** **

**UNITED STATES**SECURITIES AND EXCHANGE COMMISSION

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

 

**FORM 10-Q**

 

| **ý**                                                                                                                                                    | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**          |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------|
|                                                                                                                                                          |                                                                                                 |   |   |   |
| **For the quarterly period ended July 3,  2004**                                                                                                         |
|                                                                                                                                                          |                                                                                                 |   |   |   |
| **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**                                                                                                                  |

 

| **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**                                                    | ** ** | **84121-1050** |
| (Address of Principal Executive Offices)                                    |   | (Zip Code) |
| ** **                                                                  | ** ** | ** ** |
| Registrant’s telephone number, including  area code:**(801) 736-5600** |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

| Yes  o |   | No  ý |
|-------------|--------|-----------------|

 

Indicate by check mark whether the registrant is an accelerated filer(as defined by Rule 12b-2 of the Exchange Act).

 

| Yes  o |   | No  ý |
|-------------|--------|-----------------|

 

On August 17, 2004, 100 common interests of registrant wereoutstanding, all of which are held by an affiliate.  There is no established trading market forregistrant’s common interests.

 

 

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

 

**TABLE OF CONTENTS**

 
| **PART 1 – FINANCIAL  INFORMATION**                                                            |   |
|-----------------------------------------------------------------------------------------------------|--------|
|                                                                                                |   |   |
| Item 1. Financial Statements (Unaudited)                                                            |   |
|                                                                                                |   |   |
|                                                                                                |   | Condensed Consolidated Balance Sheets as of  July 3, 2004 and January 3, 2004 |   |
|                                                                                                |   |   |
|                                                                                                |   | Condensed Consolidated Statements of Income  and Comprehensive Income for the 13 Weeks Ended July 3, 2004 and  June 28, 2003 |   |
|                                                                                                |   |   |
|                                                                                                |   | Condensed  Consolidated Statements of Income and Comprehensive Income for the 26 Weeks  Ended July 3, 2004 and June 28, 2003 |   |
|                                                                                                |   |   |
|                                                                                                |   | Condensed Consolidated Statements of Cash  Flows for the 26 Weeks Ended July 3, 2004 and June 28, 2003 |   |
|                                                                                                |   |   |   |
|                                                                                                |   | 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 Disclosure  About Market Risk                                  |   |
|                                                                                                |   |   |
| Item 4. Controls and Procedures                                                                     |   |
|                                                                                                |   |   |
| **PART II – OTHER INFORMATION**                                                                |   |
|                                                                                                |   |   |
| Item 1. Legal Proceedings                                                                           |   |
|                                                                                                |   |   |
| Item 6. Exhibits and Reports on Form 8-K                                                            |   |
|                                                                                                |   |   |
| Signatures                                                                                          |   |

 

2

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**PART 1 – FINANCIAL INFORMATION**

 

**ITEM 1.**                                           Financial Statements

 

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

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

**(Dollars in thousands)**

 
| ** **                                                                              | ** ** | **July 3, 2004** | ** ** | **January 3, 2004** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|
| ASSETS:                                                                                 |       |                  |       |                     |       |
| Cash and cash equivalents                                                               |       | $                     | 16,783     |                     | $          | 1,300 |   |
| Receivables, net of allowance for doubtful  accounts of $1,508 and $1,948, respectively |       | 6,983                 |       | 9,070                    |       |
| Amounts due from affiliates                                                             |       | 182                   |       | —                   |       |
| Inventories                                                                             |       | 2,095                 |       | 1,962                    |       |
| Prepaid rent and other                                                                  |       | 940                   |       | 1,122                    |       |
| Deferred tax asset                                                                      |       | 1,605                 |       | 1,535                    |       |
|                                                                                    |       |                  |       |                     |       |
| Total current assets                                                                    |       | 28,588                |       | 14,989                   |       |
| Property and equipment, net                                                             |       | 3,280                 |       | 3,174                    |       |
| Goodwill, net                                                                           |       | 113,456               |       | 113,456                  |       |
| Trademarks and other intangible assets, net                                             |       | 24,784                |       | 26,149                   |       |
| Deferred loan costs, net of accumulated  amortization of $8,405 and $20,470             |       | 8,337                 |       | 4,222                    |       |
| Other assets                                                                            |       | 631                   |       | 612                      |       |
|                                                                                    |       |                  |       |                     |       |
|                                                                                    |       | $                     | 179,076    |                     | $          | 162,602 |   |
|                                                                                    |       |                  |       |                     |       |
| LIABILITIES AND MEMBER’S DEFICIT:                                                  |       |                  |       |                     |       |
| Accounts payable                                                                        |       | $                     | 1,895      |                     | $          | 6,789 |   |
| Accrued liabilities                                                                     |       | 17,797                |       | 13,210                   |       |
| Current liabilities of discontinued  operations                                         |       | 96                    |       | 405                      |       |
| Amounts due to affiliates                                                               |       | 1,901                 |       | 3,135                    |       |
| Current portion of capital lease  obligations                                           |       | 37                    |       | —                   |       |
| Current portion of deferred revenues                                                    |       | 2,372                 |       | 2,289                    |       |
|                                                                                    |       |                  |       |                     |       |
| Total current liabilities                                                               |       | 24,098                |       | 25,828                   |       |
| Long-term debt                                                                          |       | 195,747               |       | 185,762                  |       |
| Capital lease obligations, net of current  portion                                      |       | 456                   |       | —                   |       |
| Deferred revenues, net of current portion                                               |       | 1,369                 |       | 2,019                    |       |
| Deferred tax liability                                                                  |       | 3,148                 |       | 4,814                    |       |
|                                                                                    |       |                  |       |                     |       |
| Total liabilities                                                                       |       | 224,818               |       | 218,423                  |       |
| Member’s deficit                                                                   |       | (45,565               | )          | (55,601                  | )          |
| Deferred stock compensation                                                             |       | (48                   | )          | (75                      | )          |
| Accumulated other comprehensive loss                                                    |       | (129                  | )          | (145                     | )          |
|                                                                                    |       |                  |       |                     |       |
| Total member’s deficit                                                             |       | (45,742               | )          | (55,821                  | )          |
|                                                                                    |       |                  |       |                     |       |
| COMMITMENTS AND CONTINGENCIES                                                           |       |                  |       |                     |       |
|                                                                                    |       | $                     | 179,076    |                     | $          | 162,602 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

3

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

**CONDENSED CONSOLIDATED STATEMENTS OF INCOMEAND COMPREHENSIVE INCOME**

**(Unaudited)**

**(Dollars in thousands)**

** **
| ** **                                                                            | ** ** | **13 Weeks Ended**    | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                            | ** ** | **July 3, 2004** | ** ** | **June 28, 2003** | ** ** |
|                                                                                  |       |                  |       |   |   |
| REVENUES:                                                                             |       |                  |       |   |   |
| Franchising                                                                           |       | $                     | 15,228     |   | $ | 14,928 |   |
| Gifts                                                                                 |       | 4,758                 |       | 3,200 |   |
| Licensing                                                                             |       | 1,191                 |       | 1,325 |   |
| Other                                                                                 |       | 58                    |       | 114 |   |
|                                                                                  |       |                  |       |   |   |
| Total revenues                                                                        |       | 21,235                |       | 19,567 |   |
|                                                                                  |       |                  |       |   |   |
| OPERATING COSTS AND EXPENSES:                                                         |       |                  |       |   |   |
| Franchising                                                                           |       | 6,345                 |       | 4,812 |   |
| Gifts                                                                                 |       | 4,230                 |       | 2,781 |   |
| Licensing                                                                             |       | 200                   |       | 448 |   |
| General and administrative                                                            |       | 3,052                 |       | 2,702 |   |
| Stock compensation expense                                                            |       | 13                    |       | 31 |   |
| Depreciation                                                                          |       | 324                   |       | 442 |   |
| Amortization                                                                          |       | 701                   |       | 492 |   |
| Other operating expenses (income), net                                                |       | (40                   | )          | 208 |   |
|                                                                                  |       |                  |       |   |   |
| Total operating costs and expenses                                                    |       | 14,825                |       | 11,916 |   |
| Income from operations                                                                |       | 6,410                 |       | 7,651 |   |
| Interest expense, net                                                                 |       | (5,502                | )          | (6,142 | ) |
|                                                                                  |       |                  |       |   |   |
| Income from continuing operations before  provision for income taxes                  |       | 908                   |       | 1,509 |   |
| Provision for income taxes                                                            |       | 415                   |       | 534 |   |
|                                                                                  |       |                  |       |   |   |
| Income from continuing operations                                                     |       | 493                   |       | 975 |   |
| Income from discontinued operations (net of  income taxes of $10 and $1, respectively |       | 11                    |       | 30 |   |
|                                                                                  |       |                  |       |   |   |
| Net income                                                                            |       | $                     | 504        |   | $ | 1,005 |   |
|                                                                                  |       |                  |       |   |   |
| COMPREHENSIVE INCOME:                                                                 |       |                  |       |   |   |
| Net income                                                                            |       | $                     | 504        |   | $ | 1,005 |   |
| Foreign currency translation adjustment                                               |       | 19                    |       | (3 | ) |
| Comprehensive income                                                                  |       | $                     | 523        |   | $ | 1,002 |   |

 

See accompanying notes to condensedconsolidated financial statements. 

 

4

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

**CONDENSED CONSOLIDATED STATEMENTS****OF INCOME AND COMPREHENSIVE INCOME**

**(Unaudited)**

**(Dollars in thousands)**

** **
| ** **                                                                             | ** ** | **26 Weeks Ended**    | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                             | ** ** | **July 3, 2004** | ** ** | **June 28, 2003** | ** ** |
|                                                                                   |       |                  |       |   |   |
| REVENUES:                                                                              |       |                  |       |   |   |
| Franchising                                                                            |       | $                     | 28,233     |   | $ | 27,772 |   |
| Gifts                                                                                  |       | 9,298                 |       | 6,010 |   |
| Licensing                                                                              |       | 2,448                 |       | 2,944 |   |
| Other                                                                                  |       | 141                   |       | 240 |   |
|                                                                                   |       |                  |       |   |   |
| Total revenues                                                                         |       | 40,120                |       | 36,966 |   |
|                                                                                   |       |                  |       |   |   |
| OPERATING COSTS AND EXPENSES:                                                          |       |                  |       |   |   |
| Franchising                                                                            |       | 10,520                |       | 8,910 |   |
| Gifts                                                                                  |       | 7,896                 |       | 4,859 |   |
| Licensing                                                                              |       | 329                   |       | 694 |   |
| General and administrative                                                             |       | 5,365                 |       | 5,050 |   |
| Stock compensation expense                                                             |       | 26                    |       | 62 |   |
| Costs associated with debt refinancing                                                 |       | 87                    |       | — |   |
| Depreciation                                                                           |       | 640                   |       | 902 |   |
| Amortization                                                                           |       | 1,416                 |       | 879 |   |
| Other operating expenses (income), net                                                 |       | (22                   | )          | 250 |   |
|                                                                                   |       |                  |       |   |   |
| Total operating costs and expenses                                                     |       | 26,257                |       | 21,606 |   |
|                                                                                   |       |                  |       |   |   |
| Income from operations                                                                 |       | 13,863                |       | 15,360 |   |
| Interest expense, net                                                                  |       | (14,387               | )          | (12,236 | ) |
| Other income                                                                           |       | 1,054                 |       | — |   |
|                                                                                   |       |                  |       |   |   |
| Income from continuing operations before  provision for income taxes                   |       | 530                   |       | 3,124 |   |
| Provision for income taxes                                                             |       | 230                   |       | 1,289 |   |
|                                                                                   |       |                  |       |   |   |
| Income from continuing operations                                                      |       | 300                   |       | 1,835 |   |
| Income from discontinued operations (net of  income taxes of $39 and $19, respectively |       | 58                    |       | 31 |   |
|                                                                                   |       |                  |       |   |   |
| Net income                                                                             |       | $                     | 358        |   | $ | 1,866 |   |
|                                                                                   |       |                  |       |   |   |
| COMPREHENSIVE INCOME:                                                                  |       |                  |       |   |   |
| Net income                                                                             |       | $                     | 358        |   | $ | 1,866 |   |
| Foreign currency translation adjustment                                                |       | 17                    |       | 1 |   |
|                                                                                   |       |                  |       |   |   |
| Comprehensive income                                                                   |       | $                     | 375        |   | $ | 1,867 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

5

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### **MRS. FIELDS FAMOUSBRANDS, LLC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Unaudited)**

**(Dollars in thousands)**

 
| ** **                                                              | ** ** | **26 Weeks Ended**    | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                              | ** ** | **July 3, 2004** | ** ** | **June 28, 2003** | ** ** |
|                                                                    |       |                  |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                   |       |                  |       |   |   |
| Net income from continuing operations                                   |       | $                     | 300        |   | $ | 1,835 |   |
| Gain on sale of equity warrants                                         |       | (1,054                | )          | — |   |
| Depreciation and amortization                                           |       | 2,056                 |       | 1,781 |   |
| Amortization of deferred loan costs                                     |       | 3,124                 |       | 2,259 |   |
| Stock compensation expense                                              |       | 26                    |       | 62 |   |
| Amortization of discount on notes                                       |       | 1,245                 |       | 286 |   |
| Non-cash debt increases associated with PIK  interest                   |       | —                |       | 280 |   |
| Deferred income taxes                                                   |       | (1,736                | )          | (245 | ) |
| Changes in assets and liabilities:                                      |       |                  |       |   |   |
| Receivables, net                                                        |       | 2,087                 |       | 2,057 |   |
| Amounts due to/from affiliates                                          |       | (1,416                | )          | (3,968 | ) |
| Inventories                                                             |       | (133                  | )          | (399 | ) |
| Prepaid rent and other                                                  |       | 182                   |       | (211 | ) |
| Other assets                                                            |       | (69                   | )          | (164 | ) |
| Accounts payable                                                        |       | (4,894                | )          | (1,327 | ) |
| Accrued liabilities                                                     |       | 4,603                 |       | 3,745 |   |
| Deferred revenues                                                       |       | (567                  | )          | (448 | ) |
| Net cash provided by continuing operating  activities                   |       | 3,754                 |       | 5,543 |   |
| Net cash (used in) provided by discontinued  operating activities       |       | (251                  | )          | 374 |   |
| Net cash provided by operating activities                               |       | 3,503                 |       | 5,917 |   |
|                                                                    |       |                  |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                   |       |                  |       |   |   |
| Proceeds from sale of equity warrants                                   |       | 1,054                 |       | — |   |
| Purchase of property and equipment                                      |       | (72                   | )          | (172 | ) |
| Net cash provided by (used in) investing  activities                    |       | 982                   |       | (172 | ) |
|                                                                    |       |                  |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                   |       |                  |       |   |   |
| Net borrowings (payments) under line of  credit                         |       | (3,452                | )          | 7,019 |   |
| Principal payments on long-term debt                                    |       | (98,014               | )          | (2,900 | ) |
| Payment of debt financing costs                                         |       | (12,034               | )          | (1,136 | ) |
| Proceeds from issuance of Senior Notes                                  |       | 115,000               |       | — |   |
| Principal payments on capital lease                                     |       | (23                   | )          | — |   |
| Contribution by parent                                                  |       | 17,500                |       | — |   |
| Other activity with parent                                              |       | (7,996                | )          | (9,515 | ) |
| Net cash provided by (used in) financing  activities                    |       | 10,981                |       | (6,532 | ) |
| Effect of foreign exchange rate changes on  cash                        |       | 17                    |       | 1 |   |
| Net increase (decrease) in cash and cash  equivalents                   |       | 15,483                |       | (786 | ) |
| Cash and cash equivalents at beginning of  period                       |       | 1,300                 |       | 2,900 |   |
| Cash and cash equivalents at end of period                              |       | $                     | 16,783     |   | $ | 2,114 |   |
|                                                                    |       |                  |       |   |   |
| Supplemental Disclosure of Cash Flow  Information:                      |       |                  |       |   |   |
| Cash paid for interest                                                  |       | $                     | 6,295      |   | $ | 9,449 |   |
| Cash paid for income taxes                                              |       | 50                    |       | 251 |   |
| Cash paid to parent for income taxes                                    |       | 1,450                 |       | 5,000 |   |
| Supplemental Disclosure of Noncash  Investing and Financing Activities: |       |                  |       |   |   |
| Distributions payable to parent under tax  sharing agreement            |       | $                     | —     |   | $ | 1,520 |   |
| Assets acquired under capital lease                                     |       | 500                   |       | — |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

6

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### ** **

### **MRS. FIELDS FAMOUSBRANDS, LLC AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**1.****                                      BASISOF PRESENTATION**

 

The accompanying unaudited condensed consolidated financial statementshave been prepared by Mrs. Fields Famous Brands, LLC and subsidiaries (“Mrs.Fields” or the “Company”) in accordance with the rules and regulations of theSecurities and Exchange Commission for Form 10-Q and, accordingly, do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States of America for a complete presentationof the financial statements. In the opinion of management, these unauditedcondensed consolidated financial statements reflect all adjustments, whichconsist only of normal recurring adjustments, necessary to present fairly thefinancial position of Mrs. Fields as of July 3, 2004 and January 3,2004, and the results of their operations and their cash flows for the periodspresented. These unaudited condensed consolidated financial statements shouldbe read in conjunction with the combined financial statements and notes theretofor the fiscal year ended January 3, 2004 contained in Mrs. Fields’Registration Statement on Form S-4 (File No. 333-115046), as amended, filedwith the Securities and Exchange Commission on April 30, 2004.

 

The Company is an entity that was formed in March 2004 inconnection with the reorganization of certain entities and segments that areunder the common control of Mrs. Fields’ Companies, Inc. (“MFC”),formerly known as Mrs. Fields’ Famous Brands, Inc. The Company is awholly-owned subsidiary of Mrs. Fields’ Original Cookies, Inc. (“MFOC”).MFOC is a wholly-owned subsidiary of Mrs. Fields’ HoldingCompany, Inc. (“MFH”) and MFH is a wholly-owned subsidiary of MFC. Priorto the reorganization, TCBY Systems, LLC (“TCBY”) was a wholly-owned subsidiaryof TCBY Enterprises, LLC (“TCBY Enterprises”), whose parent is also MFC.

 

The accompanying unaudited condensed consolidated financial statementsinclude the accounts of TCBY and the franchising, licensing and gifts segmentsof MFOC through March 2004. In March 2004, MFC completed a reorganizationwhereby TCBY and the franchising, licensing and gifts segments of MFOC werecontributed to the Company. These financial statements have been prepared toreflect this reorganization as if it had occurred on December 31, 2000(the beginning of fiscal 2001).

 

The unaudited condensed consolidated financial statements assume thatMrs. Fields, for all periods presented, had existed as a separate legalentity with the following three business segments: franchising, gifts andlicensing. The unaudited condensed consolidated financial statements, whichthrough March 2004, have been carved out from the consolidated financialstatements of MFOC and TCBY using the historical results of operations andassets and liabilities of these businesses and activities and which exclude thecompany-owned stores segment of MFOC, reflect the accounting policies adoptedby MFOC and TCBY in the preparation of their consolidated financial statementsand thus do not necessarily reflect the accounting policies whichMrs. Fields might have adopted had it been an independent company. Thehistorical consolidated financial statements of Mrs. Fields include thoseaccounts specifically attributable to Mrs. Fields, substantially all ofthe indebtedness of MFOC and TCBY, and allocations of expenses relating toshared services and administrative functions incurred at MFOC.

 

Historically, MFOC has not allocated its various corporate overheadexpenses, and common general and administrative expenses to its operatingbusiness units. However, an allocation of such expenses has been included ingeneral and administrative expenses in the accompanying unaudited condensedconsolidated statements of income and comprehensive income. The Company’sgeneral and administrative expenses represent portions of MFOC’s corporatefunctions such as human resources, legal, accounting and finance, treasury andinformation technology systems, that have been allocated to Mrs. Fieldsbased on percentage of labor hours devoted by the functional department. Theseallocated costs are not necessarily indicative of the costs thatMrs. Fields would have incurred had it operated as an independent,stand-alone entity for all periods presented.

 

The Company’s cash balances at January 3, 2004 include cashaccounts specifically attributable to Mrs. Fields plus an allocatedportion of cash included in MFOC’s centralized cash management systems.Accordingly, the Company’s cash balance at January 3, 2004 may not berepresentative of what it would have been if Mrs. Fields were anindependent company.

 

7

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The results of operations for the 13 weeks and 26 weeks endedJuly 3, 2004 are not necessarily indicative of the results that may beexpected for the remainder of the fiscal year ending January 1, 2005.  Income per common interest information is notpresented as Mrs. Fields is wholly-owned by MFOC and, therefore, its commoninterests are not publicly traded.

 

**2.****                                     ****DEBT REFINANCING**

 

On March 16, 2004, the Company issued $80.7 million of9 percent senior secured notes (the “9 percent Senior Secured Notes”)in exchange for $80.7 million of 10 1/8 percent Senior Notes and issued$115.0 million of 11 1/2 percent senior secured notes (the “11 1/2 percentSenior Secured Notes” together with the 9 percent Senior Secured Notes,the “Senior Secured Notes”). The proceeds from the 11 1/2 percent SeniorSecured Notes were used to retire the Company’s remaining long-term debtsubsequent to year-end.

 

The Senior Secured Notes will mature March 15, 2011, with interestpayable semi-annually. The Senior Secured Notes rank senior in right of paymentto all subordinated indebtedness of the Company and rank equal in right ofpayment with all existing and future senior indebtedness of the Company. TheSenior Secured Notes are secured by all of the tangible and intangible assetsof the Company and its subsidiaries.

 

The Senior Secured Notes are redeemable at the option of the Companyanytime on or after March 15, 2008. Prior to March 15, 2007, theCompany may redeem up to 35 percent of the aggregate principal amount ofthe notes with the net proceeds of certain equity offerings, provided at least65 percent of the aggregate principal amount of the Senior Secured Notesoriginally issued remain outstanding. The Senior Secured Notes require theCompany to repurchase a portion of the notes at 100 percent of theprincipal amount, plus accrued and unpaid interest thereon to the date ofpurchase, with 50 percent of the Company’s “excess cash flow”, as definedin the indenture agreement entered into by the Company in respect of the SeniorSecured Notes (the "Indenture"), when the ratio of the Company’s Netindebtedness to Consolidated EBITDA is above 3.75 to 1.0. In the event of achange in control, as defined in the Indenture, the holders of the SeniorSecured Notes will have the right to put the notes to the Company at101 percent of their principal amount, plus accrued and unpaid interest.

                                           

The Senior Secured Notes contain certain covenants that limit amongother things, the ability of the Company and its subsidiaries to:(i) incur additional indebtedness; (ii) make certain investments orenter into sale and leaseback transactions; (iii) pay dividends, redeemsubordinated debt, repurchase the Company’s or its subsidiaries stock or makeany other restricted payments as defined in the indenture; (iv) enter intocertain transactions with affiliates; (v) create or incur liens;(vi) transfer or sell assets; (vii) make dividends, distributions orother payments from the Company’s subsidiaries; (viii) consummate amerger, consolidation or sale of all or substantially all of our assets; and(ix) engage in unrelated business.

 

**3.****                                      RECENTLYADOPTED ACCOUNTING PRONOUNCEMENTS**

 

InJanuary 2003, the Financial Accounting Standards Board (“FASB”) issuedFASB Interpretation No. 46, “Consolidation of Variable InterestEntities—an Interpretation of Accounting Research Bulletin No. 51” (“FIN46”). In December 2003, the FASB issued FIN No. 46 (Revised 2003)(“FIN 46R”) to address certain FIN 46 implementation issues, including thedelay of the effective date for certain types of Variable Interest Entities(“VIE”). This interpretation clarifies the application of Accounting ResearchBulletin No. 51, “Consolidated Financial Statements,” for companies thathave interests in entities that are defined as a VIE under FIN 46. According tothis interpretation, if a company has an interest in a VIE and is at risk for amajority of the expected losses of the VIE or receives a majority of theexpected gains of the VIE, it shall consolidate the VIE. FIN 46R also requiresadditional disclosures by primary beneficiaries and other significant variableinterest holders. For entities acquired or created before December 31,2003, FIN 46R is effective as of the beginning of fiscal 2005 while it iseffective immediately for all VIEs created after December 31, 2003. TheCompany completed adoption of FIN 46R during the first quarter of fiscal 2004.The adoption of FIN 46R had no effect on the Company’s consolidated financialstatements.

 

8

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**4.****                                      PROPERTYAND EQUIPMENT**

 

Property and equipment arestated at cost less accumulated depreciation and amortization.  Equipment, fixtures and leaseholdimprovements are depreciated or amortized over three to seven years or thelease term, using the straight-line method. Property and equipment at July 3, 2004 and January 3, 2004were comprised of the following (in thousands):

 
| ** **                                      | ** ** | **July 3, 2004** | ** ** | **January 3, 2004** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|
|                                            |       |                  |       |                     |       |
| Leasehold improvements                          |       | $                     | 3,715      |                     | $          | 3,204 |   |
| Equipment and fixtures                          |       | 9,222                 |       | 9,695                    |       |
| Land                                            |       | 240                   |       | 240                      |       |
|                                            |       | 13,177                |       | 13,139                   |       |
| Less accumulated depreciation and  amortization |       | (9,897                | )          | (9,965                   | )          |
| Net property and equipment                      |       | $                     | 3,280      |                     | $          | 3,174 |   |

 

Property and equipmentincluded gross assets acquired under a capital lease and related accumulateddepreciation and amortization of $500,000 and $27,000, respectively, atJuly 3, 2004.  There were no assetsacquired under a capital lease as of January 3, 2004.

 

**5.****                                      ACCRUEDLIABILITIES**

 

Accrued liabilities were comprised of thefollowing at July 3, 2004 and January 3, 2004 (in thousands):

 
| ** **                        | ** ** | **July 3, 2004** | ** ** | **January 3,  2004** | ** ** |
|-----------------------------------|------------|-----------------------|------------|--------------------------------|------------|
|                              |       |                  |       |                           |       |
| Accrued liabilities               |       | $                     | 7,627      |                           | $          | 7,628 |   |
| Accrued compensation and benefits |       | 3,965                 |       | 3,555                          |       |
| Accrued interest payable          |       | 6,205                 |       | 2,027                          |       |
|                              |       | $                     | 17,797     |                           | $          | 13,210 |   |

 

On June 24, 2004, the Company announceda reorganization of its executive management team effective June 28,2004.  As a result of thisreorganization, the Company terminated the employment of two Senior Vice Presidentseffective June 28, 2004 and accrued approximately $600,000 related toseverance expenses.

 

On May 7, 2003, the Board ofDirectors of MFC accepted the resignation of Larry A. Hodges as its President,Chief Executive Officer and Director of MFC and its subsidiaries, whichresignation was effective on May 14, 2003. Pursuant to the terms of aseparation agreement, dated August 6, 2003, and a Severance AssumptionAgreement dated March 16, 2004, among MFC, MFOC, the Company and Mr.Hodges (the “Separation Agreements”), Mr. Hodges is receiving 28 months ofsalary as severance, which is being paid semi-monthly through the end of 2004,and the balance will be paid in a lump sum in January 2005. This severanceobligation was assumed by the Company concurrently with the completion of thereorganization and refinancing (see Notes 1 and 2). As of July 3, 2004,severance payments of $520,000 were due to Mr. Hodges and included in accruedcompensation and benefits.

 

Under the terms of astockholders’ agreement among MFC and its stockholders, there are put and callrights with respect to the common shares of MFC, including common sharesreceived upon exercise of options. Pursuant to the Separation Agreements, Mr.Hodges and MFC agreed that all of the shares of MFC’s common stock held by Mr.Hodges, would be purchased by MFC for an aggregate purchase price of $449,479.The purchase price is payable in five installments of $74,913 and a sixthinstallment of $74,914 (in each case, without interest). The installments are payableevery 30 days, beginning on April 15, 2004, which was 30 days followingthe closing date of the reorganization and refinancing (see Notes 1 and 2).This payment obligation to Mr. Hodges was assumed by the Company concurrentlywith the completion of the reorganization and refinancing (see Notes 1 and 2).As of July 3, 2004, the remaining obligation payable to Mr. Hodges for thepurchase of the shares of MFC’s common stock was $224,740 and was included inaccrued liabilities.

 

9

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**6.****                                      RELATEDPARTY TRANSACTIONS**

 

Amounts due to/fromaffiliates were comprised of the following at July 3, 2004 andJanuary 3, 2004 (in thousands):

 
| ** **                   | ** ** | **July 3, 2004** | ** ** | **January 3,  2004** | ** ** |
|------------------------------|------------|-----------------------|------------|--------------------------------|------------|
|                         |       |                  |       |                           |       |
| Amounts due from affiliates: |       |                  |       |                           |       |
| MFOC                         |       | $                     | 159        |                           | $          | — |   |
| MFC                          |       | 23                    |       | —                         |       |
|                         |       | $                     | 182        |                           | $          | — |   |
| Amounts due to affiliates:   |       |                  |       |                           |       |
| Mrs. Fields’ Holding    |       | $                     | 273        |                           | $          | 273 |   |
| TCBY Enterprises             |       | —                |       | 550                            |       |
| MFC – tax sharing       |       | 1,628                 |       | 2,312                          |       |
|                         |       | $                     | 1,901      |                           | $          | 3,135 |   |

 

**7.****                                      REPORTABLESEGMENTS**

 

Operating segments are components of the Company forwhich separate financial information is available that is evaluated regularlyby management in deciding how to allocate resources and in assessingperformance. This information is reported on the basis that it is used internallyfor evaluating segment performance. Mrs. Fields has three reportable operatingsegments: franchising, gifts, and licensing. The franchising segment consistsof revenues received either directly or indirectly from cookie, yogurt andpretzel stores, which are owned and operated by third parties. These revenuesinclude initial franchise or license fees, royalties based on a percentage of afranchisee’s gross sales, sales of cookie dough that the Company produces, andcertain product formulation fees and supplier allowances which are based uponsales to franchisees. The gifts segment includes sales generated from theCompany’s mail order gift catalog and web site. The licensing segment consistsof other licensing activity from third parties for the sale of products bearingthe Company’s brand names. Sales and transfers between segments are eliminatedin consolidation.

 

The Company evaluates performance of each segmentbased on contribution margin. Contribution margin 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 margin is used as ameasure of the operating performance of an operating segment. The Company doesnot allocate any indirect general and administrative expenses, other operatingincome (expense), interest expense, depreciation and amortization or assets toits reportable operating segments.

 

Segment revenue and contribution margin are presentedin the following table (in thousands):

 
| ** **                             | ** ** | **Franchising** | ** ** | **Gifts**  | ** ** | **Licensing** | ** ** | **Total**  | ** ** |
|----------------------------------------|------------|-----------------|------------|------------|------------|---------------|------------|------------|------------|
| **13 weeks ended July 3, 2004**   | ** ** | ** **      | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| Revenue                                |       | $               | 15,228     |       | $          | 4,758         |       | $          | 1,191      |   | $ | 21,177 |   |
| Contribution  margin                   |       | 8,883           |       | 528        |       | 991           |       | 10,402     |       |
|                                   |       |            |       |       |       |          |       |       |       |
| **13 weeks ended  June 28, 2003** |       |            |       |       |       |          |       |       |       |
| Revenue                                |       | $               | 14,928     |       | $          | 3,200         |       | $          | 1,325      |   | $ | 19,453 |   |
| Contribution margin                    |       | 10,116          |       | 419        |       | 877           |       | 11,412     |       |
|                                   |       |            |       |       |       |          |       |       |       |
| **26 weeks ended  July 3, 2004**  |       |            |       |       |       |          |       |       |       |
| Revenue                                |       | $               | 28,233     |       | $          | 9,298         |       | $          | 2,448      |   | $ | 39,979 |   |
| Contribution  margin                   |       | 17,713          |       | 1,402      |       | 2,119         |       | 21,234     |       |
|                                   |       |            |       |       |       |          |       |       |       |
| **26 weeks ended  June 28, 2003** |       |            |       |       |       |          |       |       |       |
| Revenue                                |       | $               | 27,772     |       | $          | 6,010         |       | $          | 2,944      |   | $ | 36,726 |   |
| Contribution margin                    |       | 18,862          |       | 1,151      |       | 2,250         |       | 22,263     |       |

 

10

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The reconciliation of contribution margin to net loss is as follows (inthousands):

 
| ** **                                                                                     | ** ** | **13 Weeks Ended**    | ** ** | **26 Weeks Ended**     | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                     | ** ** | **July 3, 2004** | ** ** | **June 28, 2003** | ** ** | **July 3, 2004** | ** ** | **June 28, 2003** | ** ** |
| Contribution margin                                                                            |       | $                     | 10,402     |                   | $          | 11,412 |   | $ | 21,234 |   | $ | 22,263 |   |
| Other operating revenues                                                                       |       | 58                    |       | 114                    |       | 141 |   | 240 |   |
| General and administrative expenses                                                            |       | (3,052                | )          | (2,702                 | )          | (5,365 | ) | (5,050 | ) |
| Stock compensation expense                                                                     |       | (13                   | )          | (31                    | )          | (26 | ) | (62 | ) |
| Other operating income (expense), net                                                          |       | 40                    |       | (208                   | )          | (65 | ) | (250 | ) |
| Interest expense, net                                                                          |       | (5,502                | )          | (6,142                 | )          | (14,387 | ) | (12,236 | ) |
| Other income                                                                                   |       | —                |       | —                 |       | 1,054 |   | — |   |
| Depreciation and amortization                                                                  |       | (1,025                | )          | (934                   | )          | (2,056 | ) | (1,781 | ) |
| Provision for income taxes                                                                     |       | (415                  | )          | (534                   | )          | (230 | ) | (1,289 | ) |
| Income from current operations                                                                 |       | 493                   |       | 975                    |       | 300 |   | 1,835 |   |
| Income from discontinued operations (net of  income taxes of $10, $1, $39 and$19,respectively) |       | 11                    |       | 30                     |       | 58 |   | 31 |   |
| Net income                                                                                     |       | $                     | 504        |                   | $          | 1,005 |   | $ | 358 |   | $ | 1,866 |   |

 

The fixed assets and inventory of the Companyprimarily relate to the Company’s Great American Cookie batter facility and thegifts business segment and related activities. Assets relating to franchisingand licensing activity are primarily amounts due from franchisees and licenseesand goodwill relating to franchising concepts.

 

The Company has one customer that accounted for$879,000 and $2.2 million, or 18.5 percent and 23.7 percent of the revenue ofthe gifts segment for the 13 weeks and 26 weeks ended July 3, 2004,respectively, and $363,000 and $938,000, or 11.3 percent and 15.6 percent ofthe revenue of the gifts segment for the 13 weeks and 26 weeks endedJune 28, 2003, respectively. The Company has one licensee that accountedfor $778,000 and $1.5 million, or 65.3 percent and 61.3 percent of the revenueof the licensing segment for the 13 weeks and 26 weeks ended July 3, 2004,respectively, and $841,000 and $1.8 million, or 63.5 percent and 61.1 percentof the revenue of the licensing segment for the 13 weeks and 26 weeks endedJune 28, 2003, respectively. There were no other customers or licenseesthat accounted for more than 10.0 percent of Mrs. Fields’ total revenue or anyindividual segment’s revenue.

 

**8.****                                      COMMITMENTSAND CONTINGENCIES**

 

***Legal Matters***

 

The Company andits products are subject to regulation by numerous governmental authorities,including, without limitation, federal, state and local laws and regulationsgoverning health, sanitation, environmental protection, safety and hiring andemployment practices.

 

In the ordinarycourse of business, the Company is involved in routine litigation, includingfranchise disputes and trademark disputes. The Company is not a party to anylegal proceedings (including the matter described below) which, in the opinionof management, after consultation with legal counsel, is material to itsbusiness, financial condition or results of operations.

 

As discussed inthe Company’s Registration Statement on Form S-4 (File No. 333-115046), asamended, the Company’s indirect subsidiary, TCBY of Ireland, Inc., was thedefendant in a recently concluded case captioned Advanced FoodConcepts, Ltd. et al. v. William P. Creasman, et al., CaseNo. 401-CV-00-117JMM, filed in the U.S. District Court for the EasternDistrict of Arkansas (the “Court”). This complaint was filed in 2001 by twoformer franchisees against TCBY of Ireland and other corporate and individualdefendants, but all defendants have been dismissed with the exception of TCBYof Ireland, Inc., the franchisor party under a Transnational MasterLicense Agreement entered into with certain of the plaintiffs and others. Theplaintiffs sought damages in excess of $70 million in connection with TCBYof Ireland’s performance under and termination of the Transnational Master

 

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License Agreement. On August 4, 2004, the Court granted TCBY ofIreland’s Motion for Summary Judgment on all remaining counts of the complaint.The plaintiffs may still file motions for reconsideration and/or appeal theCourt’s ruling. The Company does not have insurance coverage for this lawsuitbecause the claims arose prior to the Company’s acquisition of TCBY; however,TCBY has reserved anticipated defense costs. Notwithstanding the excessive claim for damages, the lack of insurancecoverage and the risk that TCBY of Ireland’s parent entities might ultimatelybear or share in the cost of any significant judgment obtained against it,after consultation with legal counsel, and in light of the favorable summaryjudgment ruling, management believes it is unlikely that plaintiffs will obtainany judgment against TCBY of Ireland that would be material to our business,financial condition or operations.

 

**9.****                                      DISCONTINUEDOPERATIONS**

 

TCBY transitioned its equipment sales segment(“Riverport”) to a third party equipment and smallwares distributor during thequarter ended March 29, 2003. The distributor purchased certain ofRiverport’s inventory at cost, subject to certain slow moving inventorypurchase price adjustments. The Company has reserved for anticipated purchaseprice adjustments and believes that future periods will not be negativelyimpacted as a result of this transition. The segment’s assets that were subjectto depreciation and amortization were being periodically expensed over theremaining estimated useful life. The results of operations and financialposition of Riverport are classified as discontinued operations in theaccompanying unaudited condensed consolidated financial statements.

 

**10.****                               SUPPLEMENTALCONDENSED CONSOLIDATING FINANCIAL INFORMATION**

 

The Senior Secured Notes are fully and unconditionally guaranteed on ajoint and several basis by all of the Company’s domestic subsidiaries otherthan minor, immaterial subsidiaries. Mrs. Fields Famous Brands, LLC has noindependent assets or operations; therefore, supplemental financial informationon a condensed consolidating basis of the guarantor subsidiaries is notrequired. There are no restrictions on the Company’s ability to obtain cashdividends, loans or other distributions of funds from the guarantorsubsidiaries, except those imposed by applicable law.

 

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**ITEM 2.****                             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND****RESULTS OFOPERATIONS**

 

**Forward-looking Information**

 

This report includes “forward-looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995. Forward-lookingstatements are those that do not relate solely to historical fact. Theyinclude, but are not limited to, any statement that may predict, forecast,indicate or imply future results, performance, achievements or events. They maycontain words such as “believe,” “anticipate,” “expect,” “estimate,” “intend,”“project,” “plan,” “continue,” “will,” “may” or words or phrases of similar meaning.Forward-looking statements involve risks and uncertainties, including, but notlimited to, economic, competitive and governmental factors outside of ourcontrol, that may cause actual results to differ materially from trends, plansor expectations set forth in the forward looking statements.  Factors you should consider that could causethese differences include:

 

•                  the availabilityand adequacy of cash flow to satisfy our obligations, including debt service onour long-term debt and additional funds required for working capital;

 

•                  the impact ofour current negative member’s deficit on our franchising activities;

 

•                  our ability tosolicit new franchisees;

 

•                  economic,competitive, demographic, business and other pressures, trends and conditionsin various markets;

 

•                  the seasonalnature of our operations;

 

•                  actions taken orfailed to be taken by third parties, including by our customers, suppliers,distributors, competitors and shareholders, as well as legislative, regulatory,judicial and other governmental authorities;

 

•                  changes in ourbusiness strategy or development plans;

 

•                  performance byour franchisees and licensees or changes in relationships with our franchiseesand licensees;

 

•                  difficulties ordelays in our developing and introducing anticipated new products or failure ofour customers to accept new product offerings;

 

•                  adoption of newaccounting pronouncements;

 

•                  changes inconsumer preferences and our ability to adequately anticipate such changes;

 

•                  changes inprices of our raw materials;

 

•                  changes inpersonnel or increased labor costs;

 

•                  the terminationof, or inability to renew on favorable terms, our material agreements;

 

•                  changes incustomer traffic;

 

•                  prevailinginterest rates;

 

•                  legalproceedings and regulatory matters;

 

•                  acts of war orterrorist incidents; and

 

•                  all otherfactors described under “Risk Factors” in our Registration Statement on FormS-4 (File No. 333-115046), as amended.

 

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We undertake noobligation to publicly update or revise any forward-looking statements, whetheras a result of new information, future events or otherwise.  In light of these risks, uncertainties andassumptions, the forward-looking events discussed in this report may not occur.

 

**Overview**

 

We are one of thelargest franchisors in the premium snack-food industry, featuring Mrs. Fields,Great American Cookie Company, TCBY, Pretzel Time and Pretzelmaker as our corebrands. Through our franchisees’ retail stores, we are the largest retailer of freshlybaked on-premises specialty cookies and brownies in the United States; thelargest retailer of soft serve frozen yogurt in the United States; and thesecond largest retailer of baked on-premises pretzels in the United States. Inaddition, we operate a profitable gifts business and have entered into keylicensing arrangements that leverage awareness of our core brands among ourretail customer base. We operate through a network of 2,885 retail conceptlocations, which are located throughout the United States and in approximately40 foreign countries.

 

Our business is divided into three primarybusiness segments for financial reporting purposes: franchising, gifts andlicensing representing 70.4 percent, 23.2 percent and 6.1 percent of totalrevenues, respectively, for the 26 weeks ended July 3, 2004. 

 

As of July 3, 2004, our store portfolioconsisted of 2,296 domestic franchised locations, 353 international franchisedlocations and 236 licensed locations. By brand, our franchisees’ and licensees’concept locations are distributed as follows:

 
| ** **                       | ** ** | **Domestic  Franchised** | ** ** | **International  Franchised** | ** ** | **Licensed  Locations** | ** ** | **Total** | ** ** |
|----------------------------------|------------|--------------------------|------------|-------------------------------|------------|-------------------------|------------|-----------|------------|
|                             |       |                     |       |                          |       |                    |       |      |       |
| Mrs. Fields                      |       | 392                      |       | 83                            |       | 58                      |       | 533       |       |
| Great American                   |       | 284                      |       | 1                             |       | 1                       |       | 286       |       |
| Original Cookie                  |       | —                   |       | —                        |       | 11                      |       | 11        |       |
| Cookie Subtotal                  |       | 676                      |       | 84                            |       | 70                      |       | 830       |       |
| Pretzel Time                     |       | 213                      |       | 3                             |       | 6                       |       | 222       |       |
| Pretzelmaker                     |       | 164                      |       | 39                            |       | 3                       |       | 206       |       |
| Hot Sam                          |       | —                   |       | —                        |       | 15                      |       | 15        |       |
| Pretzel Subtotal                 |       | 377                      |       | 42                            |       | 24                      |       | 443       |       |
| Bakery Brands Subtotal           |       | 1,053                    |       | 126                           |       | 94                      |       | 1,273     |       |
| TCBY—Traditional Stores     |       | 512                      |       | 227                           |       | —                  |       | 739       |       |
| TCBY—Non-traditional Stores |       | 731                      |       | —                        |       | 142                     |       | 873       |       |
| Dairy Brands Subtotal            |       | 1,243                    |       | 227                           |       | 142                     |       | 1,612     |       |
| Totals                           |       | 2,296                    |       | 353                           |       | 236                     |       | 2,885     |       |

 

The above tablecounts each concept location individually. For example, if a physical locationhad a Mrs. Fields store and a Pretzel Time store together, this would becounted as two concept locations in the table above. If actual physical storeswere counted, rather than concept locations, total store counts would bereduced by 254 locations to 2,631.

 

Mrs. FieldsOriginal Cookies, Inc. (“MFOC”), our parent company, and certain of itssubsidiaries own approximately 216 franchised and licensed retail conceptlocations, representing 7.5 percent of the total retail concept locations.During the 26 weeks ended July 3, 2004, we recognized $1.6 million offranchise royalties and $1.5 million of product sales relating to these retailconcept locations. MFOC expects that certain of these retail concept locationsmay be sold over time to new and current franchisees or will be closed.

 

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During the periodfrom January 3, 2004 to July 3, 2004, our store portfolio hasdeclined from 3,027 concept locations to 2,885 concept locations, as follows:

 
| ** **                    | ** ** | **Domestic  Franchised** | ** ** | **International  Franchised** | ** ** | **Licensed  Locations** | ** ** | **Total** | ** ** |
|-------------------------------|------------|--------------------------|------------|-------------------------------|------------|-------------------------|------------|-----------|------------|
|                          |       |                     |       |                          |       |                    |       |      |       |
| Balance, January 3, 2004 |       | 2,380                    |       | 378                           |       | 269                     |       | 3,027     |       |
| New development openings      |       | 78                       |       | 8                             |       | 1                       |       | 87        |       |
| Permanent closings            |       | (183                     | )          | (33                           | )          | (32                     | )          | (248      | )          |
| Other openings, net           |       | 21                       |       | —                        |       | (2                      | )          | 19        |       |
| Balance July 3, 2004     |       | 2,296                    |       | 353                           |       | 236                     |       | 2,885     |       |

 

Of the 248permanent closings between January 3, 2004 and July 3, 2004, 50.0percent related to TCBY brand non-traditional locations, 19.0 percent relatedto TCBY brand traditional locations, 15.7 percent related to bakery conceptlocations owned by franchisees other than MFOC and 15.3 percent related toretail concept locations owned by MFOC.

 

**Recent Developments**

 

***Reorganization andRefinancing.***  We were formed in March 2004in connection with the reorganization of certain entities and segments that areunder the common control of Mrs Fields’ Companies, Inc. (“MFC”), formerly knownas Mrs. Fields’ Famous Brands, Inc.  Weare a wholly-owned subsidiary of MFOC. MFOC is a wholly-owned subsidiary of Mrs. Fields’ Holding Company, Inc.(“MFH”) and MFH is a wholly-owned subsidiary of MFC.  Prior to the reorganization, TCBY Systems,LLC (“TCBY”) was a wholly-owned subsidiary of TCBY Enterprises, LLC (“TCBYEnterprises”), whose parent is also MFC.

 

As part of the reorganization describedabove, we refinanced substantially all of our indebtedness.  We issued $80.7 million of 9 percent seniorsecured notes (the “9 percent Senior Secured Notes”) in exchange for $80.7million of 10 1/8 percent senior notes and issued $115.0 million of 11 1/2percent senior secured notes (the “11 1/2 percent Senior Secured Notes”together with the 9 percent Senior Secured Notes, the “Senior SecuredNotes”).  The proceeds from the 11 1/2percent Senior Secured Notes were used to retire the Company’s remaininglong-term debt subsequent to year-end.

 

***Increase Investmentin Brands.***  As discussed in our Registration Statement onForm S-4 (File No. 333-115049), as amended, in 2004, we intend to invest$3.0 million in advertising, promotion and brand building ideas. While webelieve this investment in our brands will support the initiatives aimed atincreasing sales at all franchised locations, we have identified TCBY as thebrand that offers our greatest opportunity for building profitable sales in theshort term. Against the background of a product aligned with current healthtrends and not limited by mall based locations, we intend to reposition theTCBY concept consistent with our consumer and franchisee based strategicframework, building on today’s health conscious consumer and a desire for a lowfat, healthy, yet satisfying treat, which we believe will increase positiveconsumer perception of our brand.

 

During the 13 weeks and 26 weeks ended July 3, 2004, we incurredexpenses of $1.3 million related to brand investment initiatives.  There were no such expenses in 2003.  These expenses for brand investmentinitiatives included increased advertising and promotion of the TCBY brand andits products, including the introduction during the second quarter of severalflavors of “low carb” yogurt at most of our TCBY traditional franchised retailstores of approximately $1.0 million and initial expenses relating to thereconcepting of TCBY of approximately $300,000. We currently anticipate expending an additional $1.7 million in 2004 forbrand investment initiatives.

 

***ManagementReorganization.***  On June 24, 2004, weannounced a management reorganization effective June 28, 2004.  We believe this new structure is aligned withour strategic vision.  In addition tocreating a new executive committee comprised of our Chief Executive Officer andfour Executive Vice Presidents, we created two cross-functional teams, whichwill have representation from all functions of our company and will shareaccountability for building the bakery and TCBY brands.  Under the cross-functional teams, we willmove decision-making closer to our customers.

 

As a result of this reorganization, weterminated the employment of two Senior Vice Presidents effective June 28,2004 and accrued approximately $600,000 related to severance expenses for the13 weeks ended July 3, 2004.

 

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In comparison, during the 13 weeks ended June 28, 2003, weexpensed and accrued approximately $800,000 for severance costs relating to theresignation of our previous Chief Executive Officer.

 

In addition, as part of the neworganizational alignment, we expect to hire additional personnel includingthree new Vice Presidents and several Director level staff.  As a result, we expect additional expenses ofapproximately $500,000 in the second half of 2004 relating to the recruitment,relocation and compensation of these individuals.  However, this may fluctuate depending upon thetiming of these new hires.

 

**Results of Operations**

 

The followingtable sets forth, for the periods indicated, certain information relating tothe operations of Mrs. Fields and percentage changes from period toperiod.

 

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**Statementof Operations Data:**

 
| ** **                                                                                      | ** **   | **13 Weeks Ended**         | ** **   | **26 Weeks Ended**     | ** ** |
|-------------------------------------------------------------------------------------------------|--------------|----------------------------|--------------|------------------------|------------|
| ** **                                                                                      | ** **   | **July 3, 2004**      | ** **   | **June 28, 2003** | ** ** | **%****Change** | ** ** | **July 3, 2004** | ** ** | **June 28, 2003** | ** ** | **%****Change** | ** ** |
| *** ***                                                                                    | *** *** | **(Dollars in Thousands)** | *** *** |
| REVENUES:                                                                                       |         |                       |         |                   |       |   |   |   |   |   |   |   |   |
| Franchising                                                                                     |         | $                          | 15,228       |                   | $          | 14,928 |   | 2.0 |   | $ | 28,233 |   | $ | 27,772 |   | 1.7 |   |
| Gifts                                                                                           |         | 4,758                      |         | 3,200                  |       | 48.7 |   | 9,298 |   | 6,010 |   | 54.7 |   |
| Licensing                                                                                       |         | 1,191                      |         | 1,325                  |       | (10.1 | ) | 2,448 |   | 2,944 |   | (16.8 | ) |
| Other                                                                                           |         | 58                         |         | 114                    |       | (49.1 | ) | 141 |   | 240 |   | (41.3 | ) |
|                                                                                            |         |                       |         |                   |       |   |   |   |   |   |   |   |   |
| Total revenues                                                                                  |         | 21,235                     |         | 19,567                 |       | 8.5 |   | 40,120 |   | 36,966 |   | 8.5 |   |
| OPERATING COSTS AND EXPENSES:                                                                   |         |                       |         |                   |       |   |   |   |   |   |   |   |   |
| Franchising                                                                                     |         | 6,345                      |         | 4,812                  |       | 31.9 |   | 10,520 |   | 8,910 |   | 18.1 |   |
| Gifts                                                                                           |         | 4,230                      |         | 2,781                  |       | 52.1 |   | 7,896 |   | 4,859 |   | 62.5 |   |
| Licensing                                                                                       |         | 200                        |         | 448                    |       | (55.4 | ) | 329 |   | 694 |   | (52.6 | ) |
| General and administrative                                                                      |         | 3,052                      |         | 2,702                  |       | 13.0 |   | 5,365 |   | 5,050 |   | 6.2 |   |
| Stock compensation expense                                                                      |         | 13                         |         | 31                     |       | (58.1 | ) | 26 |   | 62 |   | (58.1 | ) |
| Costs associated with debt refinancing                                                          |         | —                     |         | —                 |       | NM |   | 87 |   | — |   | NM |   |
| Depreciation                                                                                    |         | 324                        |         | 442                    |       | (26.7 | ) | 640 |   | 902 |   | (29.0 | ) |
| Amortization                                                                                    |         | 701                        |         | 492                    |       | 42.5 |   | 1,416 |   | 879 |   | 61.1 |   |
| Other operating expenses (income), net                                                          |         | (40                        | )            | 208                    |       | NM |   | (22 | ) | 250 |   | NM |   |
|                                                                                            |         |                       |         |                   |       |   |   |   |   |   |   |   |   |
| Total operating costs and expenses                                                              |         | 14,825                     |         | 11,916                 |       | 24.4 |   | 26,257 |   | 21,606 |   | 21.5 |   |
|                                                                                            |         |                       |         |                   |       |   |   |   |   |   |   |   |   |
| Income   from operations                                                                   |         | 6,410                      |         | 7,651                  |       | (16.2 | ) | 13,863 |   | 15,360 |   | (9.7 | ) |
| Interest expense, net                                                                           |         | (5,502                     | )            | (6,142                 | )          | (10.4 | ) | (14,387 | ) | (12,236 | ) | 17.6 |   |
| Other income                                                                                    |         | —                     |         | —                 |       | NM |   | 1,054 |   | — |   | NM |   |
|                                                                                            |         |                       |         |                   |       |   |   |   |   |   |   |   |   |
| Income from continuing operations before  provision for income                                  |         | 908                        |         | 1,509                  |       | (39.8 | ) | 530 |   | 3,124 |   | (83.0 | ) |
| Provision for income taxes                                                                      |         | 415                        |         | 534                    |       | (22.3 | ) | 230 |   | 1,289 |   | (82.2 | ) |
| Income from continuing operations                                                               |         | 493                        |         | 975                    |       | (49.4 | ) | 300 |   | 1,835 |   | (83.7 | ) |
| Income from discontinued operations (net of  income taxes of $10, $1, $39 and $19,respectively) |         | 11                         |         | 30                     |       | (63.3 | ) | 58 |   | 31 |   | 87.1 |   |
|                                                                                            |         |                       |         |                   |       |   |   |   |   |   |   |   |   |
| Net income                                                                                      |         | $                          | 504          |                   | $          | 1,005 |   | (49.9 | ) | $ | 358 |   | $ | 1,866 |   | (80.8 | ) |
|                                                                                            |         |                       |         |                   |       |   |   |   |   |   |   |   |   |
| Cash flows from operating activities                                                            |         | $                          | 7,308        |                   | $          | 1,342 |   |   |   | $ | 3,503 |   | $ | 5,917 |   |   |   |
| Cash flows from investing activities                                                            |         | $                          | (27          | )                      | $          | (4 | ) |   |   | $ | 982 |   | $ | (172 | ) |   |   |
| Cash flows from financing activities                                                            |         | $                          | (67          | )                      | $          | (2,582 | ) |   |   | $ | 10,981 |   | $ | (6,532 | ) |   |   |

 

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**13 Weeks Ended July 3, 2004**

**Compared to the 13 Weeks Ended June 28,2003**

 

*Income From Operations—Overview.*Income from operations was $6.4 million for the 13 weeks endedJuly 3, 2004, a decrease of $1.3 million or 16.2 percent, from$7.7 million for the 13 weeks ended June 28, 2003. This decrease wasprimarily attributable to a decrease in contribution from our franchisingsegment of $1.2 million which was primarily attributable to $1.3 millionexpended for brand investment initiatives previously discussed.  These brand investment initiatives includedincreased advertising and promotion of the TCBY brand and its products,including the introduction during the second quarter of 2004 of several flavorsof “low carb” yogurt at most of our TCBY traditional franchised retail stores,and initial expenses relating to the repositioning of the TCBY conceptconsistent with our consumer and franchisee based strategic framework.

 

*Segment Contribution.*  The following table sets forth thecontribution from each of our reporting segments. Franchising contribution iscomprised of sales of new franchises and royalties from existing franchisesless direct operating expenses. Gifts contribution is comprised of sales of ourproducts through our catalog and Internet business less direct operatingexpenses. Licensing contribution is comprised of licensing fees received fromthird parties for the sale of products bearing our brand names less directoperating expenses.

 
| ** **                 | ** ** | **13 Weeks Ended**                  | ** ** | ** **                           | ** ** |
|----------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|
| **Reporting  Segment**     | ** ** | **July 3, 2004  Contribution** | ** ** | **June 28, 2003  Contribution** | ** ** | **Percent Change** | ** ** |
| ** **                 | ** ** | **(dollars in thousands)**          | ** ** | ** **                           | ** ** |
| Franchising                |       | $                                   | 8,883      |                                 | $          | 10,116 |   | (12.2 | )% |
| Gifts                      |       | 528                                 |       | 419                                  |       | 26.0 | % |
| Licensing                  |       | 991                                 |       | 877                                  |       | 13.0 | % |
| Total Segment Contribution |       | $                                   | 10,402     |                                 | $          | 11,412 |   | (8.9 | )% |

 

**Franchising**

 

*Franchising Revenues.*  Franchising revenues were $15.2 millionfor the 13 weeks ended July 3, 2004, an increase of $300,000 or2.0 percent, from $14.9 million for the 13 weeks ended June 28,2003. This increase was principally due to a $500,000 or 8.7 percent increasein revenues from our TCBY franchise system as a result of increased royalties.  This increase in our TCBY franchisee systemrevenues was partially offset by a $200,000 or 2.1 percent decrease in revenuesfrom our bakery franchisee system as a result of lower initial franchise feesof $300,000 and lower product formulation revenues of $100,000 partially offsetby an increase in revenues of $200,000 as a result of a 0.6 percent increase inyear over year sales at our bakery franchisee system and sales from our GreatAmerican Cookie batter facility to franchisees.

 

*Franchising Expenses.*  Franchising expenses were $6.3 millionfor the 13 weeks ended July 3, 2004, an increase of $1.5 million or31.9 percent, from $4.8 million for the 13 weeks ended June 29,2003. This increase was principally due to increases in expenses for brandinvestment initiatives as previously discussed of $1.3 million, operating costsassociated with our Great American Cookie batter facility of $300,000 and othermarketing and advertising expenses of $200,000 partially offset by a reductionin franchise development and selling expenses of $300,000.

 

*Franchising Contribution.*  The decrease in franchising contribution of$1.2 million or 12.2 percent was principally due to costs incurred for brandinvestment initiatives of $1.3 million.

 

**Gifts**

 

*Gifts Revenues.*  Gifts revenues were $4.8 million for the13 weeks ended July 3, 2004, an increase of $1.6 million or48.7 percent, from $3.2 million for the 13 weeks ended June 28,2003. Gifts revenues consist of sales through our catalog and e-tailing Website. The increase in revenues in the 13 weeks ended July 3, 2004 was dueto increases in corporate gift sales of $900,000 or 59.8 percent and catalogand Internet sales of $900,000 or 74.1 percent partially offset by a reductionin our sales to commercial airlines of $200,000.

 

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*Gifts Expenses.*  Gifts expenses were $4.2 million for the13 weeks ended July 3, 2004, an increase of $1.4 million or 52.1percent, from $2.8 million for the 13 weeks ended June 28, 2003. Thisincrease in expenses was due to increases in cost of sales of $900,000associated with the increased sales volume and increased cost of product,advertising and marketing expenses of $400,000 due to increased circulation ofcatalogs, and labor and related expenses of $100,000 due to increased salesvolume.

 

*Gifts Contribution.*  The increase in gifts contribution of$100,000 or 26.0 percent was primarily attributable to an increase in giftssales of $1.6 million or 48.7 percent partially offset by an increasein gifts operating expenses of $1.4 million or 52.1 percent.

 

**Licensing**

 

*Licensing Revenues.*  Licensing revenues were $1.2 million forthe 13 weeks ended July 3, 2004, a decrease of $100,000 or10.1 percent, from $1.3 million for the 13 weeks ended June 28,2003. This decrease was due to decreases in licensing royalties earned underour licensing agreement for the sale of TCBY frozen food specialty productsthrough retail channels of $200,000 partially offset by an increase inlicensing royalties from premium candies and other various Mrs. Fieldsbranded products of $100,000.

 

*Licensing Expenses.*  Licensing expenses were $200,000 for the 13weeks ended July 3, 2004, a decrease of $200,000 or 55.4 percent,from $400,000 for the 13 weeks ended June 28, 2003. This decrease was dueto reduced licensing expenses incurred under our licensing agreement for TCBYfrozen food specialty products.

 

*Licensing Contribution.*  The increase in licensing contribution of$100,000 or 13.0% was primarily due to the decrease in licensing expensespreviously discussed, which was partially offset by the decrease in licensingrevenues.

 

**Other**

 

*General and Administrative Expense.*  General and administrative expenses were$3.1 million for the 13 weeks ended July 3, 2004, an increase of$400,000 or 13.0 percent, from $2.7 million for the 13 weeks endedJune 28, 2003.   This increase wasprimarily due to increases in salaries and wages of $100,000, health insurancecosts of $100,000, property and casualty insurance of $100,000, occupancy costsof $100,000 and other administrative expenses of  $200,000 partially offset by a decrease inseverance costs of $200,000 associated with certain terminations of ourexecutive management team as previously discussed.

 

*Depreciation and Amortization Expense.* Total depreciation and amortizationexpense was $1.0 million for the 13 weeks ended July 3, 2004, anincrease of $100,000 or 11.1 percent, from $900,000 for the 13 weeks endedJune 28, 2003. Depreciation expense was $300,000 for the 13 weeks endedJuly 3, 2004, a decrease of $100,000 or 26.7 percent, from $400,000for the 13 weeks ended June 28, 2003. This decrease was principally due tothe write off of equipment relating to distribution of TCBY yogurt product inconvenience stores in the third quarter of 2003. Amortization expense was$700,000 for the 13 weeks ended July 3, 2004, an increase of $200,000or 42.5 percent from $500,000 for the 13 weeks ended June 28, 2003.This increase was due to the amortization associated with the TCBY trade namesand recipes, which were previously considered to be indefinite, lived assetsand are now amortized over a 15 year life.

 

*Interest Expense, Net.*  Interest expense, net was $5.5 millionfor the 13 weeks ended July 3, 2004, a decrease of $600,000 or10.4 percent, from $6.1 million for the 13 weeks ended June 28,2003. This decrease was primarily due to the refinancing of our debt inMarch 2004 resulting in lower effective interest rates on our outstandingdebt for the 13 weeks ended July 3, 2004 compared to the effectiveinterest rate on our outstanding debt for the 13 weeks ended June 28,2003.

 

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**26 Weeks Ended July 3, 2004**

**Compared to the 26 Weeks Ended June 28,2003**

 

*Income From Operations—Overview*.  Income from operations was $13.9 millionfor the 26 weeks ended July 3, 2004, a decrease of $1.5 million or9.7 percent, from $15.4 million for the 26 weeks ended June 28,2003. This decrease was primarily attributable to decreases in contributionfrom our franchising segment of $1.1 million which was primarily attributableto $1.3 million of expenses incurred for brand investment initiativespreviously discussed, our licensing segment of $100,000, and other revenues of$100,000, and increases in general and administrative expenses of $300,000,expenses incurred for the refinancing of our debt of $100,000 and depreciationand amortization expense of $300,000 offset by an increase in contribution fromour gifting segment of $300,000 and a decrease in other operating expenses of$200,000.

 

*Segment Contribution.*  The following table sets forth thecontribution from each of our reporting segments. Franchising contribution iscomprised of sales of new franchises and royalties from existing franchisesless direct operating expenses. Gifts contribution is comprised of sales of ourproducts through our catalog and Internet business less direct operatingexpenses. Licensing contribution is comprised of licensing fees received fromthird parties for the sale of products bearing our brand names less directoperating expenses.

 
| ** **                 | ** ** | **26 Weeks Ended**                  | ** ** | ** **                           | ** ** |
|----------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|
| **Reporting  Segment**     | ** ** | **July 3, 2004  Contribution** | ** ** | **June 28, 2003  Contribution** | ** ** | **Percent Change** | ** ** |
| ** **                 | ** ** | **(dollars in thousands)**          | ** ** | ** **                           | ** ** |
|                       |       |                                |       |                                 |       |   |   |
| Franchising                |       | $                                   | 17,713     |                                 | $          | 18,862 |   | (6.1 | )% |
| Gifts                      |       | 1,402                               |       | 1,151                                |       | 21.8 | % |
| Licensing                  |       | 2,119                               |       | 2,250                                |       | (5.8 | )% |
| Total Segment Contribution |       | $                                   | 21,234     |                                 | $          | 22,263 |   | (4.6 | )% |

 

**Franchising**

 

*Franchising Revenues.*  Franchising revenues were $28.2 millionfor the 26 weeks ended July 3, 2004, an increase of $400,000 or 1.7 percent,from $27.8 million for the 26 weeks ended June 28, 2003. Thisincrease was principally due to an increase in revenues from our TCBY franchisesystem of $500,000 as a result of increased royalties of $400,000 and increasedproduct formulation revenues on TCBY products sold through the TCBY franchiseesystem of $100,000.  Our bakery franchisesystem experienced an increase in royalties of $200,000 as a result of yearover year sales increase of 2.2% and an increase in revenues from sales by ourGreat American Cookie batter facility to franchisees of $300,000.  These increases in revenues were partiallyoffset by a decrease in initial franchisees fees recognized upon new storeopenings of $400,000 and lower royalties as a result of fewer franchised locationsof $200,000.

 

*Franchising Expenses.*  Franchising expenses were $10.5 millionfor the 26 weeks ended July 3, 2004, an increase of $1.6 million or18.1 percent, from $8.9 million for the 26 weeks ended June 28,2003. This increase was principally due to increases to expenses for brandinvestment initiatives of $1.3 million, operating costs associated with ourGreat American Cookie batter facility of $500,000, other marketing andadvertising expenses of $100,000 and product development of $100,000 partiallyoffset by a reduction in franchise development and selling expenses of$400,000.

 

*Franchising Contribution.*  The decrease in franchising contribution of$1.1 million or 6.1 percent was principally due to increases in expensesincurred for brand investment initiatives of $1.3 million, operating expensesassociated with our Great American Cookie batter facility of $500,000, productdevelopment and marketing expenses of $200,000 offset by increased royaltyrevenues associated to our TCBY franchisee system of $500,000 and reducedfranchise development and selling expenses of $400,000.

 

**Gifts**

 

*Gifts Revenues.*  Gifts revenues were $9.3 million for the26 weeks ended July 3, 2004, an increase of $3.3 million or54.7 percent, from $6.0 million for the 26 weeks ended June 28,2003. Gifts revenues consist of sales through our catalog and e-tailing Website. The increase in revenues in the 26 weeks ended July 3, 2004 was dueto

 

20

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increases in corporate gift sales of $2.1 million or 74.1 percent andcatalog and Internet sales of $1.3 million or 50.7 percent partially offset bya reduction in our sales to commercial airlines of $100,000.

 

*Gifts Expenses.*  Gifts expenses were $7.9 million for the26 weeks ended July 3, 2004, an increase of $3.0 million or 62.5percent, from $4.9 million for the 26 weeks ended June 28, 2003. Thisincrease in expenses was due to increases in cost of sales of $1.8 millionassociated with the increased sales volume and increased cost of product,advertising and marketing expenses of $900,000 due to increased circulation ofcatalogs, labor and related expenses of $200,000 due to increased sales volumeand other operating expenses of $100,000.

 

*Gifts Contribution.*  The increase in gifts contribution of$300,000 or 21.8 percent was primarily attributable to an increase in giftssales of $3.3 million or 54.7 percent partially offset by an increasein gifts operating expenses of $3.0 million or 62.5 percent.

 

**Licensing**

 

*Licensing Revenues.*  Licensing revenues were $2.4 million forthe 26 weeks ended July 3, 2004, a decrease of $500,000 or16.8 percent, from $2.9 million for the 26 weeks ended June 28,2003. This decrease was due to decreases in licensing royalties earned underour licensing agreement for the sale of TCBY frozen food specialty productsthrough retail channels of $400,000 and in licensing royalties forMrs. Fields branded cookies distributed through retail channels by anational manufacturer of cookies of $300,000 offset by an increase in licensingroyalties from premium candies and other various Mrs. Fields brandedproducts of $200,000.

 

*Licensing Expenses.*  Licensing expenses were $300,000 for the 26weeks ended July 3, 2004, a decrease of $400,000 or 52.6 percent,from $700,000 for the 26 weeks ended June 28, 2003. This decrease was dueto reduced licensing expenses incurred under our licensing agreement for TCBYfrozen food specialty products.

 

*Licensing Contribution.*  The decrease in licensing contribution of$100,000 or 5.8% was primarily due to net decreases in royalties earned underour licensing agreements as previously discussed, which were partially offsetby the decrease in licensing expenses.

 

**Other**

 

*General and Administrative Expense.*  General and administrative expenses were$5.4 million for the 26 weeks ended July 3, 2004, an increase of$300,000 or 6.2 percent, from $5.1 million for the 26 weeks ended June 28,2003.   This increase was primarily dueto increases in salaries and wages of $300,000, health insurance costs of$100,000, and property and casualty insurance of $100,000 offset by a decreasein severance costs of $200,000 associated with certain terminations of ourexecutive management team as previously discussed.

 

*Costs Associated with Debt Refinancing.*  During the 26 weeks ended July 3, 2004,we incurred $12.0 million of costs that were directly related to our debtrefinancing which was completed March 16, 2004. Generally, these costswould be deferred and amortized into interest expense over the term of the borrowings.However, approximately $4.9 million of these costs related to the exchangeof $80.7 million of the existing senior notes for $80.7 million ofthe newly issued 9 percent Senior Secured Notes. In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 15, “Accounting byDebtors and Creditors for Troubled Debt Restructurings,” these costs wereexpensed net of the gain recognized on retirement of the senior notes of$4.8 million.

 

*Depreciation and Amortization Expense.*  Total depreciation and amortization expensewas $2.1 million for the 26 weeks ended July 3, 2004, an increase of$300,000 or 16.6 percent, from $1.8 million for the 26 weeks endedJune 28, 2003. Depreciation expense was $600,000 for the 26 weeks endedJuly 3, 2004, a decrease of $300,000 or 29.0 percent, from $900,000for the 26 weeks ended June 28, 2003. This decrease was principally due tothe write off of equipment relating to distribution of TCBY yogurt product inconvenience stores in the third quarter of 2003. Amortization expense was $1.4million for the 26 weeks ended July 3, 2004, an increase of $500,000or 61.1 percent from $900,000 for the 26 weeks ended June 28, 2003.This increase was due to the amortization associated with the TCBY trade namesand recipes, which were previously considered to be indefinite, lived assetsand are now amortized over a 15 year life.

 

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*Interest Expense, Net.*  Interest expense, net was $14.4 millionfor the 26 weeks ended July 3, 2004, an increase of $2.2 million or17.6 percent, from $12.2 million for the 26 weeks ended June 28,2003. This increase was primarily due to the write-off of deferred loan costsof $2.8 million associated with our previous debt. These deferred loan costs werewritten off due to the completion of our debt refinancing on March 16,2004.  This increase was partially offsetby lower interest expense incurred as a result of the refinancing of our debtin March 2004 resulting in lower effective interest rates on ouroutstanding debt for the 13 weeks ended July 3, 2004 compared to theeffective interest rate on our outstanding debt for the 13 weeks endedJune 28, 2003.

 

*Other Income.*  Other income was $1.1 million for the 26weeks ended July 3, 2004. Other income represents gain on the sale ofcertain equity warrants of Nonni’s Food Company, a predecessor-in-interest toShadewell Grove Foods, Inc., a manufacturer and distributor ofMrs. Fields branded soft baked cookies under certain license agreements withus and our affiliates.

 

###### **ConsolidatedFinancial Condition**

 

Total assets at July 3, 2004 were $179.1 million, an increase of$16.5 million or 10.1 percent, from $162.6 million atJanuary 3, 2004. This increase was primarily attributable to increases incash and cash equivalents of $15.5 million, net deferred loan costs of$4.1 million, amounts due from affiliates of $200,000 and inventories of$100,000 offset by decreases in accounts receivable of $2.1 million andnet trademarks and other intangible assets of $1.3 million.

 

Total liabilities at July 3, 2004 were $224.8 million, anincrease of $6.4 million or 2.9 percent, from $218.4 million atJanuary 3, 2004. This increase was primarily due to an increase inlong-term debt of $10.0 million, accrued liabilities of $4.6 million andcapital lease obligations of $500,000 offset by decreases in accounts payableof $4.9 million, deferred tax liability of $1.7 million, amounts dueto affiliates of $1.2 million, deferred revenue of $600,000 and liabilities ofdiscontinued operations of $300,000.

 

###### **ConsolidatedCash Flows**

 

Net cash flows provided by operating activities were $3.5 million forthe 26 weeks ended July 3, 2004, a decrease of $2.4 million, from net cashflows provided by operating activities of $5.9 million for the 26 weeks endedJune 28, 2003.  This decrease wasprincipally due to decreased contribution by our operating segments of $1.0million primarily as a result of brand investment expenses previouslydiscussed, increased general and administrative expenses of $300,000 and cashused from changes in working capital.

 

Net cash flows provided by investing activities were $1.0 million forthe 26 weeks ended July 3, 2004, an increase of $1.2 million, from cashused in investing activities of $200,000 for the 26 weeks ended June 28,2003.  This increase was attributable toproceeds from the sale of equity warrants in Nonni’s Food Company of $1.1million during the 26 weeks ended July 3, 2004.

 

Net cash flows provided by financing activities were $11.0 million forthe 26 weeks ended July 3, 2004, an increase of $17.5 million from cashused in financing activities of $6.5 million for the 26 weeks endedJune 28, 2003.  This increase wasprincipally due to the completion of our debt refinancing on March 16,2004 which resulted in $115.0 million in proceeds from the issuance of oursenior secured notes, a capital contribution by our parent of $17.5 million anda decrease in other activity with parent of $1.5 million partially offset byincreases in payments to retire our previous debt of $105.6 million and paymentof debt issuance costs of $10.9 million.

 

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

 

During 2004, we expect that our principal uses of cash will be forworking capital, capital expenditures of approximately $1.4 million, debtservice requirements and other general corporate purposes. We expect that ourprincipal sources of cash will be provided by operating activities and the cashreserve retained from the net proceeds of the offering of the original notes.  At July 3, 2004, we had $16.8 million ofcash on hand.

 

Our working capital at July 3, 2004 was $4.5 million, animprovement of $15.3 million, from a working capital deficit of $10.8 millionat January 3, 2004.  Thisimprovement was the result of cash and working capital generated through ouroperating activities, cash generated from our debt refinancing and capitalcontribution by our parent.

 

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We are highly leveraged. At July 3, 2004, we had$195.7 million of long-term debt due in 2011. Due to borrowingrestrictions under the indenture governing the notes, our ability to obtainadditional debt financing is significantly limited. We believe that our sourcesof cash will be adequate to meet our cash requirements anticipated for the next12 months.

 

**Inflation**

 

The impact ofinflation on our business has not been significant in recent years.  Some of our employees are paid hourly wagesat the Federal minimum wage level. Minimum wage increases will negatively impact our payroll costs in theshort term, but management believes such impact can be offset in the long termthrough lower staffing of operations and, if necessary, through product priceincreases.

 

**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 with our Audit Committee the accountingpolicies that it uses to prepare our consolidated financial statements andbelieves that the following policies are the most important to the portrayal ofour financial condition and the results of our operations while requiring theuse of judgments and estimates about the effects of matters that are inherentlyuncertain.

 

*Impairment of Goodwill*.  Goodwill is not amortized, but is subject toan annual assessment for impairment, or more frequently if circumstancesindicate potential impairment, through a comparison of fair value to itscarrying amount. The two-step approach to assess our goodwill impairmentrequires that we first compare the estimated fair value of each reportingsegment with goodwill to the carrying amount of the segment’s assets andliabilities, including its goodwill. If the fair value of the reporting segmentis below its carrying amount, then the second step of the impairment test isperformed, in which the current fair value of the segment’s assets andliabilities will determine the current implied fair value of the segment’sgoodwill.

 

On an annual basis, we complete an evaluation ofgoodwill associated with our various reporting segments. To the extent that thefair value associated with goodwill is determined to be less than the recordedvalue, we write down the value of the related goodwill. The estimated fairvalue of goodwill is affected by, among other things, our business plan for thefuture, estimated results of future operations and the comparable companiesthat are used to estimate the fair value of our goodwill. Changes in thebusiness plan or operating results that are different than the projections usedto develop the valuation of goodwill 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 segments. Thetest methods employed involve assumptions concerning useful lives of intangibleassets, interest and discount rates, projections and other assumptions offuture business conditions. The assumptions employed are based on management’sjudgment using internal and external data.

 

*Impairment of Long-lived and CertainIdentifiable Intangible Assets*.  We review our long-lived assets forimpairment when circumstances indicate that the book value of an asset may notbe fully recovered by the undiscounted net cash flow generated over theremaining life of the related asset or group of assets. If the cash flowsgenerated by the asset are not sufficient to recover the remaining book valueof the asset, we are required to write down the value of the asset to itsestimated fair value. In evaluating whether the asset will generate sufficientcash flow to recover its book value, we estimate the amount of cash flow thatwill be generated by the asset and the remaining life of the asset. In makingour estimate, 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.

 

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*Allowance for Doubtful Accounts.*  We sell products to and receive royaltiesfrom our franchisees and sell products to other customers. Sometimes thesefranchisees and customers are unable or unwilling to pay for the products thatthey receive or royalties that they owe. Factors that affect our ability tocollect amounts that are due to us include the financial strength of afranchisee or customer and its operations, the economic strength of the mallwhere the franchisee is located and the overall strength of the retail economy.We are required to establish an estimated allowance for the amounts included inaccounts receivable that we will not be able to collect in the future. Toestablish this allowance, we evaluate the customer’s or franchisee’s financialstrength, payment history, reported sales and the availability of collateral tooffset potential losses. If the assumptions that are used to determine theallowance for doubtful accounts change, we may have to provide for a greaterlevel of expense in future periods or to reverse amounts provided in priorperiods.

 

*RevenueRecognition*.  We recognizerevenues from our initial franchising fees and licensing and other fees whenall material services or conditions relating to the revenues have beensubstantially performed or satisfied, which is generally upon the opening of astore. We recognize franchise and license royalties, which are based on apercentage of gross sales, as earned, which is generally upon sale of productby our franchisee or licensee. Minimum royalty payments under our licensingagreements are deferred and recognized on a straight-line basis over the termof the agreement. We recognize revenues from the sale of cookie dough that weproduce and sell to franchisees at the time of shipment and classify them asfranchising revenues. We recognize revenues from gift sales at the time ofshipment. We receive product formulation fees and allowances from suppliersbased on product sales to franchisees. We recognize these fees and allowancesupon shipment of product to our distributors or franchisees.

 

**RecentAccounting Pronouncements**

 

InJanuary 2003, the Financial Accounting Standards Board (“FASB”) issuedFASB Interpretation No. 46, “Consolidation of Variable InterestEntities—an Interpretation of Accounting Research Bulletin No. 51” (“FIN46”). In December 2003, the FASB issued FIN No. 46 (Revised 2003)(“FIN 46R”) to address certain FIN 46 implementation issues, including thedelay of the effective date for certain types of Variable Interest Entities(“VIE”). This interpretation clarifies the application of Accounting Research BulletinNo. 51, “Consolidated Financial Statements,” for companies that haveinterests in entities that are defined as a VIE under FIN 46. According to thisinterpretation, if a company has an interest in a VIE and is at risk for amajority of the expected losses of the VIE or receives a majority of theexpected gains of the VIE, it shall consolidate the VIE. FIN 46R also requiresadditional disclosures by primary beneficiaries and other significant variableinterest holders. For entities acquired or created before December 31,2003, FIN 46R is effective as of the beginning of fiscal 2005 while it iseffective immediately for all VIEs created after December 31, 2003. Wecompleted adoption of FIN 46R during the first quarter of fiscal 2004. Theadoption of FIN 46R had no effect on our consolidated financial statements.

 

**ITEM 3.****                             QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

There have been no significant changes in market risks since the end ofthe Company’s fiscal year ended January 3, 2004. For more information,please read the combined financial statements and notes thereto included in ourRegistration Statement on Form S-4 (File No. 333-115046), as amended.

 

**ITEM 4.****                             CONTROLSAND PROCEDURES**

 

The Company’s management, with the participation of our Chief ExecutiveOfficer and Chief Financial Officer, reviewed and evaluated the effectivenessof our disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e) and 15d-15(e)) as of the end of the period covered by this report.  Based on that evaluation, these officers haveconcluded that as of July 3, 2004, our disclosure controls and procedureswere effective in alerting them on a timely basis to material informationrelating to the Company (including its consolidated subsidiaries) required tobe included in our reports filed or submitted under the Securities Exchange Actof 1934.  There were no significantchanges with respect to our internal controls over financial reporting or inother factors that could significantly affect internal controls over financialreporting during the quarter ended July 3, 2004.

 

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**PART II - OTHER INFORMATION**

 

**ITEM 1.****                             LEGALPROCEEDINGS**

 

We and ourproducts are subject to regulation by numerous governmental authorities,including without limitation, federal, state and local laws and regulationsgoverning health, sanitation, environmental protection, safety and hiring andemployment practices.

 

In the ordinarycourse of business, we are involved in routine litigation, including franchisedisputes and trademark disputes. We are not a party to any legal proceedings(including the matter described below) which, in the opinion of management,after consultation with legal counsel, is material to our business, financial conditionor operations.

 

As discussed inour Registration Statement on Form S-4 (File No. 333-115046), as amended, ourindirect subsidiary, TCBY of Ireland, Inc., was the defendant in arecently concluded case captioned Advanced Food Concepts, Ltd. et al. v.William P. Creasman, et al., Case No. 401-CV-00-117JMM, filed in the U.S.District Court for the Eastern District of Arkansas (the “Court”). Thiscomplaint was filed in 2001 by two former franchisees against TCBY of Irelandand other corporate and individual defendants, but all defendants have beendismissed with the exception of TCBY of Ireland, Inc., the franchisorparty under a Transnational Master License Agreement entered into with certainof the plaintiffs and others. The plaintiffs sought damages in excess of$70 million in connection with TCBY of Ireland’s performance under andtermination of the Transnational Master License Agreement. On August 4,2004, the Court granted TCBY of Ireland’s Motion for Summary Judgment on allremaining counts of the complaint. The plaintiffs may still file motions forreconsideration and/or appeal the Court’s ruling. The Company does not haveinsurance coverage for this lawsuit because the claims arose prior to ouracquisition of TCBY; however, TCBY has reserved anticipated defense costs.  Notwithstanding the excessive claim fordamages, the lack of insurance coverage and the risk that TCBY of Ireland’sparent entities might ultimately bear or share in the cost of any significant judgmentobtained against it, after consultation with legal counsel, and in light of thefavorable summary judgment ruling, management believes it is unlikely thatplaintiffs will obtain any judgment against TCBY of Ireland that would bematerial to our business, financial condition or operations.

 

**ITEM 6.****                             EXHIBITSAND REPORTS ON FORM 8-K**

 

**(a)****          Exhibits**

 
| 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 Financial 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 Financial Officer  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |

 

**(b)****          Reports Filed On Form8-K**

 

We filed a Form 8-K on July 27, 2004,attaching a press release announcing that we have commenced an offer toexchange an aggregate principal amount of up to $115.0 million of our 11 1/2%Senior Secured Notes due 2011, which have been registered under the SecuritiesAct of 1933, as amended, for a like principal amount of our issued andoutstanding 11 1/2% Senior Secured Notes due 2011 from the registered holdersthereof, and an aggregate principal amount of up to $80.7 million of our 9%Senior Secured Notes due 2011, which have been registered under the SecuritiesAct of 1933, as amended, for a like principal amount of our issued and outstanding9% Senior Secured Notes due 2011 from the registered holders thereof.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
| **MRS. FIELDS FAMOUS BRANDS, LLC**                                                                                            |       |       |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|                                                                                                                          |       |       |
|                                                                                                                          |       |       |
| /s/ Stephen Russo                                                                                                             |       |       | August 17, 2004 |   |
| **Stephen  Russo, President and Chief Executive Officer**                                                                     | ** ** | **Date**   |
| ** **                                                                                                                    | ** ** | ** ** |
| ** **                                                                                                                    | ** ** | ** ** |
| ** **                                                                                                                    | ** ** | ** ** |
| /s/ Sandra M. Buffa                                                                                                           |       |       | August 17, 2004 |   |
| **Sandra M. Buffa, Executive Vice President and Chief Financial Officer  (Chief Financial and Principal Accounting Officer)** |       | **Date**   |
|                                                                                                                               |            |            |  |  |  |

 

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