NEW YORK BAGEL ENTERPRISES INC, 10-K405, 1997-03-27

NEW YORK BAGEL ENTERPRISES INC
10-K405, 1997-03-27
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

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(MARK ONE)
[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 pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [no fee required]
For the transition period from to
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Commission file number 0-21205

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NEW YORK BAGEL ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)

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KANSAS 73-1369185
(State or other jurisdiction (I.R.S. Employer
of Identification
incorporation or No.)
organization)
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300 I.M.A. PLAZA
250 NORTH WATER STREET
WICHITA, KANSAS 67202-1213
316-267-7373
(Address, including zip code, and telephone number of Registrant's principal
executive offices)

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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED

None

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $0.01 per share
(Title of class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. (_X_)

As of February 28, 1997, the aggregate market value of the voting stock held
by non-affiliates of the registrant (based upon the last reported sale price of
the Common Stock of the registrant as quoted on the Nasdaq National Market of
The Nasdaq Stock Market, Inc.) was $11,058,844. (For purposes of calculating the
preceding amount only, all directors, executive officers and stockholders
holding 5% or greater of the registrant's Common Stock are assumed to be
affiliates). The number of shares of Common Stock of the registrant outstanding
as of February 28, 1997 was 4,667,500.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant's Proxy Statement for its annual meeting
of stockholders are incorporated by reference into Items 10, 11, 12 and 13 of
Part III. The registrant intends to file such Proxy Statement no later than 120
days after the end of the fiscal year covered by this Form 10-K.

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NEW YORK BAGEL ENTERPRISES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 29, 1996

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PART I

Item 1. Business........................................................................................ 3

Item 2. Properties...................................................................................... 10

Item 3. Legal Proceedings............................................................................... 13

Item 4. Submission of Matters to a Vote of Security Holders............................................. 13

Risk Factors.................................................................................... 13

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................... 17

Item 6. Selected Financial Data......................................................................... 18

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 19

Item 8. Financial Statements and Supplementary Data..................................................... 23

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 23

PART III

Item 10. Directors and Executive Officers of the Registrant.............................................. 23

Item 11. Executive Compensation.......................................................................... 23

Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 24

Item 13. Certain Relationships and Related Transactions.................................................. 24

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 24

SIGNATURES.................................................................................................. 27

INDEX TO FINANCIAL STATEMENTS............................................................................... F-1
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PART I

ITEM 1. BUSINESS

GENERAL

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS FORM 10-K ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY,
INCLUDING, WITHOUT LIMITATION, RISKS ASSOCIATED WITH THE COMPANY'S ABILITY TO
SUCCESSFULLY AND TIMELY INTEGRATE CERTAIN ACQUISITIONS, INCLUDING THE LOTS A'
BAGELS RESTAURANTS AND BAGEL COMMISSARY, THE COMPANY'S ABILITY TO DEVELOP,
CONSTRUCT, ACQUIRE OR FRANCHISE ADDITIONAL RESTAURANTS IN ACCORDANCE WITH THE
COMPANY'S DEVELOPMENT SCHEDULE, MANAGEMENT OF QUARTER TO QUARTER EARNINGS AND
INCREASES IN OPERATING COSTS. CERTAIN OF THESE RISKS ARE SET FORTH IN THE "RISK
FACTORS" SECTION OF THIS FORM 10-K. UPDATED INFORMATION WILL BE PERIODICALLY
PROVIDED BY THE COMPANY AS REQUIRED BY THE SECURITIES EXCHANGE ACT OF 1934.

As of March 1, 1997, New York Bagel Enterprises, Inc. (the "Company") owned
and franchised 61 quick-service New York Bagel restaurants and seven Lots A'
Bagels restaurants in 16 states that serve generous portions of fresh, high
quality food with fast, friendly service at an attractive price-value
relationship. The Company has grown by developing Company-owned restaurants,
making acquisitions and by selectively adding franchisees. As of March 1, 1997,
there were 36 Company-owned restaurants located in Oklahoma, Kansas, Tennessee,
Texas, Colorado, Missouri and New Mexico and 32 franchised restaurants located
in 12 states operated by 19 franchisees.

The Company believes that consumption of bagels has increased in recent
years, as consumers have discovered that bagels are a healthier, lower fat
alternative to other quick-service foods and are a suitable substitute for
sandwich breads. Management believes that the market for retail bagel
restaurants is fragmented and underserved, and that the Company can capitalize
on the demand for fresh bagels by expanding the New York Bagel concept in
targeted markets.

The Company opened its first restaurant in 1986, and has developed, as of
March 1, 1997, 24 of its 36 Company-owned restaurants in Oklahoma, Kansas,
Tennessee, Texas and Missouri. In addition to developing new restaurants, as of
March 1, 1997 the Company has acquired one bagel restaurant in Tennessee, seven
Lots A' Bagels restaurants and a bagel commissary in Colorado and four
franchised New York Bagel restaurants in Texas, Kansas and New Mexico. See Note
11 of the Notes to Consolidated Financial Statements.

The Company's business was previously operated through six separate
entities, each of which was owned by one or more stockholders that existed prior
to the Company's initial public offering (collectively, the "Prior Entities").
The Company was incorporated in December 1995 under the laws of Kansas, and on
December 31, 1995, the Prior Entities were merged into the Company (the
"Reorganization"). The financial statements herein include the results of
operations of the Prior Entities on a combined basis for all periods. See Note 1
of the Notes to Consolidated Financial Statements.

The Company completed its initial public offering of its Common Stock on
August 27, 1996. Reference to "New York Bagel" restaurants include the Company's
Lots A' Bagels restaurants unless otherwise indicated.

THE NEW YORK BAGEL CONCEPT

PREPARE FRESH, HIGH QUALITY PRODUCTS. New York Bagel restaurants serve up
to 20 varieties of bagels that are made from scratch, boiled and baked
throughout the day in the traditional "New York style." The Company believes its
five-ounce bagel is larger than those served by many of its competitors. Menu
items are prepared in accordance with the Company's specifications using high
quality ingredients such as Philadelphia-Registered Trademark- Brand cream
cheese, Kraft-Registered Trademark- cheeses and premium deli meats. Generous
portions of cream cheese are applied on its breakfast bagel and four ounces of
meat are served on each of its deli sandwiches. The Company believes that the
quality and portion size of its menu items generally equals or exceeds those

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of its competitors. Because its menu pricing is competitive, the Company
believes that it offers customers an attractive price-value relationship.

MAXIMIZE TRAFFIC THROUGHOUT THE DAY. Management has recognized the
versatility of the bagel and has developed a menu to attract customers
throughout the day. The breakfast menu at New York Bagel restaurants includes a
variety of bagels and custom-blended cream cheeses, breakfast sandwiches on
bagels, gourmet coffees, muffins and croissants. Lunch and dinner items include
a wide range of delicatessen sandwiches made on bagels or other breads, salads,
cookies and soft drinks. Management believes that Company-owned restaurants
typically generate approximately 40% of their sales before 11:00 a.m., with an
average ticket of approximately $3.00 during such period and $4.00 thereafter.

COMMITMENT TO TIMELY SERVICE. The Company believes that timely service is
essential in the quick-service restaurant business. Service time is minimized
through the division of employee functions, efficient store layout and design
and queuing mechanisms. The Company conducts time studies of its restaurants on
a periodic basis and believes that on average, breakfast customers are served
within three minutes of placing their order and lunch and dinner customers are
served within five minutes. As a result, the Company also has been able to
successfully operate drive-through windows at certain New York Bagel
restaurants.

FOCUS ON TRAINING. The Company believes that comprehensive training is
essential to the efficiency and consistency of its operations. Accordingly, the
Company conducts an extensive 90-day training program for its restaurant
managers and franchisees that is composed of approximately ten days of classroom
instruction and approximately 80 days of on-site instruction. In addition, the
Company's training team provides on-site assistance during the initial ten days
of operation at each Company-owned restaurant and at a franchisee's initial
franchised restaurant.

EXPANSION STRATEGY

EMPHASIZE MID-SIZED AND SMALLER METROPOLITAN MARKETS. The Company presently
targets its expansion efforts in mid-sized and smaller metropolitan markets.
Management believes that these markets are attractive because they typically
have fewer competing bagel restaurants and more favorable lease and labor
environments than larger metropolitan markets.

ESTABLISH STRONG MARKET PRESENCE. Since the bagel industry is highly
fragmented and increasingly competitive, the Company seeks to establish a strong
market presence in its targeted markets. To develop a strong market presence
rapidly and efficiently, the Company employs a multiple store strategy involving
a bakery restaurant which produces bagels for itself and one or more nearby
satellite restaurants. By entering underserved markets and opening multiple
restaurants, the Company seeks to maximize market share and establish brand
awareness. The Company and its franchisees have implemented this bakery/
satellite restaurant combination 21 times.

FOCUS ON UNIT AND MARKET ECONOMICS. Consistent with its market share
objective, the Company focuses not only on generating attractive unit level
economics, but also on the economic returns of a particular target market. The
Company believes that bakery restaurants can be opened for an initial
investment, including leasehold improvements, furniture, fixtures, equipment,
initial working capital and pre-opening expenses, excluding real estate, of
approximately $275,000, with satellite restaurants requiring approximately
$175,000. By averaging these initial investment amounts within markets, the
Company believes it achieves attractive returns on investment.

MAINTAIN BALANCED RESTAURANT DEVELOPMENT. The Company intends to expand
through a balanced development of Company-owned and franchised New York Bagel
restaurants. While Company-owned restaurants generally provide the Company with
greater revenues and profits than franchised restaurants, franchising allows the
Company to accelerate its expansion and name recognition with less investment of
the Company's capital or human resources.

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MAKE SELECTIVE ACQUISITIONS. During 1996, the Company acquired eight bagel
restaurants, including seven Lots A' Bagels restaurants from an unaffiliated
restaurant chain in Colorado Springs, Colorado, a new market, and a franchised
restaurants in Santa Fe, New Mexico. The Company intends to pursue other
acquisitions of local and regional bagel operations with an established market
presence.

ACQUISITION

On December 6, 1996 the Company acquired substantially all of the operating
assets, business operations and facilities (the "Acquisition") of Lots A'
Bagels, Inc. ("Lots A' Bagels"), including seven restaurants and a bagel
commissary located in Colorado Springs and Monument, Colorado for $2.1 million
in cash and the assumption of certain liabilities of Lots A' Bagels.
Additionally, certain contingent consideration may be required as discussed
below. In connection with the Acquisition, Lots A' Bagels and its shareholders,
Mr. Stephen K. Goldstone and Mrs. Linda F. Goldstone, executed noncompete
agreements in favor of the Company.

Pursuant to the Asset Purchase Agreement (the "Agreement"), the Company
acquired from Lots A' Bagels seven leased restaurants, a leased bagel commissary
and substantially all of Lots A' Bagels' inventory, property, operating
equipment, intellectual property and certain other assets. Lots A' Bagels
restaurants are similar in design to New York Bagel restaurants and offer
similar products. However, fresh baked products are supplied daily to Lots A'
Bagels restaurants from the bagel commissary. In connection with the
Acquisition, all lease agreements for the restaurants were assigned to and
assumed by the Company. The Company intends to operate the restaurants in
substantially the same manner as they were operated by Lots A' Bagels. The
intellectual property acquired from Lots A' Bagels consists principally of the
trademarks and logos of Lots A' Bagels.

The Agreement also provides for contingent consideration which includes a
$563,000 promissory note from the Company. The principal amount and accrued
interest payable under such promissory note are subject to offset (up to the
full amount of such principal and interest) for (i) certain adjustments to be
made upon the completion of a final statement of operations for the period from
July 1, 1996 through March 30, 1997 (the "Final Statement of Operations") and
(ii) any amounts required to be paid by Lots A' Bagels pursuant to the
indemnification provisions of the Agreement. In addition, depending upon
adjustments which may result from the Final Statement of Operations, the Company
may be required to pay up to an additional $325,000 in cash and issue to Lots A'
Bagels a promissory note in the amount, if any, by which the Final Statement of
Operations adjustment exceeds $325,000. In addition, the Company issued a
warrant to purchase common stock entitling Lots A' Bagels to purchase a to be
determined number of shares of the Company's Common Stock equal to the total
amount of debt issued to Lots A' Bagels times 60% divided by the exercise price
which is the average final "close" price per share of the Company's Common Stock
for the ten trading days ending three trading days prior to December 6, 1996.

The Company's source of the cash portion of the purchase price was a portion
of the net proceeds from the Company's initial public offering of Common Stock
completed in August 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

RESTAURANT DESIGN AND SITE SELECTION

The Company's prototypical restaurant is decorated in rich colors and dark
woods and contains a mixture of booth, table and barstool seating and, where
available, outdoor seating. Exposed ceilings with drop lighting and a
combination of tile and carpeted flooring are used to enhance its comfortable
ambiance. Walls are covered with black and white photographs depicting classic
New York scenes. The Company's restaurants are configured to facilitate a smooth
flow of dine-in and carry-out traffic while retaining a casual, cafe atmosphere.
Bagels and other baked products are displayed prominently behind a glass counter
while other items such as salads, packaged cream cheese for take-out and
specialty sodas and drinks are located in an open, self-serve refrigerated area
next to the cash register. Restaurant staff prepare sandwich and other menu
items behind the counter for dine-in and take-out customers. Dine-in customers'
food is delivered directly to the table. The restaurants serve cappuccino and
espresso, and a

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fountain drink and gourmet coffee station are placed in the dining area for
customer convenience. Retail merchandise, including logo clothing, coffee mugs
and gift items, are displayed throughout the restaurant.

The Company believes that the layout and design of each restaurant
contributes to the success of its operations. The Company continually reviews
the restaurant design package for its restaurants and remodels as required.
Pursuant to the franchise agreement, franchised restaurants' decor must be
updated every five years or upon renewal of each particular franchise agreement.
Remodeling typically requires closing the restaurant for one to four weeks.
Although restaurants may vary in size, layout and design are generally
consistent.

The Company considers the location of a restaurant to be important, and,
therefore, devotes significant resources to the investigation and evaluation of
potential sites. The site selection process focuses on area demographics,
including population density, traffic patterns, income levels and competitive
factors. The Company generally targets locations that possess a population
density of at least 50,000 residents within a three mile radius and are situated
on the morning side of commuter traffic. The Company's restaurants are typically
located in strip shopping centers or free-standing buildings that provide
visibility, curb appeal and accessibility. Certain limited hour satellite
restaurants are located in office buildings and are open during business hours
Monday through Friday. The Company's restaurant design may be configured to fit
a wide variety of building shapes and sizes, thereby increasing the number of
suitable sites for new locations.

UNIT ECONOMICS

In targeted markets, the Company employs a multiple store strategy involving
a bakery restaurant which produces bagels for itself and one or more nearby
satellite restaurants. The Company's approach to opening new restaurants has
been to minimize its required investment by leasing substantially all of its
locations. The Company believes that bakery restaurants can be opened for an
initial investment, including leasehold improvements, furniture, fixtures,
equipment, initial working capital and pre-opening expenses, excluding real
estate, of approximately $275,000, with satellite restaurants requiring
approximately $175,000. By averaging these initial investment amounts within a
particular market, the Company believes it achieves attractive returns on
investment within markets.

PLANNED EXPANSION

The Company intends to expand through the balanced development of
Company-owned and franchised restaurants. Since January 1, 1997, the Company has
opened or acquired three Company-owned restaurants and plans to open 11 to 14
additional Company-owned restaurants during the remainder of 1997 and
approximately 20 to 25 in 1998. Since January 1, 1997, franchisees have opened
two franchised restaurants and the Company, as of March 1, 1997, has 19
franchisees operating 32 restaurants in 12 states. The Company considers
franchisees to be an integral component of its continued growth. The Company
expects franchisees to open an additional 10 to 12 restaurants during the
remainder of 1997 and approximately 15 to 20 franchised restaurants during 1998,
although there can be no assurance that all of these restaurants will be opened.

OPERATIONS

RESTAURANT PERSONNEL. A typical New York Bagel restaurant employs a
restaurant manager, an assistant manager and approximately 25 to 30 hourly
employees for a bakery restaurant and 15 to 20 hourly employees for a satellite
restaurant, most of whom work part-time. The restaurant manager is responsible
for the day-to-day operation of the restaurant and for compliance with
Company-established operating standards. The Company also employs eight area
managers, each of whom has responsibility for overseeing three to seven
Company-owned restaurants. The Company seeks to hire experienced restaurant
managers and staff, and to motivate and retain them by providing opportunities
for advancement and performance-based, financial incentives. Training and
compensation programs are intended to instill restaurant managers and area
managers with a sense of ownership in their restaurants. The Company believes
the issuance

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of stock awards under the New York Bagel Enterprises, Inc. 1996 Incentive Plan
and the restaurant management bonus program will enhance its ability to attract
and retain restaurant and area managers. To date, the Company has experienced a
low managerial turnover rate which it believes results in decreased training
costs and higher productivity.

REPORTING. The Company's restaurant managers prepare daily and weekly
reports of sales, cash deposits and operating costs. Physical inventories of all
food and beverage items are taken biweekly. The Company conducts monthly
meetings with area managers to discuss restaurant sales, profitability and
operations, personnel needs and product quality.

HOURS OF OPERATIONS. The restaurants are generally open Monday through
Saturday from 6:30 a.m. to 8:00 p.m. and on Sunday from 8:00 a.m. to 5:00 p.m.
Management believes that Company-owned restaurants typically generate
approximately 40% of their sales before 11:00 a.m. Although the majority of
restaurants are open seven days a week, certain satellite restaurants are
located in downtown business districts and are open during business hours Monday
through Friday.

TRAINING

The Company believes that comprehensive training is essential to the
efficiency and consistency of its restaurants. Accordingly, the Company conducts
an extensive 90-day training program for its restaurant managers and franchisees
that is composed of approximately ten days of classroom instruction on
administration, record keeping and inventory control and approximately 80 days
of on-site instruction on baking and food preparation at the Company's training
facility in Oklahoma City, Oklahoma. The Company has a team of three employees
dedicated to training and new restaurant openings, including a full-time
coordinator. In addition, the team provides on-site assistance during the
initial ten days of operation at each Company-owned restaurant and at a
franchisee's initial franchised restaurant. Management believes that its
emphasis on training currently exceeds that of many of its competitors.

PURCHASING AND DISTRIBUTION

The Company establishes quality standards and specifications for food
products and equipment used in New York Bagel restaurants and designates primary
and secondary suppliers for all food items and restaurant supplies. In order to
ensure product quality and consistency, franchisees purchase certain products
from the Company's approved distributors. To obtain competitive prices, the
Company contracts centrally for certain food products and supplies and
negotiates volume discounts for the benefit of Company-owned and franchised
restaurants. Most Company-owned and franchised restaurants purchase the majority
of their food and non-food items from one nationally recognized distributor. The
Company believes that the loss of this distributor would not materially affect
the Company's results of operations.

MARKETING AND ADVERTISING

The Company and its franchisees advertise through newspapers, direct mail
and radio. All advertising materials must be produced or pre-approved by the
Company. The Company provides restaurants with pre-opening, grand opening and
ongoing advertising and in-store promotional materials. In April 1996, the
Company and its franchisees commenced payments of 0.5% of gross sales to the
Company's advertising fund. The advertising fund is governed by a six-member
board comprised of three Company representatives and three franchisee
representatives who oversee the development of advertising materials. Prior to
April 1996, the Company funded the development of advertising materials and
furnished such materials to all restaurants for their use. Franchisees maintain
sole discretion over the placement of advertisements in their market.

FRANCHISE PROGRAM

The Company commenced franchising its restaurant concept in 1993 and, as of
March 1, 1997, has 19 franchisees operating 32 New York Bagel restaurants in
twelve states. The Company expects that 42 to 44

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franchised restaurants will be open by the end of 1997 and 57 to 64 by the end
of 1998. However, there can be no assurance that all of these restaurants will
be open or that the development schedule set forth in each development agreement
will be achieved. During April 1996, a franchisee in the Houston, Texas market
closed two restaurants. The Company anticipates refranchising the Houston, Texas
market in the future. During July 1996, the Company agreed to purchase certain
restaurant operating equipment of its existing Kansas City area franchisee and a
franchisee in the Dallas, Texas market closed one restaurant. The Company
anticipates refranchising the Kansas City market in the future. During February
1997, a franchisee in the Dallas, Texas market closed one restaurant.

The Company primarily seeks franchisees that have restaurant experience and
that will enter into development agreements for multiple restaurants.
Franchisees are approved on the basis of operational experience and financial
resources. If the franchisee is not an owner-operator, the Company encourages
the franchisee to provide the full-time operator an equity interest in the
franchise operation.

DEVELOPMENT AGREEMENT. The Company enters into a development agreement with
each franchisee (a "Development Agreement") for the exclusive development of a
predetermined number of New York Bagel restaurants within a designated market
area (the "Area of Exclusivity"). The Area of Exclusivity is negotiated prior to
the signing of a Development Agreement and varies by agreement as to size,
number of New York Bagel restaurants required and the schedule for restaurant
development and opening. A Development Agreement generally requires a franchisee
to develop the first restaurant within 12 months of signing the Development
Agreement and the second restaurant within 18 months. Subsequent restaurants are
generally required to be opened in six-month intervals thereafter. Development
schedules vary based upon the size of the territory and the number of
restaurants to be developed. Development Agreements contain cross-default
provisions, and failure to develop the restaurants on schedule may result in a
loss of exclusivity within the Area of Exclusivity. Under the Company's
Development Agreement, the franchisee is required to pay, at the time of
signing, a non-refundable fee equal to one-third of the initial franchise fee
per restaurant covered by the Development Agreement. The amount is credited
against the Company's standard franchisee fee, the remainder of which is payable
to the Company upon signing the franchise agreement for a specific location.

FRANCHISE AGREEMENT. After signing a Development Agreement, the Company
enters into a franchise agreement (a "Franchise Agreement") generally when a
franchisee secures a location. The Franchise Agreement provides for a term of
ten years with one ten-year renewal option and contains cross-default
provisions. The Company has the right to terminate any Franchise Agreement under
certain specified circumstances, including a franchisee's failure to make
payments when due or failure to adhere to the Company's standards or procedures.
Many state franchise laws limit the ability of a franchisor to terminate or
refuse to renew a franchise. The current Franchise Agreement contains a right of
first refusal for the Company to purchase an interest in the franchise and the
franchisee. The current Franchise Agreement provides for an initial franchise
fee of $21,000 for each bakery restaurant and $12,000 for each satellite
restaurant. During 1995, the initial franchise fees for a bakery restaurant and
a satellite restaurant were $18,000 and $9,000, respectively. Under the current
Franchise Agreement, the franchisee pays the Company a monthly royalty fee of 4%
of gross sales. Upon renewal of the Franchise Agreement, the monthly royalty fee
cannot be increased to an amount greater than the monthly royalty fee then in
effect for new franchisees. See "Business--Government Regulation."

SERVICES. The Company assists each franchisee in the site selection and
development of restaurants and provides the physical specifications and plans
for each franchised location. Each franchisee is responsible for recommending
the location for its restaurants, but must obtain Company approval of each
restaurant design and each location based on Company requirements. Company
personnel also visit each site in connection with the site approval process. The
Company provides standard design plans and equipment layout and specifications
for most franchisees. In addition, Company personnel provide telephone support
with respect to operations issues, as well as ongoing assistance with
advertising and promotion.

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QUALITY CONTROL. All franchisees are required to operate their New York
Bagel restaurants in compliance with the Company's policies, standards and
specifications, including matters such as menu items, ingredients, materials,
supplies, fixtures, furnishings, decor and signage. Each franchisee has full
discretion, however, to determine the prices to charge its customers. The
Company collects sales and other operating information from its franchisees on a
monthly, quarterly and annual basis. The Company monitors each franchisee's
operations and product quality through review of monthly paperwork, review of
quarterly financial statements and quarterly field visits. These overview
mechanisms allow the Company to quickly identify potential problems and provide
operational, marketing or accounting assistance.

FRANCHISE TRAINING AND SUPPORT. Each franchisee is required to have a
restaurant manager, approved by the Company, who satisfactorily completes the
Company's training program and who devotes his or her full business time and
efforts to the operation of the franchisee's restaurant. In addition to this
program, the Company also provides an on-site training crew for ten days during
the opening of the franchisee's initial restaurant and ongoing supervision
thereafter. Multi-unit franchisees are encouraged to hire a full-time training
coordinator to train new employees for their restaurants. The Company regularly
communicates with its franchisees, and encourages active communication among its
franchisees, through franchise newsletters, special bulletins and periodic
meetings.

GOVERNMENT REGULATION

The Company is subject to various federal, state and local laws affecting
its business. Each of the Company's restaurants is subject to licensing and
regulation by a number of governmental authorities, which include health,
safety, sanitation, building and fire agencies in the state or municipality in
which the restaurant is located. Difficulties in obtaining or failures to obtain
required licenses or approvals could delay or prevent the opening of a new
restaurant in a particular area.

The Company is subject to Federal Trade Commission ("FTC") regulation and
various state laws which regulate the offer and sale of franchises. Several
state laws also regulate substantive aspects of the franchisor-franchisee
relationship. The FTC requires the Company to furnish to prospective franchisees
a franchise offering circular containing prescribed information. The Company is
currently required to register as a franchisor in three states. A number of
states in which the Company may consider franchising also regulate the sale of
franchises and require registration of the franchise offering circular with
state authorities. Substantive state laws that regulate the
franchisor-franchisee relationship presently exist in many states, and bills
have been introduced in Congress from time-to-time which would provide for
Federal registration of the franchisor-franchisee relationship in certain
respects. The state laws often limit, among other things, the duration and scope
of non-competition provisions and the ability of a franchisor to terminate or
refuse to renew a franchise.

The Company's operations are also subject to federal and state laws
governing such matters as wages, working conditions, citizenship requirements
and overtime. The Company is also subject to the Americans with Disabilities Act
of 1990, which, among other things, could require certain renovations to its
restaurants to meet federal mandates. If such renovations are required, the
Company believes the cost thereof will not materially affect the Company's
results of operations. The Company believes it is in substantial compliance with
all material laws.

COMPETITION

The quick-service restaurant industry is intensely competitive and generally
characterized by low barriers to entry. There are a growing number of
significant national, regional and local bagel restaurant chains, operating both
owned and franchised bagel restaurants including Einstein/Noah Bagel Corp.,
Quality Dining, Inc. (Brueggers Bagel Bakery), Manhattan Bagel Company, Inc. and
BAB Holdings, Inc., many of which have greater financial resources than the
Company. New York Bagel restaurants also compete with other well established
quick-service restaurants that have greater product and name recognition, larger
financial and other resources than the Company and longer operating histories,
as well

9
<PAGE>
as numerous local food establishments, supermarkets and convenience stores that
offer similar products. The Company believes that New York Bagel restaurants
compete favorably in terms of taste, food quality, portions, service,
convenience and value, which the Company believes are important factors to its
targeted customers.

The Company competes for qualified franchisees with a wide variety of
investment opportunities both in the restaurant business and in other
industries. The Company's continued success is dependent to a substantial extent
on its reputation for providing high quality and value with respect to its
service, products and franchises, and this reputation may be affected not only
by the performance of Company-owned restaurants, but also by the performance of
its franchised restaurants over which the Company has limited operational
control.

TRADEMARKS AND SERVICE MARKS

The Company operates and franchises bagel restaurants under the names "New
York Bagel Shop & Delicatessen," "New York Bagel Shop & Deli," "NY Bagel Cafe,"
"New York Bagel Cafe & Deli," "NYB New York Bagel" and "the New York Bagel
Shop." The Company's trademark "New York Bagel Shop & Delicatessen" and service
mark "Like Bread With An Attitude" are registered under applicable federal
trademark law. Under federal trademark law, the Company is required to renew
these marks every 20 years. The Company's trademark "Lots A' Bagels, Inc." is
registered in the State of Colorado. The Company claims common-law rights to the
marks "New York Bagel Shop & Delicatessen," "NYB," "The City's Best Bagel," and
"Where Yeast Meets West," but there have been no judicial determinations of the
existence, validity, or extent of the Company's rights. Certain of the marks are
licensed by the Company to franchisees pursuant to franchise agreements.

The Company is aware of the use by other persons and entities in certain
geographic areas of names and marks which are the same or similar to the
Company's marks. Some of these persons or entities may have prior rights to
those names or marks in their respective localities. Therefore, there is no
assurance that the "New York Bagel Shop & Delicatessen" mark or any other marks
are available in all locations.

EMPLOYEES

As of March 1, 1997, the Company employed 523 persons, 390 of which are
employed part-time. None of the Company's employees is subject to any collective
bargaining agreements, and management considers its relations with its employees
to be good.

ITEM 2. PROPERTIES

The average bakery restaurant contains approximately 2,750 square feet, and
the average satellite restaurant contains approximately 2,000 square feet.
Approximately 1,200 square feet of a bakery restaurant is used for dough
production, baking and food preparation while approximately 500 square feet of a
satellite restaurant is used for food preparation. The Lots A' Bagel restaurants
are approximately 2,000 square feet, 500 square feet of which is used for food
preparation. The restaurants have an average seating capacity of approximately
60 persons. The Company leases approximately 1,200 to 4,000 square feet of space
for 34 of its Company-owned restaurant sites. The Company also leases a 19,479
square foot bagel commissary located at 4325 Northpark Drive, Colorado Springs,
Colorado 80915 that provides all of the dough production, baking and food
preparation for the seven Lots A' Bagels restaurants. Such lease expires during
June 2004. The Company also owns two restaurant sites. As of March 1, 1997, the
Company has entered into agreements to purchase land for development of three
restaurants and leases for four restaurants under development. Although the
terms of its leases for Company-owned restaurants vary, the Company typically
seeks to obtain an initial five-year term lease with two or three five-year
option terms. The following table sets forth certain information as of March 1,
1997 with respect to Company-owned and franchised restaurants currently in
operation or under development. Restaurants under development include locations
for which leases have been signed, a real estate purchase agreement has been
executed, or construction has commenced, but are not currently in operation.

10
<PAGE>
COMPANY-OWNED RESTAURANTS

<TABLE>
<CAPTION>
DATE TYPE OF
LOCATION OPENED/ACQUIRED RESTAURANT
- -------------------------------- ---------------------- -----------
<S> <C> <C> <C>
NEW YORK BAGEL RESTAURANTS
Stillwater, OK Elm Street January 1986 Bakery
Stillwater, OK Downtown August 1986 Satellite
Oklahoma City, OK Casady Square August 1988 Bakery
Oklahoma City, OK Leadership Square October 1989 Satellite
Tulsa, OK Yale and 71st Street January 1990 Bakery
Edmond, OK Broadway Extension September 1991 Satellite
Wichita, KS East Central Avenue July 1992 Bakery
Wichita, KS Downtown April 1993 Satellite
Oklahoma City, OK Brixton Square July 1993 Satellite
Tulsa, OK Cherry Street January 1994 Satellite
Norman, OK Lindsey Avenue August 1994 Bakery
Norman, OK Campus September 1994 Satellite
Tulsa, OK Peoria Avenue September 1995 Bakery
Nashville, TN West End Avenue December 1995 Bakery
Wichita, KS Rock Road December 1995 Satellite
Nashville, TN Hillsboro Village March 1996 Satellite
Tulsa, OK Downtown March 1996 Satellite
Waco, TX West Waco Drive April 1996 Bakery
Nashville, TN White Bridge Road April 1996 Satellite
Nashville, TN L&C Tower June 1996 Satellite
Springfield, MO Campbell Avenue August 1996 Bakery
Stillwater, OK Perkins Road September 1996 Satellite
Santa Fe, NM St. Michaels Boulevard September 1996 Bakery
Lubbock, TX Quaker Avenue November 1996 Bakery
Tulsa, OK 51st Street December 1996 Satellite
Oklahoma City, OK Walnut Square December 1996 Bakery
Waco, TX South 5th Street February 1997 Satellite
Austin, TX Research Boulevard February 1997 Bakery
Austin, TX Research Boulevard February 1997 Satellite
Santa Fe, NM Montezuma Street Under Development Satellite
Midland, TX Desta Drive Under Development Bakery
Louisville, KY Shelbyville Road Under Development Bakery
Temple, TX General Bruce Drive Under Development Bakery
Wichita, KS 21st Street and Tyler Road Under Development Satellite
Wichita, KS 21st Street and Rock Road Under Development Satellite
Springfield, MO Sunshine Avenue Under Development Satellite

LOTS A' BAGELS RESTAURANTS
Colorado Springs, CO East Cheyenne Mountain Blvd. December 1996 Satellite
Colorado Springs, CO North Academy December 1996 Satellite
Colorado Springs, CO West Colorado Avenue December 1996 Satellite
Colorado Springs, CO Austin Bluff Parkway December 1996 Satellite
Colorado Springs, CO Centennial Boulevard December 1996 Satellite
Colorado Springs, CO North Academy December 1996 Satellite
Monument, CO Highway 105 December 1996 Satellite
</TABLE>

11
<PAGE>
FRANCHISED RESTAURANTS

<TABLE>
<CAPTION>
DATE TYPE OF
LOCATION OPENED/ACQUIRED RESTAURANT
- -------------------------------- ---------------------- -----------
<S> <C> <C> <C>
Omaha, NE South 106th December 1993 Bakery
Knoxville, TN Kingston Pike March 1994 Bakery
Dallas, TX Lemmon Avenue July 1994 Bakery
Little Rock, AR Markham Avenue November 1994 Bakery
Tucson, AZ East Broadway February 1995 Bakery
Omaha, NE Farnam Street February 1995 Satellite
Littleton, CO West Bowles Avenue April 1995 Bakery
Plano, TX Legacy Drive April 1995 Bakery
Amarillo, TX Soncy Road June 1995 Bakery
Knoxville, TN Gay Street July 1995 Satellite
Longview, WA Ocean Beach Highway July 1995 Bakery
Columbia, SC Harden Street September 1995 Bakery
Tampa, FL North Dale Mabry Highway September 1995 Bakery
Bismarck, ND East Bismark Expressway October 1995 Bakery
San Antonio, TX Embassy Oaks November 1995 Bakery
Amarillo, TX West Georgia Street December 1995 Satellite
Omaha, NE Pacific Street January 1996 Satellite
Irving, TX North MacArthur Boulevard March 1996 Satellite
New Orleans, LA Veteran's Boulevard March 1996 Bakery
Tucson, AZ North Oracle Avenue March 1996 Satellite
San Antonio, TX Broadway Avenue May 1996 Satellite
Englewood, CO Holly Street June 1996 Bakery
Birmingham, AL 20th Street South June 1996 Bakery
Aurora, CO East Mississippi Street July 1996 Satellite
Little Rock, AR Center Street August 1996 Satellite
Littleton, CO Wadsworth Avenue September 1996 Satellite
Lincoln, NE 13th Street September 1996 Satellite
El Paso, TX North Mesa Avenue October 1996 Bakery
Columbia, SC Palmetto Plaza October 1996 Satellite
Little Rock, AR Fairway Avenue December 1996 Satellite
Springdale, AR West Sunset February 1997 Bakery
Tyler, TX Loop 323 February 1997 Bakery
Fayetteville, AR Mission Boulevard Under Development Satellite
San Carlos, CA Redwood Shores Parkway Under Development Bakery
</TABLE>

The Company's principal executive offices are located at 300 I.M.A. Plaza,
250 North Water Street, Wichita, Kansas 67202-1213, where the Company subleases
approximately 2,158 square feet of office space pursuant to a sublease agreement
with Murfin Drilling Company, Inc., a wholly owned subsidiary of Murfin, Inc.,
on a month to month basis. The Company has the option to terminate such sublease
upon 30 days' notice. Mr. David L. Murfin, a Director of the Company, is a 7.1%
stockholder of Murfin, Inc. The Company believes that alternative office space
is available at comparable rates from third parties. The Company's operational
offices are located at 115 East 8th, Stillwater, Oklahoma 74074, where the
Company leases approximately 2,200 square feet of office space, 600 square feet
of which the Company subleases to an unaffiliated third party on a monthly
basis, and 1,000 square feet of storage space pursuant to a lease agreement that
expires during December 1999. The Company conducts its management and franchisee
training at its Casady Square, Oklahoma City, Oklahoma facility in an
approximately 3,400 square foot space contiguous to the restaurant. Such
facility is subject to a lease that expires during July 2003. The Company
believes that its current executive offices and training facilities are adequate
for the near future and does not anticipate the need for significant expansion
of these facilities in the foreseeable future.

12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS

The Company is involved from time-to-time in various legal proceedings and
claims incident to the normal conduct of its business. The Company believes that
such legal proceedings and claims, individually and in the aggregate, are not
likely to have a material adverse effect on its financial condition or results
of operations.

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

None.

RISK FACTORS

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS FORM 10-K ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY,
INCLUDING, WITHOUT LIMITATION, RISKS ASSOCIATED WITH THE COMPANY'S ABILITY TO
SUCCESSFULLY AND TIMELY INTEGRATE CERTAIN ACQUISITIONS, INCLUDING THE LOTS A'
BAGELS RESTAURANTS AND BAGEL COMMISSARY, THE COMPANY'S ABILITY TO DEVELOP,
CONSTRUCT, ACQUIRE OR FRANCHISE ADDITIONAL RESTAURANTS IN ACCORDANCE WITH THE
COMPANY'S DEVELOPMENT SCHEDULE, MANAGEMENT OF QUARTER TO QUARTER EARNINGS AND
INCREASES IN OPERATING COSTS. CERTAIN OF THESE RISKS ARE SET FORTH HEREIN.
UPDATED INFORMATION WILL BE PERIODICALLY PROVIDED BY THE COMPANY AS REQUIRED BY
THE SECURITIES EXCHANGE ACT OF 1934.

EXPANSION. As of March 1, 1997, there were 68 restaurants in operation,
consisting of 29 New York Bagel Company-owned and 32 franchised restaurants and
seven Lots A' Bagels restaurants. In addition, there were seven Company-owned
restaurants and two franchised restaurants in various stages of development. By
the end of 1997, the Company contemplates having approximately 47 to 50
Company-owned and 42 to 44 franchised restaurants in operation. The Company
expects to have approximately 67 to 75 Company-owned and 57 to 64 franchised
restaurants in operation by the end of 1998. The Company has used and intends to
continue to use a significant portion of the net proceeds of its initial public
offering to develop additional Company-owned restaurants. There can be no
assurance that the Company will be able to open all of its planned restaurants
or that, if opened, such restaurants can operate profitably. The opening and
success of New York Bagel restaurants will depend on various factors, not all of
which are within the control of the Company, including customer acceptance of
the Company's concept in new markets, the availability of suitable sites, the
negotiation of acceptable lease or purchase terms for new locations, permit and
regulatory compliance, the ability to meet construction schedules, the financial
and other capabilities of the Company and its franchisees, the ability of the
Company to successfully manage this anticipated expansion and to hire and train
personnel, and general economic and business conditions. Furthermore, because of
the Company's relatively small restaurant base, an unsuccessful restaurant could
have a more significant adverse effect on the Company's results of operations
than would be the case for a company with a larger restaurant base.

The Company's expansion will also require the implementation and integration
of enhanced operational and financial systems and additional management,
operational and financial resources. Failure to implement and integrate these
systems and add these resources could have a material adverse effect on the
Company's results of operations and financial condition. There can be no
assurance that the Company will be able to manage its expanding operations
effectively or that it will be able to maintain or accelerate its growth. The
Company experienced growth in revenues and net income in 1996. There can be no
assurance that the Company will continue to experience growth in, or maintain
its present level of, revenues or net earnings. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business--Expansion Strategy."

DEPENDENCE ON FRANCHISEES. The Company realizes a portion of its revenues
from initial franchise fees and continuing royalty payments from its
franchisees. If the Company's franchisees encounter business or operational
difficulties, the Company's revenues from royalties will be adversely affected.
Such

13
<PAGE>
difficulties may also negatively impact the Company's ability to sell new
franchises. Consequently, the Company's financial prospects are significantly
related to the success of its franchised restaurants, over which the Company has
limited direct operational control. There can be no assurance that the Company
will be able to successfully attract new franchisees or that the Company's
franchisees will be able to successfully operate existing or develop and operate
additional New York Bagel restaurants. See "Business--Expansion Strategy" and
"Business--Franchise Program."

COMPETITION. The quick-service restaurant industry is intensely competitive
and characterized by relatively low barriers to entry. New York Bagel
restaurants compete against many well established, quick-service restaurants,
local food establishments, supermarkets and convenience stores, many of which
have greater product and name recognition and larger financial and other
resources than the Company. An increase in the number of competitors,
particularly bagel restaurants or delicatessens, in the Company's territories
could have an adverse impact on the Company's results of operations and
expansion plans. See "Business--Competition."

RESTAURANT INDUSTRY. The Company and the restaurant industry are
significantly affected by factors such as changes in local, regional or national
economic conditions, changes in consumer tastes and concerns about the
nutritional quality of quick-service foods. Multi-unit food service chains such
as the Company can also be substantially adversely affected by publicity
resulting from food quality, illness, injury or other health concerns or
operating issues stemming from one restaurant or a limited number of
restaurants. In addition, factors such as increases in food, labor and energy
costs, the availability and cost of suitable restaurant sites, fluctuating
insurance rates, state and local regulations and the availability of an adequate
number of hourly-paid employees can also adversely affect the restaurant
industry.

DEPENDENCE ON KEY PERSONNEL. The Company's future success will be highly
dependent on the continued efforts of senior management. The Company does not
have employment agreements with any of its senior management. The loss of the
services of one or more of such key personnel could have a material adverse
effect upon the Company's results of operations. The Company's success is also
dependent upon its ability to attract and retain skilled restaurant managers and
employees and the ability of its key personnel to manage the Company's growth
and integrate its operations. There can be no assurance that the Company will be
successful in attracting and retaining such personnel.

INCREASES IN OPERATING COSTS; INTERRUPTIONS IN SUPPLIES. An increase in
operating costs could adversely affect the profitability of the Company. Factors
such as inflation, increased food and labor costs, including the additional
increase in the minimum hourly wage requirement, and employee benefit costs and
the availability of qualified management and other personnel may adversely
affect the profitability of the Company. The cost and availability of many
restaurant commodities are subject to fluctuations due to seasonality, weather,
demand and other factors. The Company's restaurants are dependent on frequent
deliveries of food supplies and any shortages or interruptions could have a
material adverse effect on the Company. See "Business--Purchasing and
Distribution."

GEOGRAPHIC CONCENTRATION. All but two of the Company-owned restaurants are
located in Oklahoma, Kansas, Tennessee, Texas and Colorado. As a result, the
Company's results of operations may be materially affected by adverse business,
economic or weather conditions in these states. Although the Company plans to
open additional restaurants in new geographic areas, there can be no assurance
that the current geographic concentration of the Company's business will not
have an adverse effect on its results of operations or financial condition in
the future.

POSSIBLE ACQUISITIONS. The Company's growth strategy includes possible
acquisitions of bagel restaurants. However, no assurance can be given that the
Company will be able to find attractive acquisition candidates, consummate
additional acquisitions or that it will successfully integrate, convert or
operate any acquired business. In the event that the Company makes acquisitions,
there can be no assurance that any such acquisition and resulting conversion
expenses, including loss of restaurant sales during the remodel

14
<PAGE>
period, will not have a material adverse effect upon the Company's operating
results, particularly during the period in which such operations are being
integrated into the Company. Furthermore, the Company's ability to make
acquisitions may depend upon its ability to obtain financing. There can be no
assurance that the Company will be able to obtain financing on acceptable terms.
See "Business--Expansion Strategy."

FLUCTUATIONS IN QUARTERLY RESULTS. The timing of restaurant openings,
remodelings or acquisitions, recognition of franchise fee income and seasonal
factors may result in fluctuations in quarterly operating results of the
Company. In accordance with generally accepted accounting principles, franchise
and development fees and the corresponding deferred charges with respect to each
franchise or development agreement are not recognized as income or expense until
a restaurant commences operations. There can be no assurance that quarterly
fluctuations will not continue and, accordingly, the Company's financial results
for a particular quarter may not be indicative of results for an entire year.

CONTROL OF COMPANY. As of March 1, 1997 the directors and officers of the
Company beneficially owned approximately 44.3% of the outstanding Common Stock
of the Company. In addition, the stockholders that existed prior to the
Company's initial public offering and the Company are parties to a certain
stockholders' agreement (the "Stockholders' Agreement"), which, among other
things, sets forth certain agreements regarding the designation and election of
directors of the Company. As of March 1, 1997 these stockholders owned
approximately 55.6% of the outstanding Common Stock. Due to their ownership
position and the Stockholders' Agreement, such stockholders will retain the
power to direct the Company's business and affairs through their ability to
control the outcome of elections of the Company's Board of Directors and to take
other actions that require the vote or approval of the stockholders of the
Company.

GOVERNMENT REGULATION. The Company is subject to numerous federal, state
and local government regulations, including those relating to the preparation
and sale of food, the sale of alcoholic beverages, public health and building
and zoning requirements. Also, the Company and its franchisees are subject to
laws governing their relationship with employees, including minimum wage
requirements, overtime, working conditions and citizenship requirements. The
Company is also subject to federal regulation and certain state laws which
govern the offer and sale of franchises. Many state franchise laws impose
substantive requirements on franchise agreements, including limitations on
non-competition provisions and termination or non-renewal of a franchise. Some
states require that certain franchise offering materials be registered before
franchises can be offered or sold in that state. The failure to obtain or retain
food licenses, alcoholic beverage licenses or approvals to sell franchises could
adversely affect the Company's and its franchisees' results of operations. The
future enactment, adoption or amendment of laws or regulations, such as
establishing basic franchisee rights, increasing the minimum wage or other costs
associated with employees, could adversely affect the Company's results of
operations. See "Business--Franchise Program" and "Business--Government
Regulation."

TRADEMARKS AND SERVICE MARKS. The Company is aware of the use by other
persons and entities in certain geographic areas of names and marks that are the
same as or similar to the Company's marks. Some of these persons or entities may
have prior rights to those names or marks in their respective localities.
Negative publicity surrounding such businesses may adversely affect the
Company's operations in those markets. In addition, the Company's marks contain
common descriptive words and thus may be subject to challenge by users of these
words, alone or in combination with other words, which describe other services
or products. Accordingly, there is no assurance that the Company's marks will be
available in all locations or that a challenge to the Company's use of such
marks will not result in adverse consequences, including a judgment that would
entail damages and/or the discontinuation of the Company's use of its marks. It
is the Company's policy to utilize other compatible marks in areas where there
are preexisting competing marks. See "Business--Trademarks and Service Marks."

15
<PAGE>
CLASSIFIED BOARD OF DIRECTORS. The Company's Restated and Amended Articles
of Incorporation and Restated and Amended Bylaws provide for a classified Board
of Directors. The terms of each class expire in consecutive years so that only
one class is elected in any given year. Such provisions could delay, deter or
prevent a merger, consolidation, tender offer, or other business combination or
change of control involving the Company that some or a majority of the Company's
stockholders might consider to be in their best interests, including offers or
attempted takeovers that might otherwise result in such stockholders receiving a
premium over the market price for the Common Stock.

PREFERRED STOCK. The Company's Restated and Amended Articles of
Incorporation and Restated and Amended Bylaws authorize shares of Preferred
Stock with respect to which the Board of Directors of the Company have the power
to fix the rights, preferences, privileges and restrictions without any further
vote or action by the stockholders. Depending upon the rights of such Preferred
Stock, the issuance of Preferred Stock could have an adverse effect on holders
of Common Stock by delaying or preventing a change in control of the Company,
diluting the voting rights of holders of Common Stock, making removal of the
present management of the Company more difficult or reducing or restricting the
payment of dividends and other distributions to the holders of Common Stock,
including, without limitation, any liquidation preferences which may relate to
such Preferred Stock. Such provisions could delay, deter or prevent a merger,
consolidation, tender offer, or other business combination or change of control
involving the Company that some or a majority of the Company's stockholders
might consider to be in their best interests, including offers or attempted
takeovers that might otherwise result in such stockholders receiving a premium
over the market price for the Common Stock.

SUPERMAJORITY STOCKHOLDER VOTES. The Company's Restated and Amended
Articles of Incorporation and Restated and Amended Bylaws require the
affirmative vote of the holders of at least two-thirds of the outstanding
capital stock in order to remove directors for cause, amend the Bylaws and
approve certain business combinations with respect to a "related person." Such
provisions could delay, deter or prevent a merger, consolidation, tender offer,
or other business combination or change of control involving the Company that
some or a majority of the Company's stockholders might consider to be in their
best interests, including offers or attempted takeovers that might otherwise
result in such stockholders receiving a premium over the market price for the
Common Stock.

ABSENCE OF ACTIVE MARKET; VOLATILITY OF STOCK PRICE. There can be no
assurance that an active market for the Company's Common Stock will exist;
therefore, a purchaser of the Common Stock may not be able to readily liquidate
its investment in the Common Stock. Market prices for the Common Stock may be
influenced by a number of factors, including the Company's operating results and
other factors affecting the Company specifically and the restaurant industry and
the financial markets generally, as well as the liquidity of the market for the
Common Stock. The Company believes that the market price of its Common Stock
reflects expectations that the Company will be able to continue to operate its
restaurants profitably and to develop new restaurants at a significant rate and
operate them profitably. If the Company is unable to operate its restaurants as
profitably and develop restaurants at a pace that reflects the expectations of
the market, investors could sell shares of the Common Stock at or after the time
that it becomes apparent that such expectations may not be realized, resulting
in a decrease in the market price of the Common Stock. In recent years the stock
market has experienced extreme price and volume fluctuations. This volatility
has had a significant effect on the market prices of securities issued by many
companies for reasons unrelated to their operating performance.

SHARES ELIGIBLE FOR FUTURE SALE. Shares of Common Stock outstanding prior
to completion of the Company's initial public offering are "restricted
securities" as that term is defined in Rule 144 ("Rule 144") promulgated under
the Securities Act of 1933, as amended (the "Securities Act"). These "restricted
securities," and any shares purchased by affiliates of the Company in such
offering or thereafter may be publicly sold only if registered under the
Securities Act or if sold in accordance with an available exemption from
registration, such as those provided by Rule 144. No prediction can be made as
to the effect, if any, that future sales of shares, or the availability of
shares for future sales, will have on the

16
<PAGE>
market price of the Common Stock. The sale of substantial amounts of Common
Stock, or the perception that such sales could occur, could adversely affect the
prevailing market price for the Common Stock.

PART II

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

MARKET INFORMATION

The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "NYBS." For the period commencing on August 27, 1996, (the date of the
Company's initial public offering) through December 29, 1996, high and low
closing sale prices for the Common Stock as reported by the Nasdaq National
Market were $11.13 and $5.50, respectively. Prior to the initial public
offering, there was no public market for the Company's Common Stock.

The table sets forth, for the periods indicated, the reported high and low
close sale prices of the Company's Common Stock, as reported on the Nasdaq
National Market:

<TABLE>
<CAPTION>
1996 FISCAL QUARTER HIGH BID LOW BID
- --------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Third Quarter.................................................. $ 11.13 $ 9.00
Fourth Quarter................................................. $ 9.25 $ 5.50
</TABLE>

According to the records of the Company's transfer agent, the Company had
104 holders of record of the Common Stock as of March 1, 1997. The Company
believes that a substantially larger number of beneficial owners hold such
shares in depository or nominee form.

DIVIDENDS AND DISTRIBUTIONS

S CORPORATION DISTRIBUTIONS. From January 1, 1994 until August 25, 1996
(the "Termination Date"), the Company and certain of the Prior Entities were
treated for federal and state income tax purposes as S corporations under
Subchapter S of the Internal Revenue Code of 1986, as amended (the "Code").
During such period, the Company's earnings were taxed for federal and most state
income tax purposes directly to the Company's stockholders, rather than to the
Company. The Company is responsible for the payment of all federal and state
income taxes on earnings subsequent to the Termination Date and continuing
thereafter. See Notes 2 and 8 of the Notes to Consolidated Financial Statements.

Certain Prior Entities paid cash distributions to their stockholders in the
aggregate amounts of approximately $2.5 million during 1995. The distributions
made in 1995 were in excess of the earnings of such Prior Entities and were
partially funded by borrowings of such Prior Entities which were assumed by the
Company in connection with the Reorganization. The Company repaid all of its
bank borrowings with a portion of the net proceeds of its initial public
offering. The Company used a portion of the net proceeds of its initial public
offering to fund a distribution on March 4, 1997 of $156,000 to the stockholders
that existed prior to the Company's initial public offering in connection with
their estimated federal and state income tax obligations attributable to the
Company's 1996 earnings through the Termination Date. Under federal tax laws, if
the Company failed to distribute its undistributed S corporation earnings within
a limited period of time following the Termination Date, a later distribution
could be taxed as a dividend to the stockholders. No S corporation distributions
have been or are anticipated to be made to the stockholders in connection with
the Company's earnings for any period after the Termination Date.

DIVIDEND POLICY. The Company currently intends to retain all earnings to
provide funds for its operations and expansion, and therefore does not
anticipate paying cash dividends or making any other distributions on its shares
of Common Stock in the foreseeable future. The Company's future dividend policy
will be determined by its Board of Directors based on various factors, including
the Company's results of operations, financial condition, business
opportunities, capital requirements, credit restrictions and such other factors
as the Board of Directors may deem relevant.

17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial data for the
Company at the dates and for the periods indicated. The selected consolidated
financial data at December 31, 1994 and 1995 and December 29, 1996 and for each
of the years in the three-year period ended December 31, 1995 and for the
fifty-two weeks ended December 29, 1996 have been derived from the audited
Consolidated Financial Statements of the Company. The selected consolidated
financial data at December 31, 1992 and 1993, and for the year ended December
31, 1992, have been prepared on the same basis as the audited financial
statements, have been derived from the unaudited financial statements of the
Company for such periods and include, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary for the fair
presentation of the financial position and results of operations at and for such
periods. Selected financial data should be read in conjunction with, and is
qualified in its entirety by, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of the Company and the Notes thereto appearing herein.
<TABLE>
<CAPTION>
FIFTY-TWO
YEAR ENDED DECEMBER 31, WEEKS ENDED
-------------------------------------------- DECEMBER 29,
1992 1993 1994 1995(1) 1996(1)(2)
----------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)

<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales from Company-owned restaurants................ $ 2,438 $ 3,539 $ 5,653 $ 6,875 $ 10,865
Franchise revenues.................................. -- 22 169 484 672
----------- --------- --------- --------- ------------
Total revenues.................................... 2,438 3,561 5,822 7,359 11,537
Costs and expenses:
Cost of sales....................................... 1,192 1,527 2,280 2,612 3,750
Restaurant operating expenses....................... 985 1,386 2,326 3,084 5,185
General and administrative expenses................. 203 469 452 838 964
Depreciation and amortization....................... 57 80 117 159 552
----------- --------- --------- --------- ------------
Total costs and expenses.......................... 2,437 3,462 5,175 6,693 10,451
Operating income.................................. 1 99 647 666 1,086
Interest expense, net................................. 18 14 53 40 86
----------- --------- --------- --------- ------------
Earnings (loss) before income taxes............... (17) 85 594 626 1,000
Income tax expense (benefit).......................... (1) 9 (3) 7 270
----------- --------- --------- --------- ------------
Net earnings (loss)............................... $ (16) $ 76 $ 597 $ 619 $ 730
----------- --------- --------- --------- ------------
----------- --------- --------- --------- ------------
Pro forma to reflect income taxes(3):
Net earnings...................................... $ 380 $ 610
Net earnings per share............................ $ 0.13 $ 0.17
Pro forma weighted average shares outstanding(4)...... 3,019 3,565
</TABLE>

18
<PAGE>

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------- DECEMBER 29,
1992 1993 1994 1995 1996
----------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Working capital (deficit)................................ $ (67) $ (171) $ (120) $ (368) $ 5,297
Total assets............................................. 347 819 872 2,295 15,173
Total debt............................................... 230 560 359 3,365 86
Stockholders' equity (deficit)........................... 51 126 159 (1,578) 13,675
</TABLE>

- ------------------------

(1) The Company acquired seven restaurants in December 1996, a restaurant in
September 1996 and two restaurants in December 1995. If such transactions
had occurred on January 1, 1996 and January 1, 1995, respectively, "Total
revenues," "Net earnings" and "Net earnings per share" would have been
approximately $15,315,000, $647,000 and $0.18, respectively, for the
fifty-two weeks ended December 29, 1996 and $12,104,000, $264,000 and $0.09,
respectively, for the year ended December 31, 1995, on a pro forma basis.
The pro forma results do not necessarily reflect what would have occurred if
the acquisitions had been made at the beginning of the respective periods or
the results that may occur in the future. See Note 11 of the Notes to
Consolidated Financial Statements.

(2) Effective January 1, 1996, the Company elected to change its fiscal year end
from a calendar year end to a 52/53-week fiscal year, ending on the last
Sunday of the year, which consists of four 13-week periods.

(3) Reflects a pro forma adjustment assuming the Company had been treated as a C
corporation rather than as an S corporation for income tax purposes for the
periods presented. See "Market for Registrant's Common Equity and Related
Stockholder Matters-Dividends and Distributions-S Corporation Distributions"
and Notes 2(h) and 2(k) of the Notes to Consolidated Financial Statements.

(4) See Note 2(k) of the Notes to Consolidated Financial Statements.

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

OVERVIEW

The Company opened its first restaurant in 1986, and has developed, as of
March 1, 1997, 24 of its 36 Company-owned restaurants in Oklahoma, Kansas,
Tennessee, Texas and Missouri. In addition to developing new restaurants, as of
March 1, 1997 the Company has acquired one bagel restaurant in Tennessee, seven
Lots A' Bagels restaurants in Colorado and four franchised New York Bagel
restaurants in Kansas, New Mexico and Texas. The Company commenced franchising
the New York Bagel concept in 1993 and has 19 franchisees operating 32
restaurants. See Note 11 of the Notes to Consolidated Financial Statements.

The Company's business was previously operated through the Prior Entities.
The Company was incorporated in December 1995 under the laws of Kansas, and on
December 31, 1995, the Prior Entities were merged into the Company (the
"Reorganization"). The financial statements herein include the

19
<PAGE>
results of operations of the Prior Entities on a combined basis for all periods.
See Note 1 of the Notes to Consolidated Financial Statements.

The Company's revenues are derived from sales from Company-owned restaurants
and franchise revenues, which consist of royalties from franchised restaurant
sales as well as franchise and development fees. Franchise and development fees
are initially recorded as deferred revenue until each franchised restaurant
opens, at which time these fees are recorded as revenue.

Cost of sales includes food, paper and beverage costs associated with
Company-owned restaurants. Restaurant operating expenses consist primarily of
labor costs, rent, advertising, utilities, maintenance and insurance associated
with Company-owned restaurants. General and administrative expenses include
corporate and administrative salaries, accounting, legal and direct costs
associated with franchise operations.

RESULTS OF OPERATIONS

The following table sets forth the percentage relationship of certain
operating statement data to total revenues, except as otherwise indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 52-WEEKS ENDED
31 DECEMBER 29
-------------------- ---------------
1994 1995 1996
--------- --------- ---------------
<S> <C> <C> <C>
Revenues:
Sales from Company-owned restaurants..................................... 97.1% 93.4% 94.2%
Franchise revenues....................................................... 2.9 6.6 5.8
--------- --------- -------
Total revenues......................................................... 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales(1)......................................................... 40.3% 38.0% 34.5%
Restaurant operating expenses(1)......................................... 41.1 44.9 47.7
General and administrative expenses...................................... 7.8 11.4 8.4
Depreciation and amortization............................................ 2.0 2.2 4.8
Operating income........................................................... 11.1 9.0 9.4
Interest expense, net...................................................... 0.9 0.5 0.7
Net earnings............................................................. 10.3 8.4 6.3
</TABLE>

- ------------------------

(1) As a percentage of sales from Company-owned restaurants.

FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995

Total revenues increased by $4.2 million, or 56.8%, to $11.6 million for
1996 compared to $7.4 million for 1995, primarily due to an increase in the
number of Company-owned and franchised restaurants open.

Sales from Company-owned restaurants increased $4.0 million, or 58.0%, to
$10.9 million for 1996 compared to $6.9 million for 1995. This is primarily the
result of opening nine restaurants throughout 1996, acquiring seven restaurants
in December 1996 and acquiring one restaurant in September 1996. In addition,
the Company experienced a 4.4% increase in same restaurant sales (sales from
restaurants that were open during the entire period indicated and the entire
corresponding prior period) during 1996. At December 29, 1996, the Company had
33 Company-owned restaurants compared to 15 restaurants at December 31, 1995.

Franchise revenues increased by $188,000, or 38.8%, to $672,000 for 1996
compared to $484,000 for 1995. This increase is primarily due to the full year
of royalty revenues from franchise restaurants opened in 1995 and the new
franchise restaurants opened in 1996. There were 33 franchised restaurants at
the end

20
<PAGE>
of 1996 and 25 franchised restaurants at the end of 1995, which impacted both
initial franchise fees and royalty revenue. Initial franchise and development
fees decreased $22,000, or 8.8%, to $229,000 for 1996 compared to $251,000 for
1995, due to a decrease in the number of franchise restaurants opened in 1996 as
compared to 1995. Franchise royalty revenue increased by $210,000, or 89.7%, to
$444,000 for 1996 compared to $234,000 for 1995.

Cost of sales increased by $1.1 million, or 43.5%, to $3.7 million for 1996
compared to $2.6 million for 1995. This increase is primarily attributable to
the increase in sales from Company-owned restaurants. As a percentage of sales
from Company-owned restaurants, cost of sales decreased to 34.5% in 1996 from
38.0% in 1995 as a result of purchasing and operating efficiencies, portioning
refinements and, to a lesser extent, modest price increases in 1996. Prices of
the Company's commodities (meat and cheese, flour and other bakery ingredients)
have generally remained stable during the comparable periods.

Restaurant operating expenses increased by $2.1 million, or 68.1%, to $5.2
million for 1996 compared to $3.1 million for 1995. This increase is primarily
due to the increase in sales from Company-owned restaurants discussed above. As
a percentage of sales from Company-owned restaurants, restaurant operating
expenses increased to 47.7% for 1996 from 44.9% for 1995. This increase is
primarily the result of remodeling five Company-owned restaurants for an
aggregate of 16 weeks in 1996. The increase is also attributable to increased
labor costs as a result of an increase in the minimum wage rate. Finally, labor
and occupancy rates associated with the Nashville market, a market developed in
1996 with the acquisition of a bagel restaurant in December 1995 and the opening
of three additional New York Bagel restaurants in 1996, are higher than rates
historically experienced by Company-owned restaurants.

General and administrative expenses increased by $126,000, or 15.0% to
$964,000 for 1996 compared to $838,000 for 1995. This increase is primarily
attributable to the continued growth of the Company. As a percentage of total
revenues, general and administrative expenses decreased to 8.4% in 1996 from
11.4% in 1995, primarily as a result of increased economies of scale in
management infrastructure as it relates to new Company-owned and franchised
restaurant activities.

Depreciation and amortization increased by $393,000, or 247.4%, to $552,000
for 1996 compared to $159,000 for 1995. As a percentage of total revenues,
depreciation and amortization increased to 4.8% for 1996 from 2.2% in 1995. This
increase is primarily attributable to the significant addition of capital
expenditures to develop and acquire the additional Company-owned restaurants
discussed above.

Interest expense increased by $198,000 to $238,000 for 1996 compared to
$40,000 for 1995 as a result of increased bank borrowings during the first seven
months of 1996.

Interest income was $152,000 in 1996 compared to $0 for 1995 as a result of
investing proceeds from the initial public offering in interest-bearing,
short-term, investment grade securities until such proceeds are used to fund
Company growth.

Income tax expense increased by $263,000 to $270,000 for 1996 compared to
$7,000 for 1995 as a result of the Company changing from an S corporation to a C
corporation concurrent with the Company's initial public offering of its Common
Stock. See Note 8 of Notes to Consolidated Financial Statements.

FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994

Total revenues increased by $1.5 million, or 26.4%, to $7.4 million for 1995
compared to $5.8 million for 1994, primarily due to an increase in the number of
Company-owned and franchised restaurants open.

Sales from Company-owned restaurants increased $1.2 million, or 21.6%, to
$6.9 million for 1995 compared to $5.7 million for 1994. This is primarily the
result of the opening of one additional Company-owned restaurant in October 1995
and two additional Company-owned restaurants in late 1994. In

21
<PAGE>
addition, the Company experienced an 9.8% increase in same restaurant sales
during 1995. At December 31, 1995, the Company had 15 Company-owned restaurants
compared to 12 restaurants at December 31, 1994.

Franchise revenues increased by $315,000, or 187.1%, to $484,000 for 1995
compared to $169,000 for 1994. This increase is primarily due to the opening of
franchised restaurants in 1995. There were 25 franchised restaurants at the end
of 1995 and nine franchised restaurants at the end of 1994, which impacted both
franchise fees and royalty revenue. Franchise and development fees increased
$143,000, or 132.4%, to $251,000 for 1995 compared to $108,000 for 1994.
Franchise royalty revenue increased by $173,000, or 283.6%, to $234,000 for 1995
compared to $61,000 for 1994.

Cost of sales increased by $333,000, or 14.6%, to $2.6 million for 1995
compared to $2.3 million for 1994. This increase is primarily attributable to
the increase in sales from Company-owned restaurants. As a percentage of sales
from Company-owned restaurants, cost of sales decreased to 38.0% in 1995 from
40.3% in 1994 as a result of purchasing and operating efficiencies and
portioning refinements achieved in 1995. Prices of the Company's commodities
(meat and cheese, flour and other bakery ingredients) have generally remained
stable during the comparable periods.

Restaurant operating expenses increased by $758,000, or 32.6%, to $3.1
million for 1995 compared to $2.3 million for 1994. This increase is primarily
due to the increase in sales from Company-owned restaurants discussed above and
to approximately two weeks of operating expenses attributable to the acquisition
of the bagel restaurant in Tennessee subsequent to its acquisition by the
Company on December 14, 1995. As a percentage of sales from Company-owned
restaurants, restaurant operating expenses increased to 44.9% for 1995 from
41.1% for 1994. This increase is primarily the result of higher operating
expenses attributable to a restaurant which opened in October 1995, the above
acquisition and two restaurants which were closed for remodeling during a
portion of the fourth quarter of 1995.

General and administrative expenses increased by $386,000, or 85.5%, to
$838,000 for 1995 compared to $452,000 for 1994. This increase is primarily
attributable to the increase in franchise activity and to merger-related
expenses related to the Reorganization in 1995. As a percentage of total
revenues, general and administrative expenses increased to 11.4% in 1995 from
7.8% in 1994, primarily as a result of the further development of the franchise
program.

Depreciation and amortization increased by $42,000, or 35.9%, to $159,000
for 1995 compared to $117,000 for 1994. As a percentage of total revenues,
depreciation and amortization increased to 2.2% for 1995 from 2.0% in 1994. This
increase is primarily attributable to the opening of the additional restaurants
discussed above.

Interest expense decreased by $12,000 to $40,000 for 1995 compared to 52,000
for 1994. This decrease in interest expense is primarily the result of lower
bank borrowings during 1995.

LIQUIDITY AND CAPITAL RESOURCES

The Company requires capital primarily for the development of new
restaurants, possible acquisitions and the remodeling of existing Company-owned
restaurants. Capital expenditures totaled $285,000, $475,000 and $4.7 million
for 1994, 1995 and 1996, respectively. Acquisition expenditures totaled $656,000
and $2.5 million for 1995 and 1996, respectively. Prior to the Company's initial
public offering, the Company historically funded its capital expenditures with
cash provided by operations and bank borrowings. Net cash provided by operating
activities was $696,000, $777,000 and $1.3 million for 1994, 1995 and 1996,
respectively.

At June 30, 1996, the Company had outstanding bank borrowings of $3.8
million consisting of (i) $2.5 million under a loan agreement which accrued
interest at the prime rate plus 1.0% and matures on December 28, 2000, (ii)
aggregate outstanding borrowings under certain term notes of $800,000, each of
which accrued interest at the prime rate plus 0.5% and have a maturity date of
June 15, 2003 and

22
<PAGE>
(iii) $487,000 under a certain promissory note which accrued interest at the
prime rate plus 0.5% and matures on March 26, 2003. Subsequent to June 30, 1996,
the Company incurred additional bank borrowings to finance capital expenditures
of $747,500, consisting of (i) $300,000 under a certain promissory note which
accrued interest at the prime rate plus 0.5% and matures on January 10, 2007,
(ii) $125,000 under a certain promissory note which accrued interest at the
prime rate plus 0.5% and matures on October 8, 2001, (iii) $172,500 under a
certain promissory note which accrued interest at the prime rate plus 0.5% and
matures on July 8, 2001, and (iv) $150,000 under a certain promissory note which
accrued interest at the prime rate plus 0.5% and matures on October 15, 2003.
The outstanding indebtedness under these bank financings, which were secured by
substantially all of the assets of the Company, were repaid from the proceeds of
the Company's initial public offering.

The Company distributed $156,000 on March 4, 1997 to the stockholders
existing prior to its initial public offering in connection with their estimated
federal and state income tax obligations attributable to the Company's 1996
earnings prior to the Termination Date. See "Market for Registrant's Common
Equity and Related Stockholder Matters--Dividends and Distributions--S
Corporation Distributions."

Based on its contemplated expansion plans, the Company estimates that its
total capital expenditures will be approximately $4.0 million in 1997 and $5.5
million in 1998. These estimates include the estimated costs of developing new
restaurants and renovating Company-owned restaurants. The Company expects that
the remaining net proceeds of its initial public offering and cash provided by
operating activities will provide sufficient funds to finance its capital
expenditures through 1997.

INFLATION

The Company believes that the relatively moderate rates of inflation over
the past few years have not had a significant impact on its results of
operations or net sales.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the Consolidated Financial Statements referred to in
the Index on page F-1 setting forth the consolidated financial statements of New
York Bagel Enterprises, Inc. and Subsidiary, together with the report of KPMG
Peat Marwick LLP dated February 21, 1997.

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this Item 10 is incorporated herein by reference to
"Directors and Executive Officers of the Company" in the Company's Proxy
Statement.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this Item 11 is incorporated herein by reference to
"Executive Compensation--Compensation Committee Interlocks and Insider
Participation, --Summary Compensation Table, -- Stock Option Grant Table,
- --Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values Table, --Employment Arrangements, and --Incentive Plan" and "Directors
and Executive Officers of the Company--Compensation of Directors" in the
Company's Proxy Statement.

23
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this Item 12 is incorporated herein by reference to
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this Item 13 is incorporated herein by reference to
"Certain Relationships and Related Transactions" in the Company's Proxy
Statement.

PART IV

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

(a)(1) FINANCIAL STATEMENTS. Reference is made to the Index to Consolidated
Financial Statements on page F-1 for a list of all financial statements
filed as part of this Report.

(a)(2) FINANCIAL STATEMENT SCHEDULES. Reference is made to the Index to
Financial Statements on page F-1 for a list of all financial statement
schedules filed as part of this Report.

(a)(3) EXHIBITS. Reference is made to Item 14(c) of this Report.

(b) REPORTS ON FORM 8-K. A current report was filed on December 23, 1996
with respect to the acquisition of Lots A' Bagels, Inc.

REPORTS ON FORM 8-K/A. An amendment to the 8-K was filed on February 18,
1997 with respect to the acquisition of Lots A' Bagels, Inc. including
the following financial statements:

<TABLE>
<S> <C> <C> <C>
(A) Financial Statements of Business Acquired

(i) Audited balance sheets as of December 31, 1995 and 1994, and the unaudited
balance sheet as of September 30, 1996.

(ii) Audited statements of operations for the years ended December 31, 1995 and
1994.

(iii) Unaudited statements of operations for the nine months ended September 30,
1996 and 1995.

(iv) Audited statements of shareholders' equity for the years ended December
31, 1995 and 1994.

(v) Unaudited statement of shareholders' equity for the nine months ended
September 30, 1996.

(vi) Audited statements of cash flows for the years ended December 31, 1995 and
1994.

(vii) Unaudited statements of cash flows for the nine months ended September 30,
1996 and 1995.

(viii) Notes to financial statements.
</TABLE>

24
<PAGE>
<TABLE>
<S> <C> <C> <C>
(B) Pro Forma Financial Information

(i) Introduction.

(ii) Unaudited pro forma consolidated balance sheet as of September 29, 1996
(for the Company and for Lots A' Bagels, Inc.).

(iii) Unaudited pro forma consolidated statements of operations for the year
ended December 31, 1995 (for the Company and Lots A' Bagels, Inc.).

(iv) Unaudited pro forma consolidated statements of operations for the
thirty-nine weeks ended September 29, 1996 (for the Company and Lots A'
Bagels, Inc.).

(v) Notes to pro forma consolidated financial statements (unaudited).
</TABLE>

NEW YORK BAGEL ENTERPRISES, INC.

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
COMPANY'S REGISTRATION
STATEMENT ON FORM S-1
(COMMISSION FILE NO.
333-05785)
EXHIBIT NO. EXHIBIT DESCRIPTION EXHIBIT NO.
- ----------- ------------------------------------------------------------------------------- ---------------------------
<C> <S> <C>
2.1 Plan and Agreement of Merger dated December 27, 1995, by and between New York 2.1
Bagel Enterprises, Inc., a Kansas corporation, and New York Bagel Enterprises,
Inc., an Oklahoma corporation.

2.2 Plan and Agreement of Merger dated December 27, 1995, by and among New York 2.2
Bagel Enterprises, Inc., VPR Incorporated, New York Bagel Shop, Inc., Bagel
Boss, Inc., Bagels of Norman, Inc., New York Bagel Shop & Delicatessen, Inc.

2.3 Certificate of Ownership and Merger (Articles of Merger) Merging Nashville 2.3
Bagel Co. (a Tennessee corporation) into New York Bagel Enterprises, Inc. (an
Oklahoma corporation).

2.4 Asset Sale and Purchase Agreement dated December 27, 1995, by and among New 2.4
York Bagel Enterprises, Inc., Central & Ridge Yogurt, Inc. and Paul R. Hoover.

2.5 Asset Purchase Agreement dated November 25, 1996 by and among LAB Acquisition *
Corporation, New York Bagel Enterprises, Inc., Lots A' Bagels, Inc., and
Stephen K. Goldstone and Linda F. Goldstone.

3.1 Restated and Amended Articles of Incorporation of the Registrant. 3.3

3.2 Restated and Amended Bylaws of the Registrant. 3.4

4.1 Specimen of Common Stock Certificate. 4.1

4.2 Form of New York Bagel Enterprises, Inc. Grant of Incentive Stock Option. 4.2

4.3 Form of New York Bagel Enterprises, Inc. Grant of Nonqualified Stock Option. 4.3

4.4 New York Bagel Enterprises, Inc. 4% Convertible and Subordinated Debenture due 4.4
December 14, 1999.

4.5 New York Bagel Enterprises, Inc. Warrant to Purchase Common Stock. +
</TABLE>

25
<PAGE>
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
COMPANY'S REGISTRATION
STATEMENT ON FORM S-1
(COMMISSION FILE NO.
333-05785)
EXHIBIT NO. EXHIBIT DESCRIPTION EXHIBIT NO.
- ----------- ------------------------------------------------------------------------------- ---------------------------
4.6 Schedule of Employees Receiving Stock Option Grants.
<C> <S> <C>

4.7 Schedule of Non-employees Receiving Stock Option Grants.

9.1 Contract for Sale of Stock dated June 21, 1994, by and between Robert Geresi, 9.1
Paul Sorrentino and Vince Vrana and David L. Murfin and Paul R. Hoover.

9.2 Stockholders' Agreement dated January 1, 1996, by and among Robert J. Geresi, 9.2
Vincent J. Vrana, Paul T. Sorrentino, Paul R. Hoover, David L. Murfin, Nancy
Murfin Moxley, Mark A. Moxley, Barbara Murfin Murphy, V. Richard Hoover, Philip
Faubert, Rodney Joe Trizza, Brent Durham, John R. Geresi, Chad E. Watkins,
Markus K. Scholler and the Company.

10.1 New York Bagel Enterprises, Inc. 1996 Incentive Plan. 10.1

10.2 Representative Uniform Franchise Offering Circular, including form of Franchise 10.2
Agreement and form of Development Agreement.

10.3 Lease Agreement dated June 1, 1994, by and between Bagel Land, Inc. and Bagels 10.3
of Norman, Inc.

10.4 Lease Agreement dated December 1, 1993, by and between Cherry Street Land and 10.4
Bagel Boss, Inc.

10.5 Sublease dated April 1, 1996, by and between Murfin Drilling Company and New 10.5
York Bagel Enterprises, Inc.

10.6 Real Estate Purchase Agreement dated October 10, 1996 by and between New York
Bagel Enterprises, Inc. and Bagel Land, Inc.

21 Subsidiaries of the Company.

27 Financial Data Schedule.
</TABLE>

- ------------------------

* Incorporated by reference from Exhibit No. 2 of the Company's Form 8-K filed
December 23, 1996.

+ Incorporated by reference from Exhibit No. 4 of the Company's Form 8-K filed
December 23, 1996.

26
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized this 27th
day of March, 1997.

NEW YORK BAGEL ENTERPRISES, INC.

By: /s/ ROBERT J. GERESI
-----------------------------------------
Robert J. Geresi
CHIEF EXECUTIVE OFFICER AND PRESIDENT

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------

Chairman of the Board,
/s/ ROBERT J. GERESI Chief Executive Officer
- ------------------------------ and President (Principal March 27th, 1997
Robert J. Geresi Executive Officer)

Chief Financial Officer,
/s/ JON H. CRAMER Secretary and Treasurer
- ------------------------------ (Principal Financial and March 27th, 1997
Jon H. Cramer Accounting Officer)

/s/ PAUL T. SORRENTINO
- ------------------------------ Vice President--New Store March 27th, 1997
Paul T. Sorrentino Development and Director

/s/ PAUL R. HOOVER
- ------------------------------ Vice President--Strategic March 27th, 1997
Paul R. Hoover Planning and Director

/s/ WILLIAM S. ATHERTON
- ------------------------------ Director March 27th, 1997
William S. Atherton

/s/ STANLEY K. CLARK
- ------------------------------ Director March 27th, 1997
Stanley K. Clark

/s/ DAVID L. MURFIN
- ------------------------------ Director March 27th, 1997
David L. Murfin

/s/ WILLIAM J. WALSH, JR.
- ------------------------------ Director March 27th, 1997
William J. Walsh, Jr.

27
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
New York Bagel Enterprises, Inc.:
Independent Auditors' Report............................................................................. F-2

Consolidated Balance Sheets at December 29, 1996 and December 31, 1995................................... F-3

Consolidated Statements of Operations for the Fifty-Two Weeks Ended December 29, 1996 and the Years Ended
December 31, 1995 and 1994............................................................................. F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the Fifty-Two Weeks Ended December 29, 1996
and the Years Ended December 31, 1995 and 1994......................................................... F-5

Consolidated Statements of Cash Flows for the Fifty-Two Weeks Ended December 29, 1996 and the Years Ended
December 31, 1995 and 1994............................................................................. F-6

Notes to Consolidated Financial Statements............................................................... F-7
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
New York Bagel Enterprises, Inc.:

We have audited the accompanying consolidated balance sheets of New York
Bagel Enterprises, Inc. as of December 29, 1996 and December 31, 1995, and the
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the fifty-two weeks ended December 29, 1996 and for each of the years
in the two-year period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
New York Bagel Enterprises, Inc. as of December 29, 1996 and December 31, 1995,
and the results of its operations and its cash flows for the fifty-two weeks
ended December 29, 1996 and for each of the years in the two-year period ended
December 31, 1995, in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Wichita, Kansas
February 21, 1997

F-2
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 29, 1996 AND DECEMBER 31, 1995

ASSETS

<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 1,305,130 $ 133,425
Investment securities available for sale........................................... 4,265,862 --
Accounts receivable................................................................ 315,293 137,853
Inventories........................................................................ 272,261 143,964
Deferred costs..................................................................... 239,269 77,100
Income tax receivable.............................................................. 87,783 16,747
Prepaid expenses................................................................... 120,145 7,271
------------- ------------
Total current assets............................................................. 6,605,743 516,360
Property, plant and equipment, net................................................... 7,616,344 1,256,154
Other assets, net of accumulated amortization of $20,581 in 1996 and $12,433 in
1995............................................................................... 145,118 55,658
Deferred offering costs.............................................................. -- 8,474
Goodwill, net of accumulated amortization of $26,341 in 1996 and $999 in 1995,
respectively....................................................................... 806,016 458,052
------------- ------------
$ 15,173,221 $ 2,294,698
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt............................................. $ 28,750 $ 519,936
Accounts payable................................................................... 515,206 163,172
Accrued payroll and benefits....................................................... 220,182 38,774
Accrued liabilities................................................................ 262,113 44,987
Current portion of deferred franchise fees......................................... 61,000 69,000
Deferred income taxes.............................................................. 56,808 --
Distributions payable.............................................................. 164,194 48,693
------------- ------------
Total current liabilities........................................................ 1,308,253 884,562
Long-term debt, less current installments............................................ 57,500 2,845,064
Deferred franchise fees.............................................................. 34,000 98,000
Deferred rents payable............................................................... 72,035 45,537
Deferred income taxes................................................................ 26,600 --
------------- ------------
Total liabilities................................................................ 1,498,388 3,873,163
------------- ------------
Stockholders' equity (deficit):
Class A common stock, $.01 par value. Authorized 30,000,000 and 25,000,000 shares
in 1996 and 1995, respectively; issued and outstanding 4,667,500 and 1,416,988
shares in 1996 and 1995, respectively............................................ 46,675 14,170
Class B common stock, $.01 par value. Authorized 5,000,000 shares in 1995; issued
and outstanding 1,368,704 shares in 1995......................................... -- 13,687
Additional paid-in capital......................................................... 13,390,769 157,793
Retained earnings (accumulated deficit)............................................ 237,389 (1,764,115)
------------- ------------
Total stockholders' equity (deficit)............................................. 13,674,833 (1,578,465)
------------- ------------
Commitments
------------- ------------
$ 15,173,221 $ 2,294,698
------------- ------------
------------- ------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE FIFTY-TWO WEEKS ENDED DECEMBER 29, 1996 AND THE
YEARS ENDED DECEMBER 31, 1995 AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Sales from Company-owned restaurants................................ $ 10,864,863 $ 6,875,146 $ 5,653,177
Franchise revenues.................................................. 671,987 484,300 168,704
------------- ------------ ------------
Total revenues.................................................... 11,536,850 7,359,446 5,821,881
------------- ------------ ------------
Costs and expenses:
Cost of sales....................................................... 3,749,471 2,612,772 2,280,012
Restaurant operating expenses....................................... 5,185,362 3,083,902 2,326,178
General and administrative expenses................................. 963,927 838,190 451,900
Depreciation and amortization....................................... 552,419 158,996 116,960
------------- ------------ ------------
Total costs and expenses.......................................... 10,451,179 6,693,860 5,175,050
------------- ------------ ------------
Operating income.................................................. 1,085,671 665,586 646,831
Other income (expense):
Interest income..................................................... 152,167 -- --
Interest expense.................................................... (237,858) (39,800) (52,383)
------------- ------------ ------------
Total other income (expense)...................................... (85,691) (39,800) (52,383)
------------- ------------ ------------
Earnings before income taxes...................................... 999,980 625,786 594,448
Income tax expense (benefit).......................................... 269,714 6,689 (2,498)
------------- ------------ ------------
Net earnings...................................................... $ 730,266 $ 619,097 $ 596,946
------------- ------------ ------------
------------- ------------ ------------
Pro forma earnings to reflect income taxes:
Income tax expense.................................................. $ 389,505 $ 245,628
------------- ------------
------------- ------------
Net earnings........................................................ $ 610,475 $ 380,158
------------- ------------
------------- ------------
Net earnings per share.............................................. $ .17 $ .13
------------- ------------
------------- ------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

FOR THE FIFTY-TWO WEEKS ENDED DECEMBER 29, 1996 AND THE
YEARS ENDED DECEMBER 31, 1995 AND 1994

<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
--------------------- PAID-IN (ACCUMULATED
CLASS A CLASS B CAPITAL DEFICIT) TOTAL
--------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993................... $ 14,170 $ 13,687 $ 101,043 $ (2,868) $ 126,032
Contributed capital.......................... -- -- 50,250 -- 50,250
Net earnings................................. -- -- -- 596,946 596,946
Distributions to stockholders................ -- -- -- (614,260) (614,260)
--------- ---------- ------------- ------------- -------------
Balance, December 31, 1994................... 14,170 13,687 151,293 (20,182) 158,968
Net earnings................................. -- -- -- 619,097 619,097
Stock compensation........................... -- -- 6,500 -- 6,500
Distributions to stockholders................ -- -- -- (2,363,030) (2,363,030)
--------- ---------- ------------- ------------- -------------
Balance, December 31, 1995................... 14,170 13,687 157,793 (1,764,115) (1,578,465)
Net earnings................................. -- -- -- 730,266 730,266
Issuance of 14,308 shares of common stock.... -- 143 (143) -- --
Issuance of 1,867,500 shares of common stock
pursuant to initial public offering........ 18,675 -- 14,660,357 -- 14,679,032
Reclassification of accumulated deficit
pursuant to termination of S corporation
status at August 27, 1996.................. -- -- (1,427,238) 1,427,238 --
Conversion of 1,383,012 shares of Class B
common stock to Class A common stock on a
one-for-one basis pursuant to the initial
public offering............................ 13,830 (13,830) -- -- --
Distributions to stockholders................ -- -- -- (156,000) (156,000)
--------- ---------- ------------- ------------- -------------
Balance, December 29, 1996................... $ 46,675 $ -- $ 13,390,769 $ 237,389 $ 13,674,833
--------- ---------- ------------- ------------- -------------
--------- ---------- ------------- ------------- -------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE FIFTY-TWO WEEKS ENDED DECEMBER 29, 1996 AND THE
YEARS ENDED DECEMBER 31, 1995 AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.......................................................... $ 730,266 $ 619,097 $ 596,946
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization....................................... 552,419 158,996 116,960
Gain on sale of equipment........................................... (21,286) -- --
Noncash stock compensation expense.................................. -- 6,500 --
Increase (decrease) in cash resulting from changes in listed items,
net of effects from acquisitions:
Deferred income taxes............................................. 83,408 1,302 (2,498)
Inventory......................................................... (96,654) (178,209) (28,451)
Income taxes receivable........................................... (71,036) 1,300 --
Prepaid expenses.................................................. (90,312) (1,588) (4,348)
Accounts receivable............................................... (123,545) (23,361) (105,638)
Deferred costs.................................................... (337,492) (70,672) (6,428)
Other assets...................................................... -- (2,403) (52,318)
Accounts payable.................................................. 352,034 140,253 30,882
Accrued liabilities, accrued payroll and benefits, and deferred
rents payable................................................... 399,213 78,509 34,138
Income taxes payable.............................................. -- -- (2,295)
Deferred franchise fees........................................... (72,000) 47,500 119,500
------------- ------------ ----------
Net cash provided by operating activities....................... 1,305,015 777,224 696,450
------------- ------------ ----------
Cash flows from investing activities:
Additions to property, plant and equipment............................ (4,716,867) (474,674) (285,080)
Acquisitions, net of cash acquired.................................... (2,468,092) (656,174) --
Proceeds from sale of equipment....................................... 21,722 -- --
Purchase of investment securities available for sale.................. (7,265,862) -- --
Proceeds from sales and maturities of investment securities available
for sale............................................................ 3,000,000 -- --
Purchase of other assets.............................................. (72,468) -- --
------------- ------------ ----------
Net cash used in investing activities........................... (11,501,567) (1,130,848) (285,080)
------------- ------------ ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.............................. 1,398,700 3,049,210 252,865
Principal payments on long-term debt.................................. (4,677,450) (90,852) (128,309)
Proceeds from initial public offering of common stock................. 14,679,032 -- --
Decrease in due to stockholders....................................... -- (26,330) (40,274)
Decrease in distributions payable..................................... (40,499) (8,807) --
Proceeds from contributed capital..................................... -- -- 50,250
Debt issuance costs................................................... -- (13,916) --
Deferred offering costs............................................... 8,474 (8,474) --
Distributions to stockholders......................................... -- (2,459,982) (394,080)
Decrease in excess of checks written over funds on deposit............ -- -- (105,622)
------------- ------------ ----------
Net cash provided by (used in) financing activities............. 11,368,257 440,849 (365,170)
------------- ------------ ----------
Net increase in cash............................................ 1,171,705 87,225 46,200
Cash and cash equivalents at beginning of year.......................... 133,425 46,200 --
------------- ------------ ----------
Cash and cash equivalents at end of year................................ $ 1,305,130 $ 133,425 $ 46,200
------------- ------------ ----------
------------- ------------ ----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) REORGANIZATION AND OPERATIONS

REORGANIZATION

The Company was formed as a result of a merger (the Merger) between New York
Bagel Enterprises, Inc., which became the surviving corporation, and New York
Bagel Shop, Inc.; New York Bagel Shop & Delicatessen, Inc.; Bagels of Norman,
Inc.; Bagel Boss, Inc.; and VPR Incorporated (the five restaurant entities). The
Merger was effective on December 31, 1995 whereby each of the five restaurant
entities were merged into New York Bagel Enterprises, Inc. (collectively the
five restaurant entities and New York Bagel Enterprises, Inc. are referred to as
the Prior Entities). The term Company as used herein refers to New York Bagel
Enterprises, Inc. including the five restaurant entities unless the context
otherwise requires.

To effect the Merger, New York Bagel Enterprises, Inc. issued 1,368,704
shares of its Class B non-voting common stock in exchange for all the
outstanding stock of each of the five restaurant entities.

Since the primary stockholders of each of the five restaurant entities prior
to the Merger were also the primary stockholders of the Company subsequent to
the Merger, the Merger essentially represents a transfer to New York Bagel
Enterprises, Inc. of nonmonetary assets in exchange for stock and has been
accounted for at historical cost.

The accompanying financial statements for periods prior to the effective
date of the Merger are presented on a combined basis since this is the most
meaningful presentation of the business and due to substantial commonality of
ownership and management of the Prior Entities throughout such prior periods.

The Company converted the number of shares of Class A common stock
outstanding in connection with the Merger (effectively a 3373.78:1 stock split).
The outstanding shares of common stock, as reflected in the accompanying
financial statements, include the effect of such stock conversion and the shares
issued to effect the Merger for all periods presented.

On June 4, 1996, the Company effected a 1.4 for 1 stock split. The stock
split has been reflected in the accompanying financial statements and,
accordingly, all applicable dollar and share amounts have been restated to
reflect the stock split.

Effective August 27, 1996, the Company completed an initial public offering
(IPO) in which it sold 1,867,500 shares of its Class A common stock and realized
net proceeds, net of offering costs of $951,943, of $14,679,032. Concurrent with
the IPO, (i) the number of authorized shares of Class A common stock increased
to 30,000,000, (ii) each share of outstanding Class B non-voting common stock
was converted into one share of Class A common stock, and (iii) the Class B
non-voting common stock ceased to exist.

OPERATIONS

The Company owns and franchises New York Bagel and Lots A' Bagels
restaurants that provide a wide variety of bagels that are made from scratch,
boiled and baked in the traditional "New York style". Breakfast menu items
include a wide variety of bagels and custom-blended cream cheeses, gourmet
coffees, muffins and croissants. Lunch and dinner items include an assortment of
bagel delicatessen sandwiches, prepared salads, cookies and soft drinks. As of
December 29, 1996, the Company has 33 Company-owned restaurants (15 at December
31, 1995) primarily located in Oklahoma, Kansas, Colorado and Tennessee and 33
franchised restaurants (25 at December 31, 1995) located throughout the United
States.

F-7
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of New York Bagel
Enterprises, Inc. and its wholly-owned subsidiary. All material intercompany
activity has been eliminated.

(b) FRANCHISE REVENUES

Franchise agreements are executed for each franchise restaurant and provide
the terms of the franchise arrangement between the Company and the franchisee.
The franchise agreement requires the franchisee to pay an initial,
non-refundable franchise fee plus continuing royalties based upon a percentage
of restaurant sales. Additionally, the Company executes development agreements
with certain franchisees which stipulates the area, the number of restaurants,
and the timeframe for development in exchange for an initial, non-refundable
development fee based on a standard price per type of restaurant.

Initial franchise fees are recognized as revenue when the Company performs
substantially all initial services required by the franchise agreement, which
generally occurs shortly after restaurant opening. Continuing royalties are
recognized as earned with an appropriate provision for estimated uncollectible
amounts. Initial franchise fees received applicable to restaurants for which
substantially all initial services required by the franchise agreement have not
been performed are recorded as deferred franchise fees in the accompanying
balance sheets. Development fees are received upon signing the agreement and are
initially recorded as deferred franchise fees. Such fees are applied to reduce
the initial franchise fees paid for each restaurant opened and are accounted for
as a component of the initial franchise fees.

Deferred initial and development fees that are expected to be recognized
within twelve months of the balance sheet date are classified as current portion
of deferred franchise fees in the accompanying balance sheets.

Investment securities at December 29, 1996 consist of highly liquid debt
securities with maturities of less than six months. The Company classifies its
debt securities as available for sale which are recorded at fair value.
Unrealized holding gains and losses, net of related tax effect, on available for
sale securities are excluded from earnings and are reported as a separate
component of stockholders' equity until realized. Realized gains and losses from
sales and maturities of available for sale securities are determined on a
specific identification basis.

Gross unrealized holding gains and gross unrealized holding losses were
immaterial as of December 29, 1996.

(d) INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.

(e) DEFERRED FRANCHISE COSTS

Direct, incremental costs incurred to secure franchise agreements are
charged to expense in the same period the related initial franchise fees are
recognized as revenue. Costs applicable to initial franchise fees not yet
recognized as revenue are recorded as deferred franchise costs.

F-8
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized on a straight-line basis over the lesser of
the remaining lease term, including renewal periods when the Company intends to
exercise renewal options, or the estimated useful life of the asset. Estimated
useful lives are as follows:

<TABLE>
<S> <C>
Buildings...................................................... 30 years
5 - 10
Restaurant and bakery equipment................................ years
7 - 15
Leasehold improvements......................................... years
Delivery vehicles, office furniture and equipment.............. 5 - 7 years
</TABLE>

(g) GOODWILL

Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over 20 years. The
Company periodically assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of goodwill impairment, if any, is measured based
on projected future operating cash flows discounted at a rate commensurate with
the risks involved. The assessment of the recoverability of goodwill will be
impacted if estimated future operating cash flows are not achieved.

(h) INCOME TAXES

Effective January 1, 1994, New York Bagel Enterprises, Inc. and certain of
the restaurant entities elected and received approval to become S corporations.
During the periods the entities operated as S corporations, income tax expense
or benefit was not recorded in the accompanying financial statements as the
entities' results of operations were reported to the entities' stockholders for
inclusion in their individual income tax returns.

Concurrent with the IPO, the Company terminated its S corporation status.
Accordingly, income taxes subsequent to the effective date of the IPO are
accounted for under the asset and liability method whereby deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Any effect on
deferred tax assets and liabilities due to a change in tax rates is recognized
in income in the period that includes the enactment date.

(i) STATEMENTS OF CASH FLOWS

For purposes of the consolidated statements of cash flows, the Company
considers cash and cash equivalents to include currency on hand, demand deposits
and money market funds.

F-9
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Noncash investing and financing activities during 1996, 1995 and 1994
included:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
Noncash distributions to stockholders:
Distributions payable................................ $ 156,000 $ 15,500 $ 42,000
---------- ----------- -----------
Net asset (liability) distributions:
Assets distributed................................. -- 137,134 507,695
Liabilities distributed............................ -- (249,586) (329,515)
---------- ----------- -----------
Net assets (liabilities) distributed............. -- (112,452) 178,180
---------- ----------- -----------
Total noncash distributions...................... $ 156,000 $ (96,952) $ 220,180
---------- ----------- -----------
---------- ----------- -----------
Property, plant and equipment sale proceeds included in
accounts receivable.................................. $ 53,895 $ -- $ --
---------- ----------- -----------
---------- ----------- -----------
Property, plant and equipment acquired in exchange for
increase in due to stockholders...................... $ -- $ -- $ 44,250
---------- ----------- -----------
---------- ----------- -----------
Long-term debt issued to seller in connection with
acquisition.......................................... $ -- $ 115,000 $ --
---------- ----------- -----------
---------- ----------- -----------

Cash paid during the years for interest and taxes is as
follows:

<CAPTION>
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
Interest............................................... $ 238,181 $ 36,676 $ 52,383
Taxes, net............................................. 257,342 -- 3,660
</TABLE>

(j) PREOPENING COSTS

Direct, incremental restaurant preopening costs, comprised primarily of the
cost of hiring and training restaurant employees and rent, are amortized over
the initial twelve months of a restaurant's operations.

(k) PRO FORMA INCOME TAX EXPENSE AND PRO FORMA NET EARNINGS PER SHARE

PRO FORMA INCOME TAX EXPENSE

Subsequent to the IPO, the Company no longer operates as an S corporation.
Pro forma income tax expense, as set forth in the accompanying 1996 and 1995
statements of operations, reflects what the income tax expense of the Company
would have been for the fifty-two weeks ended December 29, 1996 and the year
ended December 31, 1995 if none of the entities included in the financial
statements had operated as S corporations during such periods.

PRO FORMA NET EARNINGS PER SHARE

Pro forma net earnings per share information, as set forth in the
accompanying statements of operations, is computed based on pro forma net
earnings of $610,475 and $380,158 which is based on reported earnings before
income taxes less pro forma income tax expense of $389,505 and $245,628 for the
fifty-two weeks ended December 29, 1996 and the year ended December 31, 1995,
respectively.

F-10
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Pro forma weighted average common shares outstanding have been determined as
follows:

<TABLE>
<CAPTION>
FIFTY-TWO
WEEKS ENDED YEAR ENDED
DECEMBER 29, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Weighted average shares outstanding.............................. 3,420,172 2,785,692
Shares issued during 12-month period prior to initial filing of
the registration statement at price per share below the initial
public offering price.......................................... -- 14,308
Pro forma number of shares whose proceeds would be sufficient
(based upon the net initial public offering price) to replace
the excess of distributions to stockholders over net earnings
for the year ended December 31, 1995........................... 145,292 218,538
------------ ------------
Pro forma weighted average common shares outstanding............. 3,565,464 3,018,538
------------ ------------
------------ ------------
</TABLE>

The effect on pro forma earnings per share of stock options and a
convertible debenture were excluded from the determination of pro forma weighted
average common shares outstanding due to immateriality.

(l) USE OF ESTIMATES

The preparation of financial statements in accordance with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from these estimates.

(m) STOCK AWARDS

The Company accounts for its stock options in accordance with the provisions
of Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION, which permits entities to continue to apply the
cost measurement provisions of APB Opinion No. 25 but also requires that pro
forma net income and pro forma earnings per share disclosures for employee stock
option grants made in 1996 and future years be provided as if the fair-value-
based cost measurement method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.

(n) FISCAL PERIODS

Prior to 1996, the Company's financial reporting was done on a calendar
basis. Effective January 1, 1996, the Company changed to a 52/53-week fiscal
year comprised of four thirteen-week periods.

F-11
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(o) IMPAIRMENT OF LONG-LIVED ASSETS

The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have an impact on the Company's
financial position, results of operations, or liquidity in 1996.

(3) FRANCHISE REVENUES

Franchise revenues for the fifty-two weeks ended December 29, 1996 and the
years ended December 31, 1995 and 1994 consist of the following:

<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Initial franchise and development fees................... $228,500 $250,500 $108,000
Royalty revenue.......................................... 443,487 233,800 60,704
---------- ---------- ----------
Total.................................................. $671,987 $484,300 $168,704
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

The associated franchise receivables included within accounts receivable in
the accompanying balance sheets at December 29, 1996 and December 31, 1995 are
as follows:

<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Initial and development fee receivables............................... $41,000 $106,416
Royalty receivables................................................... 116,528 46,437
Less allowance for doubtful accounts.................................. (28,200) (15,000)
---------- ----------
$129,328 $137,853
---------- ----------
---------- ----------
</TABLE>

(4) DEFERRED COSTS

Deferred costs as of December 29, 1996 and December 31, 1995 include the
following:

<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Preopening costs...................................................... $209,823 $60,445
Deferred franchise costs.............................................. 29,446 16,655
---------- ----------
Total deferred costs................................................ $239,269 77,100
---------- ----------
---------- ----------
</TABLE>

F-12
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5) PROPERTY, PLANT AND EQUIPMENT

A summary of property, plant and equipment and accumulated depreciation as
of December 29, 1996 and December 31, 1995 is as follows:

<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Land and buildings................................................ $ 1,045,724 $ 30,292
Restaurant and bakery equipment................................... 3,856,681 1,337,203
Leasehold improvements............................................ 3,469,730 453,863
Delivery vehicles, office furniture and equipment................. 136,289 17,446
------------ ------------
8,508,424 1,838,804
Less accumulated depreciation..................................... (892,080) (582,650)
------------ ------------
Net property, plant and equipment............................... $ 7,616,344 $ 1,256,154
------------ ------------
------------ ------------
</TABLE>

(6) LEASES

The Company leases several restaurant facilities under noncancelable
operating leases. These leases generally contain renewal options for periods
ranging from 3 to 15 years and require the Company to pay executory costs such
as maintenance and insurance. Rent expense for operating leases aggregated
$631,021, $296,950 and $193,418 for the fifty-two weeks ended December 29, 1996
and the years ended December 31, 1995 and 1994, respectively.

Future minimum lease payments under noncancelable operating leases with
initial or remaining lease terms in excess of one year as of December 29, 1996
are:

<TABLE>
<S> <C>
1997.................................................... $1,052,694
1998.................................................... 1,041,963
1999.................................................... 1,014,265
2000.................................................... 890,566
2001.................................................... 648,173
Thereafter.............................................. 2,269,548
---------
Total minimum lease payments.......................... $6,917,209
---------
---------
</TABLE>

The Company is party to certain operating leases with companies that are
owned by certain stockholders of the Company. Rent expense paid to these related
companies pursuant to lease agreements aggregated $60,177, $63,249 and $14,100
in 1996, 1995 and 1994, respectively.

Deferred rents payable in the accompanying balance sheets represent accruals
for escalating rental payments on operating leases.

F-13
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(7) LONG-TERM DEBT

Long-term debt at December 29, 1996 and December 31, 1995 consists of the
following:

<TABLE>
<CAPTION>
1996 1995
--------- ------------
<S> <C> <C>
Prime rate plus 1% note payable to bank. Repaid in 1996.............. $ -- $ 2,750,000
Prime rate plus .5% note payable to bank. Repaid in 1996............. -- 500,000
4% contingently convertible subordinated debenture payable in annual
installments of $28,750 plus interest beginning in December 1996.
The debenture may be converted at the option of the debenture
holder into 14,490 shares of common stock at December 29, 1996. The
debenture is subordinate to all other liabilities of the Company... 86,250 115,000
--------- ------------
Total long-term debt............................................... 86,250 3,365,000
Less current installments of long-term debt.......................... 28,750 519,936
--------- ------------
Long-term debt, less current installments............................ $ 57,500 $ 2,845,064
--------- ------------
--------- ------------
</TABLE>

The aggregate maturities of long-term debt for each of the three years
subsequent to December 29, 1996 are as follows: 1997--$28,750; 1998--$28,750;
and 1999--$28,750.

(8) INCOME TAXES

Income tax expense (benefit) for the fifty-two weeks ended December 29, 1996
and the years ended December 31, 1995 and 1994 consists of the following:

<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Current..................................................... $ 186,306 9,805 --
Deferred.................................................... 83,408 (3,116) (2,498)
---------- --------- ---------
Total..................................................... $ 269,714 6,689 (2,498)
---------- --------- ---------
---------- --------- ---------
</TABLE>

As described in note 2, certain entities included in the consolidated
financial statements elected S corporation status as of January 1, 1994, and as
a result did not pay corporate income taxes. Additionally, as a result of the
Merger discussed in note 1, the consolidated Company was an S corporation
effective December 31, 1995 and, accordingly, no deferred tax assets or
liabilities are recorded in the accompanying 1995 consolidated balance sheet.
Consequently, income tax expense (benefit) for the years ended December 31, 1995
and 1994 include the reversal of existing deferred tax assets and liabilities
for those entities which first became S corporations in each year. Finally,
concurrent with the IPO, the Company terminated its S corporation status and,
consequently, incurred a one-time charge of $74,000 to deferred tax expense to
properly record deferred tax assets and liabilities that existed as of the
effective date of the IPO.

F-14
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(8) INCOME TAXES (CONTINUED)
Actual income tax expense (benefit) differs from the "expected" tax expense
computed by applying the U.S. Federal corporate tax rate of 34% to earnings
before income taxes for the fifty-two weeks ended December 29, 1996 and the
years ended December 31, 1995 and 1994 as follows:

<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Computed expected tax expense.......................... $ 339,993 $ 212,767 $ 202,112
S corporation earnings allocated to stockholders....... (167,578) (195,515) (193,589)
S corporation termination deferred tax charge.......... 74,000 -- --
State taxes, net of federal income tax benefit......... 19,503 -- --
Surtax exemption....................................... -- (7,613) (6,488)
Change in valuation allowance.......................... -- (9,736) (5,303)
Other.................................................. 3,79 66,786 770
----------- ----------- -----------
$ 269,714 $ 6,689 $ (2,498)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 29, 1996 are presented below:

<TABLE>
<S> <C>
Deferred tax assets:
Accounts receivable, due to allowance for doubtful
accounts.............................................. $ 10,716
Accrued liabilities, due to accrual for financial
reporting purposes.................................... 30,252
Deferred franchise fees deferred for financial reporting
purposes but recognized for tax reporting purposes.... 20,520
---------
Total deferred tax assets............................. 61,488
---------
Deferred tax liabilities:
Deferred costs deferred for financial reporting purposes
but recognized for tax reporting purposes............. 11,714
Preopening costs initially capitalized for financial
reporting purposes but recognized for tax reporting
purposes.............................................. 79,209
Property, plant and equipment, due to accelerated
depreciation for tax reporting purposes............... 53,504
Goodwill, due to accelerated amortization for tax
reporting purposes.................................... 469
---------
Total deferred tax liabilities........................ 144,896
---------
Net deferred tax liability............................ $ 83,408
---------
---------
</TABLE>

(9) STOCKHOLDERS' EQUITY

CAPITAL CONTRIBUTIONS AND DISTRIBUTIONS TO STOCKHOLDERS

In July 1994, pursuant to a contract for sale of stock (the contract) of New
York Bagel Enterprises, Inc. (NYBE), the then existing stockholders (sellers) of
NYBE sold a 50% ownership interest in NYBE to certain individuals (buyers) in
exchange for a cash payment from the buyers directly to the sellers and a
$50,000 contribution by the buyers to NYBE of which $49,250 has been recorded as
contributed

F-15
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(9) STOCKHOLDERS' EQUITY (CONTINUED)
capital and $750 has been applied as payment of amounts owed to NYBE by the
sellers. The remaining $1,000 of capital contribution in 1994 was a cash
contribution to one of the five restaurant entities. Pursuant to the contract,
NYBE is obligated to pay to the sellers (as distributions) collections of
franchise fees NYBE receives subsequent to closing of the contract for certain
specified locations. To the extent such fees have been recognized as income but
have not yet been distributed to the sellers, such amounts are recorded as
distributions payable in the accompanying balance sheets.

In 1996, as a result of the Company's termination of its S corporation
status immediately prior to the effective date of the IPO, the Company declared
a distribution to the then current stockholders in an amount commensurate with
their federal and state income tax obligations arising from the Company's 1996
results of operations while an S corporation which are reported to the
stockholders for inclusion in their individual income tax returns. The
distribution has been accrued and is included in distributions payable at
December 29, 1996.

Distributions to stockholders for the fifty-two weeks ended December 29,
1996 and the years ended December 31, 1995 and 1994 are comprised of the
following:

<TABLE>
<CAPTION>
1996 1995 1994
---------- ------------ ----------
<S> <C> <C> <C>
Distributions of NYBE--Kansas.......................... $ 156,000 $ -- $ --
Distributions of NYBE--Oklahoma........................ -- 963,923 132,000
Distributions of the five restaurant entities.......... - 1,399,107 482,260
---------- ------------ ----------
Total distributions.................................... $ 156,000 $ 2,363,030 $ 614,260
---------- ------------ ----------
---------- ------------ ----------
</TABLE>

As disclosed in note 2(i), distributions of the five restaurant entities
include two transfers to certain stockholders in 1994 of real estate net of
related indebtedness and the transfer in 1995, prior to the Merger, of certain
assets and liabilities (primarily restaurant related current assets and
liabilities) to the stockholders of the five restaurant entities.

(10) FINANCIAL INSTRUMENTS FAIR VALUE INFORMATION

The carrying value of the Company's long-term debt approximates its fair
value based on current interest rates of similar instruments. The carrying
values of the Company's other financial instruments at December 29, 1996,
including cash and cash equivalents, investment securities available for sale,
accounts receivable, other current assets, accounts payable, and accrued
expenses approximate their fair values because of their short maturity.

(11) ACQUISITIONS

Effective December 6, 1996, the Company purchased substantially all of the
operating assets and business operations and assumed certain liabilities of Lots
A' Bagels, Inc. for an initial cash payment of $2,100,000. In addition, certain
contingent consideration, potentially comprised of promissory notes, additional
cash, and issuance of a warrant to purchase the Company's common stock, may be
paid as additional purchase price based on Lots A' Bagels, Inc.'s earnings (as
defined in the purchase agreement) for the period July 1, 1996 through March 30,
1997. Acquisition expenses incurred through December 29, 1996 amounted to
$81,869. The acquisition has been accounted for by the purchase method of
accounting and, accordingly, the operations of Lots A' Bagels, Inc. have been
included in the accompanying statements

F-16
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(11) ACQUISITIONS (CONTINUED)
of operations subsequent to December 6, 1996. The initial purchase price has
been allocated to the assets and liabilities acquired based on their estimated
fair values at date of acquisition. Goodwill as of December 29, 1996 arising
from the acquisition amounted to $279,124.

Effective September 27, 1996, the Company purchased certain assets of Jeff
Eateries Limited Partnership for $245,000. The acquisition has been accounted
for by the purchase method of accounting. The purchase price has been allocated
to the assets acquired based on their estimated fair values at date of
acquisition. Goodwill arising from the acquisition amounted to $94,182.

Effective December 14, 1995, the Company purchased all the outstanding
common stock of Nashville Bagel Co., Inc. for $565,000. Acquisition expenses
amounted to $23,338. The acquisition has been accounted for by the purchase
method of accounting and, accordingly, the operations of Nashville Bagel Co.,
Inc. have been included in the accompanying statements of operations subsequent
to December 14, 1995. The purchase price has been allocated to the assets and
liabilities acquired based on their estimated fair values at date of
acquisition. Goodwill arising from the acquisition amounted to $434,451.

Effective December 31, 1995, the Company purchased certain assets of Central
& Ridge Yogurt, Inc. by assuming liabilities amounting to $225,000. The
acquisition has been accounted for by the purchase method of accounting. The
purchase price has been allocated to the net assets acquired based on their
estimated fair values at date of acquisition. Goodwill arising from the
acquisition amounted to $24,600. A Company officer was also an officer and
stockholder of Central & Ridge Yogurt, Inc.

The following table summarizes the pro forma results of operations for the
fifty-two weeks ended December 29, 1996 and the years ended December 31, 1995
and 1994 as if the acquisitions consummated in 1996 had been consummated at the
beginning of 1996 and 1995, respectively, and the acquisitions consummated in
1995 had been consummated at the beginning of 1995 and 1994, respectively. In
presenting the pro forma information, depreciation, amortization and interest
expense have been adjusted to reflect the purchase accounting recorded in the
acquisitions and income taxes have been recognized as if none of the entities
included in the pro forma results had operated as an S corporation. The pro
forma results do not necessarily reflect what would have occurred if the
acquisitions had been made at the beginning of the respective periods or the
results that may occur in the future.

<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Revenues......................................... $ 15,314,832 $ 12,103,662 $ 7,339,463
Net earnings..................................... $ 646,746 $ 264,129 $ 311,051
Net earnings per share........................... $ .18 $ .09
</TABLE>

(12) STOCK AWARDS

In 1996, the Company adopted the 1996 Incentive Plan (the Plan) pursuant to
which the Company may grant incentive stock options, nonqualified stock options
or restricted stock to officers, directors, employees, consultants and advisors.
The Plan authorizes grants of up to 400,000 shares of authorized but unissued
common stock. In addition to the stock options granted under the Plan, the
Company entered into nonqualified stock option agreements with two of its
non-employee directors to purchase a total of 35,000 shares of authorized but
unissued common stock. Stock options are granted with an exercise price equal to
the stock's fair market value at the date of grant except for options granted to
employees and directors that are also greater than 10% stockholders of the
Company in which case such options are

F-17
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(12) STOCK AWARDS (CONTINUED)
granted with an exercise price equal to 110% of the stock's fair market value at
the date of grant. Stock options granted in 1996 have terms of either ten years
or five years. One-fifth of the options are exercisable six months after date of
grant and one-fifth on each of the first four anniversaries of the date of
grant.

At December 29, 1996, there were 138,500 additional shares available for
grant under the Plan. The per share weighted-average fair value of stock options
granted during 1996 was $3.70 on the date of grant using the Black Scholes
option-pricing model with the following weighted average assumptions: expected
dividend yield 0%, expected volatility of 38.5%, risk-free interest rate of
6.58%, and an expected life of 5 years.

The Company applies APB Opinion No. 25 in accounting for its stock options
and, accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No. 123,
the Company's 1996 pro forma net earnings and pro forma net earnings per share
would have been reduced to the pro forma amounts indicated below.

<TABLE>
<S> <C> <C>
Net earnings As reported.......................................... $ 610,475
Pro forma............................................ $ 496,251

Earnings per
share As reported.......................................... $ .17
Pro forma............................................ $ .14
</TABLE>

Stock option activity during 1996 is as follows:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Balance at December 31, 1995.............................................. -- $ --
Granted................................................................. 331,000 8.77
Exercised............................................................... -- --
Forfeited............................................................... (34,500) 9.00
----------- -----
Balance at December 29, 1996.............................................. 296,500 $ 8.74
----------- -----
----------- -----
</TABLE>

At December 29, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $6.125 - $9.90 and 8.22
years, respectively.

At December 29, 1996, the number of options exercisable was 47,300 and the
weighted-average exercise price of those options was $9.29.

F-18
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Financial results by quarter are as follows:

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
1996:
Total revenues....................................... $ 2,389 $ 2,801 $ 2,891 $ 3,456
Gross profit (a)..................................... 1,406 1,711 1,774 2,224
Operating income..................................... 338 338 244 166
Net earnings......................................... 260 252 59 159
Pro forma net earnings (b)........................... 156 155 133 166
Pro forma net earnings per share (b)................. .05 .05 .04 .04

1995:
Total revenues....................................... $ 1,708 $ 1,831 $ 1,797 $ 2,023
Gross profit (a)..................................... 1,013 1,059 1,003 1,188
Operating income..................................... 177 217 156 116
Net earnings......................................... 170 204 146 99
Pro forma net earnings (b)........................... 103 124 90 63
Pro forma net earnings per share (b)................. .03 .04 .03 .02
</TABLE>

- ------------------------

(a) Gross profit is sales from Company-owned restaurants less cost of sales.

(b) Pro forma net earnings and net earnings per share is based on reported
earnings before income taxes less pro forma income tax expense.

F-19

<PAGE>
EXHIBIT 4.6

SCHEDULE OF EMPLOYEES RECEIVING STOCK OPTION GRANTS

Date Options Strike Exercised
Granted Employee Granted Price (Cancelled)
------- -------- ------- ------ -----------

1 June 4, 1996 Rob Geresi 20,000 $9.90 -
2 June 4, 1996 Paul Hoover 20,000 $9.00 -
3 June 4, 1996 Paul Sorrentino 20,000 $9.90 -
4 June 4, 1996 Chris Dennis 20,000 $9.00 (20,000)
5 June 4, 1996 Vince Vrana 20,000 $9.90 -
6 June 4, 1996 Joe Trizza 20,000 $9.00 -
7 June 4, 1996 Bob Young 12,500 $9.00 -
8 June 4, 1996 Mark Scholler 10,000 $9.00 -
9 June 4, 1996 Scott White 5,000 $9.00 -
10 June 4, 1996 Brent Durham 5,000 $9.00 -
11 June 4, 1996 Chris Moorman 5,000 $9.00 -
12 June 4, 1996 John Wallace 5,000 $9.00 -
13 June 4, 1996 Suzi Lindsey 5,000 $9.00 -
14 June 4, 1996 Keith Durham 5,000 $9.00 -
15 June 4, 1996 Casey Williamson 2,500 $9.00 -
16 June 4, 1996 Dave McLenand 2,500 $9.00 -
17 June 4, 1996 Ray Yarrol 2,500 $9.00 -
18 June 4, 1996 Celeste Little 2,500 $9.00 -
19 June 4, 1996 Kathryn Elliott 2,500 $9.00 -
20 June 4, 1996 John Corbett 2,500 $9.00 (2,500)
21 June 4, 1996 John Law 2,500 $9.00 (2,500)
22 June 4, 1996 Michael Longacre 2,500 $9.00 -
23 June 4, 1996 Wes Hodges 2,500 $9.00 (2,500)
24 June 4, 1996 Dana Brown 2,500 $9.00 -
25 June 4, 1996 Mark Tuller 2,500 $9.00 -
26 June 4, 1996 Andy Stafford 2,500 $9.00 -
27 June 4, 1996 Cindy Unruh 2,500 $9.00 -
28 June 4, 1996 Brain Bush 2,500 $9.00 -
29 June 4, 1996 Pat Laughlin 2,500 $9.00 -
30 June 4, 1996 Julie Fulginiti 2,500 $9.00 -
31 June 4, 1996 Kenny Adams 2,500 $9.00 -
32 June 4, 1996 Craig Wallace 1,000 $9.00 -
33 June 4, 1996 Alan Cops 1,000 $9.00 -
34 June 4, 1996 Kamicha Darby 1,000 $9.00 -
35 June 4, 1996 Tracy Lusher 1,000 $9.00 -
36 June 4, 1996 Mark Little 1,000 $9.00 -
37 June 4, 1996 Robery Maldanado 1,000 $9.00 -
38 June 4, 1996 Felix Rozier 1,000 $9.00 (1,000)
39 June 4, 1996 Rhonda Edwards 1,000 $9.00 -
40 June 4, 1996 Mark White 1,000 $9.00 -
41 June 4, 1996 Julie Smith 1,000 $9.00 (1,000)
42 June 4, 1996 Jason Hill 1,000 $9.00 (1,000)
43 June 4, 1996 Ethel Ruggles 1,000 $9.00 -
44 June 4, 1996 Jamie Savoy 1,000 $9.00 (1,000)
45 June 4, 1996 Bob Lehr 1,000 $9.00 (1,000)
46 June 4, 1996 Michael Harmon 1,000 $9.00 -
47 June 4, 1996 Jenny O'Donnell 1,000 $9.00 (1,000)
48 June 4, 1996 Si Page 1,000 $9.00 (1,000)
49 June 4, 1996 Nina Tunnison 1,000 $9.00 -
50 June 4, 1996 Patty Hageman 1,000 $9.00 -
51 June 4, 1996 Victor Gates 500 $9.00 -
52 June 4, 1996 Sara Carmen 500 $9.00 -
53 June 4, 1996 Jay Gates 500 $9.00 -
54 June 4, 1996 Lisa Page 500 $9.00 -
55 October 1, 1996 Steve Frazier 2,500 $9.125 -
56 October 1, 1996 Jason Hadrava 500 $9.125 -
57 November 1, 1996 Chris Howell 1,000 $8.375 -
58 November 1, 1996 Karen Howell 1,000 $8.375 -
59 November 25, 1996 Jon Cramer 20,000 $6.75 -
------- -------
261,000 (34,500)
------- -------
------- -------

<PAGE>
EXHIBIT 4.7

SCHEDULE OF NON-EMPLOYEES RECEIVING STOCK OPTION GRANTS

Date Options Strike Exercised
Granted Non-employee Granted Price (Cancelled)
------- ------------ ------- ------ -----------

1 June 4, 1996 Bill Atherton 17,500 $9.00 -
2 June 4, 1996 David Murfin 17,500 $9.90 -

3 December 20, 1996 Bill Walsh 17,500 $6.125 -
4 December 20, 1996 Stan Clark 17,500 $6.125 -
------ ---
70,000 0
------ ---
------ ---

<PAGE>

EXHIBIT 10.6

REAL ESTATE PURCHASE AGREEMENT

THIS REAL ESTATE PURCHASE AGREEMENT (hereinafter "Agreement") is made
and entered into as of the 10th day of October, 1996,

BY AND BETWEEN BAGEL LAND, INC.,
an Oklahoma corporation,
hereinafter referred to as

"SELLER"

AND NEW YORK BAGEL ENTERPRISES, INC.,
a Kansas corporation,
hereinafter referred to as

"BUYER"

W I T N E S S E T H:

WHEREAS, Seller desires to sell, and Buyer desires to purchase, the
following described real estate owned by Seller, upon the terms and
conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the mutual promises, covenants and
payments hereinafter set out, Seller and Buyer do hereby contract to, and
agree with, each other as follows:

1. PROPERTY. Seller does hereby agree to sell, and Buyer does hereby
agree to purchase, upon the terms and conditions in this Agreement, the real
estate together with all improvements located thereon described in Exhibit
"A" attached hereto (hereinafter referred to as the "Property").

2. PURCHASE PRICE. Buyer agrees to pay to Seller in consideration for
the conveyance to Buyer of said Property a purchase price of Three Hundred
Fifty-three Thousand Two Hundred Fifteen and 63/100 Dollars ($353,215.63) in
cash or to Seller's lending institution for the benefit of Seller.

3. PRORATION OF TAXES. All ad valorem taxes, including real estate
taxes and special assessments, shall be adjusted and prorated as of the date
of this Agreement. General taxes shall be prorated for the year 1996 on the
basis of taxes levied for the year 1995. Special assessments shall be
prorated on the basis of the amount due for the year 1996. All ad valorem
taxes, including real estate taxes and any special assessments for the year
1995 and all prior years shall be paid by Seller. On and after the date of
this Agreement, Buyer shall be responsible for the payment of all such taxes
and assessments levied against the Property.

4. RISK OF LOSS; INSURANCE. Buyer assumes the risk of loss and shall
be responsible to obtain such insurance or other protections for such loss as
Buyer may so desire.

5. CONDITION OF THE PROPERTY; REPRESENTATIONS. Seller makes the
following representations in respect to the condition of the Property:

A. ENVIRONMENTAL. Seller states that Seller has not, nor have any of
Seller's agents, representatives or employees, contaminated the
Property during the term of Seller's ownership in violation of any
applicable federal, state or local law, rule, regulation or ordinance
pertaining to the air, water, soil quality, water well, hazardous
waste, waste disposal and/or other environmental matters. Seller
also represents that Seller has no knowledge that there has been any
contamination on or under the Property prior to ownership by Seller,
and that to the best of Seller's knowledge no contamination currently
exists on or under the Property which would violate any applicable
federal, state and local law, rule, regulation or ordinance pertaining
to air, water, soil quality, water well, hazardous waste, waste
disposal and/or other environmental matters.

B. UTILITIES. There is available to the Property at its boundary lines
for use by Buyer water, sewer, electrical, gas and telephone lines
and systems having adequate capacity for the full and complete use
of the Property for commercial

<PAGE>

purposes. If any of said utilities servicing the Property pass
through adjoining private lands, they do so in accordance with valid
public easements.

C. SELLER'S AUTHORITY. Seller represents and warrants to Buyer that
(i) it is duly authorized and empowered to execute, enter into and
perform this Real Estate Purchase Agreement, (ii) all action on its
part requisite for the due extension, delivery and performance of
this Real Estate Purchase Agreement has been duly and effectively
taken, and (iii) the person signing this Real Estate Purchase
Agreement on behalf of Seller is duly authorized to do so.

6. CLOSING COSTS. Buyer agrees to pay all costs associated with
obtaining Buyer's financing, if any, including any mortgage registration
fees. Seller and Buyer, respectively, shall each be responsible to pay all
costs associated with any attorneys' fees or other professional fees which
they may individually engage to assist them in the closing of this
transaction. Except as otherwise set forth in this Agreement, all other
closing costs shall be split equally between Seller and Buyer.

7. SURVIVAL. Where applicable, all of the terms and conditions of
this Agreement shall survive closing and delivery of the deed.

8. TEXAS LAWS; HEIRS AND ASSIGNS. This Agreement and its validity,
construction and performance shall be governed by the laws of the State of
Texas. This Agreement shall be binding upon the parties hereto and their
respective successors and assigns.

9. ASSIGNMENT. Neither party may assign this Agreement or any rights
arising thereunder without the prior written consent of the other party.

IN WITNESS WHEREOF, the parties do hereby sign this Agreement as of the
10th day of October, 1996.

BAGEL LAND, INC.

By
--------------------------------
Robert J. Geresi, President

"SELLER"

NEW YORK BAGEL ENTERPRISES, INC.

By
--------------------------------
Paul R. Hoover, Vice President-
Strategic Planning

"BUYER"

<PAGE>

EXHIBIT 21

SUBSIDIARIES OF THE COMPANY

1 LAB Acquisition Corporation Wholly-owned subsidiary of New York Bagel
Enterprises, Inc.

<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains audited summary financial information extracted from the
balance sheet, and the statements of operation and is qualified in its entirety
by reference to such audited financial statements.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-29-1996
<CASH> 1,305,130
<SECURITIES> 4,265,862
<RECEIVABLES> 343,493
<ALLOWANCES> (28,200)
<INVENTORY> 272,261
<CURRENT-ASSETS> 6,605,743
<PP&E> 8,508,424
<DEPRECIATION> (892,080)
<TOTAL-ASSETS> 15,173,221
<CURRENT-LIABILITIES> 1,308,253
<BONDS> 57,500
0
0
<COMMON> 46,675
<OTHER-SE> 13,628,158
<TOTAL-LIABILITY-AND-EQUITY> 15,173,221
<SALES> 10,864,863
<TOTAL-REVENUES> 11,536,850
<CGS> 3,749,471
<TOTAL-COSTS> 10,451,179
<OTHER-EXPENSES> 85,691
<LOSS-PROVISION> 13,200
<INTEREST-EXPENSE> 85,691
<INCOME-PRETAX> 999,980
<INCOME-TAX> 269,714
<INCOME-CONTINUING> 730,266
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 730,266
<EPS-PRIMARY> .17
<EPS-DILUTED> .17

</TABLE>