price for Willoughby's was $3,100,000
(net of $700,000 of acquired debt immediately paid following the closing date of
the purchase). This amount consisted of $600,000 cash, $600,000 cash payable on
July 1, 1997, $1,700,000 in seller financing and $200,000 in restricted Common
Stock. The Willoughby's acquisition has enabled the Company to lower its cost of
coffee significantly, improve its quality control, and enter the mail order and
wholesale businesses.

     In 1996, the Company focused its site selection strategy to target
residential and shopping area sites which, based on the Company's experience,
generally offer more attractive economics.  In addition, the Company developed a
new, larger, more comfortable format (approximately 1,800 square feet compared
to 600 previously) designed to create a neighborhood gathering place environment
and better capture whole bean and merchandise sales.  In the fourth quarter of
fiscal 1996, the Company's sales mix was 62% beverages, 23% food, 12% whole
beans and 3% merchandise, compared to 63%, 32%, 5% and 0%, respectively, for the
comparable 1995 quarter. 

     The Company has incurred losses in each fiscal year from inception
primarily due to the cost of retail store expansion and developing an
infrastructure to support future growth.  The Company's recent operating
performance has improved.  Several factors underlie this improved performance:

     (a)  The Company's cost of sales as a percentage of revenues for the fourth
          quarter of 1996 versus the comparable 1995 period has declined by 8.1%
          due to (i) improved coffee costs from the Willoughby's acquisition,
          (ii) improvement in the Company's ability to manage waste, resulting
          from the implementation of the POS System, and (iii) improved vendor
          pricing resulting from greater scale economies.

     (b)  The Company's occupancy expense as a percentage of revenues for the
          fourth quarter of 1996 versus the comparable 1995 period has declined
          by 3.3% due to (i) the strategic refocusing of site selection towards
          residential and shopping area sites which carry lower occupancy costs
          as a percentage of revenues, (ii) expansion beyond New York City where
          sites carry lower occupancy costs as a percentage of revenues and
          (iii) the closing of five stores which were primarily business
          district stores. The Company expects that its cost of occupancy should
          continue to decline as it continues to expand beyond its New York City
          base.

     (c)  The Company's personnel expense as a percentage of revenues for the
          fourth quarter of 1996 versus the comparable 1995 period has declined
          by 2.0% due to (i) improved labor scheduling resulting from the
          implementation of the POS System, and (ii) the increase in residential
          and shopping area sites which can be staffed more efficiently due to
          lower peak staffing demands and therefore generally lower store
          personnel expense ratios.

     (d)  The Company's general and administrative expense as a percentage of
          revenues for the fourth quarter of 1996 versus the comparable 1995
          period has declined by 4.0% as (i) its investment in building a senior
          management team is substantially complete and (ii) further growth will
          enable it to leverage its management and achieve greater scale
          economies. The Company expects that this decline should continue.

                                     II-1
<PAGE>
 
RESULTS OF OPERATIONS

Year Ended December 29, 1996 Compared to Year Ended December 31, 1995

     Revenues.  Revenues increased 18.5% to $11,340,199 for fiscal 1996 from
$9,572,019 for fiscal 1995.  Comparable store sales for the 18 stores open for
both periods decreased 8.5%.  Management attributes this decrease to the opening
of additional stores in Manhattan to solidify the Company's market presence, and
the capacity constraints experienced in certain of the Company's primarily
residential stores which average approximately 615 square feet in size and are
achieving approximately $945 in average sales per square foot.  The Company has,
in response, expanded both its geographic focus (to four states: New York,
Connecticut, Pennsylvania and New Jersey) and its average store size (to
approximately 1,800 square feet for its newer stores) and expects that its
comparable store sales should improve as its newer format stores enter the
comparable base.

     Costs and Expenses.  Cost of sales and related occupancy costs as a
percentage of revenues for fiscal 1996 decreased to 57.1% from 62.6% for fiscal
1995.  The primary components were a decrease of 5.3% in cost of goods due to
the Company's implementation of the POS System which has allowed the Company to
better control store purchasing and waste as well as improved coffee pricing due
to vertical integration from the acquisition of Willoughby's and improved vendor
pricing due to greater economies of scale.  Occupancy expense as a percentage of
revenues decreased 0.2%.  The Company expects that its cost of occupancy as a
percentage of revenues will decline significantly as it continues to expand
beyond its New York City base.

     Store operating expenses as a percentage of revenues for fiscal 1996
decreased to 31.1% from 35.1% for fiscal 1995.  The primary components were a
3.5% decrease in personnel costs due to improved labor scheduling as a result of
the Company's implementation of the POS System and a 0.6% reduction in
miscellaneous store expenses due to increased cash controls and reduced store
supplies costs.

     Depreciation and amortization expenses as a percentage of revenues for
fiscal 1996 increased to 11.9% from 10.8% for fiscal 1995 primarily due to
increased amortization resulting from the acquisitions and costs associated with
the implementation of the POS System.

     General and administrative expenses increased to $2,738,975 or 24.2% of
revenues for fiscal 1996 compared to $1,784,257 or 18.6% of revenues, for fiscal
1995.  Corporate payroll and recruiting expense increased by $691,683 

                                     II-2
<PAGE>
 
due to the addition of a Chief Operating Officer, a Vice President-Real Estate,
and Directors of Construction, Human Resources, and Training as the Company
added to its infrastructure to support its planned expansion.  General and
administrative expenses also included $149,519 relating to investor relations
and financial printing which were minimal in fiscal 1995.  The Company expects
that its general and administrative expenses as a percentage of revenues should
continue to decline significantly as (i) its investment in building a senior
management team is generally complete and (ii) further growth will enable it to
leverage its management and achieve further economies of scale.

     In accordance with the Company's strategy of focusing on residential and
shopping area stores, the Company recorded a provision for store closings and
reorganization costs in the second quarter of fiscal 1996 of $1,800,000, of
which $1,014,888 was a non-cash writedown of the fixed assets in five
unprofitable stores, four of which were not in residential areas. The Company
has additionally developed a more rigorous site selection process and recruited
Bruce Morningstar, previously Starbucks' Director - Northeast Development, as
its Vice President-Real Estate.

     Interest expense, net for fiscal 1996 decreased to $74,348 or 0.7% of
revenues, from $297,587 or 3.1% of revenues for fiscal 1995.  This decrease
resulted primarily from the paydown of debt after the Company's initial public
offering.

     The Company recorded a write-off of debt issuance costs related to the
Company's bridge financing prior to its initial public offering of $1,050,000 in
the first quarter of fiscal 1996. Of the charge $1,000,000 was a non-cash charge
related to the issuance of warrants in connection with the financing.

     Net Loss.  Net loss for fiscal 1996 increased to $5,670,951 or 50.0% of
revenues from $2,901,557 or 30.3% of revenues for fiscal 1995.  The primary
components of this increase were one-time charges totaling 25.1% of revenues and
an increase in general and administrative expenses as percentage of revenues of
5.6%, which more than offset improvements in store operating margins of 9.7%,
primarily from decreases in cost of sales and personnel expenses, and a
reduction in interest expense as a percentage of revenues of 2.4%.

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

     Revenues.  Revenues increased 112.2% to $9,572,019 for fiscal 1995 from
$4,510,488 for fiscal 1994.  Comparable store sales for the three stores opened
for both periods decreased 16.6%.  Management believes this decrease was not
meaningful due to the small number of stores in the comparable store base.
Incremental sales for the 19 stores which were opened at December 31, 1994
contributed 69.0% of the percentage increase in revenues.  Sales for the 8
stores opened since December 31, 1994 contributed 43.2% of the percentage
increase in revenues.

     Costs and Expenses.  Cost of sales and related occupancy costs as a
percentage of revenues for fiscal 1995 increased to 62.6% from 59.0% for fiscal
1994.  The primary components were a decrease of 2.4% in cost of goods due to
the Company's ability to negotiate improved vendor pricing as a result of
increased purchasing power which was offset by an increase in occupancy costs of
5.9% primarily due to a large number of new store openings which carry higher
occupancy expense as a percentage of revenues during their ramp-up period.

     Store operating expenses as a percentage of revenues for fiscal 1995
increased to 35.1% from 34.5% for fiscal 1994.  The primary components were 0.3%
increases in personnel costs and miscellaneous store expenses each due to the
increase in the number of new store openings which carry higher other operating
expenses as a percentage of revenues during their ramp-up period.

     Depreciation and amortization expenses as a percentage of revenues for
fiscal 1995 increased to 10.8% from 6.6% for fiscal 1994 primarily due to an
increase in the number of new store openings which carry higher depreciation
expense as a percentage of revenues during their ramp-up period.

     General and administrative expenses increased to $1,784,257 or 18.6% of
revenues for fiscal 1995 compared to $745,543 or 16.5% of revenues, for fiscal
1994.  General and administrative expenses included a non-recurring charge of
$137,000 taken as a reserve for non-operating leases as well as $80,000 of costs
related to special marketing projects (which represent expenditures in
connection with certain specific promotions, which were not continued) incurred
in the first quarter of 1995, without which general and administrative expenses
as a percentage of revenues would have remained constant at 16.5% of revenues.
The increase also reflected the addition of key personnel such as a Chief
Operating Officer, Vice Presidents of Real Estate, Operations and Finance, as
well as their support teams.

                                     II-3
<PAGE>
 
     Interest expense, net for fiscal 1995 increased to $297,587 or 3.1% of
revenues, from $1,140 for fiscal 1994.  This increase in interest expense
resulted from bank borrowings for the construction of new stores.

     Net Loss.  Net loss for fiscal 1995 increased to $2,901,557 from $755,106
for fiscal 1994.  Operating margins decreased to a loss of 30.3% from a loss of
16.7% in fiscal 1994, primarily due to increased occupancy costs of 5.9% as a
percentage of revenues, increased depreciation and amortization expenses of 4.2%
as a percentage of revenues due to the large number of new store openings which
carry higher expenses as a percentage of revenues during their ramp-up period
and interest expense which increased to 3.1% as a percentage of revenues.

INCOME TAXES

     The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 (SFAS 109).  Realization of deferred taxes is
dependent on future events and earnings, if any, the timing and extent of which
are uncertain.  Accordingly, the benefit of deferred tax assets has been fully
reserved as of December 29, 1996 and December 31, 1995.  At December 29, 1996,
the Company had net operating loss carryforwards of approximately $7,500,000
available to offset future taxable income. These amounts expire at various times
through 2011. As a result of ownership changes resulting from recent sales of
equity securities, the Company's ability to use the loss carryforwards is
subject to limitations as defined in Sections 382 of the Internal Revenue Code
of 1986, as amended.

LIQUIDITY AND CAPITAL RESOURCES

     The Company successfully completed its initial public offering on February
1, 1996 in which the Company realized approximately $11,100,000 in net proceeds.
The Company repaid its then existing bank line of $3,500,000 and repurchased
from an existing shareholder approximately $2,000,000 of the Company's then
outstanding Series C Preferred Stock. On June 28, 1996, the Company completed
the sale of 375 shares of Series A Preferred Stock realizing approximately
$3,320,000 in net proceeds. On February 26, 1997, the Company completed a
private placement of 1,000,000 shares of Common Stock (the "Private Placement")
realizing approximately $1,345,000 in net proceeds. The Company anticipates
using proceeds of the Private Placement for general corporate purposes. In
February 1997, the Company exchanged 175 shares of Series A Preferred Stock for
an aggregate of 137.5 shares of a new Series B Preferred Stock and 194,440
shares of unregistered Common Stock. The Company is negotiating with the holders
of the outstanding shares of Series A Preferred Stock to exchange such shares
for Series B Preferred Stock and/or unregistered shares of Common Stock. The
Company is pursuing a possible offering of shares of its Common Stock resulting
in gross proceeds of between $4,000,000 and $6,000,000 through a registered
broker-dealer. However, there can be no assurance that the Company will be
successful in completing such an offering.

     The Company's capital requirement is primarily for expansion of its retail
operations.  Currently, all of the Company's stores are in leased facilities.
During fiscal 1996, the Company's average cost to open a store was approximately
$300,000, including all leasehold improvements, equipment, beginning inventory,
as well as all expenses for the store design, site selection, lease negotiation,
construction supervision and permitting.  The Company currently estimates that
capital expenditures through fiscal 1997 will be approximately $6,000,000.

     At December 29, 1996, the Company had a working capital deficit of
$1,086,824 compared to a working capital deficit of $823,030 at December 31,
1995.

     The Company had net cash used in operating activities of $1,973,609 for
fiscal 1996 and net cash used in operating activities of $1,027,981 for fiscal
1995.

     The Company had net cash used for investing activities of $5,023,416 for
fiscal 1996 and $3,241,876 for fiscal 1995.  The primary use of cash for
investing activities was for capital expenditures related to the Company's
retail store expansion.

     The Company had net cash provided by financing activities of $7,465,456 for
fiscal 1996 and $5,020,411 for fiscal 1995. The Company funded its growth
through its initial public offering and the sale of Series A Convertible
Preferred Stock raising approximately $11,100,000 and $3,320,000 in net
proceeds, respectively.

     The Company is currently negotiating to obtain a debt facility with a bank
or other financial institution although there can be no assurance that the
Company will obtain a debt facility in an amount or on such terms as will be
acceptable to the Company.

                                      II-4
<PAGE>
 
     In December 1995 and January 1996, the Company obtained a bridge loan
totaling $1,000,000 from certain individuals and financial institutions.  The
loan carried an interest rate of 10% and was repaid with proceeds from the
initial public offering.  In connection with the loan, the Company issued to the
lenders warrants to purchase 181,818 shares of its Common Stock at a price of
$0.01 per share.

     As a result of the Willoughby's transaction, the Company has scheduled debt
payments of $600,000 due on July 1, 1997, $600,000 due on January 5, 1998 and
$1,100,000 due on January 5, 1999.

SEASONALITY AND GENERAL ECONOMIC TRENDS

     The Company anticipates that its business will be affected by general
economic trends that affect retailers in general.  While the Company has not
operated during a period of high inflation, it believes based on industry
experience that it would generally be able to pass on increased costs resulting
from inflation to its customers.  The Company's business may be affected by
other factors, including increases in the commodity prices of green coffee,
acquisitions by the Company of existing specialty coffee stores, existing and
additional competition, marketing programs, weather, and variations in the
number of store openings. The Company has few, if any, employees at the minimum
wage level and therefore believes that an increase in the minimum wage would
have minimal impact on its operations and financial condition.



ITEM 7.  FINANCIAL STATEMENTS

     Information in response to this item is set forth in the Financial
Statements beginning on page F-1 of this filing.


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
           ACCOUNTING AND FINANCIAL DISCLOSURES

     None.

                                     II-5
<PAGE>
 
                                   PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
           COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

     The directors, nominees, key employee and executive officers of the Company
and their ages as of the date of this 10-KSB are as follows:

<TABLE>
<CAPTION>
 
 
 
          Name             Age              Position with the Company
-------------------------  ---  --------------------------------------------------
<S>                        <C>  <C>
R. Ramin Kamfar             33  President and Chief Executive Officer and Director
 
Bruce Morningstar           51  Vice President-Real Estate
 
Jerold E. Novack            41  Vice President-Finance
 
John DeNapoli               37  Vice President-Operations
 
Barry Levine                47  Vice President-Coffee
 
Robert Williams             48  Vice President-Coffee
 
Julie Calise                35  Director of Marketing
 
Keith F. Barket/(1)/        35  Director
 
Jack Bush/(2)/              61  Director
 
Gwenn M. Cagann             37  Director
 
Kevin R. Greene/(1)(2)/     38  Director
 
Ronald S. Hari              55  Director

Edward McCabe               59  Director

Steven A. Rothstein         45  Director
</TABLE> 
 
(1)   Member of Audit Committee
(2)   Member of Compensation Committee
-------------------------------------------------------------------------------

     Mr. Kamfar has served as a director since the founding of the Company.  Mr.
Kamfar has served as President and Chief Executive Officer since May 1996.
Between August 1994 and May 1996, Mr. Kamfar served as Co-President and Co-Chief
Executive Officer of the Company.  Between October 1993 and August 1994, Mr.
Kamfar served as Chief Executive Officer and Chief Financial Officer of the
Company.  Between 1988 and 1993, he worked in the Investment Banking Division of
Lehman Brothers Inc., most recently as a Vice President in the firm's Private
Placement Group. Prior to Lehman Brothers, Mr. Kamfar worked at First Growth
(U.K.) Ltd. where he gained experience in real estate finance and development.
Mr. Kamfar has a B.S. degree in Finance from the University of Maryland and an
M.B.A. degree in Finance from The Wharton School at the University of
Pennsylvania.

     Mr. Morningstar joined the Company as Vice President-Real Estate in March
1996.  From 1994 to 1996, he served as the Director of Development, Northeast
for Starbucks Corporation, where he planned, developed and opened new markets in
Atlanta, Richmond, Baltimore, Philadelphia, Pittsburgh, New Jersey and Boston,
opening over 100 stores. From 1992 to 1994, he served as Director of Real Estate
for Clothestime Stores, Inc. From 1987 to 1992, he served as Director of Real
Estate for Woman's World Shops, Inc. Prior to that time, Mr. Morningstar held
various real estate positions with Winchells Donuts, Inc., Payless Shoes, Inc.
and See's Candies. Mr. Morningstar has a B.A. degree in Government from Wesleyan
University and a J.D. degree from South Bay University School of Law.

     Mr. Novack joined the Company as Vice President-Finance in June 1994. From
1991 to 1994, he served as Vice President/Controller of The Outdoor Furniture
Store, Inc., a specialty retail chain. From 1988 to 1991, he served as
Controller for Richmond Ceramic Tile, Inc., a retailer and distributor of
ceramic tile. From 1985 to 1988, Mr. Novack served as Assistant Controller for
Brooks Fashion Stores, Inc., a specialty retail chain. Prior to 1985, Mr. Novack
served as Import Division Controller for Mercantile Stores Company, Inc., a
department store chain. Mr. Novack has a B.S. degree in Accounting from Brooklyn
College, City University of New York.

     Mr. DeNapoli joined the Company as Vice President-Operations in August
1996.  From 1992 to 1996, Mr. DeNapoli served as Regional Director of Operations
for Atlantic Foods Corporation, where he was responsible for the development and
operation of 46 Boston Market restaurants.  From 1987 to 1992, he served as Vice
President of Operations for The American Cafe.  Prior to that time, Mr. DeNapoli
held various operations positions with W.R. Grace Restaurant Group, Marriott
International, Corp., and Host International, Inc.  Mr. DeNapoli graduated from
the Florida International University with a B.S. in Restaurant and Hotel
Management.

     Mr. Levine joined the Company as Vice President-Coffee in October 1996.
From 1985 to 1996, he served as co-founder and co-Chief Executive Officer of
Willoughby's, where he jointly directed coffee sourcing and roasting, site
selection, store design, operations, strategic planning and development.  From
1980 to 1987 he co-founded and operated New York Bread Express, a wholesale
baked goods distributor.  Prior to that time, Mr. Levine held various positions
in the publishing industry.

     Mr. Williams joined the Company as Vice President-Coffee in October 1996.
From 1985 to 1996, he served as co-founder and co-Chief Executive Officer of
Willoughby's, where he jointly directed coffee sourcing and roasting, site
selection, store design, operations, strategic planning and development.  From
1980 to 1987 he co-founded and operated New York Bread Express, a wholesale
baked goods distributor.  Prior to that time Mr. Williams held various positions
in the publishing industry.

     Ms. Calise joined the Company as Director of Marketing in June 1996 and is
the key employee set forth in the table. From 1995 to 1996, she served as
Creative Director-Marketing/Visual Merchandising for The Coffee Plantation, Inc.
where she was responsible for developing in-store marketing, merchandising and
retail programs. From 1991 to 1994, she was Director of Purchasing/Visual at
Hayday, a subsidiary of Sutton Place Gourmet. From 1988 to 1991, she founded and
operated Baskets From the Heart, a gift basket business. Ms. Calise has a B.A.
degree in Communications from Curry College.

                                     III-1
<PAGE>
 
     Mr. Barket has served as a director of the Company since June 1995. Mr.
Barket is the Managing Director of Amerimar Enterprises Inc., a real estate
investment and development company based in Philadelphia. Mr. Barket has been
with Amerimar since 1988 and has been involved in a variety of office, retail,
residential and hotel projects.  From 1984 to 1986, he worked as a senior tax
accountant with Arthur Andersen & Co. in New York City.  Mr. Barket received his
B.A. degree from Georgetown University and received his M.B.A. degree from The
Wharton School at the University of Pennsylvania.

     Mr. Bush has served as a director of the Company since February 1996.  Mr.
Bush has served as a Managing Director of Raintree Partners, Inc. since
September 1995.  Mr. Bush served as President and Chief Operating Officer of
Michaels Stores, Inc., a retailer of crafts, from 1991 to September 1995.  From
1990 to 1991, Mr. Bush served as Executive Vice President, Director of Stores of
Ames Discount Department Stores, Inc. From 1985 to 1990, Mr. Bush worked for
Rose's Stores, Inc., first as Senior Vice President of Operations and Stores and
subsequently as President and Chief Operating Officer. Prior to 1985, Mr. Bush
served as Vice President Southern Zone Manager with Zayre Corporation, an
operator of discount stores, and served in various positions with J.C. Penney,
Inc. Mr. Bush received a B.S. degree in Business and Public Administration from
the University of Missouri.

     Ms. Cagann has served as a director since the founding of the Company.  Ms.
Cagann has served as a consultant since May 1996.  Between August 1994 and May
1996, Ms. Cagann served as Co-President and Co-Chief Executive of the Company.
Between October 1993 and August 1994, Ms. Cagann served as President of the
Company, and between June 1993 and October 1993, she served as President and
Chief Executive Officer.  Between 1990 and 1992, she was a Senior Product
Manager at Colgate-Palmolive Company.  Ms. Cagann has a B.S. degree in Finance
and Marketing from the University of Illinois and an M.M. degree from the
Kellogg Graduate School of Management at Northwestern University.

     Mr. Greene has served as a director of the Company since May 1996.  Mr.
Greene has served as Chairman and Chief Executive Officer of Value Investing
Partners, Inc. since 1992.  Between 1986 and 1991, Mr. Greene served as a Senior
Manager at McKinsey & Company, an international management consulting firm.  Mr.
Greene has a B.A. in Economics from Georgetown University, an M.P.P. in
International Trade and Finance from Harvard University, and an M.B.A. in
Finance from New York University.  Mr. Greene is currently a director of
Specialty Retail Group, Inc.

     Mr. Hari has served as a director of the Company since February 1997.  Mr.
Hari has served as the President and Chief Executive Officer of Capico
International, a marketing, investment and consulting firm focusing in the
bakery and food industries since 1985.  Mr. Hari has served as Executive Vice
President of Manhattan Bagel Company from 1994 to August 1996.  Mr. Hari has a
B.S. in Business Administration from the University of Vermont and an M.B.A. in
Marketing from the University of California, Los Angeles.

     Mr. McCabe has served as director of the Company since February 1997.  Mr.
McCabe is Chief Executive Officer of McCabe & Company, an advertising and
communications company he founded in 1991. From 1967 to 1986 he served in
various capacities, most recently as President and Worldwide Creative Director
at Scali, McCabe, Sloves, Inc. an advertising agency he co-founded and built
into the tenth largest agency in the world.

     Mr. Rothstein has served as a director of the Company since February 1996.
Mr. Rothstein has been Chairman of the Board of National Securities Corporation,
a securities broker-dealer ("National"), since 1995. Since February 1996, Mr.
Rothstein has been Chairman of the Board of Directors of Olympic Cascade
Financial Corporation, the parent of National. From 1994 to 1995, Mr. Rothstein
served as a Managing Director of H.J. Meyers & Co., a securities broker-dealer.
From 1992 to 1994, he served as a Managing Director of Rodman and Renshaw, Inc.,
a securities broker-dealer. From 1989 to 1992, he served as a Managing Director
of Oppenheimer & Co. From 1979 to 1989, Mr. Rothstein was a limited partner of
Bear Stearns & Co. Mr. Rothstein received an A.B. degree from Brown University.
Mr. Rothstein is currently a director of SigmaTron International, Inc. and
Gateway Data Science Corporation.

     All directors currently serve for one-year terms and until their successors
have been elected and qualified. Officers are elected annually and serve at the
discretion of the Board. There are no family relationships between any of the
directors or executive officers of the Company.

                                     III-2
<PAGE>
 
ITEM 10.  EXECUTIVE COMPENSATION

SUMMARY COMPENSATION

     The following table provides certain information concerning the
compensation earned by the Company's Chief Executive Officer for services
rendered in all capacities to the Company during 1995 and 1996, and any
executive officers of the Company who received compensation in excess of
$100,000 during 1995 and 1996 ("Named Executive Officers").

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
                                                                               Long Term
                                                                              Compensation
                                     Annual Compensation                         Awards
                              ----------------------------------------------  ------------
                                                       Other   
                                                      Annual                                
                                                      Compen-     Securities   All Other    
Name and Principal               Salary     Bonus     sation      Underlying  Compensation  
 Position                         ($)        ($)        ($)        Options        ($)       
                                --------   --------   -------     ----------  ------------  
<S>                             <C>        <C>        <C>         <C>         <C> 
R. Ramin Kamfar                 $118,750   $ 10,000   $ 9,000(1)     125,000             -
Chief Executive Officer and
 President
 
Jerold E. Novack                 100,000     30,000     6,000(1)      75,000             -
Vice President-Finance
 
Sidney Laytin(2)                 134,467      3,247    19,947(1)           -             -
Executive Vice President and
 Chief Operating Officer
------------------------------------------------------------------------------------------
</TABLE> 
----------------------
(1) Represents car and commuting allowances for the respective individuals.
(2) Mr. Laytin was no longer employed by the Company in October 1996.

                                     III-3
<PAGE>
 
STOCK OPTION GRANTS

     Set forth below is information on grants of stock options for the Named
Executive Officers for the period January 1, 1996 to December 29, 1996.

                             OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
 
 
                                     Individual Grants
                    ---------------------------------------------------
                                                                                              
 

                                                                           Potential Realizable Value 
                     Number of     Percent of                                At Assumed Annual Rates  
                     Securities   Total Options   Exercise                 of Stock Price Appreciation
                     Underlying    Granted to      Price                       for Option Term(1)     
                       Option     Employees in     ($ per    Expiration    -----------------------------
Name                  Granted      Fiscal Year     share)       Date             5%             10%   
------------------  ------------  -------------   --------   ----------    -------------  -------------- 
<S>                 <C>           <C>             <C>        <C>         <C>              <C> 
R. Ramin Kamfar...  115,000/(2)/           34.8%     $2.31      8/13/06         $167,246        $423,835
                     10,000/(3)/            3.0       5.50      8/13/06                -           4,980
Jerold E. Novack..   65,000/(4)/           19.7       3.87       7/2/06                -         137,996
                     10,000/(5)/            3.0       5.50       7/2/06                -           4,980
--------------------------------------------------------------------------------------------------------
</TABLE>
-------------------------------

(1) The potential realizable value is calculated based on the term of the option
    at the time of grant (ten years).  Assumed stock price appreciation of 5%
    and 10% is based on the fair value at the time of grant.
(2) Options were granted on August 13, 1996 and are exercisable with respect to
    83,334 shares in two equal annual installments commencing on August 13, 1997
    and the remainder of such options, 31,666 shares are exercisable on August
    13, 1999.  The exercise price of the options is equal to the closing price
    on the Nasdaq of the Common Stock on October 1, 1996.
(3) Options were granted on August 13, 1996 at the same exercise price as the
    options listed in footnote 2.  On October 30, 1996, Mr. Kamfar voluntarily
    repriced such options to $5.50, the initial public offering price of the
    Common Stock.  Such options are exercisable on August 13, 1999.
(4) Options were granted on July 2, 1996.  Options relating to 15,000 shares
    were exercisable immediately and the remainder of such options relating to
    25,000 shares are exercisable in three equal annual installments commencing
    July 2, 1997.  The exercise price of the options is equal to the closing
    price on the Nasdaq of the Common Stock on July 2, 1996.
(5) On October 30, 1996, Mr. Novack voluntarily repriced certain options to
    $5.50 the initial public offering price of the Common Stock.  Such options
    are exercisable on July 2, 1999.


FISCAL YEAR-END OPTION VALUES

     The following table sets forth certain information with respect to the
stock options held at December 29, 1996 by the Company's executive officers.

                                     III-4
<PAGE>
 
                               1996 OPTION VALUES
<TABLE>
<CAPTION>
 
 
                            Number of           
                      Securities Underlying        Value of Unexercised   
                       Unexercised Options         In-the-Money Options   
                           at Year End              at Year End($)(1)     
                    --------------------------  -------------------------- 
Name                Exercisable  Unexercisable  Exercisable  Unexercisable
------------------  -----------  -------------  -----------  -------------
<S>                 <C>          <C>            <C>          <C>
 
R. Ramin Kamfar...       29,156        139,578      $47,491        $48,657
Jerold E. Novack..       51,987         75,000         __            __
----------
</TABLE>
(1) Calculated based on an assumed share price of $2.50 per share, less the
    exercise price payable for such shares.


EMPLOYMENT CONTRACTS

     As of July 1996, the Company entered into a new employment agreement with
Mr. Kamfar, the Company's President and Chief Executive Officer. The agreement
expires on December 31, 1997 but is automatically renewed for additional one-
year periods commencing each January 1 unless either party gives written notice
to the other of its desire not to renew such term, which notice must be given no
later than ninety (90) days prior to the end of each term on any such renewal.
The agreement provides for a compensation package of $137,500 per year, an
annual performance bonus of between 10% and 50% of the base salary for calendar
year 1996, and an annual performance bonus of between 0% and 50% of the base
salary for calendar year 1997. Each bonus is based on the attainment of certain
corporate and individual goals. In addition, pursuant to the agreement, Mr.
Kamfar was granted options on 125,000 shares of the Company's Common Stock. The
options were classified as incentive stock options under the 1994 Plan. Pursuant
to the agreement, Mr. Kamfar has agreed to maintain the confidentiality of any
confidential or proprietary information of the Company.

     In the event that the Company terminates Mr. Kamfar's employment upon a
change in control or terminates Mr. Kamfar's employment other than for cause, he
will be paid severance compensation equal to two times his annual base salary
(at the rate payable at the time of such termination) plus an amount equal to
the greater of two times the amount of his bonus for the calendar year preceding
such termination or 25% of his base salary. For a period of one year following
Mr. Kamfar's voluntary termination or termination for cause, Mr. Kamfar cannot
perform services for, have an equity interest (except for an interest of 10% or
less in an entity whose securities are listed on a national securities exchange)
in any business (other than the Company) or participate in the financing,
operation, management or control of, any firm, corporation or business (other
than the Company) that engages in the marketing or sale of specialty coffee as
its principal business.

     Mr. Kamfar's employment agreement defines a "change of control" as: 1) the
acquisition of more than 40% of the voting stock of the Company by a single
person or group; 2) a change in the majority of the Board of Directors as a
result of a cash tender offer, merger, sale of assets or contested election; 3)
the approval by shareholders of the Company of a merger or sale of all or
substantially all of the Company's assets; 4) the closing of a transaction in
which more than 50% of the Company's voting power is transferred and 5) a tender
offer which results in a person or a group acquiring more than 40% of the
Company.

     As of July 1996, the Company entered into an employment agreement with Mr.
Novack, the Company's Chief Financial Officer.  The agreement expires on June
30, 1997.  The agreement provides for a compensation package of $110,000 per
year and an annual performance bonus of 20% to 50% of the base salary based on
the attainment of certain corporate and individual goals.  In addition, pursuant
to the agreement, Mr. Novack was granted options on 75,000 shares of the
Company's Common Stock.  The options were classified as incentive stock options
under the 1994 Plan.  Pursuant to the agreement, Mr. Novack has agreed to
maintain the confidentiality of any confidential or proprietary information of
the Company.

     In the event that the Company terminates Mr. Novack's employment other than
for cause, he will be paid severance compensation equal to his base salary (at
the rate payable at the time of such termination) for a period of six months.
In the event of Mr. Novack's voluntary termination, as defined in the agreement,
subsequent to December 31, 1996, he will be paid severance compensation equal to
his base salary (at the rate payable at the time of such termination) for a
period of three months.  For a period of one year following Mr. Novack's
voluntary termination or

                                     III-5
<PAGE>
 
termination for cause, Mr. Novack cannot perform services for, have an equity
interest (except for an interest of 5% or less in an entity whose securities are
listed on a national securities exchange) in any business (other than the
Company) or participate in the financing, operation, management or control of,
any firm, corporation or business that engages in the marketing or sale of
specialty coffee as its principal business.

     In January 1997, the Company entered into an employment agreement with Mr.
Morningstar, the Company's Vice President-Real Estate.  The agreement expires on
June 30, 1998.  The agreement provides for a compensation package of $112,500
per year and an annual performance bonus of an amount not exceeding 30% of the
base salary based on the attainment of certain corporate and individual goals.
Pursuant to the terms of the agreement, Mr. Morningstar has agreed to maintain
the confidentiality of any proprietary information of the Company.

     In the event that the Company terminates Mr. Morningstar's employment other
than for cause, he will be paid severance compensation equal to his base salary
(at the rate payable at the time of such termination) for a period of up to six
months.  For a period of one year following Mr. Morningstar's voluntary
termination or termination for cause, Mr. Morningstar cannot perform services
for, have an equity interest (except for an interest of 5% or less in an entity
whose securities are listed on a national securities exchange) in any business
(other than the Company) or participate in the financing, operation, management
or control of, any firm, corporation or business that engages in the marketing
or sale of specialty coffee as its principal business.

INDEMNIFICATION OF DIRECTORS AND OFFICERS AND RELATED MATTERS

     The Company's Certificate of Incorporation limits, to the maximum extent
permitted by the General Corporation Law of the State of Delaware ("Delaware
Law"), the personal liability of directors and officers for monetary damages for
breach of their fiduciary duties as directors and officers (other than
liabilities arising from acts or omissions which involve intentional misconduct,
fraud or knowing violations of law or the payment of distributions in violation
of Delaware Law). The Certificate of Incorporation provides further that the
Company shall indemnify to the fullest extent permitted by Delaware Law any
person made a party to an action or proceeding by reason of the fact that such
person was a director, officer, employee or agent of the Company. Subject to the
Company's Certificate of Incorporation, the Bylaws provide that the Company
shall indemnify directors and officers for all costs reasonably incurred in
connection with any action, suit or proceeding in which such director or officer
is made a party by virtue of his being an officer or director of the Company
except where such director or officer is finally adjudged to have been derelict
in the performance of his duties as such director or officer.

     At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of February 28, 1997, (i) by each
person (or group of affiliated persons) who is known by the Company to own
beneficially more than five percent of the Company's Common Stock, (ii) by each
of the named executive officers, (iii) by each of the Company's directors and
nominees, and (iv) by all directors and executive officers as a group.  The
Company believes that the persons and entities named in the table have sole
voting and investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws, where
applicable.
<TABLE>
<CAPTION>
 
 
 
                                                                       
                                              Shares        
Name and Address of                         Beneficially    
Beneficial Owner                                Owned       Percentage 
-----------------------------------------  ---------------  -----------
<S>                                        <C>              <C>        
Lutheran Brotherhood                                                   
625 Fourth Avenue                                                      
5th Floor                                                              
Minneapolis, MN 55415                             602,900         9.6 %
</TABLE> 

                                     III-6
<PAGE>
 
<TABLE> 
<S>                                        <C>              <C>          
Robertson Stephens Global                                                 
  Low-Priced Stock Fund                                                  
555 California Street                                                    
San Francisco, CA 94104                            432,000         6.9%   
                                                                         
R. Ramin Kamfar                                                           
Chief Executive Officer                                                  
and President and Director                    426,120/(1)/         6.8%   
                                                                         
Gwenn M. Cagann                                                           
Director                                   345,296/(2)(3)/         5.5%   
                                                                         
Kevin R. Greene                                                           
Director                                      144,159/(4)/         2.3%   
                                                                         
Jerold E. Novack                                                          
Vice President-Finance                        103,315/(5)/         1.6%   
                                                                         
Steven A. Rothstein                                                       
Director                                       94,100/(6)/         1.5%   
                                                                         
Keith F. Barket                                                            
Director                                       37,837/(7)/            *    
                                                                         
Jack Bush                                                                  
Director                                       14,000/(7)/            *    
                                                                         
Ronald S. Hari                                                            
Director                                       11,000/(8)/            *   
                                                                         
Edward McCabe                                                             
Director                                       10,000/(8)/            *   
                                                                         
All directors and executive officers as                                   
 a group (9 persons)                             1,185,827        17.7%   
-------------------------------------------------------------------------
</TABLE>

                                     III-7
<PAGE>
 
____________________
*   Less than one percent (1%).

(1) Includes 29,156 shares which may be acquired upon the exercise of options
    which will be exercisable within 60 days.  Does not include 139,578 shares
    underlying stock options which are not exercisable within 60 days.
(2) Includes 53,734 shares which may be acquired upon the exercise of options
    which will be exercisable within 60 days.
(3) Ms. Cagann is married to Ross A. MacIntyre who is also a shareholder.  Each
    holds his or her shares pursuant to a separate property agreement.
    Accordingly, each disclaims beneficial ownership of the other's shares.
(4) Includes 141,159 shares which may be acquired upon the exercise of presently
    exercisable options and warrants.
(5) Includes 103,315 shares which may be acquired upon the exercise of presently
    exercisable options.  Does not include 65,000 shares underlying stock
    options which are not exercisable within 60 days.
(6) Includes 94,000 shares which may be acquired upon the exercise of presently
    exercisable common stock purchase warrants and 100 shares which are owned by
    one of Mr. Rothstein's children.
(7) Includes 14,000 shares which may be acquired upon the exercise of presently
    exercisable options.  
(8) Includes 10,000 shares which may be acquired upon the exercise of presently
    exercisable options.

                                     III-8
<PAGE>
 
ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 
     In April and June 1995, the Company sold 631,579 shares of its Series C
Preferred Stock to certain investors, including 421,052 to Maritime Capital
Partners, at a purchase price of $4.75 per share.  Andrew Evans, who was then a
director of the Company, is a general partner of Maritime Capital Partners.
Smith Barney Inc. acted as placement agent for the private placement of certain
of the shares of Series C Preferred Stock and earned an aggregate of $166,500 in
commissions and expenses.  Cary Sucoff, then a director of the Company, was a
Senior Vice President of Smith Barney Inc. at the time.

     In July 1995, the Company entered into an agreement with Maritime Capital
Partners giving the Company the right, until January 1996, to repurchase such
421,052 shares of Series C Preferred Stock (or the Common Stock into which such
shares are convertible) from Maritime Capital Partners for consideration of
approximately $2,000,000.  In December 1995, this agreement was amended to
extend the Company's repurchase right until March 31, 1996.  In connection with
the agreement and the amendment, the Company issued Maritime Capital Partners a
warrant to purchase 87,469 shares of Common Stock at $0.01 per share and a
warrant to purchase 25,000 shares of Common Stock at $0.01 per share.  The
Company repurchased these shares of Series C Preferred Stock at the closing of
the Company's initial public offering, with a portion of the net proceeds from
such offering.

     In December 1995 and January 1996, the Company entered into a bridge loan
transaction with a group of institutional and individual lenders including
several affiliates of the Company.  Of the total loan amount of $1,000,000, the
Company borrowed $30,000 from Keith Barket (a director of the Company), $25,000
from KFB, Inc. (a company affiliated with Keith Barket), $25,000 from Jerold
Novack and $45,000 from Jerold Novack as custodian for his minor children.  The
loan carried an interest rate of 10% and matured on the earlier of 10 days after
the closing of a public offering or June 30, 1996.  In connection with the loan,
the Company issued to each lender a warrant exercisable until December 31, 1998
to purchase, for $0.01 per share, a number of shares of Common Stock determined
by dividing such lender's loan amount by $5.50 (5,455 for Keith Barket, 4,545
for KFB, Inc., 4,545 for Jerold Novack and 8,182 for Jerold Novack as custodian
for his minor children).  The warrants were exercisable immediately, but the
shares issued pursuant to the warrants were subject to a six month lock-up
agreement.

     On May 30, 1996, the Company entered into a one year consulting agreement
with Gwenn M. Cagann whereby the Company was obligated to pay Ms. Cagann $88,784
upon execution of such consulting agreement and $25,000 in twelve (12) equal
monthly installments.  Pursuant to such consulting agreement Ms. Cagann may not
directly or indirectly, without the prior written consent of the Company,
compete with the Company until June 1, 1997.  In addition, Ms. Cagann has agreed
that all confidential information relating to the business or operations of the
Company shall be treated as confidential for a period terminating five (5) years
after the end of the consulting period thereafter except (a) as may be permitted
in writing by the Company's Board of Directors, or (b) as required by judicial
or administrative process.

     Value Investing Partners, Inc. was paid a commission for selling certain
shares of the Series A Preferred Stock which was completed on June 28, 1996.
Kevin R. Greene, a director of the Company, is the Chairman and Chief Executive
Officer of Value Investing Partners, Inc.

     The Company's initial public offering, which became effective on February
1, 1996, was co-managed by National Securities Corporation and Value Investing
Partners, Inc. Steven A. Rothstein and Kevin R. Greene, who are directors of the
Company, are the Chairman and Chief Executive Officer of National Securities
Corporation and Value Investing Partners, Inc., respectively. Mr. Rothstein and
Mr. Greene were not directors of the Company at the time of the Company's
initial public offering. The Company has agreed that, for
                                              
                                     III-9
<PAGE>
 
three years following its initial public offering, it will use its best efforts
to cause one individual designated by the Representatives, if any, to be elected
to the Company's Board of Directors.

     All future transactions, including loans, between the Company and its
officers, directors, principal shareholders and affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will be on terms
no less favorable to the Company than could be obtained from unaffiliated third
parties.

                                    III-10
<PAGE>
 
ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits
          3.1  Articles of incorporation(1)
          3.2  By-laws(2)
          4.1  Specimen Common Stock Certificate of Registrant(2)
          4.2  Form of Representatives' Warrant Agreement, including Form of 
                Representatives Warrant(2)
          4.3  Certificate of Designation of Series A Preferred Stock(3)
          4.4  Certificate of Designation of Series B Preferred Stock          
          4.5  Registration Rights Agreement with respect to Series A Preferred 
                Stock(3)
          4.6  Registration Rights Agreement by and among the Registrant and
                Barry H. Levine and Robert B. Williams(4)
          4.7  Promissory Note by and between the Registrant and Robert B.
                Williams(4)
          4.8  Promissory Note by and between the Registrant and Barry H.
                Levine(4)
         10.1  1994 Stock Plan(2)
         10.2  Employment Agreement by and between the Registrant and Barry H. 
                Levine(4)
         10.3  Employment Agreement by and between the Registrant and Robert B. 
                Williams(4)
         10.4  Employment Agreement with R. Ramin Kamfar         
         10.5  Employment Agreement with Jerold Novack         
         10.6  Stock Purchase Agreement by and among Barry H. Levine, Robert B. 
                Williams and Willoughby's Incorporated and the Registrant(4)
         10.7  Series A Preferred Stock Purchase Agreement(2)
         10.8  Series B Preferred Stock Purchase Agreement(2)
         10.9  Series C Preferred Stock Purchase Agreement(2)
         10.10 Line of Credit Agreement with Banco Popular de Puerto Rico(2)
         10.11 Agreement with Willougby's Incorporated(2)
         10.12 Investor Rights Agreement(2)
         10.13 Stock Repurchase Agreement with Maritime Capital Partners, as 
                amended(2)
         10.14 Directors' Option Plan(2)
         10.15 Agreement with Saks & Company(2)
         10.16 Employment Agreement with Gwenn M. Cagann(2)
         10.17 Employment Agreement with Sidney Laytin(2)
         10.18 Loan Agreement dated December 21, 1995 between the Registrant and
                certain lenders(2)
         10.19 Employment Agreement with Bruce Morningstar     
         11.1  Statement re computation of per share earnings (included in the 
                Financial Statements forming a part of this 10-KSB)
         21.1  List of Subsidiaries 
                  
     (b) Reports on Form 8-K
         During the fourth quarter of 1996, the Company filed a Report on
         Form 8-K with respect to the acquisition of Willoughby's.
----------
    
(1) Incorporated by reference to Exhibit 3.2 from Registrant's registration
      statement on Form SB-2 (33-95764).
(2) Incorporated by reference from Registrant's registration statement on 
      Form SB-2 (33-95764).
(3) Incorporated by reference from Registrant's Current Report on Form 8-K dated
      July 12, 1996.
(4) Incorporated by reference from Registrant's Current Report on Form 8-K dated
      November 12, 1996.
     

                                       25
<PAGE>
                                     
                                   SIGNATURES


     In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                   NEW WORLD COFFEE, INC.


                                   By:  /S/ R. RAMIN KAMFAR
                                       --------------------------------------
                                                   R. Ramin Kamfar
                                       Chief Executive Officer, President and
                                                      Director



                                   By:  /S/ JEROLD E. NOVACK
                                       -------------------------------------
                                        Jerold E. Novack
                                        Chief Financial Officer

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.                                                 


      SIGNATURE                    TITLE                           Date
      ---------                    -----                           ----
                                                            
/S/ R. RAMIN KAMFAR         President, Chief                  March 31, 1997
------------------------    Executive Officer and                   
    R. Ramin Kamfar         Director (Principal             
                            Executive Officer)              
                                                            
                                                            
/S/ JEROLD E. NOVACK        Vice President--Finance           March 31, 1997
------------------------    (Principal Financial and                
    Jerold E. Novack        Principal Accounting Officer)           
                                                            
                                                            
/S/ KEITH F. BARKET         Director                          March 31, 1997
------------------------                                            
    Keith F. Barket                                         
                                                            
                                                            
/S/                         Director                          March 31, 1997
------------------------                                            
    Gwenn M. Cagann                                         
                                                            
                                                            
/S/ JACK E. BUSH            Director                          March 31, 1997
------------------------                                            
    Jack B. Bush                                            
                                                            
                                                            
/S/ STEVEN A. ROTHSTEIN     Director                          March 31, 1997
------------------------                                            
    Steven A. Rothstein                                     
                                                            
                                                            
/S/                         Director                          March 31, 1997
------------------------                                             
    Kevin R. Greene                                         
                                                            
                                                            
/S/ EDWARD MCCABE           Director                          March 31, 1997
------------------------                                             
    Edward Mccabe                                           
                                                            
                                                            
/S/ RONALD S. HARI          Director                          March 31, 1997
------------------------                                             
    Ronald S. Hari

                                      ii5
     
<PAGE>
 
                             NEW WORLD COFFEE, INC.

                              FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
                         TOGETHER WITH AUDITORS' REPORT
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To New World Coffee, Inc.:
 
  We have audited the accompanying consolidated balance sheet of New World
Coffee, Inc. (a Delaware corporation) and subsidiary as of December 29, 1996,
and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 1995 and
December 29, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of New World Coffee, Inc. and
subsidiary as of December 29, 1996 and the results of their operations and
their cash flows for the years ended December 31, 1995 and December 29, 1996,
in conformity with generally accepted accounting principles.
 
                                          Arthur Andersen, LLP
 
New York, New York
March 6, 1997
 
                                      F-2
<PAGE>
 
                     NEW WORLD COFFEE, INC. AND SUBSIDIARY
 
                           CONSOLIDATED BALANCE SHEET
 
                               DECEMBER 29, 1996
 
<TABLE>
<S>                                                               <C>
                                    ASSETS
                                    ------
Current Assets:
  Cash and cash equivalents...................................... $  1,419,786
  Receivables....................................................      288,329
  Inventories....................................................      450,722
  Prepaid expenses...............................................      116,533
                                                                  -------------
    Total current assets.........................................    2,275,370
Property and equipment, net......................................   10,208,339
Goodwill, net of accumulated amortization of $69,851.............    3,567,721
Other assets, net................................................      904,757
                                                                  -------------
    Total assets................................................. $ 16,956,187
                                                                  =============
                     LIABILITIES AND STOCKHOLDERS' EQUITY
                     ------------------------------------
Current Liabilities:
  Accounts payable............................................... $    866,098
  Accrued expenses...............................................    1,100,942
  Accrued compensation...........................................      318,487
  Current portion of notes payable...............................      846,645
  Current portion of obligations under capital leases............      230,022
                                                                  -------------
    Total current liabilities....................................    3,362,194
                                                                  -------------
Deferred rent....................................................      614,285
                                                                  -------------
Notes payable....................................................    2,200,269
                                                                  -------------
Obligations under capital leases.................................      496,961
                                                                  -------------
Commitments (Note 9)
Stockholders' equity:
  Preferred stock, $.001 par value; 2,000,000 shares authorized..           --
  Series A Convertible Preferred Stock, $.001 par value; 400
   shares authorized, 375 issued, 320 outstanding................           --
  Common Stock, $.001 par value; 20,000,000 shares authorized;
   5,034,812 shares issued and outstanding.......................        5,035
  Additional paid-in capital.....................................   20,820,172
  Accumulated deficit............................................  (10,542,729)
                                                                  -------------
    Total stockholders' equity...................................   10,282,478
                                                                  -------------
    Total liabilities and stockholders' equity................... $ 16,956,187
                                                                  =============
</TABLE>
 
The accompanying notes are an integral part of this consolidated balance sheet.
 
 
                                      F-3
<PAGE>
 
                     NEW WORLD COFFEE, INC. AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
          FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 29, 1996
 
<TABLE>
<CAPTION>
                                                           1995         1996
                                                       ------------ ------------
<S>                                                    <C>          <C>
Revenues.............................................  $ 9,572,019  $11,340,199
Cost of sales and related occupancy costs............    5,995,396    6,473,515
Store operating expenses.............................    3,362,490    3,521,350
                                                       ------------ ------------
  Store operating income.............................      214,133    1,345,334
Depreciation and amortization........................    1,033,846    1,352,961
General and administrative expenses..................    1,784,257    2,738,975
Provision for store closings and reorganization
 costs...............................................           --    1,800,000
                                                       ------------ ------------
  Operating loss.....................................   (2,603,970)  (4,546,602)
Interest expense, net of interest income of $17,000
 and $76,036 in 1995 and 1996, respectively..........      297,587       74,349
Write-off of debt issuance costs.....................           --    1,050,000
                                                       ------------ ------------
  Net loss...........................................  $(2,901,557) $(5,670,951)
                                                       ============ ============
Net loss per common shares...........................  $     (2.71) $     (1.26)
                                                       ------------ ------------
Pro forma loss per common shares.....................  $     (1.73) $        --
                                                       ------------ ------------
Weighted average number of common shares outstanding:
  Historical.........................................    1,398,912    4,517,801
                                                       ------------ ------------
  Pro forma..........................................    2,187,166           --
                                                       ------------ ------------
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                      F-4
<PAGE>
 
                     NEW WORLD COFFEE, INC. AND SUBSIDIARY
 
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
          FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 29, 1996
 
<TABLE>
<CAPTION>
                                                                                             TOTAL
                         PREFERRED STOCK      COMMON STOCK     ADDITIONAL                STOCKHOLDERS'
                         ----------------  ------------------   PAID-IN     ACCUMULATED     EQUITY
                         SHARES   AMOUNT     SHARES   AMOUNT    CAPITAL       DEFICIT      (DEFICIT)
                         -------  -------  ---------- ------- ------------ ------------- -------------
<S>                      <C>      <C>      <C>        <C>     <C>          <C>           <C>
Balance, December 31,
 1994...................      --   $   --  1,213,725  $1,214  $   248,867  $ (1,068,091) $  (818,010)
 Warrants issued to
  Series C preferred
  stockholder...........      --       --         --      --      887,250      (887,250)          --
 Warrants issued in
  connection with bridge
  financing.............      --       --         --      --      753,627            --      753,627
 Net loss...............      --       --         --      --           --    (2,901,557)  (2,901,557)
                          -------  ------- ---------- ------- ------------ ------------- ------------
Balance, December 31,
 1995...................      --       --  1,213,725   1,214    1,889,744    (4,856,898)  (2,965,940)
 Issue of warrants in
  connection with bridge
  financing.............      --       --         --      --      246,373            --      246,373
 Common Stock shares
  issued in connection
  with the Initial
  Public Offering, net
  of offering expenses..      --       --  2,500,000   2,500   10,884,920            --   10,887,420
 Common Stock shares
  issued in connection
  with the conversion of
  Series A, B, and C
  convertible,
  redeemable, preferred
  stock and preferred
  stock warrants, net of
  offering expenses.....      --       --    900,723     901    4,218,120            --    4,219,021
 Shares issued in
  connection with the
  exercise of stock
  options and bridge
  financing warrants....      --       --    176,356     176       61,070            --       61,246
 Issuance of Series A
  convertible preferred
  stock, net of offering
  expenses..............     375       --         --      --    3,320,189            --    3,320,189
 Common Stock shares
  issued in connection
  with the conversion of
  Series A convertible
  preferred stock.......     (55)      --    221,022     221         (221)           --           --
 Common Stock shares
  issued in connection
  with the acquisition
  (Note 7)..............      --       --     22,986      23      199,977            --      200,000
 Net loss...............      --       --         --      --           --    (5,670,951)  (5,670,951)
 Dividends paid on
  Series A preferred
  stock.................      --       --         --      --           --       (14,880)     (14,880)
                          -------  ------- ---------- ------- ------------ ------------- ------------
Balance, December 29,
 1996...................     320   $   --  5,034,812  $5,035  $20,820,172  $(10,542,729) $10,282,478
                          =======  ======= ========== ======= ============ ============= ============
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
 
 
                                      F-5
<PAGE>
 
                     NEW WORLD COFFEE, INC. AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
          FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 29, 1996
 
<TABLE>
<CAPTION>
                                                          1995         1996
                                                      ------------ ------------
<S>                                                   <C>          <C>
Cash Flows From Operating Activities:
 Net loss............................................ $(2,901,557) $(5,670,951)
 Adjustments to reconcile net loss to net cash used
  in operating activities--
 Depreciation and amortization.......................   1,033,846    1,352,961
 Write-off of non-cash debt issuance costs...........          --    1,000,000
 Accrued interest on notes payable...................          --       34,881
 Increase (decrease) in cash resulting from changes
  in operating assets and liabilities--
  Receivables........................................      11,213      380,720
  Inventories........................................     (69,492)     (38,950)
  Prepaid expenses...................................     136,210        9,692
  Deposits and other assets..........................    (185,324)    (263,264)
  Accounts payable...................................     245,242     (379,672)
  Accrued expenses...................................     286,932      294,627
  Accrued compensation...............................     123,443        1,709
  Deferred rent......................................     291,506      106,853
 Charges due to restructuring and store closing
  activities:
  Provision for store closing costs and
   restructuring charges.............................          --      785,112
  Payment of store closing costs and restructuring
   charges...........................................          --     (602,215)
  Write-off of fixed assets..........................          --    1,014,888
                                                      ------------ ------------
   Net cash used in operating activities.............  (1,027,981)  (1,973,609)
                                                      ------------ ------------
Cash Flows From Investing Activities:
 Capital expenditures................................  (3,241,876)  (3,604,514)
 Acquisitions (Note 7)...............................          --   (1,418,902)
                                                      ------------ ------------
   Net cash used in investing activities.............  (3,241,876)  (5,023,416)
                                                      ------------ ------------
Cash Flows From Financing Activities:
 Issuance of Series A Convertible Preferred Stock,
  net of issuance costs of approximately $430,000....          --    3,320,189
 Issuance of common stock shares in connection with
  the initial public offering, net of offering
  expenses...........................................          --   11,074,159
 Redemption of Series C Convertible Redeemable
  Preferred Stock ...................................          --   (1,999,997)
 Issuance of Series A, B, C Convertible Preferred
  Stock and Redeemable Preferred Stock, net of
  issuance costs of approximately $250,000...........   2,744,529           --
 Payments of deferred offering costs.................    (177,000)          --
 Proceeds from issuance of notes payable.............   2,250,000           --
 Expenses paid in relation to Series A, B and C
  Convertible Preferred Stock to Common Stock........          --      (11,033)
 Shares issued in connection with the exercise of
  stock options and bridge financing warrants........          --       61,246
 Proceeds from bridge financing......................     755,000      245,000
 Repayments of bridge financing......................          --   (1,000,000)
 Repayments of capital leases........................     (52,118)    (155,415)
 Repayments of notes payable.........................    (500,000)  (4,053,813)
 Dividends paid on Series A Convertible Preferred
  Stock..............................................          --      (14,880)
                                                      ------------ ------------
   Net cash provided by financing activities.........   5,020,411    7,465,456
                                                      ------------ ------------
   Net increase in cash..............................     750,554      468,431
Cash, beginning of year..............................     200,801      951,355
                                                      ------------ ------------
Cash, end of year....................................     951,355    1,419,786
                                                      ------------ ------------
Supplemental Disclosure of Cash Flow Information:
 Cash paid during the period for interest, net of
  amount capitalized.................................     314,600       76,483
 Noncash investing and financing activities--
 Equipment acquired under capital leases.............     156,527      712,535
 Conversion of Series A, B and C Convertible
  Preferred Stock to Common Stock....................          --    4,230,054
 Conversion of Series A Convertible Redeemable
  Preferred Stock to Common Stock....................          --      550,000
 Issuance of warrants in connection with bridge
  financing..........................................     753,627      246,373
 Issuance of warrants to Series C preferred
  stockholder........................................     887,250           --
 Issuance of notes related to the acquisitions (Note
  7).................................................          --    3,012,033
 Issuance of Common Stock related to the acquisition
  (Note 7)...........................................          --      200,000
 Details of acquisitions (Note 7)
 Fair value of assets acquired.......................          --   (1,662,672)
 Goodwill............................................          --   (3,637,572)
 Liabilities assumed.................................          --      669,309
 Notes issued........................................          --    3,012,033
 Common Stock issued.................................          --      200,000
                                                      ------------ ------------
   Net cash paid for acquisitions....................          --   (1,418,902)
                                                      ============ ============
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                      F-6
<PAGE>
 
                     NEW WORLD COFFEE, INC. AND SUBSIDIARY
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                    DECEMBER 31, 1995 AND DECEMBER 29, 1996
 
1. NATURE OF BUSINESS, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
 
 Nature of Business and Organization
 
  New World Coffee, Inc. (the "Company") is incorporated in Delaware and sells
freshly brewed gourmet coffees, coffee-based beverages and an assortment of
light food products through its 40 specialty coffee cafes located in New York,
New Jersey, Pennsylvania and Connecticut.
 
  Commencing October 25, 1996, the Company began operating a roasting facility
in connection with the acquisition of Willoughby's, Incorporated, a
Connecticut corporation ("Willoughby's") (see Note 7).
 
  The consolidated financial statements herein include the accounts of the
Company and its wholly owned subsidiary, Willoughby's. All material
intercompany balances and transactions have been eliminated.
 
 Change in Fiscal Year
 
  In 1995, the Company changed its year-end from a calendar year to a fiscal
year ending on the Sunday nearest December 31.
 
 Cash and Cash Equivalents
 
  Cash and cash equivalents included cash and other liquid short-term
instruments with original maturities of less than ninety days.
 
 Inventories
 
  Inventories are stated at the lower of cost or market, with cost being
determined by the first-in, first-out method.
 
 Property and Equipment
 
  Property and equipment are recorded at cost and include direct and
incremental costs incurred in the development and construction of new stores.
Indirect costs in connection with leasing new store locations are expensed as
incurred. Expenditures for maintenance, repairs and renewals of minor items
are generally charged to expense as incurred. Leasehold improvements are
amortized over the shorter of their useful lives or the term of the related
leases by use of the straight-line method. Depreciation of property and
equipment is provided using the straight-line method over the following
estimated useful lives:
 
<TABLE>
   <S>                                                            <C>
   Leasehold improvements........................................ 8 to 15 years
   Store equipment...............................................  3 to 7 years
   Furniture and fixtures........................................  5 to 7 years
   Office equipment..............................................       5 years
</TABLE>
 
 Goodwill
 
  Goodwill is amortized using the straight-line method over a period ranging
between 10 to 20 years.
 
 Capitalized Interest
 
  Interest on borrowed funds during the construction of new stores is
capitalized.
 
                                      F-7
<PAGE>
 
                     NEW WORLD COFFEE, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 Long-lived Assets
 
  The Company's policy is to record long-lived assets at cost, amortizing
these costs over the expected useful life of the related assets. In accordance
with Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed Of," these assets are reviewed on a periodic basis for
impairment whenever events or changes in circumstances indicate that the
carrying amounts of the assets may not be realizable. Furthermore, the assets
are evaluated for continuing value and proper useful lives by comparison to
expected future cash flows. Initial adoption of SFAS 121 during the year did
not have a material effect on the Company.
 
 Store Preopening Costs
 
  Certain incremental costs and expenses incurred, which are directly related
to new store openings (primarily payroll costs incurred prior to opening), are
deferred and amortized commencing on the store opening date, on a straight-
line basis over a twelve-month period.
 
 Store Operating Costs
 
  Store operating costs primarily consist of salaries, wages and benefits of
store personnel, utilities and supplies.
 
 Deferred Rent
 
  Certain of the Company's lease agreements provide for scheduled rent
increases during the lease term or for rental payments commencing at a date
other than initial occupancy. Provision has been made for the excess of
operating lease rental expense, computed on a straight-line basis over the
lease term, over cash rentals paid.
 
 Net Loss Per Share
 
  Historical Net Loss Per Share
 
  Year Ended December 31, 1995--Net loss per share is computed by dividing net
loss plus the excess fair value of consideration over the carrying amount of
the Redeemed Series C Preferred Stock (see note 6) by the weighted average
number of shares of common stock outstanding during the period. The weighted
average shares outstanding is based on (i) the provisions of Staff Accounting
Bulletin No. 83 whereby stock options and warrants issued during the twelve
months preceding the initial filing of the offering at prices below the
expected initial public offering price have been included, even though anti-
dilutive, to calculate historical net loss per share for the year ended
December 31, 1995 for the period from January 1, 1995 to October 1, 1995 and
(ii) Accounting Principles Board Opinion No. 15, "Earnings per share," (APB
15) for the period after October 1, 1995, which excludes options and warrants
as they are antidilutive.
 
  Year ended December 29, 1996--Net loss per share is computed by dividing net
loss by the weighted average number of shares of common stock outstanding
during the period. The weighted average shares outstanding is calculated in
accordance with the provisions of APB 15 and such calculation excludes options
and warrants as they are antidilutive.
 
                                      F-8
<PAGE>
 
                     NEW WORLD COFFEE, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  Proforma Net Loss Per Share--Proforma net loss per share is computed in a
manner similar to historical net loss per share for the year ended December
31, 1995, discussed above, except for the Series A, B, and C Convertible
Redeemable Preferred Stock being considered outstanding for the year.
 
 Income Taxes
 
  The Company provides for income taxes using the liability method in
accordance with the Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"). SFAS No. 109 requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in the Company's
financial statements or tax returns.
 
 Stock-Based Compensation
 
  During October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 123, Accounting for Stock Based
Compensation ("SFAS No. 123"). This statement establishes financial accounting
and reporting standards for stock-based employee compensation plans. SFAS No.
123 encourages entities to adopt a fair value based method of accounting for
stock compensation plans. However, SFAS No. 123 also permits entities to
continue to measure compensation costs under pre-existng accounting
pronouncements with the requirement that pro forma disclosures of net income
and earnings per share be included in the notes to financial statements. The
Company has elected to adopt the disclosure requirements of SFAS No. 123
during 1996 and show pro forma results of net loss and earnings per share data
for the years ended December 29, 1996 and December 31, 1995.
 
 Use of Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
 
2. PROPERTY AND EQUIPMENT
 
  Property and equipment consist of the following as of December 29, 1996:
 
<TABLE>
   <S>                                                             <C>
   Leasehold improvements......................................... $ 7,441,156
   Store equipment................................................   3,039,564
   Furniture and fixtures.........................................     902,797
   Office equipment...............................................     814,834
                                                                   ------------
                                                                    12,198,351
   Less--Accumulated depreciation and amortization................  (1,990,012)
                                                                   ------------
                                                                   $10,208,339
                                                                   ============
</TABLE>
 
  Approximately $159,000 of capitalized interest is included in property and
equipment at December 29, 1996.
 
3. OTHER ASSETS
 
  Other assets consist of the following as of December 29, 1996:
 
<TABLE>
   <S>                                                                <C>
   Security deposits................................................. $574,640
   Store preopening costs, net of accumulated amortization of
    $117,133.........................................................  140,816
   Long-term receivable..............................................  145,835
   Other.............................................................   43,466
                                                                      ---------
                                                                      $904,757
                                                                      =========
</TABLE>
 
                                      F-9
<PAGE>
 
                     NEW WORLD COFFEE, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
4. ACCRUED EXPENSES
 
  Accrued expenses at December 29, 1996 consist of the following:
 
<TABLE>
   <S>                                                               <C>
   Store closing costs (see Note 5)................................. $  182,897
   Negative book cash balance.......................................    407,949
   Other............................................................    510,096
                                                                     ----------
                                                                     $1,100,942
                                                                     ==========
</TABLE>
 
5. PROVISION FOR STORE CLOSINGS AND REORGANIZATION COSTS
 
  During 1996, the Company recorded a provision for store closings and
reorganization costs of $1,500,000 to provide for the closing of five
unprofitable stores. This represents a provision for writedowns of property
and equipment of approximately $1,000,000 for closed stores and provides for
an additional accrual of approximately $500,000 for other closure costs, which
include losses for continuing lease payments on closed stores, severance for
store employees, and other related costs. In addition, the Company provided
for a reorganization charge of approximately $300,000 which primarily
consisted of severance and related benefits. As of December 29, 1996, the
reserve balance related to non fixed asset costs is approximately $183,000 for
the remaining three stores to be closed of which one closed on January 10,
1997.
 
6. STOCKHOLDERS' EQUITY
 
 Initial Public Offering
 
  In February 1996, the Company completed its Initial Public Offering ("IPO")
of 2,500,000 shares of common stock (par value $.001) at a purchase price of
$5.50 per share, for aggregate net proceeds of approximately $11.1 million. A
portion of the proceeds was used to repay the outstanding balance under the
Company's then existing line of credit agreement ($3,500,000), the bridge
financing ($1,000,000) and the redeemable Series C Preferred Stock
($1,999,997). Also, in connection with the IPO, the Convertible Redeemable
Preferred Stock Series A, B, and C was converted into common stock of the
Company.
 
 Bridge Financing
 
  In December 1995 and January 1996, the Company received $1,000,000 in bridge
financing from a group of lenders, which included $200,000 from certain
related parties. This borrowing bore interest at 10% and was repaid from the
proceeds of the IPO. In conjunction with this bridge financing, the Company
issued warrants to purchase 181,818 at an exercise price of $.01 per share of
these 147,200 warrants were exercised in 1996. The Company recorded a write-
off of debt issuance costs related to the repayment of the bridge financing of
$1,050,000, which has been reflected in the consolidated statement of
operations for the year ended December 29, 1996.
 
 Convertible Redeemable Preferred Stock
 
  The number of common shares which were issued upon conversion of all the
Convertible Redeemable Preferred Stock, excluding Redeemable Preferred Stock
(see below), were as follows:
 
<TABLE>
<CAPTION>
                                                       DECEMBER 31,    SHARES
                                                           1995     CONVERTED TO
                                                       OUTSTANDING  COMMON STOCK
                                                       ------------ ------------
   <S>                                                 <C>          <C>
   Series A...........................................   282,539      169,795
   Series B...........................................   678,655      464,618
   Series C...........................................   210,519      153,841
</TABLE>
 
                                     F-10
<PAGE>
 
                     NEW WORLD COFFEE, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  The holders of the Preferred Stock had the right, at any time, to convert
such shares into common stock. Under the terms of conversion, the Preferred
Stock shares automatically converted into common stock upon the consummation
of a firm commitment underwritten offering of the Company's common stock to
the public at an aggregate offering price of at least $7,500,000 and
automatically converted into common stock at such time as less than 30% of the
issued shares of Preferred Stock remain outstanding.
 
 Stock Subscription Note Receivable
 
  In October 1994, an officer of the Company purchased 29,213 shares of
Redeemable Convertible Series A stock for cash and a promissory note totaling
$80,000. Such shares were converted to 17,035 shares of common stock by the
officer. The promissory note, which bears interest at 4.5% per annum,
originally matured on October 15, 1997, but has been extended to March 15,
1998. The shares of common stock issued have been pledged as collateral.
 
 Preferred Stock Redeemed
 
  On July 21, 1995, the Company entered into an agreement with a Series C
preferred stockholder to purchase all the Preferred Stock and common stock, if
such preferred stockholder exercised his conversion rights, for $1,999,997 in
cash and a warrant to purchase 87,469 shares of common stock at an exercise
price of $.017 per share. On December 29, 1995, the agreement was amended to
extend the repurchase right until March 31, 1996. In connection with the
amendment, the Company issued an additional warrant to purchase 25,000 shares
at an exercise price of $.01 per share. Under the terms of the agreement, as
amended, the Company repurchased the stock at the closing of the Company's
initial public offering in February 1996. The fair market value of the
warrants issued in connection with the July 21, 1995 and December 29, 1995
agreements has been reflected in stockholders' equity as an increase in
additional paid-in capital and accumulated deficit and is included in the
calculation of net loss per share as of December 31, 1995. All warrants issued
in connection with this Redeemable Preferred Stock were exercised upon
completion of the Company's IPO.
 
 Series A Convertible Preferred Stock
 
  The Company completed the sale of 375 shares of Series A Convertible
Preferred Stock on June 28, 1996 realizing approximately $3,320,000 in net
proceeds after commissions and costs of approximately $430,000. During 1996,
certain individuals exercised their rights and converted 55 shares of Series A
Convertible Preferred Stock into 221,022 shares of Common Stock.
 
  In the event of a transaction or series of transactions by the Company in
which more than 50% of the voting power is transferred, the holders of the
Series A Convertible Preferred Stock have the option of redeeming their shares
at a redemption price equal to the original price of the stock purchased plus
an amount equal to eight percent per annum of the original price from the date
of original purchase through the date of redemption. In addition, the holders
have certain liquidation preferences, and dividend or voting rights and they
may convert into common shares at a conversion price calculation as set forth
in the Certificate of Designation of Series A Convertible Preferred Stock
Agreement. All outstanding shares on June 27, 1999 will automatically convert
into common stock.
 
 Warrants
 
  As of December 29, 1996, the Company has 662,398 warrants outstanding. These
warrants have exercise prices ranging from $.01-$9.08 per share and have a
term ranging from 5 to 7 years. Such warrants were issued in connection with
the bridge loan financing and certain other services.
 
                                     F-11
<PAGE>
 
                     NEW WORLD COFFEE, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 Stock Options
 
  The Company's 1994 Stock Plan (the "1994 Plan") provides for the granting to
employees of incentive stock options and for the granting to employees and
consultants of nonstatutory stock options and stock purchase rights. Unless
terminated sooner, the 1994 Plan will terminate automatically in August 2004.
The Board of Directors has the authority to amend, suspend or terminate the
1994 Plan, subject to any required stockholder approval under applicable law,
provided that no such action may affect any share of common stock previously
issued and sold or any option previously granted under the 1994 Plan.
 
  Options generally become exercisable in ratable installments over a four-
year period. A total of 750,000 shares of common stock is currently reserved
for issuance pursuant to the 1994 Plan. There were 221,968 and 177,124 shares
available for grant under the 1994 Plan at December 29, 1996 and December 31,
1995, respectively.
 
  The Company's 1995 Directors' Stock Option Plan (the "Directors' Option
Plan") was adopted by the Board of Directors and approved by the Company's
shareholders in August 1995. Unless terminated sooner, the Director's Option
Plan will terminate automatically in August, 2005. The Board of Directors may
amend or terminate the Directors' Option Plan at any time; provided, however,
that no such action may adversely affect any outstanding option without the
optionee's consent and the provisions affecting the grant and terms of options
may not be amended more than once during any six-month period. A total of
200,000 shares of common stock has been reserved for issuance under the
Directors' Option Plan. The Directors' Option Plan provides for the automatic
grant of nonstatutory stock options to nonemployee directors of the Company. A
total of 66,000 options were granted under the Directors' Option Plan as of
December 29, 1996. A total of 134,000 shares were available for grant under
the Director's Option Plan as of December 29, 1996.
 
  A summary of the status of the Company's two stock option plans at December
31, 1995 and December 29, 1996 and changes during the years then ended is
presented in the table and narrative below:
 
<TABLE>
<CAPTION>
                                                   1995             1996
                                             ---------------- -----------------
                                                     WEIGHTED          WEIGHTED
                                                     AVERAGE           AVERAGE
                                                     EXERCISE          EXERCISE
                                             OPTIONS  PRICE   OPTIONS   PRICE
                                             ------- -------- -------  --------
   <S>                                       <C>     <C>      <C>      <C>
   Outstanding at beginning of year......... 112,739  $0.83   202,750   $1.99
     Grant..................................  90,011   3.43   439,300    3.52
     Exercised..............................     --     --    (29,156)   2.37
     Forfeited..............................     --     --    (48,018)   3.74
                                             -------  -----   -------   -----
   Outstanding at end of year............... 202,750   1.99   564,876    3.09
                                             -------  -----   -------   -----
   Exercisable at end of year...............  56,854          205,943
                                             =======          =======
   Weighted average fair value of options
    granted................................. $  1.66          $  1.70
                                             =======          =======
</TABLE>
 
  A total of 101,077 of the 564,876 options outstanding at December 29, 1996
have exercise prices between $0.77 and $0.85, with a weighted average exercise
price of $0.84 and a weighted average remaining contractual life of 7.75
years, 85,526 of these options are exercisable; their weighted average
exercise price is $0.84; 220,000 options have exercise prices between $2.00
and $3.00, with a weighted average exercise price of $2.34 and a weighted
average remaining contractual life of 9.7 years. None of
 
                                     F-12
<PAGE>
 
                     NEW WORLD COFFEE, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
these options are exercisable. A total of 106,699 options have exercise prices
between $3.00 and $4.00, with a weighted average exercise price of $3.65;
100,418 of these options are exercisable; their weighted average exercise
price is $3.43 with a weighted average remaining contractual life of 9.1
years. 137,100 options have exercise price of $5.50, with a weighted average
remaining contractual life of 9.1 years. 20,000 of these options are
exercisable, their weighted average exercise price is $5.50.
 
SFAS No. 123
 
  Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net income and earnings per share would have been
reduced to the following pro forma amounts:
 
<TABLE>
<CAPTION>
                                                         1995         1996
                                                      -----------  -----------
   <S>                                                <C>          <C>
   Net loss:
     As reported..................................... $(2,901,557) $(5,670,951)
     Pro forma.......................................  (2,938,743)  (5,798,364)
   Net loss per common share:
     As reported.....................................       (2.71)       (1.26)
     Pro forma.......................................       (2.74)       (1.28)
</TABLE>
 
  Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
 
  The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: risk-free interest
rates of 7.0 % and 6.1%; expected dividend yields of 0%; expected lives of 4.2
and 5 years; expected stock price volatility of 54% and 51%.
 
7. ACQUISITIONS
 
  On October 25, 1996, the Company purchased five Willoughby's locations (plus
one under construction) and its roasting facility by acquiring the common
stock of Willoughby's for total consideration of $3,100,000 (net of acquired
debt of $700,000 paid at closing). This amount consisted of $600,000 cash paid
at the closing with an additional $600,000 due on July 1, 1997, $200,000 worth
of restricted shares of the Company's common stock, and two promissory notes
in the aggregate principal amount of $1,700,000 with $600,000 due on January
5, 1998 and $1,100,000 payable due on January 5, 1999 bearing interest at 6%
per annum. The purchase price was allocated to the assets acquired and
liabilities assumed based on their fair market value at the date of
acquisition and the difference between the cost of acquiring the assets (which
included the effect of discounting the promissory notes using an interest rate
of 10%) and the underlying fair market value of the net assets acquired was
treated as goodwill, which is being amortized over 20 years. In connection
with the acquisition, the former shareholders of Willoughby's signed
employment agreements with the Company which terminate in October, 1998.
 
  On June 13, 1996, the Company purchased three Coopers Coffee Bar ("Coopers")
locations for $242,500 cash and a $770,000 note payable over 4 years which
bears interest at 6%. The purchase price has been allocated to the assets
acquired based on their fair value at the date of acquisition and the
difference between the cost of acquiring the locations (which included the
effect of discounting the promissory notes using an interest rate of 10%) and
the fair value of the net assets acquired was allocated to goodwill, which is
being amortized over 10 years.
 
                                     F-13
<PAGE>
 
                     NEW WORLD COFFEE, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  On August 26, 1996 the Company purchased the Ridgefield Coffee Company store
("Ridgefield") for $150,000 cash and a $175,000 note payable over two years
bearing interest at 6%. The purchase price has been allocated to the assets
acquired based on their fair value at the date of acquisition and the
difference between the cost of acquiring the location (which included the
effect of discounting the promissory notes using an interest rate of 10%) and
the fair value of the net assets acquired was allocated to goodwill, which is
being amortized over 10 years.
 
  Interest expense of approximately $74,000 was recorded in 1996 for the notes
payable related to the acquisitions of Willoughby's, Coopers and Ridgefield.
 
  The consolidated statements of operations of the Company include the results
of Willoughby's, Ridgefield and Coopers since the date of acquisition.
 
  Following is the unaudited pro forma presentation as if the purchase of the
three Coopers locations, the acquisition of the stock of Willoughby's, and the
one Ridgefield location had occurred on January 1, 1995:
 
<TABLE>
<CAPTION>
                                                          1995         1996
                                                       -----------  -----------
                                                             (UNAUDITED)
   <S>                                                 <C>          <C>
   Revenue............................................ $12,993,000  $14,149,000
   Store operating income.............................   1,282,000    2,127,000
   Operating loss.....................................  (2,012,000)  (2,399,000)
   Net loss...........................................  (2,387,009)  (5,430,000)
   Net loss per share.................................       (2.34)       (1.20)
   Pro forma net loss per share.......................       (1.50)
</TABLE>
 
  The unaudited pro forma financial statements for 1996 includes accrued store
closing and restructuring costs of $1,800,000, the write-off of debt issuance
costs related to the bridge financing of $1,050,000. The statements do not
reflect the operating and net income benefit of $513,000 if the store closings
(see Note 5) had occurred as of January 1, 1995. The unaudited pro forma
financial statements for 1995 do not reflect the operating and net income
benefit of $368,000 if the store closings (see Note 5) had occurred as of
January 1, 1995.
 
  The pro forma information presented above does not purport to be indicative
of the results that actually would have been obtained if the combined
operations had been conducted during the periods presented, nor does it
purport to be indicative of future periods of the combined operations.
 
8. INCOME TAXES
 
  A summary of the significant components of deferred tax liabilities (assets)
as of December 29, 1996 is as follows:
 
<TABLE>
<CAPTION>
                                                                      1996
                                                                   -----------
   <S>                                                             <C>
   Provisions for store closing................................... $  (388,000)
   Fixed assets...................................................    (240,000)
   Store preopening costs.........................................      62,000
   Deferred rent..................................................    (270,000)
   Operating loss carryforwards...................................  (3,324,000)
                                                                   -----------
     Gross deferred tax assets....................................  (4,160,000)
   Valuation allowance............................................   4,160,000
                                                                   -----------
     Net deferred taxes........................................... $       --
                                                                   ===========
</TABLE>
 
                                     F-14
<PAGE>
 
                     NEW WORLD COFFEE, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  The Company has recorded a full valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized. The change in the
valuation allowance during 1996 was an increase of approximately $2,453,000.
 
  At December 29, 1996, the Company had net operating loss carryforwards of
approximately $7.5 million. These net operating loss carryforwards expire on
various dates through 2011. The Company's ability to utilize its net operating
loss carryforwards may be subject to annual limitations in future periods
pursuant to the "change in ownership rules" under Section 382 of the Internal
Revenue Code, as amended.
 
9. COMMITMENTS
 
 Leases
 
  The Company leases office and retail space under various noncancelable
operating leases. Property leases normally require payment of a minimum annual
rental plus a pro rata share of certain landlord operating expenses.
 
  As of December 29, 1996, approximate future minimum rental payments under
noncancelable operating leases for the next five years and the period
thereafter are as follows:
 
<TABLE>
   <S>                                                               <C>
   Year ending:
    1997...........................................................  $ 3,379,680
    1998...........................................................    3,895,484
    1999...........................................................    3,331,045
    2000...........................................................    3,384,835
    2001...........................................................    3,414,816
    Thereafter.....................................................   17,101,975
                                                                     -----------
                                                                     $34,507,835
                                                                     ===========
</TABLE>
 
  Rent expenses under operating leases were approximately $2,128,000 and
$2,650,000 for the years ended December 31, 1995 and December 29, 1996,
respectively.
 
  The Company has capital leases for computer equipment used in its stores and
offices. As of December 29, 1996, approximate future minimum lease payments
for the next four years are as follows:
 
<TABLE>
   <S>                                                                <C>
   Year ending:
     1997............................................................ $ 330,022
     1998............................................................   315,822
     1999............................................................   209,813
     2000............................................................    71,326
                                                                      ---------
                                                                        926,983
     Less-Imputed interest...........................................  (200,000)
                                                                      ---------
                                                                      $ 726,983
                                                                      =========
</TABLE>
 
 Employment Agreements
 
  The Company has entered into employment agreements with six officers of the
Company expiring in various years through October 30, 1998. Minimum base
salaries and bonuses for the term of these
 
                                     F-15
<PAGE>
 
                     NEW WORLD COFFEE, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
employment agreements total approximately $1,116,000 of which the Company is
committed to pay $791,100 after December 29, 1996.
 
10. KEY PERSON LIFE INSURANCE
 
  The Company maintains life insurance totaling $1,500,000 for its chief
executive officer, in which it is the beneficiary.
 
11. SUBSEQUENT EVENT
 
  On February 27, 1997, the Company completed a private placement of 1,000,000
unregistered shares of common stock, par value $.001 per share, and realized
net proceeds of $1,345,000.
 
  In 1997, the Company repurchased 175 shares of the Series A Convertible
Preferred Stock and in exchange issued 137.5 shares of Series B Convertible
Preferred Stock, $.001 par value, and issued 194,440 shares of unregistered
common stock, par value $.001 per share. The Series B Convertible Preferred
Stock bears no dividend and has limited voting rights except as provided under
the General Corporation Law of the State of Delaware. The stock is convertible
into shares of common stock in accordance with the Certificate of Designation
of Series B Convertible Preferred Stock.
 
                                     F-16
<PAGE>
 
                                 EXHIBIT INDEX


27.  Financial Data Schedule.