**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

### **Washington, D.C. 20549**

 

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**FORM 10-Q**

 
| **(Mark One)**                                                                                                                                                                                                                        | ** **                                                                                    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| **x**                                                                                                                                                                                                                                 | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| ** **                                                                                                                                                                                                                            | ** **                                                                                    |
| **For the  quarterly period ended September 30, 2006**                                                                                                                                                                                |
| ** **                                                                                                                                                                                                                            |
| **OR**                                                                                                                                                                                                                                |
| ** **                                                                                                                                                                                                                            |
| **o**                                                                                                                                                                                                                                 | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                            | ** **                                                                                    |
| **For the  transition period from                to                ** |

 

**Commission file number:  333-115046**

 

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**MRS. FIELDS FAMOUS BRANDS, LLC**

(Exact Name of Registrant Specified in Its Charter)

 
| **Delaware**                                                       | ** ** | **80-0096938**                     |
|--------------------------------------------------------------------|------------|------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization)   |       | (IRS Employer  Identification No.) |
| ** **                                                         | ** ** | ** **                         |
| **2855  East Cottonwood Parkway, Suite 400  Salt Lake City, Utah** | ** ** | **84121-7050**                     |
| (Address of  Principal Executive Offices)                          |       | (Zip Code)                         |

 

Registrant’sTelephone Number, Including Area Code: **(801) 736-5600**

 

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Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

YES x     NO o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (checkone):

 Large Accelerated Filer o                        Accelerated Filer o                       Non-acceleratedfiler x

 

Indicateby check mark whether the registrant is a shell company (as defined by Rule12b-2 of the Exchange Act). YES o     NO x

 

OnNovember 10, 2006, 100 common interests of registrant were outstanding, all ofwhich are held by an affiliate. There is no established trading market forregistrant’s common interests.

 

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### **MRS. FIELDS FAMOUS BRANDS,LLC**

** **

**TABLE OF CONTENTS**
|                                                                                                     | ** **                                                                                                                                          |
|-----------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                          |                                                                                                                                                |
| **PART I – FINANCIAL INFORMATION**                                                             |                                                                                                                                                |
|                                                                                                |                                                                                                                                                |
| Item 1. Financial Statements (Unaudited)                                                            |                                                                                                                                                |
|                                                                                                |                                                                                                                                                |
|                                                                                                | Condensed Consolidated Balance Sheets as of September  30, 2006 and December 31, 2005                                                               |   |
|                                                                                                |                                                                                                                                                |   |
|                                                                                                | Condensed  Consolidated Statements of Operations and Comprehensive Loss for  the 13 weeks and 39 weeks ended September 30, 2006 and October 1, 2005 |   |
|                                                                                                |                                                                                                                                                |   |
|                                                                                                | Condensed Consolidated Statements of Cash Flows for  the 39 weeks ended September 30, 2006  and October 1, 2005                                     |   |
|                                                                                                |                                                                                                                                                |   |
|                                                                                                | Notes to Condensed Consolidated Financial Statements                                                                                                |   |
|                                                                                                |                                                                                                                                                |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |                                                                                                                                                |
|                                                                                                |                                                                                                                                                |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                 |                                                                                                                                                |
|                                                                                                |                                                                                                                                                |
| Item 4. Controls and Procedures                                                                     |                                                                                                                                                |
|                                                                                                |                                                                                                                                                |
| **PART  II – OTHER INFORMATION**                                                               |                                                                                                                                                |
|                                                                                                |                                                                                                                                                |
| Item  1. Legal Proceedings                                                                          |                                                                                                                                                |
|                                                                                                |                                                                                                                                                |
| Item 1A. Risk Factors                                                                               |                                                                                                                                                |
|                                                                                                |                                                                                                                                                |
| Item 6. Exhibits                                                                                    |                                                                                                                                                |
|                                                                                                |                                                                                                                                                |
| SIGNATURES                                                                                          |                                                                                                                                                |

 

2

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# **PART I – FINANCIAL INFORMATION**

 

# **Item1.  Financial Statements**

 

**MRS. FIELDSFAMOUS BRANDS, LLC**

**Condensed Consolidated Balance Sheets**

**(Unaudited)**

**(Dollarsin thousands)**
| ** **                                                                                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ASSETS:                                                                                   |       |                   |       |                  |       |
| Cash and cash equivalents                                                                 |       | $                      | 7,916      |                  | $          | 23,664 |   |
| Receivables, net of allowance for doubtful accounts of  $496 and $612, respectively       |       | 9,489                  |       | 8,061                 |       |
| Inventories                                                                               |       | 3,903                  |       | 2,869                 |       |
| Prepaid expenses and other                                                                |       | 1,130                  |       | 932                   |       |
| Deferred tax asset                                                                        |       | 1,097                  |       | 780                   |       |
| Total current assets                                                                      |       | 23,535                 |       | 36,306                |       |
|                                                                                      |       |                   |       |                  |       |
| Property and equipment, net                                                               |       | 8,194                  |       | 4,360                 |       |
| Goodwill                                                                                  |       | 64,115                 |       | 78,683                |       |
| Trademarks and other intangible assets, net                                               |       | 11,237                 |       | 12,755                |       |
| Deferred loan costs, net of accumulated amortization  of $10,780 and $9,964, respectively |       | 6,148                  |       | 6,964                 |       |
| Deferred tax asset                                                                        |       | 421                    |       | 151                   |       |
| Other assets                                                                              |       | 822                    |       | 678                   |       |
|                                                                                      |       | $                      | 114,472    |                  | $          | 139,897 |   |
|                                                                                      |       |                   |       |                  |       |
| LIABILITIES AND  MEMBER’S DEFICIT:                                                   |       |                   |       |                  |       |
| Accounts payable                                                                          |       | $                      | 6,613      |                  | $          | 6,496 |   |
| Accrued liabilities                                                                       |       | 7,822                  |       | 12,289                |       |
| Amounts due to affiliates                                                                 |       | 4,873                  |       | 3,949                 |       |
| Current portion of capital lease obligations                                              |       | 110                    |       | 104                   |       |
| Current portion of deferred revenues                                                      |       | 1,373                  |       | 1,074                 |       |
| Total current liabilities                                                                 |       | 20,791                 |       | 23,912                |       |
| Long-term debt                                                                            |       | 195,747                |       | 195,747               |       |
| Capital lease obligations, net of current portion                                         |       | 402                    |       | 485                   |       |
| Deferred revenues, net of current portion                                                 |       | 884                    |       | 1,175                 |       |
| Other liabilities                                                                         |       | 1,308                  |       | —                |       |
| Total liabilities                                                                         |       | 219,132                |       | 221,319               |       |
| Member’s deficit                                                                     |       | (104,508               | )          | (81,273               | )          |
| Accumulated other comprehensive loss                                                      |       | (152                   | )          | (149                  | )          |
| Total member’s deficit                                                               |       | (104,660               | )          | (81,422               | )          |
| COMMITMENTS AND  CONTINGENCIES                                                            |       |                   |       |                  |       |
|                                                                                      |       | $                      | 114,472    |                  | $          | 139,897 |   |

 

See accompanying notes tocondensed consolidated financial statements.

3

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**MRS. FIELDS FAMOUS BRANDS, LLC**

**CondensedConsolidated Statements of Operations and Comprehensive Loss**

**(Unaudited)**

**(Dollars in thousands)**

** **
| ** **                              | ** ** | **13 Weeks Ended** | ** ** | **39 Weeks Ended** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **September 30,**       | ** ** | **October 1,**          | ** ** | **September 30,** | ** ** | **October 1,** | ** ** |
| ** **                              | ** ** | **2006**                     | ** ** | **2005**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| REVENUES:                               |       |                         |       |                         |       |   |   |   |   |
| Franchising                             |       | $                            | 13,386     |                         | $          | 13,332 |   | $ | 39,310 |   | $ | 39,655 |   |
| Gifts                                   |       | 3,915                        |       | 3,917                        |       | 13,980 |   | 14,266 |   |
| Branded retail                          |       | 6,906                        |       | 65                           |       | 6,985 |   | 184 |   |
| Licensing                               |       | 311                          |       | 877                          |       | 1,378 |   | 2,854 |   |
| Total revenues                          |       | 24,518                       |       | 18,191                       |       | 61,653 |   | 56,959 |   |
| OPERATING COSTS  AND EXPENSES:          |       |                         |       |                         |       |   |   |   |   |
| Franchising                             |       | 6,138                        |       | 5,214                        |       | 18,105 |   | 16,028 |   |
| Gifts                                   |       | 5,547                        |       | 4,372                        |       | 17,697 |   | 14,950 |   |
| Branded retail                          |       | 6,692                        |       | 53                           |       | 6,750 |   | 134 |   |
| Licensing                               |       | 466                          |       | 157                          |       | 1,375 |   | 512 |   |
| General and administrative              |       | 2,259                        |       | 2,357                        |       | 7,699 |   | 6,659 |   |
| Depreciation                            |       | 551                          |       | 286                          |       | 1,910 |   | 839 |   |
| Amortization                            |       | 517                          |       | 704                          |       | 1,593 |   | 2,114 |   |
| Impairment of goodwill                  |       | —                       |       | —                       |       | 14,568 |   | — |   |
| Total operating costs and expenses      |       | 22,170                       |       | 13,143                       |       | 69,697 |   | 41,236 |   |
| Income (loss) from operations           |       | 2,348                        |       | 5,048                        |       | (8,044 | ) | 15,723 |   |
| Interest  expense, net                  |       | (5,270                       | )          | (5,289                       | )          | (15,741 | ) | (15,988 | ) |
| Other loss                              |       | —                       |       | —                       |       | (28 | ) | — |   |
| Loss before benefit for income taxes    |       | (2,922                       | )          | (241                         | )          | (23,813 | ) | (265 | ) |
| Benefit for  income taxes               |       | 460                          |       | 92                           |       | 1,250 |   | 102 |   |
|                                    |       |                         |       |                         |       |   |   |   |   |
| Net loss                                |       | $                            | (2,462     | )                            | $          | (149 | ) | $ | (22,563 | ) | $ | (163 | ) |
|                                    |       |                         |       |                         |       |   |   |   |   |
| COMPREHENSIVE  LOSS:                    |       |                         |       |                         |       |   |   |   |   |
| Net loss                                |       | $                            | (2,462     | )                            | $          | (149 | ) | $ | (22,563 | ) | $ | (163 | ) |
| Foreign currency translation adjustment |       | (37                          | )          | (7                           | )          | (3 | ) | (13 | ) |
| Comprehensive loss                      |       | $                            | (2,499     | )                            | $          | (156 | ) | $ | (22,566 | ) | $ | (176 | ) |

 

See accompanying notes to condensed consolidated financial statements.

4

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**MRS. FIELDS FAMOUSBRANDS, LLCCondensed Consolidated Statements of Cash Flows(Unaudited)(Dollars in thousands)**
| ** **                                                                   | ** ** | **39 Weeks Ended** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                   | ** ** | **September 30,  2006** | ** ** | **October 1,  2005** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                        |       |                         |       |   |   |
| Net loss                                                                     |       | $                            | (22,563)   |   | $ | (163) |   |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                         |       |   |   |
| Impairment of goodwill                                                       |       | 14,568                       |       | — |   |
| Depreciation and  amortization                                               |       | 3,503                        |       | 2,953 |   |
| Amortization of  deferred loan costs                                         |       | 816                          |       | 946 |   |
| Loss on non-marketable  securities                                           |       | 28                           |       | — |   |
| Deferred income taxes                                                        |       | (587)                        |       | 382 |   |
| Changes in assets and  liabilities:                                          |       |                         |       |   |   |
| Receivables                                                                  |       | (1,428)                      |       | 1,635 |   |
| Amounts due to  affiliates, net                                              |       | 252                          |       | (315) |   |
| Inventories                                                                  |       | (1,034)                      |       | (1,066) |   |
| Prepaid expenses and  other                                                  |       | (198)                        |       | (336) |   |
| Other assets                                                                 |       | (369)                        |       | (34) |   |
| Accounts payable                                                             |       | 117                          |       | (1,032) |   |
| Accrued liabilities                                                          |       | (4,592)                      |       | (6,486) |   |
| Deferred revenues                                                            |       | 8                            |       | (598) |   |
| Other liabilities                                                            |       | 183                          |       | — |   |
|                                                                         |       |                         |       |   |   |
| Net cash used in  operating activities                                       |       | (11,296)                     |       | (4,114) |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                        |       |                         |       |   |   |
| Proceeds from sale of  equity warrants                                       |       | 122                          |       | — |   |
| Purchases of property  and equipment                                         |       | (4,494)                      |       | (1,084) |   |
|                                                                         |       |                         |       |   |   |
| Net cash used in  investing activities                                       |       | (4,372)                      |       | (1,084) |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                        |       |                         |       |   |   |
| Principal payments on  capital lease                                         |       | (77)                         |       | (47) |   |
| Net cash used in financing  activities                                       |       | (77)                         |       | (47) |   |
| Effect of foreign exchange rate changes on cash                              |       | (3)                          |       | (13) |   |
| Net decrease in cash and cash equivalents                                    |       | (15,748)                     |       | (5,258) |   |
| Cash and cash equivalents at beginning of period                             |       | 23,664                       |       | 19,859 |   |
|                                                                         |       |                         |       |   |   |
| Cash and cash equivalents at end of period                                   |       | $                            | 7,916      |   | $ | 14,601 |   |
|                                                                         |       |                         |       |   |   |
| **Supplemental Disclosures of Cash Flow  Information:**                      |       |                         |       |   |   |
| Cash paid for interest                                                       |       | $                            | 20,553     |   | $ | 20,547 |   |
| Cash paid for income  taxes                                                  |       | 60                           |       | 74 |   |
|                                                                         |       |                         |       |   |   |
| **Supplemental Disclosure of Noncash Investing and  Financing Activities:**  |       |                         |       |   |   |
| Assets acquired under  capital lease                                         |       | $                            | —     |   | $ | 198 |   |
| Distribution to parent  under tax allocation agreement                       |       | 672                          |       | — |   |
| Leasehold improvements  acquired under lease incentives                      |       | 1,250                        |       | — |   |

 

See accompanying notes tocondensed consolidated financial statements.

5

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**MRS.FIELDS FAMOUS BRANDS, LLCNotes to Condensed Consolidated Financial Statements(Unaudited)**

**1.  Basis ofPresentation**

The accompanying condensed consolidated financialstatements have been prepared by Mrs. Fields Famous Brands, LLC and subsidiaries(the “Company” or “Mrs. Fields”) in accordance with the rules and regulationsof the Securities and Exchange Commission (“SEC”) for interim financialinformation and, accordingly, do not include all of the information andfootnotes required by U.S. generally accepted accounting principles for acomplete presentation of the financial statements.  In the opinion of management, these condensedconsolidated financial statements reflect all adjustments, which consist onlyof normal recurring adjustments, necessary to present fairly the financialposition of Mrs. Fields as of September 30, 2006 and December 31, 2005, and theresults of their operations and their cash flows for the periodspresented.  The preparation of financialstatements in conformity with U.S. generally accepted accounting principlesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from theseestimates.  These condensed consolidatedfinancial statements should be read in conjunction with the consolidatedfinancial statements and notes thereto for the fiscal year ended December 31,2005 contained in Mrs. Fields’ Annual Report on Form 10-K filed with the SEC onMarch 21, 2006.

 

The Company is a wholly-owned subsidiary ofMrs. Fields’ Original Cookies, Inc. (“MFOC”).  MFOC is a wholly-owned subsidiary ofMrs. Fields’ Holding Company, Inc. (“MFH”) and MFH is a wholly-ownedsubsidiary of Mrs. Fields’ Companies, Inc. (“MFC”).

 

The results of operations for the 13 and 39 weeksended September 30, 2006 are not necessarily indicative of the results that maybe expected for the remainder of the fiscal year ending December 30, 2006.  Income per common interest information is notpresented because Mrs. Fields is wholly-owned by MFOC and, therefore, itscommon interests are not publicly traded.

** **

**2.  Receivables**

** **

Most of the Company’s receivables are due fromdomestic and international franchisees, distributors, licensees and corporatecustomers of our gifts and branded retail segments.  These receivables consist of normal tradeaccounts receivable and longer-term notes receivable.  Service charges may be assessed on past dueinvoices but any revenue associated with these charges is only recognized whencollected.  The Company maintains anallowance for doubtful accounts to cover potential losses.  This allowance is the Company’s best estimateof the amount of probable collection losses in the Company’s existing tradeaccounts receivable.  The Companydetermines the allowance based upon historical write-off experience andindividual facts and circumstances associated with individual debtors.  If the assumptions that are used to determinethe allowance for doubtful accounts change, the Company may have to provide fora greater level of expense in future periods or reverse amounts provided for inprior periods.

 

Prior to fiscal 2001, TCBY Systems, LLC (“TCBY”), awholly-owned subsidiary of the Company, extended credit from time to time inthe form of notes receivable to franchisees and certain of these notesreceivable remain outstanding.  Notesreceivable from franchisees are primarily collateralized by equipment locatedat the franchisees’ stores.  These notesbear interest at market rates at the time the notes were issued and mature atvarious dates through April 2009. TCBY regularly reviews the notes for non-performance.  Notes that are considered non-performing areplaced on a non-accrual status when the collectibility of principal or interestbecomes uncertain.  During the 39 weeksended September 30, 2006 and October 1, 2005, TCBY recognized no interest incomepertaining to these notes receivable.

6

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Prior to fiscal 2001, TCBY factored various notesreceivable aggregating $2.1 million. Under the terms of the factoring agreement, TCBY is ultimatelyresponsible to the factoring agent for the realizability of the notesreceivable.  In the event of non-performance,the factoring agent has recourse against TCBY to a maximum level of $314,000and $478,000 as of September 30, 2006 and December 31, 2005, respectively.  The Company has reserves of $314,000 and$478,000 as of September 30, 2006 and December 31, 2005, respectively, for thispotential recourse liability.  Thisreserve is included in accrued liabilities in the accompanying condensedconsolidated balance sheets.

 Notesreceivable at September 30, 2006 and December 31, 2005 are comprised of the following(in thousands):

 
|                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Performing notes                 |       | $                      | 72         |                  | $          | 195 |   |
| Allowance for  doubtful accounts |       | (22                    | )          | (69                   | )          |
|                             |       | $                      | 50         |                  | $          | 126 |   |

 

The activity inthe allowance for doubtful accounts for notes receivable for the 13 and 39weeks ended September 30, 2006 and October 1, 2005 is as follows (inthousands):

 
|                        | ** ** | **For the 13 Weeks Ended** | ** ** | **For the 39 Weeks Ended** | ** ** |
|------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **             | ** ** | **September 30,**                         | ** ** | **October 1,**                            | ** ** | **September 30,** | ** ** | **October 1,** | ** ** |
| ** **             | ** ** | **2006**                                       | ** ** | **2005**                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Beginning  balance     |       | $                                              | 43         |                                           | $          | 83 |   | $ | 69 |   | $ | 597 |   |
| Additions  (reversals) |       | (21                                            | )          | 6                                              |       | (47 | ) | 5 |   |
| Write-offs             |       | —                                         |       | —                                         |       | — |   | (513 | ) |
|                   |       | $                                              | 22         |                                           | $          | 89 |   | $ | 22 |   | $ | 89 |   |

** **

**3.  Inventories**

** **

Inventories, consistingof raw materials, finished goods, packaging and novelties, are stated at thelower of cost (first-in, first-out method) or market value.  Inventories at September 30, 2006 andDecember 31, 2005 are comprised of the following (in thousands):

** **
|                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------|------------|------------------------|------------|-----------------------|------------|
| ** **     | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Raw materials  |       | $                      | 1,009      |                  | $          | 1,283 |   |
| Finished goods |       | 1,557                  |       | 770                   |       |
| Packaging      |       | 430                    |       | 548                   |       |
| Novelties      |       | 907                    |       | 268                   |       |
|           |       | $                      | 3,903      |                  | $          | 2,869 |   |

** **

7

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**4.  Property and Equipment**

** **

Equipment and fixtures are stated at cost lessaccumulated depreciation and are depreciated over three to seven years usingthe straight-line method.  Leaseholdimprovements are stated at cost less accumulated depreciation and aredepreciated over the shorter of the term of the lease or the estimated usefullife using the straight-line method. Property and equipment at September 30, 2006 and December 31, 2005 arecomprised of the following (in thousands):

 
|                                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Equipment and  fixtures        |       | $                      | 11,025     |                  | $          | 7,927 |   |
| Leasehold  improvements        |       | 7,149                  |       | 4,241                 |       |
| Land                           |       | 240                    |       | 240                   |       |
|                           |       | 18,414                 |       | 12,408                |       |
| Less accumulated  depreciation |       | (10,220                | )          | (8,048                | )          |
|                           |       | $                      | 8,194      |                  | $          | 4,360 |   |

** **

Property and equipment atSeptember 30, 2006 and December 31, 2005 included gross assets acquired undercapital leases of $698,000 and related accumulated depreciation of $229,000 and$139,000, respectively.

 

Expenditures thatmaterially extend useful lives of property and equipment are capitalized.  Routine maintenance, repairs and renewalcosts are expensed as incurred.  Gains orlosses from the sale or retirement of property and equipment are recorded incurrent operations.

 

Included in leaseholdimprovements at September 30, 2006 is $1,250,000, less $52,000 of accumulateddepreciation representing amounts for tenant improvements provided as leaseincentives by the lessor related to the lease for the Company’s new giftingoperations facility.  Deferred rent of$1,198,000 at September 30, 2006 relating to these lease incentives is includedin accrued liabilities and other liabilities. The total amount of these leasehold improvements and deferred rent areamortized over the life of the lease.

 

**5.  Goodwill, Trademarks and Intangible Assets**

** **

The Company accounts forgoodwill and other intangible assets in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 142 (“SFAS 142”), “Goodwill and Other IntangibleAssets.”  Goodwill and intangible assetsacquired in a purchase business combination and determined to have anindefinite useful life are not amortized, but are tested for impairment atleast annually in accordance with the provisions of SFAS 142.  SFAS 142 also requires that intangibleassets with estimable useful lives be amortized over their respective estimateduseful lives to their estimated residual values and be reviewed for impairmentin accordance with SFAS No. 144 (“SFAS 144”), “Accounting for Impairmentor Disposal of Long-Lived Assets.”

 

The Company determinedthat a triggering event had occurred in the second quarter of 2006 under SFAS144 as a result of an eroding dairy franchise system due to fewer locations,consistent negative year-over-year same store sales by our dairy franchiseesand the Company’s inability to locate and open a significant number of new oradditional franchise locations.  Thesefactors have resulted in continued decreases in franchise royalties and yogurtformulation revenues from the Company’s dairy franchise system.  The Company performed the impairment test asrequired by SFAS 144 for the long-lived assets of the dairy reporting unit inthe second quarter of 2006 and determined these assets were not impaired as ofJuly 1, 2006.  Therefore, no adjustmentto the carrying value of these long-lived assets was required.  The Company did not identify any triggeringevent in the third quarter of 2006.

8

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As a result of theimpairment test performed in the second quarter of 2006 on the long-livedassets of the dairy reporting unit, the Company determined a triggering eventhad occurred under SFAS 142 and as such, tested the goodwill related to the dairyfranchise reporting unit, by comparing its fair value with its carryingvalue.  The estimated fair value ofgoodwill is affected by, among other things, operating results, the Company’sbusiness plan for the future, estimated results of future operations and thecomparable companies that are used to estimate the fair value of thegoodwill.  To the extent that thecarrying value of a reporting unit exceeds it fair value, goodwill is writtendown to its implied fair value. Changes in the business plan or operatingresults that are different than the projections used to develop the reportingunit’s fair value may have an impact on the valuation of the goodwill.

 

At the end of the second quarter of 2006, the Companycompared the implied fair value of the dairy franchising reporting unit’sgoodwill with the carrying amount of the goodwill and determined an impairmentof dairy franchising reporting unit’s goodwill of $14.6 million, which wasrecorded in the second quarter of 2006. The implied fair value of the goodwill is determined by allocating thefair value of the reporting unit to all of the assets (recognized andunrecognized) and liabilities of the reporting unit in a manner similar to apurchase price allocation, in accordance with SFAS No. 141, “BusinessCombinations.”

The following outlines the Company’s goodwill byreporting unit at September 30, 2006 and December 31, 2005 (in thousands):
|                     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------|------------|------------------------|------------|-----------------------|------------|
| ** **          | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Bakery  franchising |       | $                      | 60,404     |                  | $          | 60,404 |   |
| Dairy  franchising  |       | —                 |       | 14,568                |       |
| Gifts               |       | 1,859                  |       | 1,859                 |       |
| Licensing           |       | 1,852                  |       | 1,852                 |       |
| Total               |       | $                      | 64,115     |                  | $          | 78,683 |   |

** **

**6.  Accrued Liabilities**

** **

Accrued liabilities are comprised of the following atSeptember 30, 2006 and December 31, 2005 (in thousands):

 
|                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Other accrued  liabilities         |       | $                      | 5,604      |                  | $          | 4,778 |   |
| Accrued  compensation and benefits |       | 1,364                  |       | 1,534                 |       |
| Accrued interest  payable          |       | 854                    |       | 5,977                 |       |
|                               |       | $                      | 7,822      |                  | $          | 12,289 |   |

** **

9

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**7.  Related-Party Transactions**

** **

The amounts due toaffiliates are comprised of amounts due to MFC, MFH and MFOC at September 30,2006 and December 31, 2005 (in thousands):

 
|                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|------------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| MFC - tax  sharing |       | $                      | 3,049      |                  | $          | 3,138 |   |
| MFH                |       | 273                    |       | 273                   |       |
| MFOC               |       | 1,551                  |       | 538                   |       |
|               |       | $                      | 4,873      |                  | $          | 3,949 |   |

 

The Company has atax allocation agreement with MFC pursuant to which the Company agreed to makepayments to MFC, after taking into account payments the Company makes directlyto tax authorities, based on the Company’s stand-alone consolidatedfederal income tax liability, determined as if the Company and its subsidiariesconstituted their own consolidated group for federal income tax purposes.  The Company will not be permitted to make thesepayments to MFC, unless the MFC federal tax liability exceeds the Company’sstand-alone federal tax liability, until it meets certain financial ratios andis otherwise in compliance with the terms of the indenture governing the 9percent senior secured notes and the 111⁄2 percent senior secured notes (the “SeniorSecured Notes”).

 

During the 39weeks ended September 30, 2006, the Company recognized a benefit for incometaxes of $1.3 million related to losses from operations.  Under the tax allocation agreement with MFC,the Company is unable to carry-back tax benefits related to the net operatinglosses and, as a result, the current portion of the benefit of $672,000 wasrecorded as a distribution to parent.

 

**8.  Reportable Segments**

** **

Operating segmentsare components of the Company for which separate financial information isavailable that is evaluated regularly by management in deciding how to allocateresources and assess performance.  Thisinformation is reported on the basis that it is used internally for evaluatingsegment performance.  The Company hasfour reportable operating segments; namely, franchising, gifts, branded retailand licensing.  The franchising segmentconsists of revenues received either directly or indirectly from cookie, yogurtand pretzel stores, which are owned and operated by third parties.  These revenues include initial franchise orlicense fees, monthly royalties based on a percentage of a franchisee’s grosssales, sales of cookie dough that the Company produces and certain productformulation fees and supplier allowances which are based upon sales tofranchisees.  The gifts segment consistsof sales generated from the Company’s mail order gift catalog and website.  The branded retail segment consists of salesgenerated directly from the sale of Mrs. Fields products through various retailchannels.  As a result of terminatingcertain licensing agreements, the Company began running a new branded retailbusiness in July 2006, as more fully described in the “Shadewell Grove IP, LLC”section included in Note 10 to these condensed consolidated financialstatements.  The Company determined thatwith these new business activities, the branded retail segment constituted areportable segment under SFAS No. 131 (“SFAS 131”), “Disclosures About Segmentsof an Enterprise and Related Information” and has restated the correspondingitems of segment information for prior periods to conform to the current periodpresentation.  Prior to this quarter, ourrevenues and operating expenses associated with branded retail activities didnot meet the quantitative thresholds of SFAS 131 and were included in otherrevenues and other operating expenses. The licensing segment consists of other licensing activity from thirdparties for the sale of products bearing the Company’s brand names.

 

The accountingpolicies for the segments are the same as those discussed in the summary ofsignificant accounting policies in Note 2 to our consolidated financialstatements contained in our Annual Report on Form 10-K filed with the SEC onMarch 21, 2006.  Sales and transfersbetween segments are eliminated in consolidation.

10

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The Companyevaluates performance of each segment based on contribution.  Contribution is computed as the differencebetween the revenues generated by a reportable segment and the selling andoccupancy expenses, cost of sales and direct general and administrativeexpenses related to that reportable segment. Contribution is used as a measure of the operating performance of anoperating segment.  The Company does notallocate any indirect general and administrative expenses, interest expense,depreciation and amortization or assets to its reportable operating segments.

** **

Segment revenuesand contribution for the 13 and 39 weeks ended September 30, 2006 and October1, 2005 are presented in the following table (in thousands):

 
|                        | ** ** | **For the 13 Weeks Ended** | ** ** | **For the 39 Weeks Ended** | ** ** |
|------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **             | ** ** | **September 30,**                         | ** ** | **October 1,**                            | ** ** | **September 30,** | ** ** | **October 1,** | ** ** |
| **Total Company** | ** ** | **2006**                                       | ** ** | **2005**                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:              |       |                                           |       |                                           |       |   |   |   |   |
| Franchising            |       | $                                              | 13,386     |                                           | $          | 13,332 |   | $ | 39,310 |   | $ | 39,655 |   |
| Gifts                  |       | 3,915                                          |       | 3,917                                          |       | 13,980 |   | 14,266 |   |
| Branded retail         |       | 6,906                                          |       | 65                                             |       | 6,985 |   | 184 |   |
| Licensing              |       | 311                                            |       | 877                                            |       | 1,378 |   | 2,854 |   |
|                   |       | $                                              | 24,518     |                                           | $          | 18,191 |   | $ | 61,653 |   | $ | 56,959 |   |
| Contribution:          |       |                                           |       |                                           |       |   |   |   |   |
| Franchising            |       | $                                              | 7,248      |                                           | $          | 8,118 |   | $ | 21,205 |   | $ | 23,627 |   |
| Gifts                  |       | (1,632                                         | )          | (455                                           | )          | (3,717 | ) | (684 | ) |
| Branded retail         |       | 214                                            |       | 12                                             |       | 235 |   | 50 |   |
| Licensing              |       | (155                                           | )          | 720                                            |       | 3 |   | 2,342 |   |
|                   |       | $                                              | 5,675      |                                           | $          | 8,395 |   | $ | 17,726 |   | $ | 25,335 |   |

 

The reconciliationof contribution to net loss for the 13 and 39 weeks ended September 30, 2006and October 1, 2005 is as follows (in thousands):

 
|                                      | ** ** | **For the 13 Weeks Ended** | ** ** | **For the 39 Weeks Ended** | ** ** |
|--------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                           | ** ** | **September 30,**                         | ** ** | **October 1,**                            | ** ** | **September 30,** | ** ** | **October 1,** | ** ** |
| ** **                           | ** ** | **2006**                                       | ** ** | **2005**                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Contribution                         |       | $                                              | 5,675      |                                           | $          | 8,395 |   | $ | 17,726 |   | $ | 25,335 |   |
| General and  administrative expenses |       | (2,259                                         | )          | (2,357                                         | )          | (7,699 | ) | (6,659 | ) |
| Interest  expense, net               |       | (5,270                                         | )          | (5,289                                         | )          | (15,741 | ) | (15,988 | ) |
| Other loss                           |       | —                                         |       | —                                         |       | (28 | ) | — |   |
| Depreciation and  amortization       |       | (1,068                                         | )          | (990                                           | )          | (3,503 | ) | (2,953 | ) |
| Impairment of  goodwill              |       | —                                         |       | —                                         |       | (14,568 | ) | — |   |
| Benefit for  income taxes            |       | 460                                            |       | 92                                             |       | 1,250 |   | 102 |   |
| Net loss                             |       | $                                              | (2,462     | )                                              | $          | (149 | ) | $ | (22,563 | ) | $ | (163 | ) |

 

The fixed assetsand inventory of the Company primarily relate to the Company’s Great AmericanCookies manufacturing facility, branded retail business segment, gifts businesssegment and related activities.  Assetsrelating to franchising and licensing activities are primarily amounts due fromfranchisees and licensees and goodwill relating to franchising concepts.

11

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Revenues fromfranchisees, customers and licensees within the United States of America (“UnitedStates”) were $23.2 million and $59.7 million or 94.7 percent and 96.8 percentof total revenues for the 13 and 39 weeks ended September 30, 2006,respectively, and $18.0 million and $55.9 million or 98.9 percent and 98.1percent of total revenues for the 13 and 39 weeks ended October 1, 2005,respectively.  Revenues frominternational franchisees, customers and licensees were $1.3 million and $2.0million or 5.3 percent and 3.2 percent of total revenues for the 13 and 39weeks ended September 30, 2006, respectively, and $200,000 and $1.1 million or1.1 percent and 1.9 percent of total revenues for the 13 and 39 weeks endedOctober 1, 2005, respectively.  Revenuesfrom any single foreign country were not material.  Providing geographical information regardinglong-lived assets is impracticable.

 

The Company hasone licensee that accounted for $19,000 and $394,000 or 6.2 percent and28.6 percent of the revenues of the licensing segment for the 13 and 39weeks ended September 30, 2006, respectively, and $493,000 and $1.8 million or56.2 percent and 62.9 percent of the revenues of the licensing segment for the13 and 39 weeks ended October 1, 2005, respectively.

 

The Company hasone customer in its gifts business segment that accounted for $1.4 million and$2.3 million or 34.5 percent and 16.5 percent of revenues of thegifts business segment for the 13 and 39 weeks ended September 30, 2006,respectively, and $946,000 and $2.4 million or 24.2 percent and 17.1 percent ofthe revenues of the gifts business segment for the 13 and 39 weeks endedOctober 1, 2005, respectively.  Therewere no other customers or licensees that accounted for more thanten percent of Mrs. Fields’ total revenues or any individual segment’srevenues.

 

**9. Share-Based Compensation**

 

On January 1, 2006the Company adopted the provisions of Financial Accounting Standards BoardStatement No. 123R (“SFAS 123R”), “Share-Based Payment.”  SFAS 123R sets accounting requirements for “share-based”compensation to employees and requires companies to recognize in the statementof operations the grant-date fair value of stock options and other equity-basedcompensation.

 

Effective as ofMay 23, 2004, the Board of Directors of MFC approved adoption of the PhantomStock Plan of Mrs. Fields’ Companies, Inc. (the “Phantom Plan”).  The purpose of the Phantom Plan is to providelong-term incentives to key employees of MFC or its subsidiaries (the “Participants”)as determined by the Compensation Committee of the Board of Directors (the “Committee”).  The Phantom Plan is unfunded and Participantsdo not receive any payment under the Phantom Plan until the completion of thefirst to occur of: (i) a sale of substantially all of the assets of MFC; (ii) apublic offering of MFC’s Common Stock where MFC receives proceeds, net of anyunderwriter’s discounts and expenses, of not less than $50 million; or (iii)any stock sale, merger or other transaction where the owners of Common Stockimmediately before the transaction do not own in excess of 50 percent of thecommon stock of the entity surviving such sale, merger or other transaction (a “TriggeringEvent”).  Additionally, the Phantom Planmay be terminated by the Board of Directors at any time at its solediscretion.  Participants receiveperformance units in amounts recommended by the CEO and determined by theCommittee.  Upon the completion of aTriggering Event, Participants receive payments reflecting the number and valueof their performance units at the time of the completion of the TriggeringEvent.  Payments to Participants may bemade in cash or through issuance of equity securities of MFC, as determined bythe Committee, at which time compensation expense will be recognized.  The value of a performance unit at thecompletion of a Triggering Event is the value of one share of common stock ofMFC as determined in good faith by the Board of Directors.  If the Board of Directors determines theneed, it may seek the advice of an independent advisor.

12

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The maximum numberof performance units that may be granted under the Phantom Plan is one millionunits. Subdivisions, splits or combinations involving MFC’s Common Stock willproportionately affect the number of performance units that have been awardedunder the Phantom Plan.  In May 2004, theCommittee approved the grant of up to 392,418 performance units allocated amongParticipants as determined by the Committee. In March 2006, the Committee approved the grant of up to 182,274additional units to Participants identified by the Committee, resulting intotal authorized grants of up to 574,692 performance units.  During the 39 weeks ended September 30, 2006,the Committee granted 218,730 performance units to Participants.  Future grants, if any, shall also bedetermined by the Committee.  As ofSeptember 30, 2006, a total of 560,130 performance units have been granted toParticipants.

 

The Company’sPhantom Plan is accounted for under SFAS 123R. Compensation costs for the grants under the Phantom Plan will berecognized upon the completion of a Triggering Event.  Accordingly, no compensation costs have beenrecognized in the statement of operations for the 13 and 39 weeks endedSeptember 30, 2006.

 

**10. Commitments and Contingencies**

 

TheCompany and its products are subject to regulation by numerous governmentalauthorities, including, without limitation, federal, state and local laws andregulations governing franchising, health, sanitation, environmentalprotection, safety and hiring and employment practices.

*** ***

In the ordinary courseof business, the Company is involved in routine litigation, including franchisedisputes and trademark disputes.  TheCompany is not a party to any legal proceedings that, in the opinion ofmanagement, after consultation with legal counsel, is material to its business,financial condition or consolidated results of operations.

 

***AmericanaFoods Limited Partnership***

 

As reported in theCompany’s Form 8-K filed with the SEC on October 17, 2006, TCBY, a wholly-ownedsubsidiary of the Company, was notified that on October 11, 2006, CB AmericanaLLC, the general partner of Americana Foods Limited Partnership (“Americana”),filed an involuntary petition with the United States Bankruptcy Court for theNorthern District of Texas, naming Americana as a debtor under chapter 7 of theBankruptcy Code (the “Involuntary Petition”).

 

Americana is theprincipal supplier of TCBY’s frozen yogurt products under an Exclusive SupplyAgreement between Americana and TCBY dated November 19, 2002 (the “SupplyAgreement”).  The Supply Agreement is attached as Exhibit 10.50 to Mrs.Fields’ Registration Statement on Form S-4 (File No. 333-115046), as amended,filed with the SEC on April 30, 2004. Production of TCBY products at Americana has ceased in connection withthe Involuntary Petition.

 

TCBY has identifiedpotential replacement suppliers for its proprietary products and is in theprocess of working with these potential suppliers to accelerate short-termproduction.  TCBY has also purchased most of the inventory that remainedat Americana and removed it to an offsite storage facility.  TCBY is managing this inventory, as well asinventory at its distributors and its franchisees’ stores.  While TCBYbelieves it can avoid material shortages or immediate interruption in thesupply of its principal products to TCBY franchisees, shortages of someproducts may occur before replacement suppliers can begin fullproduction.  Further, there can be no guarantee that TCBY will be able tonegotiate long-term supply agreements on terms that are similar to or asfavorable as those in the Supply Agreement.  Any significant interruptionin the supply of TCBY products to franchisees or a material increase in thecost of TCBY products may have a material adverse effect on the TCBY franchisesystem and Mrs. Fields’ financial performance.

13

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In addition, Americanaowed TCBY approximately $585,000 for amounts collected by Americana on behalfof TCBY for product sold and for decreases in the price of commodities thatTCBY was entitled to receive from Americana under the Supply Agreement. During the 13 weeks ended September 30, 2006, TCBY recorded bad debt expense ofapproximately $585,000 and has written off this receivable.

 

***ShadewellGrove IP, LLC***

 

As reported in theCompany’s Form 8-K filed with the SEC on May 12, 2006, on May 8, 2006, theCourt of Chancery of the State of Delaware ruled in the Company’s favor on allissues in the litigation filed against Mrs. Fields Franchising, LLC (“MFF”), asubsidiary of the Company, by Shadewell Grove IP, LLC (“Shadewell”), related toMFF’s termination of certain license agreements between MFF and Shadewell.  Until June 27, 2006, Shadewell continued tooperate under the terminated license agreements.  On June 27, 2006, MFF and Shadewell enteredinto a consulting agreement (the “Shadewell Consulting Agreement”) wherebyShadewell employees would provide consulting and training services to MFFemployees through August 28, 2006 to assist MFF in establishing its ownbusiness selling products through designated retail distribution channels.  The Shadewell Consulting Agreement wasextended through October 28, 2006. Shadewell received for its services a fee of $395,000 which was paidduring the third quarter.

 

On July 5, 2006, MFFbegan running its new branded retail business, including selling products toretail customers directly or through brokers, purchasing inventory fromcontract manufacturers and arranging for distribution of product to thesecustomers.  As a result, the Companyanticipates the use of cash to operate the business while it identifies a newlicensee or develops another strategy for the operation of the type of businessformerly operated by Shadewell.  TheCompany recognized no royalty revenues from Shadewell under the terminatedlicense agreements during the 13 weeks ended September 30, 2006.

 

**11.  Supplemental Condensed ConsolidatingFinancial Information**

 

Long-term debt includesthe Senior Secured Notes that were issued by the Company and Mrs. FieldsFinancing Company, Inc. as co-issuers. Mrs. Fields Financing Company, Inc. is a wholly-owned finance subsidiaryof Mrs. Fields Famous Brands, LLC.  TheSenior Secured Notes are fully and unconditionally guaranteed on a joint andseveral basis by all of the Company’s domestic subsidiaries other thanimmaterial subsidiaries. Mrs. Fields Famous Brands, LLC has no independent assets oroperations.  Therefore, supplementalfinancial information on a condensed consolidating basis of the guarantorsubsidiaries is not required.  There are norestrictions on the Company’s ability to obtain cash dividends or other distributionsof funds from the guarantor subsidiaries, except those imposed by applicablelaw.

** **

**12.Distribution Agreements**

** **

TCBY and Blue LineDistributing (“Blue Line”), TCBY’s principal distributor of TCBY products toits franchisees, entered into an Extension to Distribution Agreement (the “ExtensionAgreement”) effective February 2, 2006. Under the Extension Agreement, Blue Line agreed to continue to performunder the Food and Packaging Distribution Agreement (the “DistributionAgreement”) dated November 14, 2002, until the earlier to occur of (a) 30 daysfollowing the date when TCBY notifies Blue Line in writing that it has obtaineda new distributor and (b) 30 days following the date, if any, when Blue Linenotifies TCBY in writing that Blue Line reasonably determines that TCBY is nolonger making best efforts and progress to obtain a new distributor.  Under the terms of the Extension Agreement,TCBY agreed to make certain payments directly to Blue Line in order to delaydistribution cost increases to franchisees and agreed to guarantee certainamounts during the extension period. TCBY has entered into supply agreements with six regional distributorswho will provide service to certain regions of the United States.  TCBY believes it will be able to identifydistributors for the remaining regions of the United States before Blue Lineceases its services under the Extension Agreement.  The Company anticipates the distributioncosts to most of its franchisees will not substantially increase under the newregional agreements.

14

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**13.Recent Accounting Pronouncements**

** **

In September 2006, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 157 (“SFAS 157”),“Fair Value Measurements.”  SFAS 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements.  SFAS 157 iseffective for fiscal years beginning after November 15, 2007 and interimperiods within those fiscal years.  TheCompany has not yet determined the impact, if any, of adopting the provisionsof SFAS 157 on its consolidated financial position or results of operations.

 

In September 2006, theSEC issued Staff Accounting Bulleting No. 108 (“SAB 108”).  SAB 108 provides interpretive guidance on howthe effects of the carryover or reversal of prior year misstatements should beconsidered in quantifying a potential current year misstatement.  Prior to SAB 108, Companies might evaluatethe materiality of financial-statement misstatements using either the incomestatement or balance sheet approach, with the income statement approachfocusing on new misstatements added in the current year and the balance sheetapproach focusing on the cumulative amount of misstatement present in a company’sbalance sheet.  Misstatements that wouldbe material under one approach could be viewed as immaterial under anotherapproach and not be corrected.  SAB 108now requires that companies view financial statement misstatements as materialif they are material according to either the income statement or balance sheetapproach.  The Company is currentlyevaluating the effect, if any, that the adoption of SAB 108 will have on itsconsolidated financial position and results of operations.

 

In July 2006, theFASB issued FASB Interpretation No. 48 (“FIN 48”) “Accounting for Income TaxUncertainties.”  FIN 48 defines thethreshold for recognizing the benefits of tax return positions in the financialstatements as “more-likely-than-not” to be sustained by the taxing authority.  FIN 48 provides guidance on thederecognition, measurement and classification of income tax uncertainties,along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income taxuncertainties in interim periods and increases the level of disclosuresassociated with any recorded income tax uncertainties.  FIN 48 is effective for fiscal yearsbeginning after December 15, 2006.  TheCompany has not yet determined the impact, if any, of adopting the provisionsof FIN 48 on its consolidated financial position or results of operations.

 

In June 2006, theEmerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 06-03(“EITF 06-03”), “How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That Is,Gross versus Net Presentation).”  EITF06-03 provides that the presentation of taxes assessed by a governmentalauthority that is directly imposed on a revenue-producing transaction between aseller and a customer on either a gross basis (included in revenues and costs)or on a net basis (excluded from revenues) is an accounting policy decisionthat should be disclosed.  The provisionsof EITF 06-03 become effective as of December 31, 2006. The adoption of EITF06-03 is not expected to have a material impact on the Company’s consolidatedfinancial position or results of operations.

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

**DISCLOSUREREGARDING FORWARD-LOOKING STATEMENTS**

 

This report includes “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of1995.  Forward-looking statementsare those that do not relate solely to historical fact.  They include, but are not limited to, anystatement that may predict, forecast, indicate or imply future results,performance, achievements or events. They may contain words such as “believe,” “anticipate,” “expect,” “estimate,”“intend,” “project,” “plan,” “continue,” “will,” “may” or words or phrases ofsimilar meaning.  Forward-lookingstatements involve risks and uncertainties, including, but not limited to,economic, competitive and governmental factors outside of our control, that maycause actual results to differ materially from trends, plans or expectationsset forth in the forward-looking statements. Factors you should consider that could cause these differences includeall factors described under Part II, Item 1A. “Risk Factors” containedelsewhere in this report.

 

You are cautioned not to place undue reliance on theforward-looking statements contained in this report, which reflect management’sanalysis only as of the date of this report. We undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.  In light of theserisks, uncertainties and assumptions, the forward-looking events discussed inthis report may not occur.

 

# **Executive Summary**

 

Mrs. Fields Famous Brands, LLC and subsidiaries (“we”,“us”, the “Company” or similar terms) is one of the largest franchisors in thepremium snack-food industry, featuring Mrs. Fields®, Great American Cookies®,TCBY®, Pretzel Time® and Pretzelmaker® as our core brands.  Through our franchisees’ retail stores, weare the largest retailer of freshly baked on-premises specialty cookies andbrownies in the United States of America (the “United States”); the largestretailer of soft-serve frozen yogurt in the United States; and the second largestretailer of baked on-premises pretzels in the United States.  In addition, we operate a gifts and newbranded retail business and have entered into licensing arrangements thatattempt to leverage awareness of our core brands among our retail customerbase.  We operate through a network of2,351 retail concept locations, which are located throughout the United Statesand in approximately 24 foreign countries.

 

Our business is divided into four primary businesssegments for financial reporting purposes: franchising, gifts, branded retailand licensing, which represented 63.8 percent, 22.7 percent, 11.3 percent and2.2 percent of total revenues, respectively, for the 39 weeks ended September30, 2006.

 

We believe our business strategy aligns the interestsof the Company with the interests of our franchisees and focuses our jointefforts on strengthening and broadening the appeal of our brands throughsatisfying the wants and needs of consumers. That strategy is based upon three continuing objectives:

 

·                  buildprofitable year-over-year franchise sales;

·                  accelerategrowth of new franchised store development; and

·                  growlicensing and gifts operations.

 

We use the following keyperformance indicators to measure our success and progress:

 

·                  year-over-yearsame store franchise sales;

·                  netchange in number of retail concept locations; and

·                  year-over-yeargifts and licensing revenues.

 

Our performance against these key performanceindicators is presented and discussed throughout this management’s discussion andanalysis.  For further disclosure ofreportable segments, see Note 8 to our condensed consolidated financialstatements contained elsewhere in this report.

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As of September30, 2006, our store portfolio consisted of 1,848 domestic franchised locations,347 international franchised locations and 156 licensed locations.  Our franchisees’ and licensees’ conceptlocations by brand are distributed as follows:
|                                | ** ** | **Domestic**   | ** ** | **International** | ** ** | **Licensed**  | ** ** | ** ** | ** ** |
|--------------------------------|------------|----------------|------------|-------------------|------------|---------------|------------|------------|------------|
| ** **                     | ** ** | **Franchised** | ** ** | **Franchised**    | ** ** | **Locations** | ** ** | **Total**  | ** ** |
| Mrs. Fields                    |       | 364            |       | 93                |       | 45            |       | 502        |       |
| Great American                 |       | 279            |       | 1                 |       | —        |       | 280        |       |
| Original Cookie                |       | —         |       | —            |       | 1             |       | 1          |       |
| Cookie subtotal                |       | 643            |       | 94                |       | 46            |       | 783        |       |
| Pretzel Time                   |       | 189            |       | 5                 |       | 6             |       | 200        |       |
| Pretzelmaker                   |       | 145            |       | 50                |       | 1             |       | 196        |       |
| Hot Sam                        |       | —         |       | —            |       | 3             |       | 3          |       |
| Pretzel subtotal               |       | 334            |       | 55                |       | 10            |       | 399        |       |
| Bakery brands subtotal         |       | 977            |       | 149               |       | 56            |       | 1,182      |       |
| TCBY -  traditional stores     |       | 397            |       | —            |       | —        |       | 397        |       |
| TCBY -  non-traditional stores |       | 464            |       | 198               |       | 99            |       | 761        |       |
| Yovana - test stores           |       | 2              |       | —            |       | 1             |       | 3          |       |
| Beriyo by TCBY -  test stores  |       | 8              |       | —            |       | —        |       | 8          |       |
| Dairy brands subtotal          |       | 871            |       | 198               |       | 100           |       | 1,169      |       |
| Total                          |       | 1,848          |       | 347               |       | 156           |       | 2,351      |       |

 

The previous table counts each concept locationindividually.  For example, if a physicallocation had a Mrs. Fields store and a Pretzel Time store together, it would becounted as two concept locations in the table above.  If actual physical stores were counted ratherthan concept locations, total store counts would be reduced by 246 locations to2,105.

Mrs. Fields’ Original Cookies, Inc. (“MFOC”) andcertain of its subsidiaries owned three franchised and licensed retail conceptlocations as of September 30, 2006, representing 0.1 percent of the totalretail concept locations.  During the 13and 39 weeks ended September 30, 2006, we recognized $24,000 and $110,000,respectively, of franchise royalties and $57,000 and $190,000, respectively, ofproduct sales relating to the retail concept locations owned by MFOC.  MFOC expects that these remaining retailconcept locations will be sold to other franchisees or will be closed duringfiscal 2006.

During the 39weeks from December 31, 2005 to September 30, 2006, our store portfoliodeclined from 2,479 concept locations to 2,351 concept locations, as follows:
|                             | ** ** | **Total Company** | ** ** |
|-----------------------------|------------|------------------------|------------|
| ** **                  | ** ** | **Domestic**           | ** ** | **International** | ** ** | **Licensed** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Franchised**         | ** ** | **Franchised** | ** ** | **Locations** | ** ** | **Total** | ** ** |
| Balance December  31, 2005  |       | 1,978                  |       | 328 |   | 173 |   | 2,479 |   |
| New development  openings   |       | 50                     |       | 47 |   | — |   | 97 |   |
| Permanent  closings         |       | (180                   | )          | (28 | ) | (17 | ) | (225 | ) |
| Balance September 30,  2006 |       | 1,848                  |       | 347 |   | 156 |   | 2,351 |   |

 

17

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The followingtables provide additional detail of new development openings and permanentclosings of our concept locations during the 39 weeks from December 31, 2005 toSeptember 30, 2006:

|                             | ** ** | **Domestic Franchised** | ** ** |
|-----------------------------|------------|------------------------------|------------|
| ** **                  | ** ** | ** **                   | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | ** **                   | ** ** | **Traditional** | ** ** | **Traditional** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Bakery**                   | ** ** | **Dairy** | ** ** | **Dairy** | ** ** | **Total** | ** ** |
| Balance December  31, 2005  |       | 1,006                        |       | 424 |   | 548 |   | 1,978 |   |
| New development  openings   |       | 39                           |       | 8 |   | 3 |   | 50 |   |
| Permanent  closings         |       | (67                          | )          | (29 | ) | (84 | ) | (180 | ) |
| Other openings,  net        |       | (1                           | )          | 4 |   | (3 | ) | — |   |
| Balance September 30,  2006 |       | 977                          |       | 407 |   | 464 |   | 1,848 |   |

 
|                             | ** ** | **International Franchised** | ** ** |
|-----------------------------|------------|-----------------------------------|------------|
| ** **                  | ** ** | ** **                        | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | ** **                        | ** ** | **Traditional** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Bakery**                        | ** ** | **Dairy** | ** ** | **Total** | ** ** |
| Balance December  31, 2005  |       | 142                               |       | 186 |   | 328 |   |
| New development  openings   |       | 24                                |       | 23 |   | 47 |   |
| Permanent  closings         |       | (17                               | )          | (11 | ) | (28 | ) |
| Balance September 30,  2006 |       | 149                               |       | 198 |   | 347 |   |

 
|                             | ** ** | **Licensed Locations** | ** ** |
|-----------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | ** **                  | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | ** **                  | ** ** | **Traditional** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Bakery**                  | ** ** | **Dairy** | ** ** | **Total** | ** ** |
| Balance December  31, 2005  |       | 64                          |       | 109 |   | 173 |   |
| Permanent  closings         |       | (8                          | )          | (9 | ) | (17 | ) |
| Balance September 30,  2006 |       | 56                          |       | 100 |   | 156 |   |

 

We have implemented a number of strategies designed toattempt to reverse our trend of declining store counts, including identifyingstores that are at risk of closure for operational issues, lease or franchiseagreement expiration and working with franchisees to relocate, transfer orcorrect operational deficiencies.  We arealso testing programs to refresh, remodel or reconcept some of our conceptlocations, as more fully discussed in our Annual Report on Form 10-K filed withthe Securities and Exchange Commission (“SEC”) on March 21, 2006.  There can be no assurance that our strategieswill succeed.  If store counts continueto decline, our business operations or financial condition could be adverselyaffected.

18

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**RecentDevelopments**

**Blue LineDistributing**

TCBY Systems, LLC (“TCBY”), our wholly-ownedsubsidiary, and Blue Line Distributing (“Blue Line”), TCBY’s principaldistributor of TCBY products to our franchisees, entered into an Extension toDistribution Agreement (the “Extension Agreement”) effective February 2,2006.  Under the Extension Agreement,Blue Line agreed to continue to perform under the Food and PackagingDistribution Agreement (the “Distribution Agreement”) dated November 14, 2002,until the earlier to occur of (a) 30 days following the date when we notifyBlue Line in writing that we have obtained a new distributor and (b) 30 daysfollowing the date, if any, when Blue Line notifies us in writing that BlueLine reasonably determines that we are no longer making best efforts andprogress to obtain a new distributor. Under the terms of the Extension Agreement, we agreed to make certainpayments directly to Blue Line in order to delay distribution cost increases tofranchisees and agreed to guarantee certain amounts during the extensionperiod.  We have entered into supplyagreements with six regional distributors who will provide service to certainregions of the United States.  We believewe will be able to identify distributors for the remaining regions of theUnited States before Blue Line ceases its services under the ExtensionAgreement.  We anticipate thedistribution costs to most of our franchisees will not substantially increaseunder the new regional agreements.

**Shadewell GroveIP, LLC**

As reported in our Form 8-K filed with the SEC on May12, 2006, on May 8, 2006, the Court of Chancery of the State of Delaware ruledin our favor on all issues in the litigation filed against Mrs. FieldsFranchising, LLC (“MFF”), a wholly-owned subsidiary of the Company, byShadewell Grove IP, LLC (“Shadewell”), related to MFF’s termination of certainlicense agreements between MFF and Shadewell. Until June 27, 2006, Shadewell continued to operate under the terminatedlicense agreements.  On June 27, 2006,MFF and Shadewell entered into a consulting agreement (the “ShadewellConsulting Agreement”) whereby Shadewell employees would provide consulting andtraining services to our employees through August 28, 2006 to assist us in establishingour own business selling products through designated retail distributionchannels.  The Shadewell ConsultingAgreement was extended through October 28, 2006.  Shadewell received for its services a fee of$395,000 which was paid during the third quarter.

On July 5, 2006, MFF began running its new brandedretail business, including selling products to retail customers directly orthrough brokers, purchasing inventory from contract manufacturers and arrangingfor distribution of product to these customers. As a result, management anticipates the use of significant cash tooperate the business while it identifies a new licensee or develops anotherstrategy for the operation of the type of business formerly operated byShadewell.

On June 1, 2006, Shadewell’s first quarter royaltypayment to MFF under the terminated license agreements became past due.  At that time, Shadewell notified us that itsbank had called its note due and exercised its right to sweep Shadewell’s cashdeposits to recover the amount of its note. As a result, management determined that the collectibility of Shadewell’sfirst quarter royalty was doubtful and established a bad debt reserve ofapproximately $345,000, which was subsequently written off as of September 30,2006.  In addition, we earned $268,000 inroyalty revenues from Shadewell during the 13 weeks ended July 1, 2006;however, due to the uncertainty of its collectibility, we did not recognize anyroyalty revenues under the terminated license agreements in the second quarterof 2006.  There were no royalty revenuesearned from Shadewell under the terminated license agreement during the 13weeks ended September 30, 2006.

We anticipate that the income realized by us from MFF’snew branded retail business activities will not immediately replace or exceedthe royalties that may have been generated by the terminated licenseagreements.

19

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**Americana FoodsLimited Partnership**

As reported in our Form 8-K filed with the SEC onOctober 17, 2006, TCBY, our wholly-owned subsidiary, was notified that onOctober 11, 2006, CB Americana LLC, the general partner of Americana FoodsLimited Partnership (“Americana”), filed an involuntary petition with theUnited States Bankruptcy Court for the Northern District of Texas, namingAmericana as a debtor under chapter 7 of the Bankruptcy Code (the “InvoluntaryPetition”).

Americana is the principal supplier of our frozenyogurt products under an Exclusive Supply Agreement between Americana and TCBYdated November 19, 2002 (the “Supply Agreement”).  The Supply Agreement isattached as Exhibit 10.50 to Mrs. Fields’ Registration Statement on Form S-4(File No. 333-115046), as amended, filed with the SEC on April 30, 2004.  Production of TCBY products at Americana hasceased in connection with the Involuntary Petition.

We have identified potential replacement suppliers forour proprietary products and are in the process of working with these potentialsuppliers to accelerate short-term production.  We have also purchasedmost of the inventory that remained at Americana and removed it to an off-sitestorage facility. We are managing this inventory, as well as inventory at ourdistributors and our franchisees’ stores.  While we believe we can avoidmaterial shortages or immediate interruption in the supply of our principalproducts to our TCBY franchisees, shortages of some products may occur beforereplacement suppliers can begin full production.  Further, there can be noguarantee that we will be able to negotiate long-term supply agreements onterms that are similar to or as favorable as those in the SupplyAgreement.  Any significant interruption in the supply of TCBY products tofranchisees or a material increase in the cost of TCBY products may have amaterial adverse effect on our TCBY franchise system and our consolidatedfinancial performance.

In addition, Americana owed us approximately $585,000for amounts collected by Americana on our behalf for product sold and fordecreases in the price of commodities that we were entitled to receive fromAmericana under the Supply Agreement.  During the 13 weeks ended September30, 2006, we recorded bad debt expense of approximately $585,000 and havewritten off this receivable.

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**Results ofOperations**

The followingtable sets forth, for the periods indicated, certain information relating toour operations and percentage changes from period to period (in thousands):
| ** **                            | ** ** | **13 Weeks Ended** | ** ** | ** **          | ** ** | **39 Weeks Ended** | ** ** | ** **             | ** ** |
|---------------------------------------|------------|------------------------------|------------|---------------------|------------|------------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **September 30,**       | ** ** | **October 1,** | ** ** | **%**                        | ** ** | **September 30,** | ** ** | **October 1,** | ** ** | **%** | ** ** |
| ** **                            | ** ** | **2006**                     | ** ** | **2005**            | ** ** | **Change**                   | ** ** | **2006**               | ** ** | **2005** | ** ** | **Change** | ** ** |
| REVENUES:                             |       |                         |       |                |       |                         |       |                   |       |   |   |   |   |
| Franchising                           |       | $                            | 13,386     |                | $          | 13,332                       |       | 0.4                    |       | $ | 39,310 |   | $ | 39,655 |   | (0.9 | ) |
| Gifts                                 |       | 3,915                        |       | 3,917               |       | (0.1                         | )          | 13,980                 |       | 14,266 |   | (2.0 | ) |
| Branded retail                        |       | 6,906                        |       | 65                  |       | NM                           |       | 6,985                  |       | 184 |   | NM |   |
| Licensing                             |       | 311                          |       | 877                 |       | (64.5                        | )          | 1,378                  |       | 2,854 |   | (51.7 | ) |
| Total revenues                        |       | 24,518                       |       | 18,191              |       | 34.8                         |       | 61,653                 |       | 56,959 |   | 8.2 |   |
| OPERATING COSTS AND  EXPENSES:        |       |                         |       |                |       |                         |       |                   |       |   |   |   |   |
| Franchising                           |       | 6,138                        |       | 5,214               |       | 17.7                         |       | 18,105                 |       | 16,028 |   | 13.0 |   |
| Gifts                                 |       | 5,547                        |       | 4,372               |       | 26.9                         |       | 17,697                 |       | 14,950 |   | 18.4 |   |
| Branded retail                        |       | 6,692                        |       | 53                  |       | NM                           |       | 6,750                  |       | 134 |   | NM |   |
| Licensing                             |       | 466                          |       | 157                 |       | 196.8                        |       | 1,375                  |       | 512 |   | 168.6 |   |
| General and  administrative           |       | 2,259                        |       | 2,357               |       | (4.2                         | )          | 7,699                  |       | 6,659 |   | 15.6 |   |
| Depreciation                          |       | 551                          |       | 286                 |       | 92.7                         |       | 1,910                  |       | 839 |   | 127.7 |   |
| Amortization                          |       | 517                          |       | 704                 |       | (26.6                        | )          | 1,593                  |       | 2,114 |   | (24.6 | ) |
| Impairment of  goodwill               |       | —                       |       | —              |       | NM                           |       | 14,568                 |       | — |   | NM |   |
| Total operating  costs and expenses   |       | 22,170                       |       | 13,143              |       | 68.7                         |       | 69,697                 |       | 41,236 |   | 69.0 |   |
| Income (loss)  from operations        |       | 2,348                        |       | 5,048               |       | (53.5                        | )          | (8,044                 | )          | 15,723 |   | NM |   |
| Interest  expense, net                |       | (5,270                       | )          | (5,289              | )          | (0.4                         | )          | (15,741                | )          | (15,988 | ) | (1.5 | ) |
| Other loss                            |       | —                       |       | —              |       | NM                           |       | (28                    | )          | — |   | NM |   |
| Loss before  benefit for income taxes |       | (2,922                       | )          | (241                | )          | NM                           |       | (23,813                | )          | (265 | ) | NM |   |
| Benefit for income  taxes             |       | 460                          |       | 92                  |       | 400.0                        |       | 1,250                  |       | 102 |   | NM |   |
| Net loss                              |       | $                            | (2,462     | )                   | $          | (149                         | )          | NM                     |       | $ | (22,563 | ) | $ | (163 | ) | NM |   |
|                                  |       |                         |       |                |       |                         |       |                   |       |   |   |   |   |
| Cash flows from  operating activities |       | $                            | (3,607     | )                   | $          | (4,842                       | )          | 25.5                   |       | $ | (11,296 | ) | $ | (4,114 | ) | (174.6 | ) |
| Cash flows from  investing activities |       | $                            | (2,691     | )                   | $          | (515                         | )          | (422.5                 | )          | $ | (4,372 | ) | $ | (1,084 | ) | (303.3 | ) |
| Cash flows from financing activities  |       | $                            | (26        | )                   | $          | (30                          | )          | 13.3                   |       | $ | (77 | ) | $ | (47 | ) | (63.8 | ) |

 

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**13 Weeks EndedSeptember 30, 2006Compared to the 13 Weeks Ended October 1, 2005**

*Income(Loss) From Operations—Overview*.  Income from operations was $2.3 millionfor the 13 weeks ended September 30, 2006, a decrease of $2.7 million or 53.5percent from $5.0 million for the 13 weeks ended October 1, 2005.  This decrease was primarily attributable to adecrease in contribution from our business segments of $2.7 million and anincrease in depreciation and amortization expense of $100,000 partially offsetby a decrease in general and administrative expenses of $100,000.  The decrease in contribution from ourbusiness segments of $2.7 million was comprised of decreases in our giftingsegment contribution of $1.2 million, our franchising segment contribution of$800,000 and our licensing segment contribution of $900,000 partially offset byan increase in our new branded retail segment of $200,000.

*Segment Contribution.**  *Franchising contribution iscomprised of sales of new franchises and royalties from existing franchisesless direct operating expenses.  Giftscontribution is comprised of sales of products through our catalog and websiteless direct operating expenses.  Brandedretail contribution is comprised of net sales of our branded products throughretail channels by us and through food brokers less related cost of sales anddirect selling and operating expenses. Licensing contribution is comprised of licensing fees received fromthird parties for the sale of products bearing our brand names less directoperating expenses.  The following tablesets forth the contribution from each of our reporting segments (in thousands).
|                             | ** ** | **For the 13 Weeks Ended** | ** ** | ** **          | ** ** |
|-----------------------------|------------|------------------------------------------------|------------|---------------------|------------|
| ** **                  | ** ** | **September 30,**                         | ** ** | **October 1,** | ** ** | **%** | ** ** |
| **Reporting Segment**  | ** ** | **2006**                                       | ** ** | **2005**            | ** ** | **Change** | ** ** |
| Franchising                 |       | $                                              | 7,248      |                | $          | 8,118 |   | (10.7 | ) |
| Gifts                       |       | (1,632                                         | )          | (455                | )          | (258.7 | ) |
| Branded retail              |       | 214                                            |       | 12                  |       | NM |   |
| Licensing                   |       | (155                                           | )          | 720                 |       | NM |   |
| Total segment  contribution |       | $                                              | 5,675      |                | $          | 8,395 |   | (32.4 | ) |

 

**Franchising**

The followingtable details the revenues and operating expenses of the franchising segmentfor the 13 weeks ended September 30, 2006 and October 1, 2005 (in thousands):
|                                      | ** ** | **For the 13 Weeks Ended** | ** ** | ** **          | ** ** |
|--------------------------------------|------------|------------------------------------------------|------------|---------------------|------------|
| ** **                           | ** ** | **September 30,**                         | ** ** | **October 1,** | ** ** | **%** | ** ** |
| ** **                           | ** ** | **2006**                                       | ** ** | **2005**            | ** ** | **Change** | ** ** |
| Bakery revenues                      |       | $                                              | 9,557      |                | $          | 9,152 |   | 4.4 |   |
| Dairy revenues                       |       | 3,829                                          |       | 4,180               |       | (8.4 | ) |
| Total franchising revenues           |       | 13,386                                         |       | 13,332              |       | 0.4 |   |
| Bakery operating  expenses           |       | 4,393                                          |       | 4,109               |       | 6.9 |   |
| Dairy operating  expenses            |       | 1,745                                          |       | 1,105               |       | 57.9 |   |
| Total franchising operating expenses |       | 6,138                                          |       | 5,214               |       | 17.7 |   |
| Total  franchising contribution      |       | $                                              | 7,248      |                | $          | 8,118 |   | (10.7 | ) |

 

22

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The following table details the year-over-year (“YOY”)percentage increase (decrease) in same store sales for the 13 weeks endedSeptember 30, 2006 and October 1, 2005:

 
|                         | ** ** | **For the 13 Weeks Ended** | ** ** |
|-------------------------|------------|------------------------------------------------|------------|
| ** **              | ** ** | **September 30,**                         | ** ** | **October 1,** | ** ** |
| ** **              | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| Mrs. Fields             |       | (0.8                                           | )          | (1.1 | ) |
| Great American  Cookies |       | 4.2                                            |       | 4.0 |   |
| Pretzel Time            |       | 10.5                                           |       | (0.1 | ) |
| Pretzelmaker            |       | 11.9                                           |       | 10.3 |   |
| Total Bakery            |       | 4.5                                            |       | 2.0 |   |
| TCBY                    |       | (2.8                                           | )          | (0.6 | ) |
| Total Company           |       | 2.5                                            |       | 1.2 |   |

 

*Year-Over-Year Same Store Sales. *Year-over-year same storesales increased for all of our concepts other than our Mrs. Fields and TCBYconcepts during the 13 weeks ended September 30, 2006. Our bakery concepts’year-over-year same store sales increased 4.5 percent for the 13 weeks endedSeptember 30, 2006.

 

Our Great American Cookies concept increasedyear-over-year same store sales during this period primarily dueto launching its new Disney® program, including cookies andcookie cakes decorated with Disney characters and themes, along with merchandisingand gifting items such as Kids Cups and Mini-Buckets, sold in accordancewith our licensing agreement with Disney. Additionally, the brand re-launched its BreezerTM smoothie line andintroduced a new Peanut Butter Chocolate Brownie.

 

Our Pretzel Time and Pretzelmaker concepts increasedin year-over-year same store sales primarily due to the introduction andpromotion of our new pretzel dough.  Consumer feedback suggests thenew pretzel and pretzel bites products have more flavor, a softer bite and afresher taste.  All of our stores were certified and retrained whenwe introduced the new pretzel dough in July 2006.  Freshly squeezedlemonade and BreezerTM smoothie beverages also continued to provide strongyear-over-year growth.

 

Our Mrs. Fields concept’s year-over-year same storesales decreased 0.8 percent for the 13 weeks ended September 30,2006.  The decrease in year-over-yearsame store sales was a result of decreased customer counts at thestores.  Performance improved for thisquarter over last quarter due to the introduction of a summer long kidspromotion and a focus on beverages and cookie cakes.

 

Our TCBY concept’s year-over-year same store salesdecreased 2.8 percent for the 13 weeks ended September 30, 2006.  We believe that the decrease inyear-over-year same store sales may be a result of increases inadvertising and market penetration from competitive brands.  Our new product introductions, hand scoopedfrozen yogurt and iced coffee Frappes, have continued to build momentum;however, this was not sufficient to stem the system-wide volume declines due todecreased customer counts at the stores.

 

*Franchising Revenues.  *Franchising revenues were$13.4 million for the 13 weeks ended September 30, 2006, an increase of$100,000 or 0.4 percent from $13.3 million for the 13 weeks ended October 1,2005.  This increase was due to an increasein revenues from our bakery franchise system of $400,000 partially offset by adecrease in revenues from the dairy franchise system of $300,000.

 

Revenues from our bakery franchise system for the 13weeks ended September 30, 2006 were $9.6 million, an increase of $400,000 or4.4 percent from $9.2 million for the 13 weeks ended October 1, 2005.  This increase was due to increases in salesof products by our Great American Cookies manufacturing facility to ourfranchisees of $400,000 and royalties of $200,000, partially offset bydecreases in initial franchise fees of $100,000 and product formulationrevenues of $100,000.  The increase insales by our Great American Cookies manufacturing facility was primarily due toincreases in batter purchases by our Great American Cookies franchisees as a resultof continued positive year-over-year same store sales by our franchisees.  The increase in royalties was principally dueto increases in year-over-year same store sales by our franchisees.  The reduction in product formulation revenueswas the result of lower product formulation revenues earned through our Mrs.Fields bakery franchise system.

23

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Revenues from our dairy franchise system were $3.8million for the 13 weeks ended September 30, 2006, a decrease of $300,000 or8.4 percent from $4.1 million for the 13 weeks ended October 1, 2005.  The decrease in revenues from our dairyfranchise system was due to decreases in product formulation revenues generatedby purchases of TCBY products by franchisees of $200,000 and initial franchisefees of $100,000.  The decrease inproduct formulation revenues is principally attributable to approximately 900or 11.7 percent fewer unit weeks and the decrease in year-over-year same storesales.  We anticipate that our dairy unitweeks will continue to decline in the near future, at least until ourreconcepting tests for Beriyo by TCBY and Yovana and remodeling tests for TCBYtraditional stores are completed and we have developed a plan to implement thereconcepting and/or remodeling in qualified TCBY traditional stores.  We anticipate our reconcepting and remodelingtests will continue into 2007.  Wecontinue to be encouraged by consumer data we have collected.  However, there can be no assurances that ourreconcepting and remodeling tests or implementation will be successful, or thata reconcepting and remodeling will slow or reverse the declining TCBY storecount or contribution, which may adversely affect our consolidated results ofoperations.

 

*Franchising Expenses.*  Franchising expenses are comprised ofoperation and supervision expenses wherein we provide support, direction andsupervision to the franchisees; development and support expenses includingproduct development costs, expenses relating to new franchise development,marketing and advertising, bad debt expense and other direct franchisingexpenses; and cost of product sales associated with our Great American Cookiesmanufacturing facility, including raw ingredients, labor and othermanufacturing costs.  Franchising expenseswere $6.1 million for the 13 weeks ended September 30, 2006, an increaseof $900,000 or 17.7 percent from $5.2 million for the 13 weeks ended October 1,2005.  This increase was attributable toincreases in bad debt expense of $300,000 related to Americana, our dairyproduct manufacturer for our dairy franchise system, distribution costs of$100,000 associated with the distribution of our dairy products to our dairyfranchise system resulting from the Blue Line Extension Agreement, product costof sales associated with our Great American Cookies manufacturing facility of$200,000 and franchise development and support expenses of $400,000 partiallyoffset by reductions in franchise operations and supervision expenses of$100,000.

 

# **Gifts**

 

*Gifts Revenues.*  Gifts revenues were $3.9 million for the 13weeks ended September 30, 2006 and for the 13 weeks ended October 1, 2005.  Gifts revenues consist of sales through ourcatalog and website as well as affiliations with other websites and sales tolarge corporate accounts for gifting purposes and commercial airlines.  This consistency in revenues for the 13 weeksended September 30, 2006 and October 1, 2005 was due to increases in nationalaccounts of $300,000 and sales through Internet search engines of $100,000 offsetby a decrease in sales through our catalog and website of $400,000.

 

*Gifts Expenses.*  Gifts expenses are comprised of cost of salesfor products sold, selling and promotional expenses and direct operatingexpenses of this segment.  Gifts expenseswere $5.5 million for the 13 weeks ended September 30, 2006, an increaseof $1.1 million or 26.9 percent from $4.4 million for the 13 weeks endedOctober 1, 2005.  This increase inexpenses was due to increases in cost of goods sold of $500,000 due to increasesin raw materials, production costs and freight expenses, facility expenses of$500,000 primarily due to accrued rents on the former gifting facility andother direct operating expenses of $100,000 due to costs associated with movingto the new gifting facility.

 

**BrandedRetail**

 

*Branded Retail Revenues. *Asdiscussed in “Recent Developments” contained elsewhere in this report,following termination of our license agreements with Shadewell, in July 2006, wecommenced selling Mrs. Fields branded shelf stable cookies directly throughretail channels. Prior to this time, our branded retail revenues consisted ofsales of Mrs. Fields branded cookie dough directly through retailchannels. Branded retail net sales were $6.9 million for the 13 weeks endedSeptember 30, 2006, an increase of $6.8 million from $100,000 for the 13 weeksended October 1, 2005.

 

*Branded Retail Expenses.*  Branded retail expenses are comprised of costof sales for product sold, selling and promotional expenses and other directoperating expenses of this segment. Branded retail expenses were $6.7 million for the 13 weeks endedSeptember 30, 2006, an increase of $6.6 million from $100,000 for the 13 weeksended October 1, 2005.  This increase wasprimarily due to the operating costs associated with the new branded retailactivities which commenced in July 2006.

24

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**Licensing**

 

*Licensing Revenues. *Licensing revenues were $300,000 for the 13 weeksended September 30, 2006, a decrease of $600,000 or 64.5 percent from$900,000 for the 13 weeks ended October 1, 2005.  This decrease was due to decreases in licensingroyalties earned under our licensing agreement for the sale of Mrs. Fieldsbranded shelf stable cookies of $500,000 and royalties earned under ourlicensing agreement for the sale of TCBY frozen food specialty products throughretail channels of $100,000.  Asdiscussed in “Recent Developments” contained elsewhere in this report, we havenot recognized any royalty revenues earned under the terminated licenseagreements during the 13 weeks ended September 30, 2006. Wedo not anticipate earning any royalties under the terminated license agreementsfor the remainder of the year.

 

*Licensing Expenses.*  Licensing expenses are comprised of sellingand promotional expenses, bad debt and other direct operating expenses of thissegment.  Licensing expenses were$500,000 for the 13 weeks ended September 30, 2006, an increase of $300,000 or196.8 percent from $200,000 for the 13 weeks ended October 1, 2005.  This increase was due to increases in baddebt expense of $300,000 related to Americana, our former manufacturer anddistributor of TCBY branded frozen products.

 

**Other**

 

*General and Administrative Expenses.*  General and administrative expenses were $2.3million for the 13 weeks ended September 30, 2006, a decrease of $100,000 or4.2 percent from $2.4 million for the 13 weeks ended October 1, 2005.  This decrease was primarily due to decreasesin recruiting and relocation costs of $200,000, incentive compensation of$200,000, salaries and related costs of $100,000, professional fees of $100,000and other administrative costs of $200,000, partially offset by a reduction inthe reimbursement amount we received for management services provided to ourparent company, MFOC, of $700,000 as a result of the decrease in the number ofstores owned and operated by MFOC.

 

*Depreciation and AmortizationExpense.*  Totaldepreciation and amortization expense was $1.1 million for the 13 weeks endedSeptember 30, 2006, an increase of $100,000 or 7.9 percent from$1.0 million for the 13 weeks ended October 1, 2005.  Depreciation expense was $600,000 for the 13weeks ended September 30, 2006, an increase of $300,000 or 92.7 percent from$300,000 for the 13 weeks ended October 1, 2005.  This increase was principally due to additionaldepreciation expense of approximately $200,000 associated with leasehold improvementsof our former gifting facility as a result of relocating from that facilityinto a new facility in August 2006, which shortened the useful lives of theseleasehold improvements.  Amortizationexpense for the 13 weeks ended September 30, 2006 was $500,000, a decrease of$200,000 or 26.6 percent from $700,000 for the 13 weeks ended October 1,2005.  This decrease was principally dueto the impairment of certain intangible assets of TCBY in 2005 which resultedin a lower carrying value of the intangible assets and lower amortizationexpense in periods subsequent to the impairment.

25

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**39 Weeks Ended September 30, 2006**

**Compared to the 39 Weeks EndedOctober 1, 2005**

 

*Income (Loss) FromOperations—Overview*. Loss from operations was $8.0 million for the 39 weeks endedSeptember 30, 2006, a decrease of $23.7 million from income from operations of$15.7 million for the 39 weeks ended October 1, 2005.  This decrease was primarily attributable tothe impairment of goodwill associated with the dairy franchise reporting unitof $14.6 million, a decrease in contribution from our business segments of $7.6million, an increase in general and administrative expenses of $1.0 million andan increase in depreciation and amortization expense of $500,000.  Decreases in contribution from our businesssegments of $7.6 million was comprised of decreases in our gifting segmentcontribution of $3.0 million, our franchising segment contribution of $2.4million and our licensing segment contribution of $2.4 million partially offsetby an increase in our new branded retail segment contribution of $200,000.

 

*Segment Contribution.*  Franchising contribution is comprised ofsales of new franchises and royalties from existing franchises less directoperating expenses.  Gifts contributionis comprised of sales of products through our catalog and website less directoperating expenses.  Branded retailcontribution is comprised of net sales of our branded products through retailchannels by us and through food brokers, less related cost of sales and directselling and operating expenses. Licensing contribution is comprised of licensing fees received fromthird parties for the sale of products bearing our brand names less directoperating expenses.  The following tablesets forth the contribution from each of our reporting segments (in thousands).

 

|                             | ** ** | **For the 39 Weeks Ended** | ** ** | ** **          | ** ** |
|-----------------------------|------------|------------------------------------------------|------------|---------------------|------------|
| ** **                  | ** ** | **September 30,**                         | ** ** | **October 1,** | ** ** | **%** | ** ** |
| **Reporting Segment**       | ** ** | **2006**                                       | ** ** | **2005**            | ** ** | **Change** | ** ** |
| Franchising                 |       | $                                              | 21,205     |                | $          | 23,627 |   | (10.3 | ) |
| Gifts                       |       | (3,717                                         | )          | (684                | )          | (443.4 | ) |
| Branded retail              |       | 235                                            |       | 50                  |       | 370.0 |   |
| Licensing                   |       | 3                                              |       | 2,342               |       | (99.9 | ) |
| Total segment  contribution |       | $                                              | 17,726     |                | $          | 25,335 |   | (30.0 | ) |

 

**Franchising**

 

The following table details the revenues and operatingexpenses of the franchising segment for the 39 weeks ended September 30, 2006and October 1, 2005 (in thousands):

 

|                                      | ** ** | **For the 39 Weeks Ended** | ** ** | ** **          | ** ** |
|--------------------------------------|------------|------------------------------------------------|------------|---------------------|------------|
| ** **                           | ** ** | **September 30,**                         | ** ** | **October 1,** | ** ** | **%** | ** ** |
| ** **                           | ** ** | **2006**                                       | ** ** | **2005**            | ** ** | **Change** | ** ** |
| Bakery revenues                      |       | $                                              | 28,574     |                | $          | 27,761 |   | 2.9 |   |
| Dairy revenues                       |       | 10,736                                         |       | 11,894              |       | (9.7 | ) |
| Total franchising revenues           |       | 39,310                                         |       | 39,655              |       | (0.9 | ) |
| Bakery operating  expenses           |       | 13,173                                         |       | 11,852              |       | 11.1 |   |
| Dairy operating  expenses            |       | 4,932                                          |       | 4,176               |       | 18.1 |   |
| Total franchising operating expenses |       | 18,105                                         |       | 16,028              |       | 13.0 |   |
| Total  franchising contribution      |       | $                                              | 21,205     |                | $          | 23,627 |   | (10.3 | ) |

 

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The following table details the YOY percentageincrease (decrease) in same store sales for the 39 weeks ended September 30,2006 and October 1, 2005:

 

|                         | ** ** | **For the 39 Weeks Ended** | ** ** |
|-------------------------|------------|------------------------------------------------|------------|
| ** **              | ** ** | **September 30,**                         | ** ** | **October 1,** | ** ** |
| ** **              | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| Mrs. Fields             |       | (1.4                                           | )          | 0.2 |   |
| Great American  Cookies |       | 3.9                                            |       | 4.3 |   |
| Pretzel Time            |       | 7.3                                            |       | 2.2 |   |
| Pretzelmaker            |       | 11.6                                           |       | 9.7 |   |
| Total Bakery            |       | 3.5                                            |       | 2.9 |   |
| TCBY                    |       | (1.4                                           | )          | (0.8 | ) |
| Total Company           |       | 2.2                                            |       | 1.8 |   |

 

*Year-Over-Year Same Store Sales.* Year-over-year same store sales increased forall of our concepts other than our Mrs. Fields and TCBY concepts during the 39weeks ended September 30, 2006.

 

Our bakery concepts’ year-over-year same store salesincreased 3.5 percent for the 39 weeks ended September 30, 2006.  Our Great American Cookies concept increasedyear-over-year same store sales during this period primarily due to continuedemphasis on Cookie Cakes and Cookie Express Grab & Go decorating tables,along with the launching of the new Disney program, the re-launching of theBreezerTM smoothie line and a retail price increase.  Our Pretzel Time and Pretzelmaker conceptsincreased year-over-year same store sales due to the introduction and promotionof our new pretzel dough and the continued focus on BreezerTM smoothies and the “GreatTastes Collide” campaign pairing pretzel bites and BreezerTM smoothiestogether.  Our Mrs. Fields concept’syear-over-year same store sales decreased 1.4 percent for the 39 weeksended September 30, 2006.  The decreasein year-over-year same store sales was a result of lower sales on keyholiday weeks this year compared to last year and decreased customer counts atthe stores.

 

Our TCBY concept’s year-over-year same store salesdecreased 1.4 percent for the 39 weeks ended September 30, 2006 due to decreasedcustomer counts at the stores.  Wecontinue to focus and emphasize store level operations and standardsenforcement to improve operations and the consumer experience in thestore.  This work is being executed in parallel to variousreconcepting tests, as more fully discussed in our Annual Report on Form 10-Kfiled with the SEC on March 21, 2006. This reconcepting work is designed to leverage consumer trends, providea new platform for sales growth, build an improved franchisee business modeland strengthen our new store development initiatives.

 

*Franchising Revenues. *Franchising revenues were$39.3 million for the 39 weeks ended September 30, 2006, a decrease of$400,000 or 0.9 percent from $39.7 million for the 39 weeks ended October1, 2005.  The decreased revenues were dueto a decrease in revenues from our dairy franchise system of $1.2 million or9.7 percent, partially offset by increased revenues from our bakery franchisesystem of $800,000 or 2.9 percent.

 

The increase in revenues from our bakery franchisesystem was principally attributable to increases in sales of products by ourGreat American Cookies manufacturing facility to our franchisees of $1.3million or 10.7 percent and royalties of $500,000 or 4.3 percent, partiallyoffset by reductions of product formulation revenues generated by purchases ofcertain bakery products by franchisees of $300,000 or 15.6 percent, allowancesearned from our beverage vendors of $400,000 or 29.3 percent and initialfranchise fees of $300,000 or 23.2 percent. The increase in sales by our Great American Cookies manufacturingfacility was primarily due to increases in batter purchases by our GreatAmerican Cookies franchisees as a result of continued positive year-over-yearsame store sales by our franchisees and a price increase to our franchisees of8.3 percent effective April 2005.  Theincrease in royalties was principally due to increases in year-over-year samestore sales by our franchisees.  Thereduction in product formulation revenues was the result of lower productformulation revenues earned through our Mrs. Fields bakery franchisesystem.  The decrease in initialfranchise fees was due to initial franchise fees earned in Canada from our Mrs.Fields and Pretzelmaker concepts in 2005 that were not repeated in 2006.

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The decrease in revenues from our dairy franchisesystem was principally comprised of decreases in product formulation revenuesgenerated by purchases of TCBY products by franchisees of $600,000 or 8.0percent, royalties of $400,000 or 8.7 percent and initial franchise fees of$200,000 or 47.7 percent.  The decreasein royalties and product formulation revenues is principally attributable toapproximately 2,900 or 11.2 percent fewer unit weeks and continued negativeyear-over-year same store sales.  Weanticipate that our dairy unit weeks will continue to decline in the nearfuture, at least until our reconcepting tests for Beriyo by TCBY and Yovana andremodeling tests for TCBY traditional stores are completed and we havedeveloped a plan to implement the reconcepting and/or remodeling in qualifiedTCBY traditional stores.  We anticipateour reconcepting and remodeling tests will continue into 2007.  We continue to be encouraged by consumer datawe have collected.  However, there can beno assurances that our reconcepting and remodeling tests or implementation willbe successful, or that a reconcepting and remodeling will slow or reverse thedeclining TCBY store count or contribution, which may adversely affect ourconsolidated results of operations.

 

*Franchising Expenses.*  Franchising expenses were $18.1 millionfor the 39 weeks ended September 30, 2006, an increase of $2.1 million or 13.0percent from $16.0 million for the 39 weeks ended October 1, 2005.  This increase was attributable to increasesin product cost of sales associated with our Great American Cookiesmanufacturing facility of $700,000, distribution costs of $600,000 associatedwith the distribution of our dairy products to our dairy franchise systemresulting from the Blue Line Extension Agreement, bad debt expense of $300,000related to Americana, our dairy product manufacturer for our dairy franchisesystem, and franchise development and support expenses of $1.3 millionpartially offset by a reduction in expenses associated with our brandinitiatives of $700,000 and operations and supervision expenses of $100,000.

 

The increase in franchisedevelopment and support expenses of $1.3 million was due to increases insalaries and related employee costs of $800,000, severance costs of $200,000,professional and legal fees of $200,000, bad debt expense of $100,000 and otherfranchise development costs of $200,000 partially offset by a reduction incosts associated with our royalty assurance program of $200,000.

 

# **Gifts**

 

*Gifts Revenues.*  Gifts revenues were $14.0 million for the 39weeks ended September 30, 2006, a decrease of $300,000 or 2.0 percent from$14.3 million for the 39 weeks ended October 1, 2005.  The decrease in revenues for the 39 weeksended September 30, 2006 was due to decreases in sales through our catalog andwebsite.

 

*Gifts Expenses.*  Gifts expenses were $17.7 million forthe 39 weeks ended September 30, 2006, an increase of $2.7 million or 18.4percent from $15.0 million for the 39 weeks ended October 1, 2005.  This increase in expenses was due toincreases in cost of goods sold of $1.3 million due to increases in rawmaterials, production costs and freight expenses, facility expenses of $700,000primarily due to accrued rents on the former gifting facility and sellingexpenses of $600,000 principally for increased paper and creative costs of ourcatalogs partially offset by decreased circulation. Other direct operatingexpenses increased $100,000 due to increases in compensation and related costsof $500,000, professional IT services of $200,000, moving costs to our newfacility of $200,000 and severance costs of $200,000 partially offset by adecrease in professional fees of $700,000 for consultants in 2005 for theassistance and development of our gifting business strategy, recruiting andrelocation costs of $200,000 and bad debt expense of $100,000.

 

**BrandedRetail**

 

*Branded Retail Revenues. *Asdiscussed in “Recent Developments” contained elsewhere in this report,following termination of our license agreements with Shadewell, inJuly 2006, we commenced selling Mrs. Fields branded shelf stable cookiesdirectly through retail channels. Prior to this time, our branded retailrevenues consisted of sales of Mrs. Fields branded cookie dough directlythrough retail channels. Branded retail net sales were $7.0 million for the 39weeks ended September 30, 2006, an increase of $6.8 million from $200,000 forthe 39 weeks ended October 1, 2005.

 

*Branded Retail Expenses.*  Branded retail expenses were $6.7 million forthe 39 weeks ended September 30, 2006, an increase of $6.6 million from$100,000 for the 39 weeks ended October 1, 2005.  This increase was primarily due to theoperating costs associated with the new branded retail activities whichcommenced in July 2006.

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**Licensing**

 

*Licensing Revenues. *Licensing revenues were $1.4 million for the 39weeks ended September 30, 2006, a decrease of $1.5 million or 51.7 percentfrom $2.9 million for the 39 weeks ended October 1, 2005.  This decrease was due to decreases inlicensing royalties earned under our licensing agreement for the sale of Mrs.Fields branded shelf stable cookies of $1.4 million and licensing royaltiesearned under an agreement for the sale of Mrs. Fields branded premium hot cocoathat was terminated in early 2005 of $100,000. As discussed in “Recent Developments” contained elsewhere in thisreport, we do not anticipateearning any royalties under the terminated license agreements for the sale ofMrs. Fields branded shelf stable cookies for the remainder of the year.

 

*Licensing Expenses.*  Licensing expenses were $1.4 million for the39 weeks ended September 30, 2006, an increase of $900,000 or168.6 percent from $500,000 for the 39 weeks ended October 1, 2005.  This increase was due principally to bad debtexpense as a result of the termination of our license agreements for the saleof Mrs. Fields branded shelf stable cookies of $400,000, bad debt expenserelated to Americana, our former manufacturer and distributor of TCBY brandedfrozen products of $300,000 and an increase in costs associated with the saleof TCBY branded frozen products of $200,000.

 

**Other**

 

*General and Administrative Expenses.*  General and administrative expenses were $7.7million for the 39 weeks ended September 30, 2006, an increase of $1.0 millionor 15.6 percent from $6.7 million for the 39 weeks ended October 1, 2005.  This increase was primarily due to areduction in the reimbursement amount we received for management servicesprovided to our parent company, MFOC, of $1.6 million as a result of thedecrease in the number of stores owned and operated by MFOC and increases inseverance costs of $200,000, salaries and related benefits of $100,000 andhealth insurance expense of $100,000 partially offset by reductions in incentivecompensation of $300,000, recruiting and relocation of $300,000, professionalfees of $200,000 and other general and administrative costs of $200,000.

 

*Depreciation and AmortizationExpense.*  Totaldepreciation and amortization expense was $3.5 million for the 39 weeks endedSeptember 30, 2006, an increase of $600,000 or 18.6 percent from$2.9 million for the 39 weeks ended October 1, 2005.  Depreciation expense was $1.9 million for the39 weeks ended September 30, 2006, an increase of $1.1 million or 127.7 percentfrom $800,000 for the 39 weeks ended October 1, 2005.  This increase was principally due to a$400,000 write-down of leasehold improvements and equipment associated with aYovana test store and additional depreciation expense of approximately $500,000associated with leasehold improvements of our former gifting facility as aresult of relocating from that facility into a new facility in August 2006,which shortened the useful lives of these leasehold improvements.  Amortization expense for the 39 weeks endedSeptember 30, 2006 was $1.6 million, a decrease of $500,000 or 24.6 percentfrom $2.1 million for the 39 weeks ended October 1, 2005.  This decrease was principally due to theimpairment of certain intangible assets of TCBY in 2005, which resulted in alower carrying value of the intangible assets and lower amortization expense infuture periods.

 

*Impairment of Goodwill. *During the 39 weeks ended September 30, 2006, we recorded a charge of$14.6 million to reduce the carrying value of the goodwill associated with ourdairy franchising reporting unit.  Thisimpairment was principally the result of an eroding dairy franchise system dueto fewer locations, consistent negative year-over-year same store sales by ourdairy franchisees and our inability to locate and open a significant number ofnew or additional franchise locations. These factors have resulted in continued decreases in franchiseroyalties and yogurt formulation revenues from our dairy franchise system.  See Note 5 to our condensed consolidatedfinancial statements contained elsewhere in this report.

 

*Interest Expense, Net.*  Interest expense, net was****$15.7 million for the 39 weeksended September 30, 2006, a decrease of $300,000 or 1.5 percent from$16.0 million for the 39 weeks ended October 1, 2005.  The decrease in interest expense, net was theresult of a reduction in amortization of deferred loan costs and an increase ininterest income earned on our cash balances.

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**Consolidated Financial Condition**

 

Total assets at September 30, 2006 were $114.5million, a decrease of $25.4 million or 18.2 percent from$139.9 million at December 31, 2005. This decrease was primarily attributable to decreases in goodwill of$14.6 million, cash and cash equivalents of $15.7 million, trademarks andintangibles of $1.5 million and deferred loan costs of $800,000 partiallyoffset by increases in property and equipment, net of $3.8 million, accountsreceivables of $1.4 million, inventories of $1.0 million, deferred tax assetsof $600,000 and prepaid expenses and other assets of $400,000.

 

Total liabilities at September 30, 2006 were $219.1million, a decrease of $2.2 million or 1.0 percent from$221.3 million at December 31, 2005. This decrease was primarily due to decreases in accrued liabilities of$4.4 million and capital lease obligations of $100,000 partially offset byincreases in other liabilities of $1.3 million, accounts payable of $100,000and amounts due to affiliates of $900,000.

 

***Consolidated Cash Flows for the39 Weeks Ended September 30, 2006 Compared to October 1, 2005***

 

Net cash flows used in operating activities were $11.3million for the 39 weeks ended September 30, 2006, an increase of $7.2 millionfrom net cash flows used in operating activities of $4.1 million for the 39weeks ended October 1, 2005.  Thisincrease in cash used in operations was principally due to a decrease incontribution by our operating segments of $7.6 million and an increase ingeneral and administrative expenses of $1.0 million partially offset by anincrease in cash provided from working capital assets and liabilities of $1.4million.

 

Net cash flows used in investing activities were $4.4million for the 39 weeks ended September 30, 2006, an increase of $3.3 millionfrom cash used in investing activities of $1.1 million for the 39 weeks endedOctober 1, 2005.  This increase wasattributable to increases in purchases of property and equipment of $3.4million principally associated with our new gifts facility partially offset byproceeds from the sale of equity warrants in Nonni’s Food Company of $100,000.

 

Net cash flows used in financing activities werenegligible for the 39 weeks ended September 30, 2006 and for the 39 weeks endedOctober 1, 2005.

 

###### **Liquidityand Capital Resources**

 

Ourprincipal sources of liquidity are cash on hand and cash flows from operatingactivities.  At September 30, 2006, wehad $7.9 million of cash on hand.  Duringthe next 12 months, we expect that our principal uses of cash will be forworking capital, capital expenditures and semi-annual interest payments of$20.5 million on our 9 percent senior secured notes and our 111⁄2 percent seniorsecured notes (the “Senior Secured Notes”), of which $10.25 million will be dueon March 15, 2007 and September 15, 2007. In addition, to the extent we have cash available and it is permitted bythe indenture governing the Senior Secured Notes, we may pay dividends to ourparent companies for uses such as acquisitions, debt repayments anddividends.  During the next 12 months, wedo not expect to be required, but we may offer, to repurchase a portion of theSenior Secured Notes as described below.

 

Weare highly leveraged.  At September 30,2006, we had $195.7 million of long-term debt represented by the Senior SecuredNotes.  The Senior Secured Notes matureon March 15, 2011, with interest payable semi-annually on March 15 andSeptember 15.  Due to borrowingrestrictions under the indenture governing the Senior Secured Notes, ourability to obtain additional debt financing is significantly limited.  The Senior Secured Notes require us to offerto repurchase a portion of the notes at 100 percent of the principalamount, plus accrued and unpaid interest thereon to the date of purchase, with50 percent of our “excess cash flow,” as defined in the indentureagreement, when the ratio of our net indebtedness to consolidated EBITDA isabove 3.75 to 1.0 and the cumulative unpaid excess cash flow offer amountexceeds $10.0 million.  For a moredetailed description of the material terms of the Senior Secured Notes, seeNote 3 to our consolidated financial statements contained in our Annual Reporton Form 10-K filed with the SEC on March 21, 2006.

 

Dueto the seasonal nature of our bakery franchising and gifting businesses, wehistorically generate a significant amount of cash during the fourthquarter.  While we believe, based onhistorical results and current projections, that the cash currently on hand andexpected cash flows from future operations will be sufficient to continueoperations for at least the next 12 months, there can be no assurance**that actual results will meet or exceedour projections or that our future operating activities will generatesufficient cash to meet our cash requirements for the next 12 months.

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**Inflation**

The impact of inflation on our business has not beensignificant in recent years.  Some of ouremployees are paid hourly wages at the federal minimum wage level.  Minimum wage increases will negatively impactour payroll costs in the short term, but management believes such impact can beoffset in the long term through lower staffing of operations and, if necessary,through product price increases.

**CriticalAccounting Policies**

The preparation of financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, disclosure of contingent assets and liabilities andthe reported amounts of revenues and expenses in our consolidated financialstatements.  Management has reviewed withour Audit Committee the accounting policies that it uses to prepare ourconsolidated financial statements and believes that the following policies arethe most important to the portrayal of our financial condition and the resultsof our operations while requiring the use of judgments and estimates about theeffects of matters that are inherently uncertain.

*Impairmentof Goodwill.*   Goodwill is not amortized, but issubject to an annual assessment for impairment, or more frequently ifcircumstances indicate potential impairment, through a comparison of fair valueto its carrying amount.  The two-stepapproach to assess our goodwill impairment requires that we first compare theestimated fair value of each reporting unit with goodwill to the carryingamount of the reporting unit’s assets and liabilities, including itsgoodwill.  If the fair value of thereporting unit is below its carrying amount, then the second step of theimpairment test is performed, in which the current fair value of the reportingunit’s assets and liabilities will determine the current implied fair value ofthe reporting unit’s goodwill.

On an annual basis (in the fourth quarter), or morefrequently if circumstances indicate potential impairment, we complete anevaluation of goodwill associated with our various reporting units.  To the extent that the fair value associatedwith goodwill is determined to be less than the recorded value, we write downthe value of the related goodwill.  Theestimated fair value of goodwill is affected by, among other things, ourbusiness plan for the future, estimated results of future operations and thecomparable companies and transactions that are used to estimate the fair valueof our goodwill.  Changes in the businessplan or operating results that are different than the projections used todevelop the valuation of goodwill may have an impact on the valuation of thegoodwill.

In conducting our impairment analyses, we performanalyses and tests of our goodwill with respect to our reporting units.  The test methods employed involve assumptionsconcerning useful lives of intangible assets, interest and discount rates,projections and other assumptions of future business conditions.  The assumptions employed are based on management’sjudgment using internal and external data.

*Impairmentof Long-lived and Certain Identifiable Intangible Assets.*   Wereview our long-lived assets for impairment when circumstances indicate thatthe carrying value of an asset may not be fully recovered by the undiscountednet cash flow generated over the remaining life of the related asset or groupof assets.  If the cash flows generatedby the asset are not sufficient to recover the remaining carrying value of theasset, we are required to write down the value of the asset to its estimatedfair value.  In evaluating whether the assetwill generate sufficient cash flow to recover its carrying value, we estimatethe amount of cash flow that will be generated by the asset and the remaininglife of the asset.  In making ourestimate, we consider the performance trends related to the asset, thelikelihood that the trends will continue or change, both at the asset level aswell as at the national economic level, and the length of time that we expectto retain the asset.

*Allowancefor Doubtful Accounts.*   We sell products to andreceive royalties from our franchisees and sell products to othercustomers.  Sometimes these franchiseesand customers are unable or unwilling to pay for the products that they receiveor royalties that they owe.  Factors thataffect our ability to collect amounts that are due to us include the financialstrength of a franchisee or customer and its operations, the economic strengthof the mall where the franchisee is located and the overall strength of theretail economy.  We are required toestablish an estimated allowance for the amounts included in accountsreceivable that we will not be able to collect in the future.  To establish this allowance, we evaluate thecustomer’s or franchisee’s financial strength, payment history, reported salesand the availability of collateral to offset potential losses.  If the assumptions that are used to determinethe allowance for doubtful accounts change, we may have to provide for agreater level of expense in future periods or reverse amounts provided in priorperiods.

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*Revenue Recognition**.  *We recognize revenues from our initial franchisingfees and licensing fees when all material services or conditions relating tothe franchising or licensing have been substantially performed or satisfied,which is generally upon the opening of a store by a franchisee orlicensee.  We recognize franchise andlicense royalties, which are based on a percentage of gross store sales, asearned, which is generally upon sale of product by franchisees or licensees.  Minimum royalty payments under certainlicensing agreements are deferred and recognized on a straight-line basis overthe term of the agreement.  We recognizerevenues from the sale of cookie dough that we produce and sell to certainfranchisees at the time of shipment and classify them in franchising revenues.  We recognize revenues, net of sales discountsand allowances, from the sale of branded retail products such as cookie doughand shelf stable cookies to grocery stores and wholesale clubs upon shipmentand include them in branded retail revenues.  We recognize revenues from gift sales at thetime of shipment.

We receive cash payments for product formulation feesand allowances from suppliers based on the amount of product purchased directlyby our distributors and franchisees. These product formulation fees and allowances represent cash payments tous for the right to use our proprietary formulations and recipes to manufacturethe frozen dough, dough mixes and TCBY products these suppliers sell to ourfranchisees.  Formulation fees andallowances are recorded as franchising revenues upon shipment of product to ourdistributors or franchisees.  Included infranchising revenues was $3.1 million and $9.2 million for the 13 and 39 weeksended September 30, 2006, respectively, and $3.5 million and $10.4 million forthe 13 and 39 weeks ended October 1, 2005, respectively, for such formulationfees and allowances.

**Recent AccountingPronouncements**

In September 2006, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards No. 157 (“SFAS157”), “Fair Value Measurements.”  SFAS157 defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements.  SFAS 157 is effectivefor fiscal years beginning after November 15, 2007 and interim periods withinthose fiscal years.  We have not yetdetermined the impact, if any, of adopting the provisions of SFAS 157 on ourconsolidated financial position or results of operations.

In September 2006, the SEC issued Staff AccountingBulleting No. 108 (“SAB 108”).  SAB 108provides interpretive guidance on how the effects of the carryover or reversalof prior year misstatements should be considered in quantifying a potentialcurrent year misstatement.  Prior to SAB108, Companies might evaluate the materiality of financial-statementmisstatements using either the income statement or balance sheet approach, withthe income statement approach focusing on new misstatements added in thecurrent year and the balance sheet approach focusing on the cumulative amountof misstatement present in a company’s balance sheet.  Misstatements that would be material underone approach could be viewed as immaterial under another approach and not becorrected.  SAB 108 now requires thatcompanies view financial statement misstatements as material if they arematerial according to either the income statement or balance sheetapproach.  We are currently evaluatingthe effect, if any, that the adoption of SAB 108 will have on our consolidatedfinancial position and results of operations.

In July 2006, the FASB issued FASB Interpretation No.48 (“FIN 48”) “Accounting for Income Tax Uncertainties.”  FIN 48 defines the threshold for recognizingthe benefits of tax return positions in the financial statements as “more-likely-than-not”to be sustained by the taxing authority. FIN 48 provides guidance on the derecognition, measurement andclassification of income tax uncertainties, along with any related interest andpenalties.  FIN 48 also includes guidanceconcerning accounting for income tax uncertainties in interim periods andincreases the level of disclosures associated with any recorded income taxuncertainties.  FIN 48 is effective forfiscal years beginning after December 15, 2006. We have not yet determined the impact, if any, of adopting theprovisions of FIN 48 on our consolidated financial position or results ofoperations.

In June 2006, the Emerging Issues Task Force (“EITF”)reached a consensus on EITF Issue No. 06-03 (“EITF 06-03”), “How TaxesCollected from Customers and Remitted to Governmental Authorities Should BePresented in the Income Statement (That Is, Gross versus Net Presentation).”  EITF 06-03 provides that the presentation oftaxes assessed by a governmental authority that is directly imposed on arevenue-producing transaction between a seller and a customer on either a grossbasis (included in revenues and costs) or on a net basis (excluded fromrevenues) is an accounting policy decision that should be disclosed.  The provisions of EITF 06-03 become effectiveas of December 31, 2006.  The adoptionthe ETIF 06-03 is not expected to have a material impact on our consolidatedfinancial position or results of operations.

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**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

There have been no significant changes in market riskssince the end of the Company’s fiscal year ended December 31, 2005.  For more information, please read Item 7A andthe consolidated financial statements and notes thereto contained in our AnnualReport on Form 10-K filed with the SEC on March 21, 2006.

**Item 4.  Controls and Procedures**

The Company’s management, with the participation ofthe Company’s Chief Executive Officer and Chief Accounting Officer, evaluated theeffectiveness of the Company’s disclosure controls and procedures as of the endof the period covered by this report. Based on that evaluation, the Chief Executive Officer and ChiefAccounting Officer concluded that the Company’s disclosure controls andprocedures, as of the end of the period covered by this report, are functioningeffectively to provide reasonable assurance that the information required to bedisclosed by the Company in reports filed under the Securities Exchange Act of1934 is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms. A controls system, no matter how well designed and operated, cannotprovide absolute assurance that the objectives of the controls system are met,and no evaluation of controls can provide absolute assurance that all controlissues and instances of fraud, if any, within a company have been detected.

There has been no change in our internal control overfinancial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under theSecurities Exchange Act of 1934) that occurred during our fiscal quarter endedSeptember 30, 2006, that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

**PART II – OTHERINFORMATION**

**Item 1.  Legal Proceedings**

The Company and its products are subject to regulationby numerous governmental authorities, including, without limitation, federal,state and local laws and regulations governing franchising, health, sanitation,environmental protection, safety and hiring and employment practices.

In the ordinary course of business, the Company isinvolved in routine litigation, including franchise disputes and trademarkdisputes.  The Company is not a party toany legal proceedings that, in the opinion of management, after consultationwith legal counsel, is material to its business, financial condition or resultsof operations.

**Item 1A.  Risk Factors**

The following risk factors, among others, could causeour financial performance to differ significantly from the goals, plans,objectives, intentions and expectations expressed in this report.  If any of the following risks anduncertainties or other risks and uncertainties not currently known to us or notcurrently considered to be material actually occur, our business, financialcondition or operating results could be harmed substantially.

***Risks Related to Our Business***

*The results ofoperations of our business in the future will depend upon whether we are ableto successfully implement our business strategy, the implementation of whichdepends on factors that are beyond our control.*

We believe that the implementation of our businessstrategy is key to enabling us to grow our revenues and profitability and,ultimately, our future success.  Ourbusiness strategy is focused on increasing the sales of our franchisees,accelerating the development of new franchised stores, carts and kiosks andgrowing our licensing and gifts operations, each of which we believe iscritical to our success.

Our business strategy is dependent in part on ourability to develop, test and implement a reconcepting of our TCBY brand.  If we are unsuccessful, our performance willbe adversely affected.

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Our initial focus includes the “repositioning” of ourTCBY brand by targeting today’s health conscious consumers and the “reconcepting”of our TCBY brand by redesigning its trademarks, décor and updating its menus.We have begun the process of reviewing how best to develop and implement thereconcepting, including the testing of our Beriyo by TCBY and Yovanaconcepts.  However, we do not know howsuccessful we will be in developing or implementing a reconcepting plan or theextent to which the capital investment required to implement such areconcepting plan will be available when needed.  If we are unable to successfully implementthis or any other aspect of our business strategy, our business operations andour financial condition could be adversely affected.

*From time to time,we may be restricted from selling our franchises.*

The sale of franchises is regulated by various statelaws as well as by the Federal Trade Commission.  The Federal Trade Commission requires thatfranchisors make extensive disclosure in a uniform franchise prospectus toprospective franchisees but does not require registration.  However, a number of states require annualregistration of the uniform franchise prospectus with state authorities orother disclosure in connection with franchise offers and sales.  In addition, several states have “franchiserelationship laws” or “business opportunity laws” that limit the ability of thefranchisors to terminate agreements or to withhold consent to renewal ortransfer of these agreements.

There are certain events that require us to makecertain disclosure to state authorities. Further, renewal of uniform franchise offering circular registrationsare required in several states within a certain period of time following ourfiscal year end.  From time to time inthe future, there will be periods of time after certain events or in connectionwith renewal during which we may be prohibited from selling our franchises incertain states.  Without limiting theforegoing, our financial condition requires us to defer collection of certainfees in some states until the store opens, and in Virginia, prohibits us fromoffering new franchises for sale.  If weare unable to sell our franchises for an extended period of time in certainstates, our business operations or financial condition could be adverselyaffected.

*A decline in malltraffic could cause our bakery brand franchise income to decrease materially.*

We believe that the amount and proximity of pedestriantraffic near our bakery brand stores strongly influence sales of our products,which we believe are frequently impulse purchases.  In recent years, we believe visits to majorshopping malls, where at September 30, 2006 the majority of our bakeryfranchisees’ stores are located, have experienced periods of decline.  This trend has had a negative impact on ourrevenues.  We cannot be sure that thistrend will not continue or that this trend can be offset by increased sales percustomer.  A prolonged decline in malltraffic could adversely affect our financial condition and results ofoperations.

*We believe ourbrand identity is critical to the success of our business.  If we are unable to use any of our trademarksor to protect our trade secrets, our sales and our results of operations willbe adversely affected.*

We believe that our trademarks have significant valueand are important to the marketing of our retail outlets and products and theoperations of our franchisees’ stores, gifts segment and licensingstrategy.  Most of our trademarks arefederally registered before the United States Patent and Trademark Office andregistered or pending in many foreign countries.  However, we cannot be sure that ourtrademarks cannot be circumvented or that our trademarks do not or will notviolate the proprietary rights of others. If a challenge to one of our trademarks is successful, we could beprevented from continuing to use that trademark.  A negative ruling concerning our use or thevalidity or enforceability of one of our trademarks would adversely affect oursales of the related products and our operating results.  In addition, we cannot be sure that we willhave the financial resources necessary to police the use of our trademarks byour franchisees and licensees or enforce or defend our trademarks, which couldresult in incorrect or unauthorized use of our trademarks.  Moreover, we may not be able to use orregister our existing trademarks abroad due to the application of foreign laws,which would force us to adopt new trademarks for use in those jurisdictionsthat initially will not be as recognizable as our existing marks.  Despite our efforts to protect our tradesecrets, unauthorized parties may attempt to obtain and use informationregarding our proprietary recipes and our means of protecting our trade secretrights may not be adequate.  Theoccurrence of any of these factors could diminish the value of our trademarkportfolio or trade secrets and negatively impact our sales, business operationsand strategies.

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*Our information systems are an integral part of ourgifts segment business.  Systemsdisruptions and failures could cause our customers to become dissatisfied withus and may impair our business.*

Our ability to maintain our website, network systemand telecommunications equipment in working order and to reasonably protectthem from interruption is critical to the success of our gifts businesssegment.  Our website must accommodateregular traffic, deliver information and complete transactions.  Our customers, advertisers and business alliancesmay become dissatisfied by any systems failure that interrupts our ability toprovide our products and services to them.

*We believe thatour relationship with our franchisees and retail licensees is critical to thesuccess of our business.  If thesefranchise and retail license agreements were to be terminated or if we are unableto maintain these relationships, our sales and our results of operations wouldbe adversely affected.*

Sixteen of our franchisees or licensees own ten ormore retail concept locations.  In total,these franchisees own 337 retail concept locations and contributedapproximately $4.5 million or 8.4 percent of our franchise revenues forthe year ended December 31, 2005.  Forthe same period, franchise revenues made up 60.9 percent of our total revenues.  The termination of these key franchise orretail license agreements or lower than anticipated sales may have an adverseaffect on our financial condition and results of operations.  We cannot be sure that our relations withfranchisees and licensees will not change or that our licensees will continueto perform as they have in the past, which could result in franchise or licenseagreements being terminated by us or by our franchisees or licensees.

Generally, we believe our relationship with ourfranchisees and our licensees is a critical component in the success of ourbusiness.  As an example, as required bystate and federal franchise disclosure rules, we must provide all prospectivefranchisees with the name and contact information for each of the concept’sexisting franchisees.  Prospects oftencontact existing franchisees as part of their due diligence before making afranchise purchase decision.  If ourrelationship with existing franchisees is strained, it may slow or suspendfranchise development with new franchisees, as well as curtail additional developmentwith existing franchisees.

*We may be harmedby actions taken by our franchisees or licensees that are beyond our control.*

Our franchisees and licensees generally areindependent contractors and are not our employees.  We require our franchisees and licensees toadhere to strict production, display, storage and marketing specifications andprocedures, and we provide training and support to franchisees, but the qualityof franchised store operations or licensed products may be diminished by anynumber of factors beyond our control. Consequently, franchisees may not operate stores or licensees may notproduce or market licensed products in a manner consistent with our standardsand requirements, or may not hire and train qualified managers and other storepersonnel.  If they do not, our image,reputation and brand may suffer, and our franchise and license revenues as wellas our ability to attract prospective franchisees may be adversely affected.

*We are vulnerableto fluctuations in the cost, availability and quality of our ingredients.*

The cost, availability and quality of the ingredientswe use to prepare our products at the Great American Cookies manufacturingfacility and in our gifts operations are subject to a range of factors, many ofwhich are beyond our control. Fluctuations in economic and political conditions, weather and demandcould adversely affect the costs of our ingredients.  We have no control over fluctuations in theprice of commodities and we may not be able to pass through any cost increasesto our customers.  We are dependent onfrequent deliveries of fresh ingredients, thereby subjecting us to the risk ofshortages or interruptions in supply. All of these factors could cause adverse market conditions which couldadversely affect our financial results.

*We depend heavilyon our suppliers and distributors.*

We depend on one primary supplier, Countryside, whichsupplies products for our Mrs. Fields brand. As discussed in the “RecentDevelopment” section of “Management’s Discussion and Analysis of FinancialConditions and Results of Operations” contained elsewhere in this report, TCBY,our wholly-owned subsidiary, was notified that on October 11, 2006, CBAmericana LLC, the general partner of Americana Foods Limited Partnership (“Americana”),filed an involuntary petition with the United States Bankruptcy Court for theNorthern District of Texas, naming Americana as a debtor under chapter 7 of theBankruptcy Code (the “Involuntary Petition”).

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Americana was the principal supplier of our frozenyogurt products under an Exclusive Supply Agreement between Americana and TCBYdated November 19, 2002 (the “Supply Agreement”).  The Supply Agreement isattached as Exhibit 10.50 to Mrs. Fields’ Registration Statement on Form S-4(File No. 333-115046), as amended, filed with the Securities and ExchangeCommission (“SEC”) on April 30, 2004. Production of TCBY products at Americana has ceased in connection withthe Involuntary Petition.

We have identified potential replacement suppliers forour proprietary products and are in the process of working with these potentialsuppliers to accelerate short-term production.  We have also purchasedmost of the inventory that remained at Americana and removed it to an off-sitestorage facility. We are managing this inventory, as well as inventory at ourdistributors and our franchisees’ stores.  While we believe we can avoidmaterial shortages or immediate interruption in the supply of our principalproducts to our TCBY franchisees, shortages of some products may occur beforereplacement suppliers can begin full production.  Further, there can be noguarantee that we will be able to negotiate long-term supply agreements onterms that are similar to or as favorable as those in the SupplyAgreement.  Any significant interruption in the supply of TCBY products tofranchisees or a material increase in the cost of TCBY products may have amaterial adverse effect on our TCBY franchise system and our financialperformance.

We also depend on our primary distributors for distributionof perishable and non-perishable items to our franchisees.  As described in “Business—Ingredients,Supplies and Distribution,” contained in our Annual Report on Form 10-K filedwith the SEC on March 21, 2006, our primary distributor to our TCBY system hasexercised its right to terminate our distribution agreement with them.  We have entered into an Extension toDistribution Agreement (the “Extension Agreement”) effective February 2,2006.  Under the Extension Agreement,Blue Line agreed to continue to perform under the Food and PackagingDistribution Agreement (the “Distribution Agreement”) dated November 14, 2002,until the earlier to occur of (a) 30 days following the date when we notifyBlue Line in writing that we have obtained a new distributor and (b) 30 daysfollowing the date, if any, when Blue Line notifies us in writing that BlueLine reasonably determines that we are no longer making best efforts andprogress to obtain a new distributor. Under the terms of the Extension Agreement, we agreed to make certainpayments directly to Blue Line in order to delay distribution cost increases tofranchisees and agreed to guarantee certain amounts during the extensionperiod.  We have entered into supplyagreements with six regional distributors who will provide service to certainregions of the United States.  We believewe will be able to identify distributors for the remaining regions of theUnited States before Blue Line ceases its services under the ExtensionAgreement.  We anticipate the distributioncosts to most of our franchisees will not substantially increase under the newregional agreements.

Our reliance on our suppliers subjects us to a numberof risks, including possible delays or interruptions in supplies, diminishedcontrol over quality and a potential lack of adequate raw materialcapacity.  Any disruption in the supplyof or degradation in the quality of the raw materials provided by our supplierscould have a material adverse effect on our business, operating results andfinancial condition.  In addition, suchdisruptions in supply or degradations in quality could have a long-termdetrimental impact on our efforts to develop a strong brand identity and aloyal consumer base.  If any supplier ordistributor fails to perform as anticipated, or if there is a termination orany disruption in any of these relationships for any reason, it could have amaterial adverse effect on our results of operations.

*Our branded retailbusiness is in its start-up phase and we are only beginning to establishrelationships with brokers, vendors and customers.*

The sale of snack products to grocery, club stores andsimilar distribution channels is highly competitive and subject to ongoingexpenses related to slotting fees, advertising credits and discounts*.  *Similarly, the business relies onrelationships with vendors, brokers and customers.  Since we commenced this business in July2006, there can be no certainty that we will successfully maintain the level ofbusiness or relationships established by Shadewell, who operated a similarbusiness under a license agreement with us. We do not believe that the income for this new business will immediatelyreplace or exceed the royalties that may have been generated by the terminatedlicense agreements.

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*If we lose keymanagement personnel, we may have difficulty in implementing the businessstrategy that current management has developed, and may fail to achieveexpected profits as a result.*

Our success depends on the continued services of oursenior management, particularly Stephen Russo, our President and ChiefExecutive Officer.  In addition, ourcontinued growth depends, in part, on attracting and retaining skilled managersand employees as well as management’s ability to utilize effectively our keypersonnel.  If Stephen Russo or any othersenior management personnel leaves us, we may have difficulty in implementingthe business strategy they have developed and may fail to achieve expectedprofits as a result.  We cannot be surethat management’s efforts to integrate, utilize, attract and retain personnelwill be successful.

*Our failure torespond to demographic trends, changes in consumer preferences and otherfactors and our failure to implement new marketing strategies could have amaterial adverse effect on our results of operations.*

The specialty and snack food industry is affected bychanges in consumer preferences, tastes and eating habits, local, regional,national and international economic conditions, demographic trends and malltraffic patterns.  A number of factors,including increased food, labor and benefits costs, the availability ofexperienced management and hourly employees and difficulties or delays indeveloping and introducing new products to suit consumer preferences, mayadversely affect the specialty retail industry in general and our franchiseoutlets in particular.  Our failure toanticipate, identify and respond to changing consumer preferences and economicconditions and the failure of our customers to respond favorably to ourmarketing or new products could have a material adverse effect on our resultsof operations.

*There is intensecompetition in the specialty food retailers industry.*

The specialty retail food and snack food industry ishighly competitive with respect to price, service, location and food qualityand within the industry we compete with cookie, pretzel, frozen yogurt and icecream retailers, as well as other confectionary, sweet snack and specialtyfoods retailers, many of which have greater resources than us.  Consequently, we cannot be certain that wecan compete successfully with these other food retailers.

In addition to the risks we face from currentcompetitors, we cannot be certain that we can successfully compete with any newentrants into the specialty retail food and snack food industry who mayintroduce new and successful products or marketing.  Our inability to compete adequately wouldhave a material adverse effect on our results of operations.

*Adverse publicity,particularly about health concerns, could reduce our sales and adversely affectresults of operations.*

Our ability to compete depends in part on maintainingour reputation with consumers.  We couldbe adversely affected by publicity resulting from food quality, illness, injuryor other health concerns, including food borne illness claims or operatingissues stemming from one store, a limited number of stores or even a competitor’sstore. In addition, we use ingredients in several of our products, such asnuts, to which some people may have allergies, and butter and cream, which arehigh in fat.  There may be adversepublicity about the health risks relating to these or other ingredients.  Adverse publicity about these factors couldreduce sales of our products and adversely affect results of operations.

*Our internationaloperations are exposed to various risks that could have a material adverseeffect on our results of operations and financial condition.*

We have franchised and licensed retail stores innumerous foreign countries.  While mostof our operations are in the United States, through our franchised retail storelocations and our branded retail activities, we also have operations innumerous other regions, including operations in Canada, Mexico, Australia,South America, the Caribbean, the Middle East and Asia, representingapproximately 3.2 percent of our total revenue during the 39 weeks endedSeptember 30, 2006.  We expect to expandinto additional regions in the future.  Ourinternational operations are subject to many additional risks, including:

·                  theburden of complying with multiple and possibly conflicting laws and anyunexpected changes in regulatory requirements;

·                  importand export restrictions and tariffs;

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·                  additionalexpenses relating to the difficulties and costs of staffing and managinginternational operations;

·                  litigationin foreign jurisdictions;

·                  potentiallyadverse tax consequences;

·                  increasedcompetition as a result of subsidies to local companies;

·                  politicalinstability or war;

·                  culturaldifferences;

·                  theimpact of business cycles and economic instability; and

·                  increasedexpense as a result of inflation.

Any one of these factors could have a material adverseaffect our sales of products or services to our international customers andcurtail our expansion strategy.

*Governmentregulation of our business could adversely affect the results of ouroperations.*

Numerous governmental authorities have issuedregulations that apply to us and our franchisees’ stores, including, withoutlimitation, federal, state and local laws and regulations governing health,sanitation, environmental protection, safety, hiring and employment practices,including laws, such as the Fair Labor Standards Act, governing such matters asminimum wages, overtime and other working conditions.  The FDA administers regulations that apply toour products.  If we fail to obtain orretain the required food licenses or to comply with applicable governmentalregulations or if there is any increase in employee benefit costs or othercosts associated with employees, our costs could increase as we attempt tocomply with regulations.  Our revenuescould decrease if we or our suppliers are unable to manufacture or if ourfranchisees or licensees are unable to sell products in locations in which wedo not have required licenses.  Ourproducts, the manufacturers and their manufacturing facilities are also subjectto periodic inspection.  Discovery ofproblems may reduce our results of operations because of costs of compliance orinability to manufacture or sell products for failure to comply withregulations.

In addition, the sale of franchises is regulated byvarious state laws as well as by the Federal Trade Commission.  The Federal Trade Commission requires thatfranchisors make extensive disclosure in a Uniform Franchise prospectus toprospective franchisees but does not require registration.  However, a number of states requireregistration of the Uniform Franchise prospectus with state authorities orother disclosure in connection with franchise offers and sales.  In addition, several states have “franchiserelationship laws” or “business opportunity laws” that limit the ability of thefranchisors to terminate agreements or to withhold consent to renewal ortransfer of these agreements.  While webelieve that we are in compliance with existing regulations in thejurisdictions where we currently offer franchises, we cannot predict the effectof any future legislation or regulation on our business operations or financialcondition.  Additionally, bills haveoccasionally been introduced in Congress which would provide for federalregulation of aspects of franchisor-franchisee relationships.  We cannot predict what effect thoseregulations could have on our business.

*Any interruptionin funding sources used by franchisees to purchase and develop our franchisescould adversely impact our ability to market franchises.*

Many of our franchisees must obtain loans to purchaseand develop our franchises.  Onesignificant source of this funding is the U.S. Small Business Administration (“SBA”).  Any suspension of funding or delays inapproval of the SBA’s funding budget will affect our franchisees’ ability to obtain funding from thissignificant source and adversely impact our ability to market franchises.

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*Litigation,including product liability litigation, could reduce our results of operationsor increase our losses because of the cost of paying on successful claims, andwe may not be able to continue to obtain adequate insurance.*

We are involved in routine litigation in the ordinarycourse of business, including franchise disputes.  Although we have not been significantlyadversely affected in the past by litigation, there can be no assurance as tothe effect of any future disputes.

Although we currently are not subject to any product liabilitylitigation, there can be no assurance that product liability litigation willnot occur in the future involving our products. Our quality control program is designed to maintain high standards forthe food and materials and food preparation procedures used by franchisedstores. Products are periodically inspected by our personnel at both the pointof sale locations and the manufacturing facilities to ensure that they conformto our standards.  In addition toinsurance held by our suppliers, we maintain insurance relating to personalinjury and product liability in amounts that we consider adequate for theretail food industry.  While we have beenable to obtain insurance in the past, there can be no assurance that we will beable to maintain these insurance policies in the future.  Consequently, any successful claim againstus, in an amount materially exceeding our coverage, could adversely affect ouroperating results.

*We experienced anumber of franchise store closures since 2003. If this trend continues, our financial position and results ofoperations could be adversely affected.*

Since the end of fiscal 2003, 61 retail conceptlocations were closed by MFOC and 1,086 retail concept locations were closed byother franchisees.  These closures represent37.9 percent of the total number of stores open at the beginning of 2004.  In comparison, 442 retail concept locationshave opened since the end of fiscal 2003. Since the end of fiscal 2003, the number of Mrs. Fields brandlocations has decreased by 6.0 percent, the number of Great AmericanCookies Company brand locations has decreased by 1.1 percent, the numberof TCBY brand traditional locations has decreased by 20.9 percent, thenumber of TCBY brand non-traditional locations has decreased by 37.9 percent,the number of Pretzel Time brand locations has decreased by 15.3 percent andthe number of Pretzelmaker brand locations has decreased by7.5 percent.  There can be noassurances that store closures will not occur in the future or that we will beable to successfully open additional stores in the future.  If this trend continues, our financialcondition and results of operations could be adversely affected.

*Quarterlyfluctuations and seasonality.*

Our operating results are subject to quarterly and seasonalfluctuations.  Our sales and income fromfranchisees’ store operations are seasonal given the significant impact of thehigh number of mall based locations.  Atthese locations, sales tend to mirror customer traffic flow trends in malls,which increase significantly during the fourth quarter, primarily betweenThanksgiving and the end of the calendar year. Holiday gift purchases also are a significant factor in increased salesin the fourth quarter.  However, with theaddition of TCBY franchised stores, we have hedged against this seasonalityimpact by introducing a concept that tends to have its strongest sales periodsduring the warmer months from late Spring through early Fall.  In addition, by marketing our cookie brandsaround holidays that occur in late Winter and early Spring, such as Valentine’sDay and Easter as well as holidays in the late Fall, such as Halloween, we hopeto continue to decrease the impact of seasonality on our cash flow.  However, there can be no assurance that wewill be successful in decreasing the impact of seasonality on our cashflow.  If we are unable to manageseasonal fluctuations of cash flow, our financial condition and results ofoperations may be adversely affected.

***Risks Related to Our Substantial Indebtedness***

*Our substantiallevel of indebtedness could adversely affect our financial condition andprevent us from fulfilling our obligations under our Senior Secured Notes.*

We have substantial indebtedness represented by ourSenior Secured Notes.  In addition,subject to restrictions in the indenture governing the Senior Secured Notes(the “Indenture”), we may incur additional indebtedness.

Our high level of indebtedness could have importantconsequences, including the following:

·                  our ability toobtain additional financing for working capital, capital expenditures,acquisitions or general corporate purposes may be impaired;

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·                  we must use asubstantial portion of our cash flow from operations to pay interest andrequired principal on the Senior Secured Notes and, to the extent incurred, ourother indebtedness, which will reduce the funds available to us for operationsand other purposes;

·                  our high levelof indebtedness could place us at a competitive disadvantage compared to ourcompetitors that may have proportionately less debt;

·                  our flexibilityin planning for, or reacting to, changes in our business and the industry in whichwe operate may be limited; and

·                  our high level of indebtedness makesus more vulnerable to economic downturns and adverse developments in ourbusiness.

 

We expect to obtain the money to pay our expenses andto pay the amounts due under the Senior Secured Notes and our other debtprimarily from our operations.  Ourability to meet our expenses and make these payments thus depends on our futureperformance, which will be affected by financial, business, economic and otherfactors, many of which we cannot control. Our business may not generate sufficient cash flow from operations inthe future and our currently anticipated growth in revenue and cash flow maynot be realized, either or both of which could result in our being unable torepay indebtedness, including the 9 percent senior secured notes and the 111⁄2percent senior secured notes (“Senior Secured Notes”), or to fund otherliquidity needs.  If we do not haveenough money, we may be required to refinance all or part of our then existingdebt (including the Senior Secured Notes), sell assets or borrow moremoney.  However, there can be noassurance that we will be able to accomplish any of these alternatives on termsacceptable to us, or at all.  Inaddition, the terms of existing or future debt agreements, including theIndenture, may restrict us from adopting any of these alternatives.  The failure to generate sufficient cash flowor to achieve any of these alternatives could have a material adverse effect onour business and our ability to pay the amounts due under the Senior SecuredNotes.

*The Indentureimposes significant operating and financial restrictions, which may prevent usfrom pursuing certain business opportunities and taking certain actions.*

The Indenture imposes significant operating and financialrestrictions on us.  These restrictionslimit or prohibit, among other things, our ability to:

·                  incur additional indebtedness;

 

·                  repay subordinated indebtedness priorto stated maturities;

 

·                  pay dividends on or redeem orrepurchase our stock;

 

·                  issue capital stock;

 

·                  make investments;

 

·                  create liens;

 

·                  sell certain assets or merge with orinto other companies;

 

·                  enter into certain transactions withstockholders and affiliates;

 

·                  sell stock in our subsidiaries;

 

·                  restrict dividends, distributions orother payments from our subsidiaries; and

 

·                  otherwise conduct necessary corporateactivities.

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These restrictions could adversely affect our abilityto finance our future operations or capital needs and pursue available businessopportunities.  A breach of any of theserestrictions could result in a default in respect of the relatedindebtedness.  If a default occurs, therelevant lenders could elect to declare the indebtedness, together with accruedinterest and fees, to be immediately due and payable and proceed against anycollateral securing that indebtedness. Acceleration of our other indebtedness could result in a default underthe terms of the Indenture and our assets may not be sufficient to satisfy ourobligations under our indebtedness, including the Senior Secured Notes.

*Our parentcompanies may take actions that conflict with bondholder, franchisee and otherinterests.*

As a result of its direct control of our ultimateparent company and indirect control of MFH and MFOC, Capricorn II and CapricornIII together control the power to elect our managers, to appoint members ofmanagement and to approve all actions requiring the approval of the holders ofour common interests, including adopting amendments to our certificate offormation and limited liability company agreement as well as approving mergers,acquisitions or sales of all or substantially all of our assets.  The actions may conflict with the interestsof bondholders, franchisees and others. Similarly, the interests of our parent companies could conflict withother stakeholder interests.  Forexample, if we encounter financial difficulties or are unable to pay our debtsas they mature, the interests of MFOC as a holder of equity might conflict withholders of the Senior Secured Notes.  Ourparent companies also may have an interest in pursuing acquisitions,divestitures, financings or other transactions that, in their judgment, couldenhance their equity investment, even though such transactions might materiallyadversely affect our financial condition and results of operations.

**Item 6.  Exhibits**
| 10.71† |   | Distribution Services Agreement, dated March 1,  2006, between TCBY Systems, LLC and Kaleel Brothers Inc.                                                                         |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                              |
| 10.72† |   | Distribution Services Agreement, dated July 17,  2006, between TCBY Systems, LLC and Cheney Brothers, Inc.                                                                        |
|        |   |                                                                                                                                                                              |
| 10.73† |   | Distribution Services Agreement, dated August 1,  2006, between TCBY Systems, LLC and Pate Dawson Company.                                                                        |
|        |   |                                                                                                                                                                              |
| 10.74† |   | Distribution Services Agreement, dated September 7,  2006, between TCBY Systems, LLC and The Merchants Company.                                                                   |
|        |   |                                                                                                                                                                              |
| 31.1        |   | Certification of Chief Executive Officer Pursuant to  Rule 13a-15(e) or 15d-15(e) of the Exchange Act, As Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.     |
|        |   |                                                                                                                                                                              |
| 31.2        |   | Certification of Chief Accounting Officer Pursuant  to Rule 13a-15(e) or 15d-15(e) of the Exchange Act, As Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.    |
|        |   |                                                                                                                                                                              |
| 32          |   | Certification of Chief Executive Officer and Chief  Accounting Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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†                                          Filedherewith.  Confidential treatment will berequested as to certain portions.  Theterm “[CONFIDENTIAL]” as used throughout the indicated exhibit means thatmaterial has been omitted and will be filed separately with the Commission.

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
| **MRS. FIELDS FAMOUS BRANDS, LLC**             | ** ** |              |
|------------------------------------------------|------------|-------------------|
| ** **                                     | ** ** |              |
|                                           |       |              |
| /s/ Stephen Russo                         |       | November 10, 2006 |   |
| Stephen Russo                                  |       | Date              |
| President and Chief Executive Officer          |       |              |
| *(Principal Executive Officer)*                | * *   |              |
|                                           |       |              |
|                                           |       |              |
| /s/ Mark C. McBride                            |       | November 10, 2006 |   |
| Mark C. McBride                                |       | Date              |
| Chief Accounting Officer                       | * *   | * *          |
| *(Principal Financial and Accounting Officer)* |       |              |

 

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