General

We have a 52/53-week fiscal year ending on the Tuesday closest to December 31. Fiscal years 2010 and 2012 ended on December 28, 2010 and January 1, 2013, respectively, and each contained 52 weeks. Fiscal year 2011 contained 53 weeks and ended on January 3, 2012. Comparable store sales percentages presented for fiscal 2011 in this Item 7 are calculated excluding the 53rd week.

Overview

We are the largest owner/operator, franchisor and licensor of bagel specialty restaurants in the United States. As a leading fast-casual restaurant chain, our restaurants specialize in high-quality foods for breakfast, lunch and afternoon snacks in a bakery-café atmosphere with a neighborhood emphasis. Our product offerings include fresh bagels and other bakery items baked on-site, made-to-order breakfast and lunch sandwiches on a variety of bagels, breads or wraps, gourmet soups and salads, assorted pastries, premium coffees and an assortment of snacks. Our manufacturing operations and network of independent distributors deliver high-quality ingredients to our restaurants.

Fiscal 2012 reflect our continued focus on execution of our key strategies and the in-depth review of strategic alternatives by our Board of Directors (the "Board"). This Overview will first review 2012 Highlights and Trends and the results of the strategic alternatives review. Lastly, we will provide a 2013 Outlook.

2012 Highlights and Trends

Our results for 2012 reflect the continued soundness of our business model, the underlying strength of our brands and the talent and dedication of our employees. We continued to focus on our key strategies which are:

• Drive comparable store sales growth;

• Manage corporate margins; and

• Accelerate unit growth.

For 2012, our system-wide comparable store sales were +1.0% with seven consecutive quarters of positive system-wide comparable store sales.

                                        Q1          Q2          Q3          Q4         Year
     System-wide comparable sales       +1.1 %      +1.3 %      +0.2 %      +1.4 %      +1.0 %
     Company-owned comparable sales     +1.1 %      +1.2 %      +0.2 %      +1.1 %      +0.9 %

The primary reasons for this sequential improvement was strong growth in average check, a favorable menu mix shift, strength in catering sales and slightly lower customer discounts. This was partially offset by lower comparable transactions.

Our catering business, on a comparable store basis, grew by approximately 17% which we attribute to our focus on our online ordering system, online search engine and online marketing. Our catering business now makes up approximately 8% of our comparable company-owned restaurant revenues. We have also seen strong growth in our blended beverage line of business. Coffee and blended beverage sales now represent approximately 10% of our menu mix and continue to grow. We believe that our sandwich business continues to benefit from the success of our bagel thin sandwich platform, paninis and our continued focus on healthy, low calorie food options. We targeted our marketing investments at coupons, directional billboards and digital online media.

Our margin as a percentage of restaurant revenues improved in our company-owned restaurants by 1.1% primarily due to a 2.0% drop in our prime costs (combined costs of sales and total labor) as a percentage of

company-owned restaurant revenues. Our initiatives around food costs and labor, including waste management, made up 1.6% of this improvement in food costs. Partially offsetting the improvement in the management of our prime costs was an increase in marketing investment of 0.4% as a percentage of company-owned restaurant revenues. Our marketing investment in fiscal 2012 included product testing in certain markets, continued local store (grass roots) marketing and grand opening support.

Revenues from our manufacturing facility grew by $1.4 million, or 4.7%, to $30.5 million as a result of additional export revenues. Our commissary revenues declined by approximately $4.9 million in 2012 from 2011 as a result of the closure of our commissaries. To streamline our supply chain and to reduce our cost base, in March 2012, we completed our plan to close our five food commissary facilities. Related to this plan, we incurred approximately $0.7 and $0.5 million of restructuring expenses in 2011 and 2012, respectively, including employee termination benefits and lease termination expenses. We realized cost savings of approximately $1.5 million from the closure of these facilities. For our manufacturing and commissaries segment as a whole, revenues declined by $3.4 million, or 10.1%, while this segment's profitability improved by $2.7 million, or 66%.

We made progress in balancing our unit portfolio toward our goal of having at least 50% of our system-wide units being franchise and license units. The proportion of units opened in our franchise and license channels was approximately 72% of total openings as we opened 40 franchise and license units in addition to 15 company-owned restaurant openings. In total, we opened 55 units. Total net units increased in fiscal 2012 to 816 from 773 at the end of fiscal 2011.

Our Recapitalization

In 2012, our Board authorized a review of strategic alternatives to maximize value for all stockholders. This review was initiated in May and culminated in December with a recapitalization of the Company, including the payment of a one-time special cash dividend of $4.00 per share of common stock on December 27, 2012.

The recapitalization included the amendment and restatement of the Company's existing Senior Credit Facility, which consists of a Term Loan A and a Revolver with a syndicate of banks ("Facility"). The amendment and restatement of the Facility increased the Company's Term Loan A from $75 million to $100 million, increased the Revolver availability from $50 million to $75 million, and extended the maturity date from December 20, 2015 to December 6, 2017. The increase to $175 million was used to fund the one-time special dividend of $68.1 million, as well as the ongoing quarterly dividend, working capital, capital expenditures, and other general corporate purposes. The loans under the Facility will bear interest equal to the Eurodollar Rate plus an applicable margin ranging from 2.5% to 4.0% or the Base Rate plus an applicable margin ranging from 1.5% to 3.0%.

2013 Outlook

Our execution plan to grow comparable store sales includes:

• Build traffic by:

• Launching everyday value combos

• Leveraging our strength in bagels

• Driving frequency through increased coffee focus

• Building awareness around lunch

• Accelerating our in-store experience

• Build average check through bulk bagels, catering, and new signature sandwich lines

• Local brand activation

• Directional outdoor

• Television test

• Digital marketing/Social Media

We expect our catering channel will continue to benefit from our online ordering system, an outsourced and expanded call center, focus on online and digital marketing, and an optimized menu. New support for catering will include expanding our sales force, focusing our marketing search engine, managing outlier markets and penetrating the lunch daypart.

Our approach to enhancing corporate margins will extend and build on the initiatives that we have already started, namely, aggressively managing the sourcing of our commodities, utilizing new packaging to drive cost advantages, further rationalize our distribution network, and negotiate favorable contracts with our vendors.

Our emphasis on acceleration of unit growth will continue to focus on a franchise first growth model, asset light unit economics, penetration into new key channels and opportunistic refranchising and acquisition efforts. Our unit growth plan for 2013 considers our long-term annual unit growth objective of
+10%, or 60 to 80 system-wide openings for 2013. This includes the openings of 15 to 20 company-owned restaurants, 15 to 20 franchised restaurants and 30 to 40 licensed restaurants. We see refranchising our units as an opportunity to attract high quality franchisees that will support our accelerated growth initiatives.

The airport channel is key for us in terms of securing success. Highlights of our airport program in 2012 and our plans for 2013 include:

• Average Unit Volume of $2.0 million in 2012.

• +1.7% Comparable sales growth in 2012.

• Total airport units of 11 in 2012.

• Awarded Dallas/Fort Worth Airport (Terminal E) for potential opening in the second quarter of 2013. In February 2013, we opened a location in Terminal A.

• Awarded two locations in San Diego Airport for potential opening in 2013.

• Awarded Atlanta (Terminal D) for potential opening in the second quarter of 2013.

We expect to spend between $20 million and $22 million in capital expenditures in 2013 which includes the opening of company-owned restaurants and the relocation of additional company-owned restaurants. We also intend to deploy our capital into areas such as installing drive-thru lanes and adding new exterior signage.

As we move into 2013, we continue to have a robust pipeline of existing franchise development agreements and new license locations. We will continue to host discovery days for potential franchisees as well as expand our license footprint. Thus far in fiscal 2013, we have opened three licensed units and two franchised units, including the entry into Montana, our 40th state where we have operations. As of February 25, 2013, we have 28 development agreements in place for 136 total restaurants, 34 of which have already opened. Based upon the development agreements, we expect the remaining 102 new restaurants will open on various dates through 2021. We expect to enter into 10 to 12 new agreements for a total of 60 to 70 new units, bringing our remaining total pipeline to 162 to 172 additional new units.

We expect our free cash flow will continue to be robust and we are comfortable with our financial ability to have the financial resources to execute on our 2013 plan including the servicing of our elevated level of debt.

Use of Non-GAAP Financial Information

In addition to the results reported in accordance with accounting principles generally accepted in the United States of America ("GAAP") included in this filing, we have provided certain non-GAAP financial information, including non-GAAP total revenues excluding the extra week in fiscal 2011; adjusted earnings before interest, taxes, depreciation and amortization, Series Z modifications, restructuring expenses, strategic alternative expenses, write-off of debt issuance costs, and other operating expenses/income ("Adjusted EBITDA"); net income adjusted for the extra 53rd week in fiscal 2011, restructuring expenses, strategic alternatives expense, incremental interest expense on additional credit facility borrowings and other operating expenses/income ("Adjusted Net Income"); earnings per share adjusted for the extra 53rd week in fiscal 2011, restructuring expenses, strategic alternatives expense, incremental interest expense on additional credit facility borrowings and other operating expenses/income ("Adjusted Net Income Per Share"); and "Free Cash Flow", which we define as net cash provided by operating activities less net cash used in investing activities. Management believes that the presentation of this non-GAAP financial information provides useful information to investors because this information may allow investors to better evaluate our ongoing business performance and certain components of our results. In addition, the Board uses this non-GAAP financial information to evaluate the performance of the Company and its management team. This information should be considered in addition to the results presented in accordance with GAAP, and should not be considered a substitute for the GAAP results. Not all of the aforementioned items defining Adjusted EBITDA occur in each reporting period, but have been included in our definitions of these terms based on historical activity. We have reconciled the non-GAAP financial information to the nearest GAAP measure on pages 30, 35, 36 and 43.

We include in this report information on system-wide comparable store sales percentages. In fiscal 2011, we modified the method by which we determine restaurants included in our comparable store sales percentages to include those restaurants in operation for a full six fiscal quarters. Previously, comparable store sales percentages were based on restaurants that had been in operation for thirteen months. This methodology modification did not have a material impact on previously reported amounts, and therefore previously reported amount have not been restated. System-wide comparable store sales percentages refer to changes in sales of our restaurants, whether operated by the company or by franchisees and licensees, in operation for six fiscal quarters including those restaurants temporarily closed for an immaterial amount of time. Some of the reasons restaurants may be temporarily closed include remodeling, relocations, road construction, rebuilding related to site-specific catastrophes and natural disasters. Franchise and license comparable store sales percentages are based on sales of franchised and licensed restaurants, as reported by franchisees and licensees. Management reviews the increase or decrease in comparable store sales to assess business trends. Comparable store sales exclude permanently closed locations. When we intend to relocate a restaurant, we consider that restaurant to be temporarily closed for up to twelve months after it ceases operations. If a suitable relocation site has not been identified by the end of twelve months, we consider the restaurant to be permanently closed. Until that time, we include the restaurant in our open store count, but exclude its sales from our comparable store sales. As of January 1, 2013, there are seven stores that we intend to relocate, and are thus considered to be temporarily closed.

We use company-owned store sales, franchise and license sales and the resulting system-wide sales information internally in connection with restaurant development decisions, planning, and budgeting analyses. We believe system-wide comparable store sales information is useful in assessing consumer acceptance of our brands; facilitates an understanding of our financial performance and the overall direction and trends of sales and operating income; helps us appreciate the effectiveness of our advertising and marketing initiatives; and provides information that is relevant for comparison within the industry.

Comparable store sales percentages are non-GAAP financial measures, which should not be considered in isolation or as a substitute for other measures of performance prepared in accordance with GAAP, and may not be equivalent to comparable store sales as defined or used by other companies. We do not record franchise or license restaurant sales as revenues. However, royalty revenues are calculated based on a percentage of franchise and license restaurant sales, as reported by the franchisees or licensees.

Results of Operations for Fiscal 2012 as compared to Fiscal 2011

Financial Highlights

• System-wide comparable store sales increased +1.0%.

• Total revenues increased $3.4 million, or 0.8%, which was driven by an increase in company-owned restaurant revenue of $6.1 million and franchise and license related revenue of $0.9 million, partially offset by a decline in manufacturing and commissary revenue. The extra 53rd week in fiscal 2011 contributed an additional $7.3 million of revenue. Excluding the extra week in fiscal 2011, total revenues increased 2.6% in 2012, with revenue growth offset by the closure of our commissaries.

• Manufacturing and commissary revenue decreased $3.5 million due to the closure of our commissaries and one less week in fiscal 2012. A decrease in commissary revenue of $4.9 million was partially offset by a 4.7% increase in manufacturing revenue of $1.4 million. We attribute this increase in manufacturing revenue to higher export sales. The extra 53rd week in fiscal 2011 contributed an additional $0.5 million of revenue.

• Franchise and license related revenues grew 8.3%, or $0.9 million, and was driven by an increase in comparable store sales of +1.3% and unit growth. The extra 53rd week in fiscal 2011 contributed an additional $0.1 million of revenue.

• Cost of goods sold decreased 180 basis points as a percentage of company-owned restaurant sales as a result of our cost savings initiatives and the leveraged impact of price increases.

• Net income decreased 3.5% primarily due to the extra 53rd week in fiscal 2011 and the above mentioned strategic alternative review process, partially offset by our cost saving initiatives.

• Adjusted net income increased $3.3 million, or 25.2% to $16.4 million, or $0.95 adjusted earnings per diluted share, compared to adjusted net income of $13.1 million, or $0.78 adjusted earnings per diluted share, on a comparable 52-week basis.

• Adjusted EBITDA increased 11.7% primarily due to improved revenue and cost saving initiatives.

• Our Board authorized a review of strategic alternatives to maximize value for all stockholders. This review was initiated in May and culminated in December with a recapitalization of the Company, including the payment of a one-time special cash dividend of $4.00 per share of common stock totaling $68.1 million on December 27, 2012.

Consolidated Results - Fiscal 2012 vs Fiscal 2011



                                                              Fiscal year ended
                                                                                      Increase/
                                                      (in thousands)                  (Decrease)
                                              January 3,          January 1,             2012
                                                 2012                2013              vs. 2011
Revenues                                     $    423,595        $    427,006                 0.8 %
Cost of sales                                     342,075             336,638                (1.6 %)
Operating expenses                                 57,002              66,140                16.0 %

Income from operations                             24,518              24,228                (1.2 %)
Interest expense, net                               3,357               3,384                 0.8 %
Income before income taxes                         21,161              20,844                (1.5 %)
Total provision for income taxes                    7,958               8,103                 1.8 %

Net income                                   $     13,203        $     12,741                (3.5 %)
Adjustments to net income:
Interest expense, net                               3,357               3,384                 0.8 %
Provision for income taxes                          7,958               8,103                 1.8 %
Depreciation and amortization                      19,259              19,707                 2.3 %
Restructuring expenses                              1,099                 480               (56.3 %)
Strategic alternatives expenses                        -                3,677                   * *
Other operating expenses (income), net               (395 )             1,592                   * *

Adjusted EBITDA                              $     44,481        $     49,684                11.7 %

** Not meaningful

Our income from operations decreased by $0.3 million in 2012 to $24.2 million primarily as a result of the non-recurring strategic alternatives review process we undertook in 2012 and an additional $0.8 million in income from operations resulting from the 53rdweek in fiscal 2011, primarily offset by improved margins in fiscal 2012.

Total revenues increased by $3.4 million to $427.0 million, primarily the result of increased revenue from our company-owned stores. The extra 53rd week in 2011 contributed an additional $7.3 million in revenue. System-wide comparable stores were +1.0% for fiscal 2012 which we attribute to strong check growth of +4.2%, reflecting price and product mix favorability. Our catering business continues to be a strong revenue generator, as evidenced by an increase in catering sales of 17.3% over fiscal 2011. To build same store sales, we focus on building traffic by leveraging our strengths, growing average check and building brand awareness through various marketing initiatives.

Net income decreased for fiscal 2012 primarily due to the extra 53rd week in 2011, which contributed net income of $0.5 million, and $3.7 million ($2.2 million, net of tax) in non-recurring strategic alternatives expenses, partially offset by improved margins.

Company-Owned Restaurant Operations



                                                                           Fiscal year ended
                                                                             Increase/                Percentage of company-owned
                                           (in thousands)                   (Decrease)                     restaurant sales
                                   January 3,           January 1,             2012               January 3,               January 1,
                                      2012                 2013              vs. 2011                2012                     2013
Company-owned restaurant
sales                             $    378,723         $    384,783                 1.6 %
Percent of total revenues                 89.4 %               90.1 %
Cost of sales (exclusive of
depreciation and
amortization):
Cost of goods sold                $    112,002         $    106,925                (4.5 %)                29.6 %                  27.8 %
Labor costs                            110,467              111,784                 1.2 %                 29.2 %                  29.0 %
Rent and related expenses               40,277               41,993                 4.3 %                 10.6 %                  10.9 %
Other operating costs                   39,092               40,320                 3.1 %                 10.3 %                  10.5 %
Marketing costs                          9,796               11,380                16.2 %                  2.6 %                   3.0 %

Total company-owned
restaurant costs                  $    311,634         $    312,402                 0.2 %                 82.3 %                  81.2 %

Total company-owned
restaurant gross margin           $     67,089         $     72,381                 7.9 %                 17.7 %                  18.8 %

Comparable store sales for our company-owned restaurants for each quarter in fiscal 2011 and 2012 were as follows:

                               Fiscal 2011        Fiscal 2012       Change
             First Quarter             -1.4 %             +1.1 %       +2.5 %
             Second Quarter            -0.3 %             +1.2 %       +1.5 %
             Third Quarter             +0.7 %             +0.2 %       -0.5 %
             Fourth Quarter            +0.8 %             +1.1 %       +0.3 %
             Annual                     0.0 %             +0.9 %       +0.9 %

Company-owned restaurant sales for fiscal 2012 increased $6.1 million, which is attributable to favorable company-owned comparable store sales, net incremental revenue of $1.7 million from new company-owned stores opened in 2012, $3.4 million from stores we acquired from franchisees and income from gift card breakage of $1.0 million. Stores that we opened in the fourth quarter 2011 further contributed incremental revenue of $5.3 million in fiscal 2012. Company-owned comparable store sales increased +0.9%, with average check increasing +4.9% partially offset by a decline in transactions. In fiscal 2012, we opened fifteen restaurants, acquired eight restaurants and closed one restaurant. Restaurant sales for 2011 benefited from $6.7 million in revenue resulting from the extra 53rd week. We took two price increases in fiscal 2012, totaling approximately 1.0%.

Catering sales, which continue to be a strong revenue driver, comprised approximately 8% of our company store sales (on a comparable basis) for fiscal 2012, an increase of 17.3% from fiscal 2011. We believe that the implementation of a new online ordering system and an outsourced/expanded call center has contributed to the growth in catering sales. Coffee sales continue to remain strong and represent approximately 10% of our comparable company-owned restaurant sales.

Total costs for company-owned restaurants, as a percentage of company-owned restaurant sales, decreased 110 basis points primarily due to sales leveraging and our cost saving initiatives, which in 2012 included a manufacturing packing efficiency review, the introduction of reusable egg boats and the closure of our commissaries.

Our prime costs, consisting of costs of goods sold and labor costs, decreased by 2.0% to 56.8% of company-owned restaurant revenues.

As a percentage of company-owned restaurant sales, we saw a decrease in our food costs from 29.6% for fiscal 2011 to 27.8% for fiscal 2012. This 180 basis point decrease includes savings from our initiatives (-140 basis points) and the leveraged impact of price increases (-80 basis points), partially offset by a shift in product mix (-20 basis points) and deflation in our commodity costs (-20 basis points). Most of our commodity-based food costs decreased in fiscal 2012 as we were able to lock in several of our prices. We are continuing to evaluate innovative ways to target additional savings of between $2.5 million and $5.0 million in 2013 without negatively impacting the customer experience. We anticipate overall inflation to be in the range of 2.0% to 3.0% for fiscal 2013.

As a percentage of company-owned restaurant sales, labor costs decreased by 0.2% to 29.0% in fiscal 2012. Rent and related expenses increased primarily due to unit growth, scheduled rent increases and related increases in property taxes. Other operating expenses increased primarily due to higher credit card fees resulting from the Durban Act, which began to take effect in October 2011.

We invested $1.6 million more in marketing during fiscal 2012, primarily related to product testing in certain markets, continued local store (grass roots) marketing and grand opening support.

Gross margin for our company-owned restaurant segment increased in fiscal 2012 by $5.3 million, or 7.9%, to $72.4 million. We attribute this to an increase of $6.1 million, or 1.6%, in company-owned restaurant sales while holding company-owned restaurant costs to a modest increase of $0.8 million, or 0.2%, in fiscal 2012 due to our focus on our initiatives.

. . .