Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

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

### ** **

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**FORM 10-Q**

 
| **(Mark One)**                                        |
|-------------------------------------------------------|
| **x**                                                 | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                  |   |   |
| **For the quarterly period ended June 28, 2008** |
|                                                  |   |   |
| **OR**                                                |
|                                                  |   |   |
| **o**                                                 | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                  |   |   |
| **For the transition period from to**                 |

 

**Commission file number: 333-115046**

 

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**MRS. FIELDS FAMOUS BRANDS, LLC**

(Exact Name of Registrant Specified in Its Charter)

 

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

 

Registrant’s Telephone Number, Including AreaCode:**(801) 736-5600**

 

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        Former Name, Former Address and Former Fiscal Year, if changed since lastreport:  **Not applicable**

 

        Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

YES xNO o

 

        Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer,” “largeaccelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):

 
| Large accelerated filer o | Accelerated filer o                            | Non-accelerated filer  x | Smaller reporting company o |
|---------------------------|------------------------------------------------|-------------------------------|-----------------------------|
|                      | (Do not check if a smaller reporting  company) |                          |

 

        Indicateby check mark whether the registrant is a shell company (as defined by Rule 12b-2of the Exchange Act).YES o     NO x

 

        On August 11, 2008,100 common interests of registrant were outstanding, all of which are held byan affiliate.  There is no establishedtrading market for registrant’s common interests.

 

 

### ** **

### ****

### **Table of Contents**

 

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

### ** **

**TABLE OF CONTENTS**

 
| ** **                                   | ** **                                                                                                                                             | ** ** | **Page** |
|----------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                         |                                                                                                                                                   |       |     |
| **PART I – FINANCIAL INFORMATION** |                                                                                                                                                   |       |     |
|                                         |                                                                                                                                                   |       |     |
| Item 1.                                      | Financial Statements (Unaudited)                                                                                                                       |       |     | 3 |
|                                         |                                                                                                                                                   |       |     |
|                                         | Condensed Consolidated Balance Sheets as of June 28, 2008 and  December 29, 2007                                                             |       | 3        |
|                                         |                                                                                                                                                   |       |     |
|                                         | Condensed Consolidated  Statements of Operations and Comprehensive Loss for the 13 weeks and 26 weeks ended  June 28, 2008 and June 30, 2007 |       | 4        |
|                                         |                                                                                                                                                   |       |     |
|                                         | Condensed Consolidated Statements of Cash  Flows for the 26 weeks ended June 28, 2008 and June 30, 2007                                           |       | 5        |
|                                         |                                                                                                                                                   |       |     |
|                                         | Notes to Condensed Consolidated Financial Statements                                                                                                   |       | 6        |
|                                         |                                                                                                                                                   |       |     |
| Item 2.                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                            |       | 21       |
|                                         |                                                                                                                                                   |       |     |
| Item 3.                                      | Quantitative  and Qualitative Disclosures About Market Risk                                                                                            |       | 40       |
|                                         |                                                                                                                                                   |       |     |
| Item 4.                                      | Controls and  Procedures                                                                                                                               |       | 41       |
|                                         |                                                                                                                                                   |       |     |
| **PART II  – OTHER INFORMATION**   |                                                                                                                                                   |
|                                         |                                                                                                                                                   |       |     |
| Item 1.                                      | Legal Proceedings                                                                                                                                      |       | 42       |
|                                         |                                                                                                                                                   |       |     |
| Item 1A.                                     | Risk Factors                                                                                                                                           |       | 42       |
|                                         |                                                                                                                                                   |       |     |
| Item 6.                                      | Exhibits                                                                                                                                               |       | 50       |
|                                         |                                                                                                                                                   |       |     |
| SIGNATURES                                   | 51                                                                                                                                                     |
|                                              |                                                                                                                                                        |            |          |  |  |

 

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# **PART I– FINANCIAL INFORMATION**

# ** **

# **Item 1.  Financial Statements**

# ** **

**MRS. FIELDS FAMOUS BRANDS, LLC**

**Condensed Consolidated Balance Sheets**

(in thousands)

(Unaudited)

** **
| ** **                                                                                 | ** ** | **June 28,** | ** ** | **December 29,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                 | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ASSETS:                                                                                    |       |              |       |                  |       |
| Cash and cash equivalents                                                                  |       | $                 | 2,847      |                  | $          | 11,425 |   |
| Restricted cash                                                                            |       | 93,416            |       | 19,965                |       |
| Marketable securities available-for-sale                                                   |       | 1,111             |       | 2,489                 |       |
| Receivables, net of allowance for doubtful  accounts of $321 and $347, respectively        |       | 4,163             |       | 7,954                 |       |
| Amounts due from affiliates                                                                |       | 240               |       | 56                    |       |
| Inventories                                                                                |       | 3,095             |       | 3,659                 |       |
| Prepaid expenses and other                                                                 |       | 952               |       | 900                   |       |
| Deferred tax asset                                                                         |       | 632               |       | 710                   |       |
| Current assets of discontinued operations                                                  |       | 4                 |       | —                |       |
| Total current assets                                                                       |       | 106,460           |       | 47,158                |       |
|                                                                                       |       |              |       |                  |       |
| Property and equipment, net                                                                |       | 4,974             |       | 6,339                 |       |
| Goodwill                                                                                   |       | 9,202             |       | 50,274                |       |
| Trademarks and other intangible assets, net                                                |       | 5,411             |       | 8,347                 |       |
| Deferred loan costs, net of accumulated  amortization of $12,665 and $12,011, respectively |       | 4,263             |       | 4,917                 |       |
| Deferred tax asset                                                                         |       | 4,767             |       | 760                   |       |
| Other assets                                                                               |       | 184               |       | 3,003                 |       |
| Total assets                                                                               |       | $                 | 135,261    |                  | $          | 120,798 |   |
|                                                                                       |       |              |       |                  |       |
| LIABILITIES AND MEMBER’S DEFICIT:                                                     |       |              |       |                  |       |
| Accounts payable                                                                           |       | $                 | 3,762      |                  | $          | 5,989 |   |
| Accrued liabilities                                                                        |       | 12,378            |       | 13,966                |       |
| Amounts due to affiliates                                                                  |       | 32,926            |       | 7,610                 |       |
| Current portion of capital lease  obligations                                              |       | 61                |       | 87                    |       |
| Current portion of deferred revenues                                                       |       | 996               |       | 807                   |       |
| Current liabilities of discontinued  operations                                            |       | 117               |       | —                |       |
| Total current liabilities                                                                  |       | 50,240            |       | 28,459                |       |
| Long-term debt                                                                             |       | 195,747           |       | 195,747               |       |
| Capital lease obligations, net of current  portion                                         |       | 270               |       | 324                   |       |
| Deferred revenues, net of current portion                                                  |       | 285               |       | 433                   |       |
| Other liabilities                                                                          |       | 967               |       | 1,066                 |       |
| Total liabilities                                                                          |       | 247,509           |       | 226,029               |       |
| Commitments and contingencies                                                              |       |              |       |                  |       |
|                                                                                       |       |              |       |                  |       |
| Member’s deficit                                                                      |       | (112,083          | )          | (104,907              | )          |
| Accumulated other comprehensive loss                                                       |       | (165              | )          | (324                  | )          |
| Total member’s deficit                                                                |       | (112,248          | )          | (105,231              | )          |
| Total liabilities and member’s deficit                                                |       | $                 | 135,261    |                  | $          | 120,798 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

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**MRS. FIELDS FAMOUS BRANDS, LLC**

**CondensedConsolidated Statements of Operations and Comprehensive Loss**

(in thousands)

(Unaudited)

 
| ** **                                                                                                   | ** ** | **13 Weeks Ended** | ** ** | **26 Weeks Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                                   | ** ** | **June 28,**            | ** ** | **June 30,**            | ** ** | **June 28,** | ** ** | **June 30,** | ** ** |
| ** **                                                                                                   | ** ** | **2008**                     | ** ** | **2007**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| REVENUES:                                                                                                    |       |                         |       |                         |       |   |   |   |   |
| Mrs. Fields                                                                                             |       | $                            | 11,602     |                         | $          | 12,173 |   | $ | 24,919 |   | $ | 23,655 |   |
| Dairy                                                                                                        |       | 2,762                        |       | 3,171                        |       | 4,551 |   | 5,516 |   |
| Total revenues                                                                                               |       | 14,364                       |       | 15,344                       |       | 29,470 |   | 29,171 |   |
|                                                                                                         |       |                         |       |                         |       |   |   |   |   |
| OPERATING COSTS AND EXPENSES:                                                                                |       |                         |       |                         |       |   |   |   |   |
| Mrs. Fields                                                                                             |       | 11,455                       |       | 10,554                       |       | 24,021 |   | 20,612 |   |
| Dairy                                                                                                        |       | 844                          |       | 1,191                        |       | 2,013 |   | 3,033 |   |
| General and administrative                                                                                   |       | 4,922                        |       | 2,620                        |       | 7,735 |   | 5,026 |   |
| Depreciation                                                                                                 |       | 493                          |       | 502                          |       | 973 |   | 988 |   |
| Amortization                                                                                                 |       | 420                          |       | 519                          |       | 892 |   | 1,036 |   |
| Impairment of intangible assets                                                                              |       | 2,091                        |       | —                       |       | 2,091 |   | — |   |
| Gain on sale of land held for sale                                                                           |       | —                       |       | —                       |       | — |   | (128 | ) |
| Other, net                                                                                                   |       | 23                           |       | —                       |       | (15 | ) | — |   |
| Total operating costs and expenses                                                                           |       | 20,248                       |       | 15,386                       |       | 37,710 |   | 30,567 |   |
| Loss from continuing operations                                                                              |       | (5,884                       | )          | (42                          | )          | (8,240 | ) | (1,396 | ) |
|                                                                                                         |       |                         |       |                         |       |   |   |   |   |
| OTHER EXPENSES, NET:                                                                                         |       |                         |       |                         |       |   |   |   |   |
| Interest expense, net                                                                                        |       | (5,281                       | )          | (5,388                       | )          | (10,173 | ) | (10,681 | ) |
| Impairment of marketable securities                                                                          |       | (8,222                       | )          | —                       |       | (8,222 | ) | — |   |
| Loss from continuing operations before  benefit for income taxes                                             |       | (19,387                      | )          | (5,430                       | )          | (26,635 | ) | (12,077 | ) |
| Benefit for income taxes                                                                                     |       | (6,381                       | )          | (1,515                       | )          | (9,159 | ) | (3,002 | ) |
| Loss from continuing operations                                                                              |       | (13,006                      | )          | (3,915                       | )          | (17,476 | ) | (9,075 | ) |
|                                                                                                         |       |                         |       |                         |       |   |   |   |   |
| DISCONTINUED OPERATIONS:                                                                                     |       |                         |       |                         |       |   |   |   |   |
| Income from discontinued operations, net of  income taxes of ($313), $1,523, $31,701and $3,020, respectively |       | 72                           |       | 2,548                        |       | 10,594 |   | 5,030 |   |
| Net loss                                                                                                     |       | $                            | (12,934    | )                            | $          | (1,367 | ) | $ | (6,882 | ) | $ | (4,045 | ) |
|                                                                                                         |       |                         |       |                         |       |   |   |   |   |
| COMPREHENSIVE LOSS:                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Net loss                                                                                                     |       | $                            | (12,934    | )                            | $          | (1,367 | ) | $ | (6,882 | ) | $ | (4,045 | ) |
| Reversal of loss on marketable securities                                                                    |       | 994                          |       | —                       |       | 160 |   | — |   |
| Foreign currency translation adjustment                                                                      |       | —                       |       | (2                           | )          | (1 | ) | (5 | ) |
| Comprehensive loss                                                                                           |       | $                            | (11,940    | )                            | $          | (1,369 | ) | $ | (6,723 | ) | $ | (4,050 | ) |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

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**MRS. FIELDS FAMOUS BRANDS, LLC**

**CondensedConsolidated Statements of Cash Flows**

(in thousands)

(Unaudited)

 
| ** **                                                                   | ** ** | **26 Weeks Ended** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                   | ** ** | **June 28,**            | ** ** | **June 30,** | ** ** |
| ** **                                                                   | ** ** | **2008**                     | ** ** | **2007** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                        |       |                         |       |   |   |
| Net loss                                                                     |       | $                            | (6,882     | ) | $ | (4,045 | ) |
| Income from discontinued operations, net of  income taxes                    |       | (10,594                      | )          | (5,030 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                         |       |   |   |
| Depreciation and amortization                                                |       | 1,865                        |       | 2,024 |   |
| Amortization of deferred loan costs                                          |       | 654                          |       | 584 |   |
| Gain on sale of land held for sale                                           |       | —                       |       | (128 | ) |
| Impairment of intangible assets                                              |       | 2,091                        |       | — |   |
| Impairment of marketable securities                                          |       | 8,222                        |       | — |   |
| Deferred income taxes                                                        |       | (4,028                       | )          | — |   |
| Changes in assets and liabilities:                                           |       |                         |       |   |   |
| Receivables                                                                  |       | 1,082                        |       | 2,432 |   |
| Inventories                                                                  |       | (576                         | )          | 670 |   |
| Prepaid expenses and other assets                                            |       | (407                         | )          | 85 |   |
| Accounts payable                                                             |       | (1,285                       | )          | (6,121 | ) |
| Accrued liabilities                                                          |       | (646                         | )          | (807 | ) |
| Amounts due to/from affiliates                                               |       | (6,569                       | )          | (511 | ) |
| Deferred revenues                                                            |       | 41                           |       | (342 | ) |
| Other liabilities                                                            |       | (99                          | )          | (61 | ) |
| Total operating cash flows used in continuing  operations                    |       | (17,131                      | )          | (11,250 | ) |
| Total operating cash flows (used in) provided  by discontinued operations    |       | (6,286                       | )          | 5,121 |   |
| Net cash used in operating activities                                        |       | (23,417                      | )          | (6,129 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                        |       |                         |       |   |   |
| Change in restricted cash                                                    |       | (73,451                      | )          | — |   |
| Proceeds from sale of land held for sale                                     |       | —                       |       | 278 |   |
| Purchases of property and equipment                                          |       | (298                         | )          | (35 | ) |
| Total investing cash flows (used in) provided  by continuing operations      |       | (73,749                      | )          | 243 |   |
| Total investing cash flows provided by (used  in) discontinued operations    |       | 88,941                       |       | (25 | ) |
| Net cash provided by investing activities                                    |       | 15,192                       |       | 218 |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                        |       |                         |       |   |   |
| Principal payments on capital leases                                         |       | (58                          | )          | (58 | ) |
| Dividends paid to parent                                                     |       | (294                         | )          | — |   |
| Net cash used in financing activities                                        |       | (352                         | )          | (58 | ) |
| Effect of foreign exchange rate changes on  cash                             |       | (1                           | )          | (5 | ) |
| Net decrease in cash and cash equivalents                                    |       | (8,578                       | )          | (5,974 | ) |
| Cash and cash equivalents at beginning of  period                            |       | 11,425                       |       | 15,963 |   |
| Cash and cash equivalents at end of period                                   |       | $                            | 2,847      |   | $ | 9,989 |   |
| **Supplemental Disclosures of Cash Flow  Information:**                      |       |                         |       |   |   |
| Cash paid for interest                                                       |       | $                            | 10,282     |   | $ | 10,311 |   |
| Cash paid for income taxes                                                   |       | 1,240                        |       | — |   |
| **Supplemental Disclosure of Noncash  Investing and Financing Activities:**  |       |                         |       |   |   |
| Securities received from the sale of assets                                  |       | $                            | 3,837      |   | $ | — |   |
| Reversal of loss on marketable securites  available-for-sale                 |       | (160                         | )          | — |   |
| Distribution to parent under tax allocation  agreement                       |       | —                       |       | 743 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

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** **

**MRS. FIELDS FAMOUS BRANDS, LLC**

**Notesto Condensed Consolidated Financial Statements**

(Unaudited)

** **

**1.  Descriptionof Business**

** **

Mrs. Fields Famous Brands, LLC and subsidiaries(the “Company”) is a wholly-owned subsidiary of Mrs. Fields’ OriginalCookies, Inc. (“MFOC”).  MFOC is awholly-owned subsidiary of Mrs. Fields’ Holding Company, Inc. (“MFH”)and MFH is a wholly-owned subsidiary of Mrs. Fields’ Companies, Inc.(“MFC”).

 

Operatingsegments are components of the Company for which separate financial informationis available that is evaluated regularly by management in deciding how toallocate resources and assess performance. This information is reported on the basis that it is used internally forevaluating segment performance.

 

TheCompany has the following five reportable operating segments:

 
| · | Mrs. Fields Gifts           |                          |   |
|--------|----------------------------------|----------------------------------------------|--------|
| · | Mrs. Fields Branded  Retail |                                         |
| · | Mrs. Fields  Franchising    | (collectively  “Mrs. Fields”) |
| · | Mrs. Fields Licensing       |                                         |
| · | Dairy                            |                                         |

 

**2.  Basisof Presentation**

** **

The accompanyingunaudited condensed consolidated financial statements of the Company have beenprepared in accordance with U.S. generally accepted accounting principles (“GAAP”)for interim financial information and Article 10 of Regulation S-X.   Accordingly they do not include all of theinformation and footnotes required by GAAP for complete financialstatements.  In the opinion ofmanagement, all adjustments, consisting only of normal recurring accruals,considered necessary for a fair presentation have been included. Income percommon interest information is not presented because the Company iswholly-owned by MFOC and, therefore, its common interests are not publiclytraded.  These unaudited condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements and notes thereto for the fiscal yearended December 29, 2007 contained in the Company’s Annual Report on Form 10-Kfiled with the Securities and Exchange Commission (the “SEC”) on March 28,2008 (the “Annual Report”).

 

The preparation of financial statements in conformity with GAAPrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from theseestimates.

 

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**MRS. FIELDS FAMOUS BRANDS, LLC**

**Notes to Condensed Consolidated FinancialStatements**

(Unaudited)

***(continued)***

 

**3.  GoingConcern**

 

Theaccompanying condensed consolidated financial statements of the Company wereprepared on a going concern basis, which contemplates the realization of assetsand the satisfaction of liabilities in the normal course of business. Therealization of assets and the satisfaction of liabilities in the normal courseof business are dependent on, among other things, the Company’s ability tooperate profitably and to generate positive cash flows from operations.  The Company has suffered recurring net lossesand negative cash flows from operations and had a net member’s deficit at June 28,2008 and December 29, 2007.  As aresult, the Company will be unable to make its scheduled $10.25 millionsemi-annual interest payment due September 15, 2008 on its 9 percentsenior secured notes (the “9 percent Senior Secured Notes”) and 11 1⁄2 seniorsecured notes (the “ 11 1⁄2 percent Senior Secured Notes,” and together with the9 percent Senior Secured Notes,  the “SeniorSecured Notes”).  Failure to make anyscheduled semi-annualinterestpayment would constitute an event of default under the indenture governing theCompany’s Senior Secured Notes (the “Indenture”), which could cause the SeniorSecured Notes to become immediately due and payable.  The Company does not currently have theability to repay the Senior Secured Notes should they become due andpayable.  These matters raise substantialdoubt about the Company’s ability to continue as a going concern.  The Company is pursuing various actions toimprove its results of operations, cash flows and financial position. These actions include, but are not limited to, the following:

 

·                          restructuringof the Company’s Senior Secured Notes; and

·                          staffreductions and other initiatives to reduce expenses and increase revenues.

 

Due to the substantial doubtabout the Company’s ability to continue as a going concern, the Company has notissued a new franchise disclosure document (the “FDD”) and it has suspendedsales of new franchises until the Company is in a position to issue a newFDD.  The Company does not expect toissue a new FDD until it has been able to improve its overall liquidityposition, including the restructuring of the Senior Secured Notes.  Until the Company issues a new FDD thatreflects its most recent financial statements, the Company will be prohibitedfrom selling new franchises, which will adversely affect the Company’s businessoperations and financial condition (see Note 19).

 

**4.  Fair Value Disclosures**

 

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**MRS. FIELDS FAMOUS BRANDS, LLC**

**Notes to Condensed Consolidated FinancialStatements**

(Unaudited)

***(continued)***

 

On December 30, 2007,the Company adopted the provision of SFAS No. 157 (“SFAS 157”), “FairValue Measurements,” except as it applies to those nonfinancial assets andnonfinancial liabilities for which the effective date has been delayed by oneyear.  The Company measures at fair valuecertain financial assets and liabilities, including its marketable securitiesavailable-for-sale.  SFAS 157 specifies ahierarchy of valuation techniques based on whether the inputs to thosevaluation techniques are observable or unobservable.  Observable inputs reflect market dataobtained from independent sources, while unobservable inputs reflect theCompany’s market assumptions.  These twotypes of inputs have created the following fair-value hierarchy:

 

·                  Level1 - Quoted prices for identical instruments in active markets;

·                  Level2 - Quoted prices for similar instruments in active markets, quoted prices foridentical or similar instruments in markets that are not active andmodel-derived valuations in which all significant inputs and significant valuedrivers are observable in active markets; and

·                  Level3 - Valuations derived from valuation techniques in which one or moresignificant inputs or significant value drivers are unobservable.

 
| ** **                                               | ** ** | **Fair Value Measurements as of June 28, 2008** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **Total**                                                                          | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Marketable securities available-for-sale  (in thousands) |       | $                                                                                  | 1,111      |   | $ | 1,111 |   | $ | — |   | $ | — |   |
|                                                     |       | $                                                                                  | 1,111      |   | $ | 1,111 |   | $ | — |   | $ | — |   |

 

Theadoption of SFAS 157 did not have a material effect on the Company’s financialposition or results of operations.

 

**5. Accounting Pronouncements Issued Not Yet Adopted**

 

InDecember 2007, the FASB issued SFAS No. 141 (revised 2007), “BusinessCombinations” (“SFAS 141R”). SFAS 141R establishes principles andrequirements for how an acquirer of a business recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,any noncontrolling interest in the acquiree and the goodwill acquired.SFAS 141R also establishes disclosure requirements to enable theevaluation of the nature and financial effects of the business combination.SFAS 141R is effective for acquisitions in fiscal years beginning after December 15,2008 and will be adopted by the Company on January 4, 2009.

 

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**MRS. FIELDS FAMOUS BRANDS, LLC**

**Notes to Condensed Consolidated FinancialStatements**

(Unaudited)

***(continued)***

 

**6. Discontinued Operations**

** **

OnJanuary 29, 2008 (the “GAC Closing Date”), the Company and itswholly-owned subsidiaries, GACCF, LLC, formerly Great American Cookie CompanyFranchising, LLC (“GACCF”) and GAMAN, LLC, formerly Great AmericanManufacturing, LLC (together with GACCF, “GAC”) completed the sale ofsubstantially all of the assets of GAC to a wholly-owned subsidiary of NexCenBrands, Inc. (“NexCen Brands” and together with its subsidiaries, “NexCen”)pursuant to an asset purchase agreement (the “GAC Agreement”) for $93.6million.  The purchase price consisted of$89.0 million in cash and 1,099,290 shares of NexCen Brands common stock valuedat $4.23 per share.  The net cashproceeds from the sale of GAC is considered restricted cash and is reflected asrestricted cash in the Company’s condensed consolidated financialstatements.  Under the terms of the GACAgreement, the NexCen Brands common stock will be held in escrow for ninemonths, pending satisfaction of certain standard representations and warrantiesas described in the GAC Agreement. Additionally, the Company paid $6.7 million of the proceeds from thesale of GAC to certain of GACCF’s franchisees at the GAC Closing Date, insatisfaction of rights they held in connection with the sale of the GACfranchise system. The Company was restricted from trading the shares of NexCenBrands common stock until July 2008. Due to the restrictions on the sale of the NexCen Brands common stock,the Company recorded the shares at a 17.5 percent discount from the marketvalue on the date of sale.  As of June 28,2008, the shares were reported as available-for-sale securities in accordancewith SFAS No. 115 (“SFAS 115”), “Accounting for Certain Investments inDebt and Equity Securities” because all shares may be traded within 12 monthsof June 28, 2008.

 

OnAugust 7, 2007, the Company and its wholly-owned subsidiaries, PTF, LLCand PMC, LLC, formerly Pretzel Time Franchising, LLC and PretzelmakerFranchising, LLC, respectively, (collectively, “Pretzels”), completed a sale ofcertain assets, consisting primarily of identifiable intangible assets ofPretzels, to NexCen for $29.3 million, consisting of $22.0 million in cash and997,671 shares of NexCen Brands common stock valued at $7.35 per share on thedate of the sale.  Under the terms of theasset purchase agreement, 533,175 shares were placed in escrow pendingsatisfaction of certain representations and warranties.  397,121 shares were released from escrow inMay2008. The remaining136,054 shares will be held in escrow until November 2008.  The Company was restricted from trading theshares of NexCen Brands common stock until August 7, 2008 and now only 25percent of the total number of shares may be traded every three months.  Due to the restrictions on the sale of theNexCen Brands common stock, the Company recorded the shares at a 25 percentdiscount from the fair value on the date of sale.  As of June 28, 2008, the shares werereported as available-for-sale securities in accordance with SFAS 115 becauseall shares may be traded within 12 months of June 28, 2008.

 

9

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**MRS. FIELDS FAMOUS BRANDS, LLC**

**Notes to Condensed Consolidated FinancialStatements**

(Unaudited)

***(continued)***

 

Thekey components of income from discontinued operations related to GAC andPretzels (collectively, “GAC/Pretzels”) were as follows (in thousands):

 
| ** **                                                                               | ** ** | **For the 13 Weeks Ended** | ** ** | **For the 26 Weeks Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                               | ** ** | **June 28,**                              | ** ** | **June 30,**                              | ** ** | **June 28,** | ** ** | **June 30,** | ** ** |
| ** **                                                                               | ** ** | **2008**                                       | ** ** | **2007**                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| GAC/Pretzel revenue                                                                      |       | $                                              | —     |                                           | $          | 7,488 |   | $ | 1,929 |   | $ | 15,224 |   |
| GAC/Pretzel operating expenses                                                           |       | (241                                           | )          | (3,380                                         | )          | (2,065 | ) | (7,097 | ) |
| Depreciation                                                                             |       | —                                         |       | (37                                            | )          | (11 | ) | (77 | ) |
| Other revenue                                                                            |       | —                                         |       | —                                         |       | 113 |   | — |   |
| Income (loss) before income taxes                                                        |       | (241                                           | )          | 4,071                                          |       | (34 | ) | 8,050 |   |
| Income taxes                                                                             |       | (91                                            | )          | 1,523                                          |       | (12 | ) | 3,020 |   |
| Income (loss) from discontinued operations                                               |       | (149                                           | )          | 2,548                                          |       | (21 | ) | 5,030 |   |
| Gain on sale of assets, net of income taxes  of ($222), $0, $31,713 and $0, respectively |       | 222                                            |       | —                                         |       | 10,616 |   | — |   |
| Income from discontinued operations, net of  income taxes                                |       | $                                              | 72         |                                           | $          | 2,548 |   | $ | 10,594 |   | $ | 5,030 |   |

 

Asof December 29, 2007, GAC’s assets and liabilities are comprised of thefollowing:

 

·                  accounts receivables, net of $2.7 million;

·                  inventories of $1.1 million;

·                  property and equipment, net of $700,000;

·                  goodwill of $41.1 million;

·                  prepaid and other assets of $400,000; and

·                  accounts payable and accrued liabilities of$1.3 million.

 

Asof June 28, 2008, current assets and liabilities of discontinuedoperations are comprised of the following:

 

·                  accounts receivables, net of $4,000; and

·                  accounts payable and accrued liabilities of$117,000, of which $112,000 relates to severance accrued as a result of thesale of GAC .

 

10

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Tableof Contents

 

**MRS. FIELDS FAMOUS BRANDS, LLC**

**Notes to Condensed Consolidated FinancialStatements**

(Unaudited)

***(continued)***

 

The operating cash flows from discontinued operations are comprised ofthe following (in thousands):

 
| ** **                                                                                                               | ** ** | **For the 26 Weeks Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                               | ** ** | **June 28,**                              | ** ** | **June 30,** | ** ** |
| ** **                                                                                                               | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| Income from discontinued operations, net of  tax                                                                         |       | $                                              | 10,594     |   | $ | 5,030 |   |
| Adjustments to reconcile income from  discontinued operations to net cash (used in) provided by discontinued operations: |       |                                           |       |   |   |
| Depreciation                                                                                                             |       | 11                                             |       | 77 |   |
| Gain on sale of assets                                                                                                   |       | (42,329                                        | )          | — |   |
| Changes in assets and liabilities:                                                                                       |       |                                           |       |   |   |
| Receivables                                                                                                              |       | 2,709                                          |       | 685 |   |
| Inventories                                                                                                              |       | (221                                           | )          | (255 | ) |
| Prepaid expenses and other                                                                                               |       | 379                                            |       | — |   |
| Current assets of discontinued operations                                                                                |       | (4                                             | )          | — |   |
| Accounts payable                                                                                                         |       | (942                                           | )          | (390 | ) |
| Accrued liabilities                                                                                                      |       | (8,301                                         | )          | (26 | ) |
| Amounts due to/from affiliates                                                                                           |       | 31,701                                         |       | — |   |
| Current liabilities of discontinued  operations                                                                          |       | 117                                            |       | — |   |
|                                                                                                                     |       | $                                              | (6,286     | ) | $ | 5,121 |   |

 

The investing cash flows from discontinued operations are comprised ofthe following (in thousands):

 
| ** **                          | ** ** | **For the 26 Weeks Ended** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|
| ** **                          | ** ** | **June 28,**                              | ** ** | **June 30,** | ** ** |
| ** **                          | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| Proceeds from sale of assets        |       | $                                              | 89,000     |   | $ | — |   |
| Purchases of property and equipment |       | (59                                            | )          | (25 | ) |
|                                |       | $                                              | 88,941     |   | $ | (25 | ) |

 

**7.  Restrictedcash**

** **

TheIndenture restricts the use of the proceeds from an asset sale, net of expensesof the transaction.  The restricted cashmust be used in one of the following ways:

 

·                  to make an investment in similar assets;

·                  make investments in the Company; or

·                  use net proceeds to make an offer to pay downlong-term debt within 45 days after the 361st day following the saleof assets.

 

11

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Tableof Contents

 

**MRS. FIELDS FAMOUS BRANDS, LLC**

**Notes to Condensed Consolidated FinancialStatements**

(Unaudited)

***(continued)***

 

**Thetotal outstanding amount of net proceeds from the sale of Pretzels and GAC was$93.4 million at June 28, 2008 and is included in restricted cash.  The restricted cash is currently held in anaccount controlled by the Trustee pursuant to the Indenture.**

** **

**8. Marketable Securities Available-for-Sale**

** **

Marketable securities available-for-sale at June 28,2008 and December 29, 2007 consist of equity securities of NexCen Brandscommon stock.  Available-for-salesecurities are recorded at fair value. The fair values of equity securities are based on quoted market pricesat the reporting date for those or similar investments.

 

Unrealized holding gains and losses, net of therelated tax effect, on available-for-sale securities are excluded from earningsand are reported as a separate component of accumulated other comprehensiveloss until realized.  Realized gains andlosses from the sale of available-for-sale securities are determined on aspecific-identification basis.

 

A decline in the market value of anyavailable-for-sale security below cost that is deemed to beother-than-temporary results in an impairment to reduce the carrying amount tofair value.  The impairment is charged toearnings and a new cost basis for the security is established.  To determine whether an impairment isother-than-temporary, the Company considers whether it has the ability andintent to hold the investment until a market price recovery and considerswhether evidence indicating the cost of the investment is recoverable outweighsevidence to the contrary.  Evidenceconsidered in this assessment includes the reasons for the impairment, theseverity and duration of the impairment, changes in value subsequent toyear-end, forecasted performance of the investee and the general marketcondition in the geographic area or industry in which the investeeoperates.  Based upon an evaluationperformed as of June 28, 2008, the Company recorded an impairment chargeof $8.2 million related to the holding of NexCen Brands common stock.

 

**Thecost, gross unrealized gain and loss and fair value of available-for-salesecurities were as follows (in thousands):**

** **
| ** **        | ** ** | **June 28, 2008** | ** ** |
|-------------------|------------|-----------------------------|------------|
| ** **        | ** ** | ** **                  | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **        | ** ** | ** **                  | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Cost**                    | ** ** | **Gain** | ** ** | **(Loss)** | ** ** | **Fair Value** | ** ** |
| Equity securities |       | $                           | 1,111      |   | $ | — |   | $ | — |   | $ | 1,111 |   |
|              |       | $                           | 1,111      |   | $ | — |   | $ | — |   | $ | 1,111 |   |

 
| ** **        | ** ** | **December 29, 2007** | ** ** |
|-------------------|------------|---------------------------------|------------|
| ** **        | ** ** | ** **                      | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **        | ** ** | ** **                      | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Cost**                        | ** ** | **Gain** | ** ** | **(Loss)** | ** ** | **Fair Value** | ** ** |
| Equity securities |       | $                               | 2,748      |   | $ | — |   | $ | (259 | ) | $ | 2,489 |   |
|              |       | $                               | 2,748      |   | $ | — |   | $ | (259 | ) | $ | 2,489 |   |

 

**9. Receivables**

** **

Most of the Company’s receivables are due from domestic andinternational franchisees, distributors, licensees and corporate customers of Mrs. FieldsGifts and Mrs. Fields Branded Retail. These receivables are comprised of normal trade accounts receivable andlonger-term notes receivable.  Servicecharges may be assessed on past due invoices but any revenue associated withthese charges is only recognized when collected.

 

12

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Tableof Contents

 

**MRS. FIELDS FAMOUS BRANDS, LLC**

**Notes to Condensed Consolidated FinancialStatements**

(Unaudited)

***(continued)***

 

The Company maintains an allowance for doubtful accounts to coverpotential losses.  This allowance is theCompany’s best estimate of the amount of probable collection losses in theCompany’s existing trade accounts receivable. The Company determines the allowance based upon historical write-offexperience and individual facts and circumstances associated with individualdebtors.  If the assumptions that areused to determine the allowance for doubtful accounts change, the Company mayhave to provide for a greater level of expense in future periods or reverseamounts provided for in prior periods.

 

Prior to fiscal 2001, TCBY Systems, LLC (“TCBY”), a wholly-ownedsubsidiary of the Company, extended credit from time to time to franchisees inexchange for notes receivable.  Certainof these notes receivable remain outstanding. Notes receivable from franchisees are primarily collateralized byequipment located at the franchisees’ stores. These notes bear interest at market rates applicable at the time thenotes were issued and mature at various dates through April 2009.  TCBY regularly reviews the notes fornon-performance.  Notes that areconsidered non-performing are placed on a non-accrual status when thecollectability of principal or interest becomes uncertain.  During the 26 weeks ended June 28, 2008and June 30, 2007, TCBY recognized no interest income pertaining to thesenotes receivable. These notes are included in receivables in the accompanyingcondensed consolidated financial statements.

 

Prior to fiscal 2001, TCBY factored various notes receivableaggregating $2.1 million.  Under theterms of the factoring agreement, TCBY is ultimately responsible to thefactoring agent for the realizability of the notes receivable.  In the event of non-performance, thefactoring agent has recourse against TCBY to a maximum level of $136,000 and$182,000 as of June 28, 2008 and December 29, 2007,respectively.  The Company has reserved100 percent for this potential recourse liability and included the reserve inaccrued liabilities in the accompanying condensed consolidated balance sheets.

 

**10. Inventories**

** **

Inventories, consisting of finished goods, novelties,packaging and raw materials are stated at the lower of cost (first-in,first-out method) or market value. Inventories are comprised of the following (in thousands):

 
| ** **     | ** ** | **June 28,** | ** ** | **December 29,** | ** ** |
|----------------|------------|-------------------|------------|-----------------------|------------|
| ** **     | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Finished goods |       | $                 | 2,027      |                  | $          | 1,717 |   |
| Novelties      |       | 586               |       | 598                   |       |
| Packaging      |       | 309               |       | 371                   |       |
| Raw materials  |       | 173               |       | 973                   |       |
|           |       | $                 | 3,095      |                  | $          | 3,659 |   |

** **

**11. Property and Equipment**

** **

Property and equipment are stated at cost, net ofaccumulated depreciation and amortization.

 

Depreciation and amortization is computed on astraight-line basis as follows:

 
| Equipment and fixtures              |   | 3 - 7 years    |
|-------------------------------------|--------|----------------|
| Leasehold improvements              |   | 2 - 10 years * |
| Building and building  improvements |   | 2 - 15 years   |

 

----

* Based on the lesser ofthe useful life of the asset or the term of the applicable lease.

 

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Tableof Contents

 

**MRS. FIELDS FAMOUS BRANDS, LLC**

**Notes to Condensed Consolidated FinancialStatements**

(Unaudited)

***(continued)***

 

Property and equipment are comprised of the following (in thousands):

 
| ** **                         | ** ** | **June 28,** | ** ** | **December 29,** | ** ** |
|------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Equipment and fixtures             |       | $                 | 10,763     |                  | $          | 11,983 |   |
| Leasehold improvements             |       | 4,854             |       | 5,017                 |       |
| Building and building improvements |       | —            |       | 2,008                 |       |
| Land                               |       | —            |       | 240                   |       |
|                               |       | 15,617            |       | 19,248                |       |
| Accumulated depreciation           |       | (10,643           | )          | (12,909               | )          |
|                               |       | $                 | 4,974      |                  | $          | 6,339 |   |

 

Property and equipment at June 28, 2008 and December 29,2007 included gross assets acquired under capital leases of $722,000 and$747,000, respectively, and related accumulated depreciation of $446,000 and$385,000, respectively.

 

Expenditures that materially extend useful lives ofproperty and equipment are capitalized. Routine maintenance, repairs and renewal costs are expensed as incurred.  Gains or losses from the sale or retirementof property and equipment are recorded in income from operations.

 

Included in leasehold improvements at June 28,2008 and December 29, 2007 is $1.3 million for tenant improvementsprovided as lease incentives by the lessor related to the lease for the Company’sgifting operations facility, less $271,000 and $208,000 of accumulateddepreciation, respectively.  At June 28,2008 and December 29, 2007, $854,000 and $917,000, respectively, ofdeferred rent was included in other liabilities and $125,000 was included inaccrued liabilities relating to these lease incentives.  The total amount of these leaseholdimprovements and deferred rent are amortized over the life of the lease.

 

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

** **

The Company accounts for goodwill and other intangibleassets in accordance with SFAS No. 142 (“SFAS 142”), “Goodwill and OtherIntangible Assets.”  Goodwill andintangible assets acquired in a purchase business combination and determined tohave an indefinite useful life are not amortized, but are tested for impairmentat least annually in accordance with the provisions of SFAS 142.  SFAS 142 also requires that intangibleassets with estimable useful lives be amortized over their respective estimateduseful lives to their estimated residual values and be reviewed for impairmentin accordance with SFAS No. 144 (“SFAS 144”), “Accounting forImpairment or Disposal of Long-Lived Assets.”

 

Thefollowing outlines the Company’s goodwill by operating segment (in thousands):

 
| ** **                   | ** ** | **June 28,** | ** ** | **December 29,** | ** ** |
|------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| GAC/Pretzels                 |       | $                 | —     |                  | $          | 41,072 |   |
| Mrs. Fields Franchising |       | 5,491             |       | 5,491                 |       |
| Mrs. Fields Gifts       |       | 1,859             |       | 1,859                 |       |
| Mrs. Fields Licensing   |       | 1,852             |       | 1,852                 |       |
|                         |       | $                 | 9,202      |                  | $          | 50,274 |   |

 

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Table of Contents

 

**MRS. FIELDS FAMOUS BRANDS, LLC**

**Notes to Condensed Consolidated FinancialStatements**

(Unaudited)

***(continued)***

 

**TheMrs. Fields Branded Retail and Dairy operating segments had no goodwill atJune 28, 2008 and December 29, 2007. GAC/Pretzels goodwill decreased $41.1 million as a result of the sale ofGAC.**

** **

The Company determined that a triggering event hadoccurred in the second quarter of 2008 under SFAS 144 as a result of theproposed restructuring of the Senior Secured Notes to be effected through aprepackaged plan of reorganization under Chapter 11 of the U.S BankruptcyCode.  The Company tested the goodwilland intangible assets by comparing the reporting unit’s fair value with itscarrying value.  As a result of theimpairment test, the Company concluded that the estimated fair value of eachreporting unit exceeded its carrying value and no impairment of goodwillexisted as of June 28, 2008.  TheCompany determined that an impairment existed for certain intangible assets ofthe dairy reporting unit and recorded a charge of $2.1 million during the 26weeks ended June 28, 2008 to write-down the TCBY trade names.

 

Trademarks and other intangible assets are comprisedof definite-lived assets and are amortized over 5 to 15 years.  The following outlines the Company’strademarks and other intangibles (in thousands):

 
| ** **                              | ** ** | **June 28,** | ** ** | **December 29,** | ** ** |
|-----------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Trademarks and trade names              |       | $                 | 12,452     |                  | $          | 15,305 |   |
| Recipes                                 |       | 4,150             |       | 4,150                 |       |
| Franchise relationships                 |       | 2,600             |       | 2,600                 |       |
| Reacquired franchise and license rights |       | 1,000             |       | 1,000                 |       |
|                                    |       | 20,202            |       | 23,055                |       |
| Less accumulated amortization           |       | (14,791           | )          | (14,708               | )          |
|                                    |       | $                 | 5,411      |                  | $          | 8,347 |   |

 

**13.  AccruedLiabilities**

** **

Accrued liabilities are comprised of the following (in thousands):

 
| ** **                        | ** ** | **June 28,** | ** ** | **December 29,** | ** ** |
|-----------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Accrued liabilities               |       | $                 | 4,528      |                  | $          | 5,211 |   |
| Accrued compensation and benefits |       | 1,816             |       | 2,644                 |       |
| Accrued severance                 |       | —            |       | 77                    |       |
| Accrued interest payable          |       | 6,034             |       | 6,034                 |       |
|                              |       | $                 | 12,378     |                  | $          | 13,966 |   |

 

Included in accrued compensation and benefits at June 28,2008 and December 29, 2007 is approximately $1.0 million and $1.5 millionfor accrued bonuses for fiscal years 2008 and 2007, respectively.

 

Theactivity in accrued severance for continuing operations for the 13 weeks and 26weeks ended June 28, 2008 is as follows (in thousands):

 
| ** **        | ** ** | **13 Weeks Ended** | ** ** | **26 Weeks Ended** | ** ** |
|-------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **        | ** ** | **June 28,**            | ** ** | **June 28,**            | ** ** |
| ** **        | ** ** | **2008**                     | ** ** | **2008**                     | ** ** |
| Beginning balance |       | $                            | 8          |                         | $          | 77 |   |
| Additions         |       | —                       |       | 36                           |       |
| Payments          |       | (8                           | )          | (113                         | )          |
|              |       | $                            | —     |                         | $          | — |   |

 

15

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**MRS. FIELDS FAMOUS BRANDS, LLC**

**Notes to Condensed Consolidated FinancialStatements**

(Unaudited)

***(continued)***

 

**14. Related-Party Transactions**

** **

Theamounts due to/from affiliates are comprised of the following (in thousands):

 
| ** **                  | ** ** | **June 28,** | ** ** | **December 29,** | ** ** |
|-----------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Amounts due from affilates: |       |              |       |                  |       |
| MFC                         |       | $                 | 50         |                  | $          | 50 |   |
| MFOC                        |       | 190               |       | 6                     |       |
|                        |       | $                 | 240        |                  | $          | 56 |   |
|                        |       |              |       |                  |       |
| Amounts due to affilates:   |       |              |       |                  |       |
| MFC - tax sharing           |       | $                 | 32,652     |                  | $          | 7,336 |   |
| MFH                         |       | 274               |       | 274                   |       |
|                        |       | $                 | 32,926     |                  | $          | 7,610 |   |

 

TheCompany has a tax allocation agreement with MFC pursuant to which the Company agreedto make payments to MFC, after taking into account payments the Company makesdirectly to tax authorities, based on its hypothetical stand-alone consolidatedfederal income tax liability, determined as if the Company and its subsidiariesconstituted its own consolidated group for federal income tax purposes.  The Company is not permitted to make paymentsunder the tax allocation agreement in respect to its hypothetical consolidatedfederal taxable income, to the extent that such payments exceed the consolidatedfederal income taxes (including estimated taxes) payable in respect to MFC’sconsolidated federal income tax group, until and only while the Company’s ratioof Net Indebtedness to Consolidated EBITDA (each as defined in the Indenture)is less than 3.75:1.0 and the Company is otherwise in compliance with the termsof the Indenture.

 

Thetax allocation agreement with MFC does not allow for the carry-back of netoperating losses.  Under the taxallocation agreement, the Company’s net operating losses must be carriedforward when determining payment to MFC.

 

**15. Reportable Segments**

** **

Operatingsegments are components of the Company for which separate financial informationis available that is evaluated regularly by management in deciding how toallocate resources and assess performance. This information is reported on the basis that it is used internally forevaluating segment performance.

 

TheCompany has the following five reportable operating segments:

 
| · | Mrs. Fields Gifts           |                          |   |
|--------|----------------------------------|----------------------------------------------|--------|
| · | Mrs. Fields Branded  Retail |                                         |
| · | Mrs. Fields  Franchising    | (collectively  “Mrs. Fields”) |
| · | Mrs. Fields Licensing       |                                         |
| · | Dairy                            |                                         |

 

Theaccounting policies for the segments are the same as those discussed in thesummary of significant accounting policies in Note 3 to the Company’s AnnualReport.  Sales and transfers betweensegments are eliminated in consolidation.

 

TheMrs. Fields Gifts operating segment includes sales generated from theCompany’s gift catalog and website.

 

16

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Table of Contents

 

**MRS. FIELDS FAMOUS BRANDS, LLC**

**Notes to Condensed Consolidated FinancialStatements**

(Unaudited)

***(continued)***

 

TheMrs. Fields Branded Retail operating segment includes sales generateddirectly from the sale of Mrs. Fields products through various retailchannels.

 

TheMrs. Fields Licensing operating segment includes licensing activity withthird parties for the sale of products bearing the Company’s brand names.

 

TheMrs. Fields Franchising and Dairy operating segments include revenuesreceived either directly or indirectly from cookie and yogurt stores, which areowned and operated by third parties. These revenues include initial franchise or license fees, monthly royaltiesbased on a percentage of a franchisee’s gross sales and certain productformulation fees and supplier allowances which are based upon sales tofranchisees.

 

Duringfiscal year 2007, the Company’s GAC/Pretzels operating segment includedrevenues received either directly or indirectly from cookie and pretzel stores,which were owned and operated by third parties. These revenues included initial franchise or license fees, monthlyroyalties based on a percentage of a franchisee’s gross sales and certainproduct formulation fees and supplier allowances which were based upon sales tofranchisees.  As a result of the sale ofGAC during the first quarter of 2008, the GAC/Pretzels operating segment’soperating results have been included in discontinued operations in theaccompanying condensed consolidated financial statements.

 

TheCompany evaluates performance of each operating segment based oncontribution.  Contribution is computedas the difference between the revenues generated by a reportable segment andthe selling and occupancy expenses, cost of sales and direct operating expensesrelated to that reportable operating segment. Contribution is used as a measure of the operating performance of anoperating segment.  The Company does notallocate any general and administrative expenses, interest expense, ordepreciation and amortization to its reportable operating segments.

 

Segmentrevenues and contribution are presented in the following table (in thousands):

 
| ** **                      | ** ** | **For the 13 Weeks Ended** | ** ** | **For the 26 Weeks Ended** | ** ** |
|---------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                      | ** ** | **June 28,**                              | ** ** | **June 30,**                              | ** ** | **June 28,** | ** ** | **June 30,** | ** ** |
| ** **                      | ** ** | **2008**                                       | ** ** | **2007**                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                       |       |                                           |       |                                           |       |   |   |   |   |
| Mrs. Fields Gifts          |       | $                                              | 3,627      |                                           | $          | 5,087 |   | $ | 9,398 |   | $ | 9,982 |   |
| Mrs. Fields Branded Retail |       | 6,115                                          |       | 5,156                                          |       | 11,611 |   | 9,659 |   |
| Mrs. Fields Franchising    |       | 1,798                                          |       | 1,815                                          |       | 3,630 |   | 3,699 |   |
| Mrs. Fields Licensing      |       | 62                                             |       | 115                                            |       | 280 |   | 315 |   |
| Total Mrs. Fields          |       | 11,602                                         |       | 12,173                                         |       | 24,919 |   | 23,655 |   |
| Dairy                           |       | 2,762                                          |       | 3,171                                          |       | 4,551 |   | 5,516 |   |
|                            |       | $                                              | 14,364     |                                           | $          | 15,344 |   | $ | 29,470 |   | $ | 29,171 |   |
| Contribution:                   |       |                                           |       |                                           |       |   |   |   |   |
| Mrs. Fields Gifts          |       | $                                              | (653       | )                                              | $          | (100 | ) | $ | (854 | ) | $ | (584 | ) |
| Mrs. Fields Branded Retail |       | 122                                            |       | 346                                            |       | 248 |   | 740 |   |
| Mrs. Fields Franchising    |       | 665                                            |       | 1,222                                          |       | 1,290 |   | 2,546 |   |
| Mrs. Fields Licensing      |       | 13                                             |       | 151                                            |       | 214 |   | 341 |   |
| Total Mrs. Fields          |       | 147                                            |       | 1,619                                          |       | 898 |   | 3,043 |   |
| Dairy                           |       | 1,918                                          |       | 1,980                                          |       | 2,538 |   | 2,483 |   |
|                            |       | $                                              | 2,065      |                                           | $          | 3,599 |   | $ | 3,436 |   | $ | 5,526 |   |

 

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**MRS. FIELDS FAMOUS BRANDS, LLC**

**Notes to Condensed Consolidated FinancialStatements**

(Unaudited)

***(continued)***

 

Thereconciliation of contribution to loss from continuing operations beforebenefit for income taxes is as follows (in thousands):

 
| ** **                                                       | ** ** | **For the 13 Weeks Ended** | ** ** | **For the 26 Weeks Ended** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                       | ** ** | **June 28,**                              | ** ** | **June 30,**                              | ** ** | **June 28,** | ** ** | **June 30,** | ** ** |
| ** **                                                       | ** ** | **2008**                                       | ** ** | **2007**                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Contribution                                                     |       | $                                              | 2,065      |                                           | $          | 3,599 |   | $ | 3,436 |   | $ | 5,526 |   |
| General and administrative expenses                              |       | (4,922                                         | )          | (2,620                                         | )          | (7,735 | ) | (5,026 | ) |
| Depreciation and amortization                                    |       | (913                                           | )          | (1,021                                         | )          | (1,865 | ) | (2,024 | ) |
| Impairment of intangible assets                                  |       | (2,091                                         | )          | —                                         |       | (2,091 | ) | — |   |
| Gain on sale of land held for sale                               |       | —                                         |       | —                                         |       | — |   | 128 |   |
| Interest expense, net                                            |       | (5,281                                         | )          | (5,388                                         | )          | (10,173 | ) | (10,681 | ) |
| Impairment of marketable securities                              |       | (8,222                                         | )          | —                                         |       | (8,222 | ) | — |   |
| Other, net                                                       |       | (23                                            | )          | —                                         |       | 15 |   | — |   |
| Loss from continuing operations before  benefit for income taxes |       | $                                              | (19,387    | )                                              | $          | (5,430 | ) | $ | (26,635 | ) | $ | (12,077 | ) |

 

Segment assets are presented in the following table (in thousands):

 
| ** **                      | ** ** | **June 28,** | ** ** | **December 29,** | ** ** |
|---------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2008**          | ** ** | **2007**              | ** ** |
|                            |       |              |       |                  |       |
| Mrs. Fields Gifts          |       | $                 | 7,292      |                  | $          | 8,777 |   |
| Mrs. Fields Branded Retail |       | 4,346             |       | 2,925                 |       |
| Mrs. Fields Franchising    |       | 9,310             |       | 9,960                 |       |
| Mrs. Fields Licensing      |       | 1,959             |       | 2,261                 |       |
| Total Mrs. Fields          |       | 22,907            |       | 23,923                |       |
|                            |       |              |       |                  |       |
| GAC/Pretzels                    |       | —            |       | 45,799                |       |
| Dairy                           |       | 3,554             |       | 5,388                 |       |
|                            |       |              |       |                  |       |
| Total Segment Identified Assets |       | 26,461            |       | 75,110                |       |
|                            |       |              |       |                  |       |
| Non-Segment Identified Assets   |       | 108,800           |       | 45,688                |       |
|                            |       |              |       |                  |       |
| Total Assets                    |       | $                 | 135,261    |                  | $          | 120,798 |   |

 

The fixed assets and inventories of the Company primarily relate to theCompany’s branded retail and gifts business segments.  Assets relating to franchising and licensingactivities are primarily amounts due from franchisees and licensees andintangible assets, such as trademarks, trade names, recipes, franchiserelationships and goodwill relating to franchising concepts.

 

Revenues from franchisees, customers and licensees within the UnitedStates of America were $13.1 million and $26.3 million or 91.0 percent and 89.3percent of total revenues for the 13 weeks and 26 weeks ended June 28,2008, respectively, and $13.8 million and $26.8 million or 89.8 percent and91.8 percent of total revenues for the 13 weeks and 26 weeks ended June 30,2007, respectively.  Revenues frominternational franchisees, customers and licensees were $1.3 million and $3.2million or 9.0 percent and 10.7 percent of total revenues for the 13 weeks and26 weeks ended June 28, 2008, respectively, and $1.6 million and $2.4million or 10.1 percent and 8.2 percent of total revenues for the 13 weeks and26 weeks ended June 30, 2007, respectively.  Revenues from any single foreign country werenot material.  Providing geographicalinformation regarding long-lived assets is impracticable.

 

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**MRS. FIELDS FAMOUS BRANDS, LLC**

**Notes to Condensed Consolidated FinancialStatements**

(Unaudited)

***(continued)***

 

The Mrs. Fields Gifts operating segment has one customer thataccounted for approximately $400,000 and $1.5 million or 10.9 percent and15.6 percent of revenues for the 13 weeks and 26 weeks ended June 28,2008, respectively, and $1.6 million and $2.4 million or 31.3 percent and 23.7percent of revenues for the 13 weeks and 26 weeks ended June 30, 2007,respectively.  No other customersaccounted for more than five percent of Mrs. Fields Gifts operatingsegment revenues.

 

The Mrs. Fields Branded Retail operating segment is not dependentupon any single customer.

 

The Mrs. Fields and Dairy business units are not dependent uponany single franchisee.

 

The Mrs. Fields Licensing operating segment, for the 13 weeks and26 weeks ended June 28, 2008 and June 30, 2007, respectively, had:

 

·                  a licensee that accounted for approximately($41,000) and $108,000 or (65.9) percent and 38.5 percent for the 13 weeks and26 weeks ended June 28, 2008, respectively, and $31,000 and $115,000 or27.3 percent and 36.5 percent for the 13 weeks and 26 weeks ended June 30,2007, respectively, of the total revenues of the licensing segment;

·                  a licensee that accounted for approximately$69,000 and $107,000 or 111.2 percent and 38.2 percent for the 13 weeks and 26weeks ended June 28, 2008, respectively, and $32,000 and $64,000 or 27.6percent and 20.1 percent for the 13 weeks and 26 weeks ended June 30,2007, respectively, of the total revenues of the licensing segment; and

·                  a licensee that accounted for approximately$27,000 and $57,000 or 42.9 percent and 20.2 percent for the 13 weeks and 26weeks ended June 28, 2008, respectively, and $30,000 and $60,000 or 26.1percent and 19.0 percent for the 13 weeks and 26 weeks ended June 30,2007, respectively, of the total revenues of the licensing segment.

 

**16. Commitments and Contingencies**

 

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

 

Inthe ordinary course of business, the Company is involved in routine litigation,including franchise disputes and trademark disputes.  The Company is not a party to any legalproceedings that, in the opinion of management, after consultation with legalcounsel, is material to its business, financial condition or consolidatedresults of operations.

 

**17. Supplemental Condensed Consolidating Financial Information**

 

Long-termdebt includes the Senior Secured Notes that were issued by the Company and Mrs. FieldsFinancing Company, Inc. (“Mrs. Fields Financing”) as co-issuers.  Mrs. Fields Financing is a wholly-ownedfinance subsidiary of the Company.  TheSenior Secured Notes are fully and unconditionally guaranteed on a joint andseveral basis by all of the Company’s domestic subsidiaries other thanimmaterial subsidiaries.  The Company hasno independent assets or operations. Therefore, supplemental financial information on a condensedconsolidating basis of the guarantor subsidiaries is not required.  There are no restrictions on the Company’sability to obtain cash dividends or other distributions of funds from theguarantor subsidiaries, except those imposed by applicable law.

 

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**MRS. FIELDS FAMOUS BRANDS, LLC**

**Notes to Condensed Consolidated Financial Statements**

(Unaudited)

***(continued)***

 

**18.  IncomeTaxes**

 

The Company is organized as a single member limitedliability company and did not elect to be taxed as a corporation for federalincome tax purposes.  As such, forfederal income tax purposes, the Company is “disregarded” and is treated as adivision of MFOC, its sole member. Although the Company is not a tax-paying entity, the assets of theCompany could be subject to income tax claims against any member of its parent’sconsolidated group.

 

The Company recognizesinterest and penalties related to unrecognized tax benefits in interest expense.  There have been no interest or penaltiesrecognized in the financial statements of the Company.

 

The Company entered intoa tax allocation agreement with MFC pursuant to which the Company agreed tomake payments to MFC, after taking into account payments the Company makesdirectly to tax authorities, based on the Company’s stand-alone consolidatedfederal income tax liability, determined as if the Company and its subsidiariesconstituted their own consolidated group for federal income tax purposes.  The Company will not be permitted to makethese payments to MFC, unless the MFC federal tax liability equals or exceedsthe Company’s stand-alone federal tax liability, until it meets certainfinancial ratios and is otherwise in compliance with the terms of theIndenture.

 

**19. Subsequent Events**

 

*Plan ofReorganization*

 

On August 13, 2008,the Company entered into amended support agreements (the “Support Agreements”)with the members of a committee of holders of the Senior Secured Notes owningapproximately 78 percent of the outstanding Senior Secured Notes (the “NoteholderCommittee”) providing for a restructuring of the Senior Secured Notes to beeffected through a prepackaged plan of reorganization (the “Plan”) underChapter 11 of the U.S. Bankruptcy Code which would exchange for the SeniorSecured Notes a combination of cash, new senior secured notes due 2014 and 87.5percent of the common equity of the Company’s parent company, Mrs. Fields’Original Cookies, Inc.  Thisrestructuring is subject to various conditions, including approval of the Planfrom at least a majority in number of the holders of the Senior Secured Notes,which condition is not met by the members of the Noteholder Committee alone,and therefore there can be no assurance that it will be successfullycompleted.  If the restructuring iscompleted, the Company will have significantly less indebtedness.  

 

*Resignationof Chief Executive Officer*

 

On July 10,2008, the president and chief executive officer (the “CEO”) of the Company,delivered a letter (the “Notice of Termination”) in which he notified theCompany that he was terminating his employment with the Company.  In his letter, the former CEO asserted thathis termination is with “Good Reason” (as that term is defined under hisemployment agreement with the Company) and that accordingly, he was entitled toimmediate payment of all salary, bonuses and benefits accruing to the date oftermination, specified severance payments and a portion of the bonus payablewith respect to calendar year 2008.  TheNotice of Termination did not address whether the former CEO intended to alsoterminate his positions as a manager of the Company and as a manager ordirector, employee and officer of subsidiaries of the Company.  However, the Company believes that the formerCEO’s status as an employee and officer of the Company was terminatedautomatically by reason of his termination as an employee of the Company andthe Company believes that it was likely the former CEO’s intention that histermination also be deemed to constitute his resignation as a manager of theCompany and a director or manager of its subsidiaries.  The accompanying condensed consolidatedfinancial statements do not include any amounts for severance which may or maynot ultimately be determined to be due the former CEO.

 

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** **

**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**DISCLOSUREREGARDING FORWARD-LOOKING STATEMENTS**

 

This report includes “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of1995.  Forward-looking statements arethose that do not relate solely to historical fact.  They include, but are not limited to, anystatement that may predict, forecast, indicate or imply future results,performance, achievements or events. They may contain words such as “believe,” “anticipate,” “expect,” “estimate,”“plan,” “continue,” “will,” “may” or words or phrases of similar meaning.  Forward-looking statements involve risks anduncertainties, including, but not limited to, economic, competitive andgovernmental factors outside of our control, that may cause actual results todiffer materially from trends, plans or expectations set forth in theforward-looking statements. Factors you should consider that could cause thesedifferences include all factors described elsewhere in this report and indetail under “Item 1A. Risk Factors.”

 

        You are cautioned not to place undue reliance on theseforward-looking statements, which reflect management’s analysis only as of thedate of this report.  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.

 

# **Recent Developments**

# ** **

*Plan ofReorganization*

 

        On August 13, 2008, we entered into amended supportagreements (the “Support Agreements”) with the members of a committee ofholders (the “Noteholder Committee”) of the 9 percent senior secured notes (the“9 percent Senior Secured Notes”) and 11 1⁄2 senior secured notes (the “11 1⁄2percent Senior Secured Notes,” and together with the 9 percent Senior SecuredNotes,  the “Senior Secured Notes”)owning approximately 78 percent of the outstanding Senior Secured Notesproviding for a restructuring of the Senior Secured Notes to be effectedthrough a prepackaged plan of reorganization (the “Plan”) under Chapter 11 ofthe U.S. Bankruptcy Code which would exchange for the a combination of cash,new senior secured notes due 2014 and 87.5 percent of the common equity of ourparent company, Mrs. Fields’ Original Cookies, Inc.  This restructuring is subject to variousconditions, including approval of the Plan from at least a majority in numberof the holders of the Senior Secured Notes, which condition is not met by themembers of the Noteholder Committee alone, and therefore there can be noassurance that it will be successfully completed.  If the restructuring is completed, we willhave significantly less indebtedness.  

 

*Resignationof Chief Executive Officer*

 

        On July 10, 2008, Stephen Russo, a director and thepresident and chief executive officer of the Company, delivered a letter to us(the “Notice of Termination”) in which he notified us that he was terminatinghis employment with the Company.  In hisletter, Mr. Russo asserted that his termination is with “Good Reason” (asthat term is defined under his employment agreement with the Company) and thataccordingly, he was entitled to immediate payment of all salary, bonuses andbenefits accruing to the date of termination, specified severance payments anda portion of the bonus payable with respect to calendar year 2008.  The Notice of Termination did not addresswhether he intended to also terminate his positions as a manager of the Companyand as a manager or director, employee and officer of subsidiaries of theCompany.  However, we believe that Mr. Russo’sstatus as an employee and officer of the Company was terminated automaticallyby reason of his termination as an employee of the Company and we believe thatit was likely Mr. Russo’s intention that his termination also be deemed toconstitute his resignation as a manager of the Company and a director ormanager of its subsidiaries.  Theaccompanying condensed consolidated financial statements do not include anyamounts for severance which may or may not ultimately be determined to be due Mr. Russo.

 

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*Appointmentin Interim Co-CEO’s*

 

On July 15, 2008,the Board of Managers of the Company appointed Michael R. Ward and John Lauckas Interim Co-Chief Executive Officers to fill the role vacated by StephenRusso, our former Chief Executive Officer, as discussed above.  In his new role, Mr. Ward will take onthe added duties of overseeing financial and accounting matters as well as theCompany’s previously announced Restructuring and he will continue to serve asExecutive Vice President, Chief Legal Officer and Secretary of the Company and retainresponsibility for areas over which he already had responsibility.  In his new role, Mr. Lauck will beprimarily responsible for the day-to-day operations of the TCBY organizationand the Mrs. Fields organization (other than those for which Mr. Wardhas already had responsibility) and Mr. Lauck will continue to serve asthe President of the Mrs. Fields organization.  Mr. Ward and Mr. Lauck have notentered into additional arrangements with the Company, nor do they have anyagreement to receive any additional compensation in conjunction with their newroles.

 

*Sales ofNew Franchises*

 

Due to the substantialdoubt about our ability to continue as a going concern, we have not issued anew franchise disclosure document (“FDD”) and we have suspended sales of newfranchises until we are in a position to issue a new FDD.  We do not expect to issue a new FDD untilhave have additional information about alternatives to improve our overallliquidity position, including restructuring the Senior Secured Notes.  Until we issue a new FDD that reflects ourmost recent financial statements, we will be prohibited from selling newfranchises, which will adversely affect our business operations and financialcondition.

 

*Impairmentof Intangible Assets*

 

We determined that atriggering event had occurred in the second quarter of 2008 under Statement ofFinancial Accounting Standards No. 144 (“SFAS 144”), “Accounting forImpairment or Disposal of Long-Lived Assets”, as a result of the proposedrestructuring of the Senior Secured Notes to be effected through a prepackagedplan of reorganization under Chapter 11 of the U.S Bankruptcy Code.  Therefore, we recorded a charge of $2.1million during the second quarter of 2008 to write-down the TCBY trade names.

 

# **Executive Summary**

# ** **

**        We are a well established franchisor inthe premium snack food industry, featuring Mrs. Fields® and TCBY® as ourcore brands.  Through our franchisees’retail stores, we are one of the largest retailers of freshly baked,on-premises specialty cookies and brownies in the United States of America (the“United States”) and the largest retailer of soft-serve frozen yogurt with liveactive cultures in the United States.  Inaddition, we operate a gifts and branded retail business and have entered intolicensing arrangements to leverage awareness of our brands among our retailcustomer base.  As of June 28, 2008,our franchise systems operated through a network of 1,268 retail conceptlocations throughout the United States and in 21 foreign countries.**

** **

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Our business is divided into two business units forfinancial reporting purposes: Mrs. Fields (defined below) and TCBY (“Dairy”).  As discussed elsewhere in this report, wesold our Pretzel Time® and Pretzelmaker® brands (collectively, the “PretzelBrands”) in August 2007 and we sold our Great American Cookie brand in January 2008(together with Pretzels, “GAC/Pretzels”). The results of operations from these businesses prior to the dates thebusinesses were sold are included in discontinued operations in the condensedconsolidated statements of operations and comprehensive loss (see Note 6).

 

        We have the following five reportableoperating segments:

 
| · | Mrs. Fields Gifts          |                                             |   |
|--------|---------------------------------|---------------------------------------------|--------|
| · | Mrs. Fields Branded Retail |                                        |
| · | Mrs. Fields Franchising    | (collectively “Mrs. Fields”) |
| · | Mrs. Fields Licensing      |                                        |
| · | Dairy                           |                                        |

 

        Mrs. Fields and Dairy represented84.6 percent and 15.4 percent of total revenues, respectively, for the 26 weeksended June 28, 2008 and 81.1 percent and 18.9 percent of total revenues,respectively, for the 26 weeks ended June 30, 2007.

 

        As of June 28, 2008, our storeportfolio consisted of 888 domestic franchised locations, 293 internationalfranchised locations and 87 licensed locations. Our franchisees’ and licensees’ concept locations by brand aredistributed as follows:

 
| ** **                    | ** ** | **Domestic**   | ** ** | **International** | ** ** | **Licensed**  | ** ** | ** ** | ** ** |
|-------------------------------|------------|----------------|------------|-------------------|------------|---------------|------------|------------|------------|
| ** **                    | ** ** | **Franchised** | ** ** | **Franchised**    | ** ** | **Locations** | ** ** | **Total**  | ** ** |
| Mrs. Fields              |       | 305            |       | 89                |       | 25            |       | 419        |       |
| TCBY - traditional stores     |       | 291            |       | —            |       | —        |       | 291        |       |
| TCBY - non-traditional stores |       | 287            |       | 204               |       | 60            |       | 551        |       |
| Yovana - test stores          |       | —         |       | —            |       | 2             |       | 2          |       |
| Beriyo by TCBY - test stores  |       | 5              |       | —            |       | —        |       | 5          |       |
| Dairy subtotal                |       | 583            |       | 204               |       | 62            |       | 849        |       |
| Total                         |       | 888            |       | 293               |       | 87            |       | 1,268      |       |

 

        Theprevious table counts each concept location individually.  For example, if a physical location had a Mrs. Fieldsstore and a TCBY store together, it would be counted as two concept locationsin the table above.  If actual physicalstores were counted rather than concept locations, total store counts would bereduced by 63 locations to 1,205.

 

        During the 26 weeks ended June 28,2008, our store portfolio declined from 1,608 concept locations to 1,268concept locations, as follows:

 
| ** **                        | ** ** | **Total Company** | ** ** |
|-----------------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **Domestic**           | ** ** | **International** | ** ** | **Licensed** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Franchised**         | ** ** | **Franchised** | ** ** | **Locations** | ** ** | **Total** | ** ** |
| Balance at December 29, 2007 |       | 1,238                  |       | 275 |   | 95 |   | 1,608 |   |
| New development openings          |       | 18                     |       | 25 |   | — |   | 43 |   |
| Permanent closings                |       | (71                    | )          | (6 | ) | (8 | ) | (85 | ) |
| Sale of GAC                       |       | (302                   | )          | (1 | ) | — |   | (303 | ) |
| Other openings, net               |       | 5                      |       | — |   | — |   | 5 |   |
| Balance at June 28, 2008     |       | 888                    |       | 293 |   | 87 |   | 1,268 |   |

 

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        The following tables provide additionaldetail of new development openings, permanent closings and other openings andclosings of our concept locations during the 26 weeks ended June 28, 2008:

 
| ** **                        | ** ** | **Domestic Franchised** | ** ** |
|-----------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **                   | ** ** | ** ** | ** ** | **Traditional** | ** ** | **Traditional** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Mrs. Fields**         | ** ** | **GAC/Pretzels** | ** ** | **Dairy** | ** ** | **Dairy** | ** ** | **Total** | ** ** |
| Balance at December 29, 2007 |       | 318                          |       | 296 |   | 311 |   | 313 |   | 1,238 |   |
| New development openings          |       | 8                            |       | 6 |   | 4 |   | — |   | 18 |   |
| Permanent closings                |       | (21                          | )          | — |   | (24 | ) | (26 | ) | (71 | ) |
| Sale of GAC                       |       | —                       |       | (302 | ) | — |   | — |   | (302 | ) |
| Other openings, net               |       | —                       |       | — |   | 5 |   | — |   | 5 |   |
| Balance at June 28, 2008     |       | 305                          |       | — |   | 296 |   | 287 |   | 888 |   |

 
| ** **                        | ** ** | **International Franchised** | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|
| ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | **Traditional** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Mrs. Fields**              | ** ** | **GAC/Pretzels** | ** ** | **Dairy** | ** ** | **Total** | ** ** |
| Balance at December 29, 2007 |       | 84                                |       | 1 |   | 190 |   | 275 |   |
| New development openings          |       | 9                                 |       | — |   | 16 |   | 25 |   |
| Permanent closings                |       | (3                                | )          | — |   | (3 | ) | (6 | ) |
| Sale of GAC                       |       | —                            |       | (1 | ) | — |   | (1 | ) |
| Other openings (closings), net .  |       | (1                                | )          | — |   | 1 |   | — |   |
| Balance at June 28, 2008     |       | 89                                |       | — |   | 204 |   | 293 |   |

 
| ** **                        | ** ** | **Licensed Locations** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | ** **                  | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **                  | ** ** | **Traditional** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Mrs. Fields**        | ** ** | **Dairy** | ** ** | **Total** | ** ** |
| Balance at December 29, 2007 |       | 25                          |       | 70 |   | 95 |   |
| Permanent closings                |       | —                      |       | (8 | ) | (8 | ) |
| Balance at June 28, 2008     |       | 25                          |       | 62 |   | 87 |   |

 

        We are experiencing a trend of decliningstore counts.  We have implemented anumber of strategies designed to reverse this trend, including identifyingstores that are at risk of closure for operational issues, lease or franchiseagreement expiration and working with franchisees to relocate, transfer or correctoperational deficiencies.  We are alsotesting programs to refresh, remodel or re-concept some of our conceptlocations, as more fully discussed elsewhere in this report.  There can be no assurance that our strategieswill succeed.  If store counts continueto decline, our business operations and financial condition could continue tobe adversely affected.

 

        Due to the substantial doubt about ourability to continue as a going concern, we have not issued a new FDD and wehave suspended sales of new franchises until we are in a position to issue anew FDD.  We do not expect to issue a newFDD until we have additional information about alternatives to improve ouroverall liquidity position, including restructuring our Senior SecuredNotes.  Until we issue a new FDD thatreflects our most recent financial statements, we will be prohibited fromselling new franchises, which will adversely affect our business operations andfinancial condition.

 

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        Throughout this discussion, we refer tothe total weeks that our franchised locations operate in any given period as “franchisedunit weeks” and use that term comparatively when describing factors that mayaffect performance.  Fewer franchisedlocations translate naturally to fewer total franchised unit weeks that ourfranchisees operate and contribute revenues to us.  The Dairy operating segment is comprised ofboth larger, traditional locations and a significant number of smaller,non-traditional locations.  We measurefranchised unit weeks differently for the Dairy operating segment, based on ourcalculation that it takes approximately three average non-traditional locationsto equal the revenues of one average traditional location.  We therefore refer to “traditional equivalentunit weeks” to describe the total number of weeks that TCBY franchisedlocations operate in any given period, adjusted to account for the differentimpact that non-traditional TCBY store openings and closings may have whencompared to similar events affecting traditional TCBY stores.

 

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**Resultsof Operations**

 

        The following table sets forth, for the periods indicated,certain information relating to our operations and percentage changes fromperiod to period (in thousands):

 
| ** **                                                                                                    | ** ** | **13 Weeks Ended** | ** ** | ** **        | ** ** | **26 Weeks Ended** | ** ** | ** **        | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-------------------|------------|------------------------------|------------|-------------------|------------|
| ** **                                                                                                    | ** ** | **June 28,**            | ** ** | **June 30,** | ** ** | **%**                        | ** ** | **June 28,** | ** ** | **June 30,** | ** ** | **%** | ** ** |
| ** **                                                                                                    | ** ** | **2008**                     | ** ** | **2007**          | ** ** | **Change**                   | ** ** | **2008**          | ** ** | **2007** | ** ** | **Change** | ** ** |
| REVENUES:                                                                                                     |       |                         |       |              |       |                         |       |              |       |   |   |   |   |
| Mrs. Fields Gifts                                                                                        |       | $                            | 3,627      |              | $          | 5,087                        |       | (28.7             | )          | $ | 9,398 |   | $ | 9,982 |   | (5.9 | ) |
| Mrs. Fields Branded Retail                                                                               |       | 6,115                        |       | 5,156             |       | 18.6                         |       | 11,611            |       | 9,659 |   | 20.2 |   |
| Mrs. Fields Franchising                                                                                  |       | 1,798                        |       | 1,815             |       | (0.9                         | )          | 3,630             |       | 3,699 |   | (1.9 | ) |
| Mrs. Fields Licensing                                                                                    |       | 62                           |       | 115               |       | (46.1                        | )          | 280               |       | 315 |   | (11.1 | ) |
| Total Mrs. Fields                                                                                        |       | 11,602                       |       | 12,173            |       | (4.7                         | )          | 24,919            |       | 23,655 |   | 5.3 |   |
| Dairy                                                                                                         |       | 2,762                        |       | 3,171             |       | (12.9                        | )          | 4,551             |       | 5,516 |   | (17.5 | ) |
| Total revenues                                                                                                |       | 14,364                       |       | 15,344            |       | (6.4                         | )          | 29,470            |       | 29,171 |   | 1.0 |   |
|                                                                                                          |       |                         |       |              |       |                         |       |              |       |   |   |   |   |
| OPERATING COSTS AND EXPENSES:                                                                                 |       |                         |       |              |       |                         |       |              |       |   |   |   |   |
| Mrs. Fields Gifts                                                                                        |       | 4,280                        |       | 5,187             |       | (17.5                        | )          | 10,252            |       | 10,566 |   | (3.0 | ) |
| Mrs. Fields Branded Retail                                                                               |       | 5,993                        |       | 4,810             |       | 24.6                         |       | 11,363            |       | 8,919 |   | 27.4 |   |
| Mrs. Fields Franchising                                                                                  |       | 1,133                        |       | 593               |       | 91.1                         |       | 2,340             |       | 1,153 |   | 102.9 |   |
| Mrs. Fields Licensing                                                                                    |       | 49                           |       | (36               | )          | NM                           |       | 66                |       | (26 | ) | NM |   |
| Total Mrs. Fields                                                                                        |       | 11,455                       |       | 10,554            |       | 8.5                          |       | 24,021            |       | 20,612 |   | 16.5 |   |
| Dairy                                                                                                         |       | 844                          |       | 1,191             |       | (29.1                        | )          | 2,013             |       | 3,033 |   | (33.6 | ) |
| General and administrative                                                                                    |       | 4,922                        |       | 2,620             |       | 87.9                         |       | 7,735             |       | 5,026 |   | 53.9 |   |
| Depreciation                                                                                                  |       | 493                          |       | 502               |       | (1.8                         | )          | 973               |       | 988 |   | (1.5 | ) |
| Amortization                                                                                                  |       | 420                          |       | 519               |       | (19.1                        | )          | 892               |       | 1,036 |   | (13.9 | ) |
| Impairment of intangible assets                                                                               |       | 2,091                        |       | —            |       | NM                           |       | 2,091             |       | — |   | NM |   |
| Gain on sale of land held for sale                                                                            |       | —                       |       | —            |       | NM                           |       | —            |       | (128 | ) | (100.0 | ) |
| Other, net                                                                                                    |       | 23                           |       | —            |       | NM                           |       | (15               | )          | — |   | NM |   |
| Total operating costs and expenses                                                                            |       | 20,248                       |       | 15,386            |       | 31.6                         |       | 37,710            |       | 30,567 |   | 23.4 |   |
| Loss from continuing operations                                                                               |       | (5,884                       | )          | (42               | )          | NM                           |       | (8,240            | )          | (1,396 | ) | 490.3 |   |
|                                                                                                          |       |                         |       |              |       |                         |       |              |       |   |   |   |   |
| OTHER EXPENSE. NET:                                                                                           |       |                         |       |              |       |                         |       |              |       |   |   |   |   |
| Interest expense, net                                                                                         |       | (5,281                       | )          | (5,388            | )          | (2.0                         | )          | (10,173           | )          | (10,681 | ) | (4.8 | ) |
| Impairment of marketable securities                                                                           |       | (8,222                       | )          | —            |       | NM                           |       | (8,222            | )          | — |   | NM |   |
| Loss from continuing operations before benefit for income taxes                                               |       | (19,387                      | )          | (5,430            | )          | 257.0                        |       | (26,635           | )          | (12,077 | ) | 120.5 |   |
| Benefit for income taxes                                                                                      |       | (6,381                       | )          | (1,515            | )          | 321.2                        |       | (9,159            | )          | (3,002 | ) | 205.1 |   |
| Loss from continuing operations                                                                               |       | (13,006                      | )          | (3,915            | )          | 232.2                        |       | (17,476           | )          | (9,075 | ) | 92.6 |   |
|                                                                                                          |       |                         |       |              |       |                         |       |              |       |   |   |   |   |
| DISCONTINUED OPERATIONS:                                                                                      |       |                         |       |              |       |                         |       |              |       |   |   |   |   |
| Income from discontinued operations, net of income taxes of ($313),  $1,523, $31,701 and $3,020, respectively |       | 72                           |       | 2,548             |       | NM                           |       | 10,594            |       | 5,030 |   | 110.6 |   |
| Net loss                                                                                                      |       | $                            | (12,934    | )                 | $          | (1,367                       | )          | NM                |       | $ | (6,882 | ) | $ | (4,045 | ) | 70.1 |   |
|                                                                                                          |       |                         |       |              |       |                         |       |              |       |   |   |   |   |
| Cash flows from operating activities, including discontinued  operations                                      |       | $                            | (3,073     | )                 | $          | 4,391                        |       | NM                |       | $ | (23,417 | ) | $ | (6,129 | ) | 282.1 |   |
| Cash flows from investing activities, including discontinued  operations                                      |       | $                            | 3,018      |              | $          | (48                          | )          | NM                |       | $ | 15,192 |   | $ | 218 |   | NM |   |
| Cash flows from financing activities, including discontinued  operations                                      |       | $                            | (320       | )                 | $          | (28                          | )          | NM                |       | $ | (352 | ) | $ | (58 | ) | NM |   |

 

NM- Calculation not meaningful.

 

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**13 Weeks Ended June 28, 2008**

**Compared to the 13 Weeks Ended June 30,2007**

 

*        Loss From Continuing Operations —Overview*.  Loss from continuing operations was $5.9 millionfor the 13 weeks ended June 28, 2008, an increase of $5.9 million from aloss of $0 for the 13 weeks ended June 30, 2007.  The increase in loss from continuingoperations was primarily due to the following:

 

·                  impairment of intangible assets for Dairyof $2.1 million;

·                  decreased contribution from our businessunits of $1.6 million; and

·                  increased general and administrativeexpenses of $2.3 million.

 

        The foregoing increases in loss fromcontinuing operations were partially offset by decreased amortization of$100,000.

 

        The decrease in contribution from ourbusiness units of $1.6 million is comprised of the following decreases:

 

·                  Mrs. Fields business unitcontribution decrease of $1.5 million; and

·                  Dairy business unit contribution decreaseof $100,000.

 

        *BusinessUnit Contribution. *Mrs. Fieldscontribution is comprised of the following:

 

·                  sales of products through our giftcatalog and website, less direct operating expenses in our Mrs. FieldsGifts operating segment;

·                  net sales of our branded products throughretail channels by us and through food brokers, less related cost of sales anddirect selling and operating expenses in our Mrs. Fields Branded Retailoperating segment;

·                  royalties from existing franchises lessdirect operating expenses in our Mrs. Fields Franchising operatingsegment; and

·                  licensing fees received from thirdparties for the sale of products bearing our brand names less direct operatingexpenses in our Mrs. Fields Licensing operating segment.

 

        Our Dairy business unit contribution iscomprised of sales of new franchises and royalties from existing franchisesless direct operating expenses.

 

        The following table sets forth thecontribution from each of our business units (in thousands):

 
| ** **       | ** ** | **For the 13 Weeks Ended** | ** ** |
|------------------|------------|------------------------------------------------|------------|
| ** **       | ** ** | **June 28,**                              | ** ** | **June 30,** | ** ** |
| ** **       | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| Mrs. Fields |       | $                                              | 147        |   | $ | 1,619 |   |
| Dairy            |       | 1,918                                          |       | 1,980 |   |
|             |       | $                                              | 2,065      |   | $ | 3,599 |   |

 

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**Mrs. Fields**

 

        The following table details the revenuesand operating expenses of the Mrs. Fields business unit (in thousands):

 
| ** **                                | ** ** | **For the 13 Weeks Ended** | ** ** | ** **        | ** ** |
|-------------------------------------------|------------|------------------------------------------------|------------|-------------------|------------|
| ** **                                | ** ** | **June 28,**                              | ** ** | **June 30,** | ** ** | **%** | ** ** |
| ** **                                | ** ** | **2008**                                       | ** ** | **2007**          | ** ** | **Change** | ** ** |
| Mrs. Fields Gifts                    |       | $                                              | 3,627      |              | $          | 5,087 |   | (28.7 | ) |
| Mrs. Fields Branded Retail           |       | 6,115                                          |       | 5,156             |       | 18.6 |   |
| Mrs. Fields Franchising              |       | 1,798                                          |       | 1,815             |       | (0.9 | ) |
| Mrs. Fields Licensing                |       | 62                                             |       | 115               |       | (46.1 | ) |
| Total Mrs. Fields revenues           |       | 11,602                                         |       | 12,173            |       | (4.7 | ) |
| Mrs. Fields Gifts                    |       | 4,280                                          |       | 5,187             |       | (17.5 | ) |
| Mrs. Fields Branded Retail           |       | 5,993                                          |       | 4,810             |       | 24.6 |   |
| Mrs. Fields Franchising              |       | 1,133                                          |       | 593               |       | 91.1 |   |
| Mrs. Fields Licensing                |       | 49                                             |       | (36               | )          | NM |   |
| Total Mrs. Fields operating expenses |       | 11,455                                         |       | 10,554            |       | 8.5 |   |
| Total Mrs. Fields contribution       |       | $                                              | 147        |              | $          | 1,619 |   | (90.9 | ) |

 

***Mrs. Fields Gifts***

 

*        Mrs. Fields Gifts Revenues.*  Mrs. FieldsGifts revenues were $3.6 million for the 13 weeks ended June 28, 2008, adecrease of $1.5 million or 28.7 percent from $5.1 million for the 13 weeksended June 30, 2007.  These revenuesconsisted of sales through our catalog and website as well as affiliations withother websites and sales to large corporate customers for giftingpurposes.  This decrease in revenues wasprimarily due to the following decreases:

 

·                  national accounts revenues of $1.1million primarily due to a decline in purchases from our largest corporatecustomer;

·                  catalog driven sales and strategicpartners revenues of $300,000 primarily due to the Easter holiday occurring inthe first quarter in 2008 compared to the second quarter in 2007; and

·                  other revenues of $100,000.

 

*        Mrs. Fields Gifts Expenses.*  Mrs. FieldsGifts expenses are comprised of cost of sales for products sold, selling andpromotional expenses and direct operating expenses of this segment.  Mrs. Fields Gifts expenses were$4.3 million for the 13 weeks ended June 28, 2008, a decrease of$900,000 or 17.5 percent from $5.2 million for the 13 weeks ended June 30,2007.  This decrease in expenses wasprimarily due to the following decreases:

 

·                  cost of sales of $700,000 due todecreased revenues and product mix;

·                  catalog and advertising expenses of$100,000 due to the timing of the Easter holiday;

·                  other operating expenses of $100,000.

 

***Mrs. FieldsBranded Retail***

*** ***

*        Mrs. FieldsBranded Retail Revenues. *Mrs. Fields Branded Retail revenues were $6.1million for the 13 weeks ended June 28,2008, an increase of $900,000 or 18.6 percent from $5.2 million for the 13weeks ended June 30, 2007.   Mrs. Fields Branded Retail revenues consist of sales of Mrs. Fieldsbranded shelf stable cookies directly through retail channels.  The increase in sales was primarily relatedto new customers and increased activity in the drug store channel.

 

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*        Mrs. Fields**BrandedRetail Expenses.*  Mrs. FieldsBranded Retail expenses is comprised of cost of sales for product sold, sellingand promotional expenses and other direct operating expenses of thissegment.  Mrs. Fields Branded Retailexpenses were $6.0 million for the 13 weeks ended June 28, 2008, anincrease of $1.2 million or 24.6 percent from $4.8 million for the 13weeks ended June 30, 2007.  Thisincrease in expenses was primarily due to the following increases:

 

·                  cost of sales of $1.0 million due toincreased revenues and increased commodity prices;

·                  advertising and promotion expenses of$100,000 related to product demos, sampling and broker fees; and

·                  other operating expenses of $100,000.

 

***Mrs. Fields Franchising***

 

        The following table details the yearover year (“YOY”) percentage increase in same store sales for our Mrs. FieldsFranchising segment:

 
| ** **       | ** ** | **For the 13 Weeks Ended** | ** ** |
|------------------|------------|------------------------------------------------|------------|
| ** **       | ** ** | **June 28,**                              | ** ** | **June 30,** | ** ** |
| ** **       | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| Mrs. Fields |       | 0.9                                            |       | 0.0 |   |

 

Our Mrs. Fieldsconcept’s YOY same store sales were up 0.9 percent due to increased visitfrequency and training by our field operations team, an increase in Big CookieCake sales and increases in the sales of our Breezer products.

 

        *Mrs. Fields Franchising Revenues. *Mrs. Fields Franchising revenues were $1.8 million forthe 13 weeks ended June 28, 2008 and the 13 weeks ended June 30,2007.  Although franchising revenues wereconsistent in both periods, franchising revenues decreased as a result ofapproximately 200 or 5.4 percent fewer unit weeks and the Easter holidayoccuring in the first quarter in 2008 compared to the second quarter in 2007,offset by the increase in same store YOY sales.

 

        *Mrs. Fields FranchisingExpenses.*  Mrs. Fields Franchising expenses arecomprised of operation and supervision expenses incurred to provide support,direction and supervision to the franchisees; development and support expensesincluding product development costs, expenses relating to new franchisedevelopment, marketing and advertising, bad debt expense and other directfranchising expenses.  These expenseswere $1.1 million for the 13 weeks ended June 28, 2008, an increase of$500,000 or 91.1 percent from $600,000 for the 13 weeks ended June 30,2007.  This increase in expenses wasprimarily due to the following increases:

 

·                  compensation and related costs of$300,000 in order to implement the planned strategy of increasing operationsand development headcount;

·                  professional fees of $100,000; and

·                  other operating expenses of $100,000.

 

***Mrs. Fields Licensing***

 

*        Mrs. FieldsLicensing Revenues. *Mrs. Fields Licensing revenues were $100,000for the 13 weeks ended June 28, 2008 and June 30, 2007. Although licensing revenues were consistent in both periods, the mix oflicensing revenues reflected a decrease in licensing royalties earned under alicensing agreement for the sale of Mrs. Fields branded boxed chocolates,offset by increases in licensing royalties earned under a licensing agreementfor the sale of Mrs. Fields branded ice cream sandwiches.

 

*        Mrs. Fields LicensingExpenses. *Mrs. Fields Licensing expenses arecomprised of compensation, selling and promotional expenses, bad debt and otherdirect operating expenses of this segment. These expenses were negligible for the 13 weeks ended June 28, 2008and June 30, 2007.

 

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**Dairy**

 

Thefollowing table details the YOY percentage increase (decrease) in same storesales for our Dairy Franchising segment:

 
| ** ** | ** ** | **For the 13 Weeks Ended** | ** ** |
|------------|------------|------------------------------------------------|------------|
| ** ** | ** ** | **June 28,**                              | ** ** | **June 30,** | ** ** |
| ** ** | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| TCBY       |       | 2.2                                            |       | (1.3 | ) |

 

OurDairy Franchising segment's YOY same store sales increased 2.2 percent for the13 weeks ended June 28, 2008.  Thisincrease was mainly due to the shift of the Easter holiday into the firstquarter of 2008 compared the second quarter of 2007, which historically hasbeen a low volume Sunday for the Dairy segment, and also due to a shift in our2008 promotional spending which focuses on the key selling season of Aprilthrough August.

 

*Dairy Franchising Revenues*.  Dairy franchising revenues were $2.8 millionfor the 13 weeks ended June 28, 2008, a decrease of $400,000 or 12.9 percentfrom $3.2 million for the 13 weeks ended June 30, 2007.  This decrease in revenues was primarily dueto the following decreases:

 

·                  product formulation revenuesof $700,000 generated by purchases of TCBY products by franchisees; and

·                  initial franchise fees of $100,000.

 

Theforegoing decreases in revenues were partially offset by increased royalties of$400,000 resulting from an increase in royalty rates.  The overall decrease in franchising revenueswas principally attributable to pricing discounts offered to franchisees as anincentive to remodel their stores and approximately 1,200 or 18.6 percent fewerunit weeks, partially offset by an increase in royalty rates and the increasein YOY same store sales.

 

*Dairy Franchising Expenses*.  Dairy franchising expenses were $800,000 forthe 13 weeks ended June 28, 2008, a decrease of $400,000 or 29.1 percent from$1.2 million for the 13 weeks ended June 30, 2007.  This decrease in expenses was primarily dueto the following decreases:

 

·                  brand initiatives of $300,000 incurred in thesecond quarter of 2007 to test the Beriyo and Yovana concepts and to preparefor the TCBY new store décor initiative that didn't occur in 2008; and

·                  decreased other operating expenses of$100,000.

 

**Other**

 

*General and Administrative Expenses*.  General and administrative expenses were $4.9million for the 13 weeks ended June 28, 2008, an increase of $2.3 million or 87.9percent from $2.6 million for the 13 weeks ended June 30, 2007.  This increase in general and administrativeexpenses was primarily attributable to the following:

 

·                  costs incurred of $2.2 million related to the restructuringof our debt through a prepackaged plan of reorganization;

·                  increased professional fees of $200,000 paidto third parties for consulting on process improvement initiatives, internalcontrol assistance and Sarbanes-Oxley compliance test work; partially offset by

·                  decreased legal fees of $100,000.

 

*Depreciation and Amortization Expense*.  Depreciation expense was $500,000 for the 13weeks ended June 28, 2008 and June 30, 2007. Amortization expense was $400,000 for the 13 weeks ended June 28, 2008,a decrease of $100,000 from $500,000 for the 13 weeks ended June 30, 2007.

 

*Impairment of intangible assets*.  Impairment of intangible assets was $2.1million for the 13 weeks ended June 28, 2008 related to TCBY trade names.  This impairment was the result of theproposed restructuring of the Senior Secured Notes to be effected through aprepackaged plan of reorganization under Chapter 11 of the U.S Bankruptcy Code.

 

*Impairment of marketable securities*.  Impairment of marketable securities was $8.2million for the 13 weeks ended June 28, 2008 resulting from another-than-temporary decline in the market price of the Nexcen common stockreceived as part of the proceeds from the sales of assets of GAC/Pretzels inthe third quarter of 2007 and the first quarter of 2008.

 

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*Discontinued Operations*.  Income from discontinued operations was100,000 for the 13 weeks ended June 28, 2008, a decrease of $2.4 million fromincome of $2.5 million for the 13 weeks ended June 30, 2007.  This decrease was primarily due to the saleof GAC/Pretzels in the third quarter of 2007 and the first quarter of 2008.

 

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**26 Weeks Ended June 28, 2008**

**Compared to the 26 Weeks Ended June 30, 2007**

 

*Loss From Continuing Operations* — *Overview*.  Loss from continuing operations was $8.2 millionfor the 26 weeks ended June 28, 2008, an increase of $6.8 million or 490.3percent from $1.4 million for the 26 weeks ended June 30, 2007.  The increase in loss from continuingoperations was primarily due to the following:

 

·                  impairment of intangible assets for Dairy of$2.1 million;

·                  decreased contribution from our businessunits of $2.0 million;

·                  increased general and administrative expensesof $2.7 million; and

·                  gain on sale of land held for sale of$100,000 that occurred in 2007.

 

Theforegoing increases in loss from continuing operations were partially offset bydecreased amortization of $100,000.

 

Thedecrease in contribution from our business units of $2.0 million is comprisedof the following:

 

·                  Mrs. Fields business unit contribution decreaseof $2.1 million; and

·                  Dairy business unit contribution increase of$100,000.

 

*Business Unit Contribution*.  Mrs. Fields contribution is comprised of thefollowing:

 

·                  sales of products through our gift catalogand website, less direct operating expenses in our Mrs. Fields Gifts operatingsegment;

·                  net sales of our branded products throughretail channels by us and through food brokers, less related cost of sales anddirect selling and operating expenses in our Mrs. Fields Branded Retailoperating segment;

·                  sales of new franchises and royalties fromexisting franchises less direct operating expenses in our Mrs. FieldsFranchising operating segment; and

·                  licensing fees received from third partiesfor the sale of products bearing our brand names less direct operating expensesin our Mrs. Fields Licensing operating segment.

 

OurDairy business unit contribution is comprised of sales of new franchises androyalties from existing franchises less direct operating expenses.

 

Thefollowing table sets forth the contribution from each of our business units (inthousands):

 
| ** **  | ** ** | **For the 26 Weeks Ended** | ** ** |
|-------------|------------|------------------------------------------------|------------|
| ** **  | ** ** | **June 28,**                              | ** ** | **June 30,** | ** ** |
| ** **  | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| Mrs. Fields |       | $                                              | 898        |   | $ | 3,043 |   |
| Dairy       |       | 2,538                                          |       | 2,483 |   |
|        |       | $                                              | 3,436      |   | $ | 5,526 |   |

 

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**Mrs.Fields**

 

Thefollowing table details the revenues and operating expenses of the Mrs. Fieldsbusiness unit (in thousands):

 
| ** **                           | ** ** | **For the 26 Weeks Ended** | ** ** | ** **        | ** ** |
|--------------------------------------|------------|------------------------------------------------|------------|-------------------|------------|
| ** **                           | ** ** | **June 28,**                              | ** ** | **June 30,** | ** ** | **%** | ** ** |
| ** **                           | ** ** | **2008**                                       | ** ** | **2007**          | ** ** | **Change** | ** ** |
| Mrs. Fields Gifts                    |       | $                                              | 9,398      |              | $          | 9,982 |   | (5.9 | ) |
| Mrs. Fields Branded Retail           |       | 11,611                                         |       | 9,659             |       | 20.2 |   |
| Mrs. Fields Franchising              |       | 3,630                                          |       | 3,699             |       | (1.9 | ) |
| Mrs. Fields Licensing                |       | 280                                            |       | 315               |       | (11.1 | ) |
| Total Mrs. Fields revenues           |       | 24,919                                         |       | 23,655            |       | 5.3 |   |
| Mrs. Fields Gifts                    |       | 10,252                                         |       | 10,566            |       | (3.0 | ) |
| Mrs. Fields Branded Retail           |       | 11,363                                         |       | 8,919             |       | 27.4 |   |
| Mrs. Fields Franchising              |       | 2,340                                          |       | 1,153             |       | 102.9 |   |
| Mrs. Fields Licensing                |       | 66                                             |       | (26               | )          | NM |   |
| Total Mrs. Fields operating expenses |       | 24,021                                         |       | 20,612            |       | 16.5 |   |
| Total Mrs. Fields contribution       |       | $                                              | 898        |              | $          | 3,043 |   | (70.5 | ) |

 

***Mrs. Fields Gifts***

 

*Mrs. Fields Gifts Revenues*.  Mrs. Fields Gifts revenues were $9.4 millionfor the 26 weeks ended June 28, 2008, a decrease of $600,000 or 5.9 percentfrom $10.0 million for the 26 weeks ended June 30, 2007.  These revenues consist of sales through ourcatalog and website as well as affiliations with other websites and sales tolarge corporate customers for gifting purposes. This decrease in revenues was primarily attributable to the followingdecreases:

 

·                  national accounts revenues of $700,000primarily due to a decline in purchases from our largest corporate customer;

**·**                 strategic partners revenues of $100,000; and

·                  other revenues of $100,000.

 

Theforegoing decreases in revenues were partially offset by increased searchengine revenues of $300,000 primarily due to a continuing trend of customerspreferring to make their purchases online.

 

*Mrs.Fields Gifts Expenses*.  Mrs.Fields Gifts expenses are comprised of cost of sales for products sold, sellingand promotional expenses and direct operating expenses of this segment.  Mrs. Fields Gifts expenses were $10.3 millionfor the 26 weeks ended June 28, 2008, a decrease of $300,000 or 3.0 percentfrom $10.6 million for the 26 weeks ended June 30, 2007.  The decrease in expenses was due to adecrease in cost of sales of $600,000 primarily due to decreased revenues andproduct mix, partially offset by increased catalog and advertising expenses of$300,000 due to increased circulation of our catalogs.

 

***Mrs. Fields Branded Retail***

 

*Mrs. Fields Branded Retail Revenues*.  Mrs. Fields Branded Retail revenues were$11.6 million for the 26 weeks ended June 28, 2008, an increase of $1.9 millionor 20.2 percent from $9.7 million for the 26 weeks ended June 30, 2007.   Mrs. Fields Branded Retail revenues consistof sales of Mrs. Fields branded shelf stable cookies directly through retailchannels.  The increase in sales isprimarily related to new customers and increased activity in the drug storechannel.

 

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*Mrs. Fields Branded Retail Expenses*.  Mrs. Fields Branded Retail expenses iscomprised of cost of sales for product sold, selling and promotional expensesand other direct operating expenses of this segment.  Mrs. Fields Branded Retail expenses were$11.4 million for the 26 weeks ended June 28, 2008, an increase of $2.5 millionor 27.4 percent from $8.9 million for the 26 weeks ended June 30, 2007.  This increase in expenses was primarily dueto the following increases:

 

·                  cost of sales of $2.0 million due toincreased revenues and increased commodity prices;

·                  advertising and promotion expenses of$300,000 related to product demos, sampling and broker fees; and

·                  other operating expenses of $200,000.

 

***Mrs. Fields Franchising***

 

Thefollowing table details the YOY percentage increase (decrease) in same storesales for our Mrs. Fields Franchising segment:

 
| ** **  | ** ** | **For the 26 Weeks Ended** | ** ** |
|-------------|------------|------------------------------------------------|------------|
| ** **  | ** ** | **June 28,**                              | ** ** | **June 30,** | ** ** |
| ** **  | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| Mrs. Fields |       | 0.1                                            |       | (1.8 | ) |

 

OurMrs. Fields concept's YOY same store sales were up 0.1 percent due to increasedvisit frequency and training by our field operations team, an increase in BigCookie Cake sales and increases in the sales of our Breezer products.

 

*Mrs. Fields Franchising Revenues*.  Mrs. Fields Franchising revenues were $3.6million for the 26 weeks ended June 28, 2008, a decrease of $100,000 or 1.9percent from $3.7 million for the 26 weeks ended June 30, 2007.  This decrease in revenues was primarilyattributable to approximately 700 or 7.4 percent fewer unit weeks partiallyoffset by the increase in same store YOY sales.

 

*Mrs. Fields Franchising Expenses*.  Mrs. Fields Franchising expenses arecomprised of operation and supervision expenses incurred to provide support,direction and supervision to the franchisees; development and support expensesincluding product development costs, expenses relating to new franchisedevelopment, marketing and advertising, bad debt expense and other directfranchising expenses.  These expenseswere $2.3 million for the 26 weeks ended June 28, 2008, an increase of $1.1 millionor 102.9 percent from $1.2 million for the 26 weeks ended June 30, 2007.  This increase in expenses was primarily dueto the following increases:

 

·                  compensation and related costs of $800,000 inorder to implement the planned strategy of increasing operations anddevelopment headcount;

·                  professional fees of $100,000; and

·                  other operating expenses of $200,000.

 

***Mrs. Fields Licensing***

 

*Mrs. Fields Licensing Revenues*.  Mrs. Fields Licensing revenues were $300,000for the 26 weeks ended June 28, 2008 and June 30, 2007.  Although total licensing revenues wereconsistent in both periods, the mix of licensing revenues reflected a decreasein licensing royalties earned under licensing agreements for the sale of Mrs.Fields branded boxed chocolates, TCBY branded yogurt covered pretzels androyalties earned under our terminated licensing agreement for the sale of Mrs.Fields branded chocolate chips.  Thesedecreases were offset by increases in licensing royalties earned under alicensing agreement for the sale of Mrs. Fields branded ice cream sandwiches.

 

*Mrs. Fields Licensing Expenses*.  Mrs. Fields Licensing expenses are comprisedof compensation, selling and promotional expenses, bad debt and other directoperating expenses of this segment. These expenses were negligible for the 26 weeks ended June 28, 2008 andJune 30, 2007.

 

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**Dairy**

 

Thefollowing table details the YOY percentage increase (decrease) in same storesales for our Dairy Franchising segment:

 
| ** ** | ** ** | **For the 26 Weeks Ended** | ** ** |
|------------|------------|------------------------------------------------|------------|
| ** ** | ** ** | **June 28,**                              | ** ** | **June 30,** | ** ** |
| ** ** | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| TCBY       |       | 0.1                                            |       | (2.4 | ) |

 

OurDairy Franchising segments YOY same store sales increased 0.1 percent for the26 weeks ended June 28, 2008.  This slightincrease was achieved due to a shift in our 2008 promotional spending, whichfocuses on the key selling season of April through August and occurred despitethe continued challenging overall economic conditions in the United States.

 

*Dairy Franchising Revenues*.  Dairy Franchising revenues were $4.6 millionfor the 26 weeks ended June 28, 2008, a decrease of $900,000 or 17.5 percentfrom $5.5 million for the 26 weeks ended June 30, 2007.  This decrease in revenues was due to thefollowing decreases:

 

·                  product formulation revenues generated bypurchases of TCBY products by franchisees of $1.3 million; and

·                  initial franchise fees of $100,000.

 

Theforegoing decreases in revenues were partially offset by increased royalties of$500,000 due to increased royalty rates. The overall decrease in revenues were principally attributable topricing discounts offered to franchisees as an incentive to remodel theirstores and approximately 2,500 or 19.3 percent fewer unit weeks, partiallyoffset by the increase in YOY same store sales.

 

*Dairy Franchising Expenses*.  Dairy Franchising expenses were $2.0 millionfor the 26 weeks ended June 28, 2008, a decrease of $1.0 million or 33.6percent from $3.0 million for the 26 weeks ended June 30, 2007.  This decrease in expenses was primarily dueto the following decreases:

 

·                  brand initiatives of $1.0 million incurred inthe first quarter of 2007 to test the Beriyo and Yovana concepts and to preparefor the TCBY new store décor initiative; and

·                  bad debt expense of $100,000.

 

Theforegoing decreases in expenses were partially offset by increases in compensationand related costs of $100,000 primarily due to the addition of a presidentduring the 4th quarter of 2007.

 

**Other**

 

*General and Administrative Expenses*.  General and administrative expenses were $7.7million for the 26 weeks ended June 28, 2008, an increase of $2.7 million or 53.9percent from $5.0 million for the 26 weeks ended June 30, 2007.  This increase in general and administrativeexpenses was primarily attributable to the following increases:

 

·                  costs incurred of $2.2 million related to the restructuringof our debt through a prepackaged plan of reorganization;

·                  professional fees of $300,000 paid to thirdparties for consulting on process improvement initiatives, internal controlassistance and Sarbanes-Oxley compliance test work;

·                  bonus expense of $200,000 primarily due tobonuses paid in the first quarter of 2008 to certain individuals to compensatethem for their contributions to the sale of GAC; and

·                  legal fees of $100,000.

 

Theforegoing increases in expenses were partially offset by a decrease incompensation and related costs of $100,000 primarily due to the decrease incorporate headcount resulting from the sale of GAC.

 

*Depreciation and Amortization Expense*.  Depreciation expense was $1.0 million for the26 weeks ended June 28, 2008 and June 30, 2007. Amortization expense was $900,000 for the 26 weeks ended June 28, 2008,a decrease of $100,000 from $1.0 million for the 26 weeks ended June 30, 2007.

 

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*Impairment of intangible assets*.  Impairment of intangible assets was $2.1million for the 26 weeks ended June 28, 2008 related to TCBY trade names.  This impairment was the result proposedrestructuring of the Senior Secured Notes to be effected through a prepackagedplan of reorganization under Chapter 11 of the U.S Bankruptcy Code.

 

*Impairment of marketable securities*.  Impairment of marketable securities was $8.2million for the 26 weeks ended June 28, 2008 resulting from another-than-temporary decline in the market price of the Nexcen common stockreceived as part of the proceeds from the sales of assets of GAC/Pretzels inthe third quarter of 2007 and the first quarter of 2008.

 

*Discontinued Operations*.  Income from discontinued operations was $10.6million for the 26 weeks ended June 28, 2008, an increase of $5.6 million from$5.0 million for the 26 weeks ended June 30, 2007.  This increase was primarily due to the gainrelated to the sale of GAC of $10.6 million partially offset by a reduction incontribution of the GAC/Pretzels reportable operating segment.

 

**ConsolidatedFinancial Condition**

 

Totalassets at June 28, 2008 were $135.3 million, an increase of $14.5 million or 12.0percent from $120.8 million at December 29, 2007.  This increase in assets was primarily due tothe following increases:

 

·                  restricted cash of $73.5 million resultingfrom the sale of GAC and Pretzels;

·                  prepaid expenses of $100,000; and

·                  deferred tax asset of $3.9 million.

 

Theforegoing increases in assets were partially offset by the following decreases:

 

·                  cash and cash equivalents of $8.6 millionprimarily due to the semi-annual interest payment of $10.25 million made inMarch 2008;

·                  marketable securities available for sale andother assets of $4.0 million due to the impairment of the Nexcen common stockreceived as proceeds on the sale of GAC/Pretzels;

·                  accounts receivable, of $3.8 millionprimarily due to receivables associated with our GAC and gifts segments;

·                  inventories of $600,000 primarily due to thesale of GAC;

·                  property and equipment of $1.4 millionprimarily due to the sale of GAC;

·                  goodwill of $41.1 million resulting from thesale of GAC;

·                  trademarks and other intangible assets, netof $2.9 million primarily related to the impairment of the TCBY intangibleassets and amortization;

·                  deferred loan costs of $600,000 related toamortization;

 

Totalliabilities at June 28, 2008 were $247.5 million, an increase of $21.5 millionor 9.5 percent from $226.0 million at December 29, 2007.  This increase in liabilities was primarilydue to the following increases:

 

·                  amounts due to affiliates of $25.3 millionprimarily the result of amounts due to our parent under the tax sharingagreement; and

·                  current liabilities of discontinuedoperations of $100,000.

 

Theforegoing increases in liabilities were partially offset by the followingdecreases:

 

·                  accounts payable of $2.2 million;

·                  accrued liabilities of $1.6 million,primarily related to the semi-annual interest payment made in March 2008; and

·                  capital lease obligations of $100,000.

 

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***Consolidated Cash Flows for the 26 Weeks Ended June 28, 2008 Comparedto June 30, 2007***

 

Netcash flows used in operating activities from continuing operations were $17.1million for the 26 weeks ended June 28, 2008, an increase in cash used of $5.8million from net cash flows used in operating activities from continuingoperations of $11.3 million for the 26 weeks ended June 30, 2007.  This increase in cash used in operating activitiesfrom continuing operations was primarily due to the following:

 

·                  decrease in contribution by our operatingsegments of $2.0 million;

·                  increase in general and administrativeexpenses of $2.7 million; and

·                  decrease in cash used for working capitalassets and liabilities of $1.1 million.

 

Netcash flows used in investing activities from continuing operations were $73.7million for the 26 weeks ended June 28, 2008, an increase in cash used of $73.9million from cash provided by investing activities from continuing operationsof $200,000 for the 26 weeks ended June 30, 2007.  This increase in cash used in investingactivities from continuing operations was primarily due to the followingincreases:

 

·                  restricted cash of $73.4 million;

·                  proceeds from the sale of land of $300,000that occurred in 2007; and

·                  purchases of property and equipment of$200,000.

 

Netcash flows used in financing activities were negligible for the 26 weeks endedJune 28, 2008 and for the 26 weeks ended June 30, 2007 and relate to principalpayments on capital leases.

 

**Liquidityand Capital Resources**

 

Ourprincipal sources of liquidity are cash on hand and cash flows generated fromoperations.  At June 28, 2008, we had$2.8 million of cash on hand, excluding the $93.4 million of restricted cash.  We expect that our principal uses of cashwill be for working capital, capital expenditures and interest payments of$20.5 million on our Senior Secured Notes, of which $10.25 million will be dueon September 15, 2008 and March 15, 2009. In addition, to the extent we have cash available and it is permitted bythe indenture governing our Senior Notes (the "Indenture"), we maypay dividends to our parent companies for uses such as acquisitions, debtrepayments and dividends.  We do notexpect to be required, but we may offer, to repurchase a portion of the SeniorSecured Notes as described below.

 

Weare highly leveraged.  At June 28, 2008,we had $195.7 million of long-term debt represented by the Senior SecuredNotes.  The Senior Secured Notes matureon March 15, 2011, with interest payable semi-annually on March 15 andSeptember 15.  Due to borrowingrestrictions under the Indenture, our ability to obtain additional debtfinancing is significantly limited.  TheSenior Secured Notes require us to offer to repurchase a portion of the notesat 100 percent of the principal amount, plus accrued and unpaid interestthereon to the date of purchase, with 50 percent of our "excess cashflow," as defined in the Indenture agreement, when the ratio of our netindebtedness to consolidated EBITDA is above 3.75 to 1.0 and the cumulativeunpaid excess cash flow offer amount exceeds $10.0 million.  We do not anticipate that our "excesscash flow" will exceed the levels that would require us to offer torepurchase a portion of the notes described above.

 

Thecondensed consolidated financial statements, contained elsewhere in thisreport, were prepared on a going concern basis, which contemplates therealization of assets and the satisfaction of liabilities in the normal courseof business. The realization of assets and the satisfaction of liabilities inthe normal course of business are dependent on, among other things, our abilityto operate profitably and to generate positive cash flows from operations.  We have suffered recurring net losses and negativecash flows from operations and had a net member’s deficit at June 28, 2008 andDecember 29, 2007.  As a result, we willbe unable to make our scheduled $10.25 million semi-annual interest payment dueSeptember 15, 2008 on our Senior Secured Notes. Failure to make any scheduled semi-annual interest payment wouldconstitute an event of default under the Indenture, which could cause theSenior Secured Notes to become immediately due and payable.  We do not currently have the ability to repaythe Senior Secured Notes should they become due and payable.  These matters raise substantial doubt aboutour ability to continue as a going concern. We are pursuing various actions to improve its results of operations,cash flows and financial position.  Theseactions include, but are not limited to, the following:

 

·                  restructuring of our Senior Secured Notes;and

·                  staff reductions and other initiatives toreduce expenses and increase revenues.

 

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Dueto the substantial doubt about our ability to continue as a going concern, wehave not issued a new FDD and we have suspended sales of new franchises untilwe are in a position to issue a new FDD. We do not expect to issue a new FDD until we have been able to improveour overall liquidity position, including the restructuring of the SeniorSecured Notes.  Until we issue a new FDDthat reflects our most recent financial statements, we will be prohibited fromselling new franchises, which will adversely affect our business operations andfinancial condition.

 

OnAugust 13, 2008, we entered into amended Support Agreements with the NoteholderCommittee providing for a restructuring of the Senior Secured Notes to beeffected through the Plan under Chapter 11 of the U.S. Bankruptcy Code whichwould exchange for the Senior Secured Notes a combination of cash, new seniorsecured notes due 2014 and 87.5 percent of the common equity of our parentcompany, Mrs. Fields' Original Cookies, Inc. This restructuring is subject to various conditions, including approvalof the Plan from at least a majority in number of the holders of the SeniorSecured Notes, which condition is not met by the members of the NoteholderCommittee alone, and therefore there can be no assurance that it will besuccessfully completed.  If therestructuring is completed, we will have significantly less indebtedness.

 

**Inflation**

 

Theimpact of inflation on our business has not been significant in recentyears.  Some of our employees are paidhourly wages at 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.

 

**Seasonality**

 

Oursales and contribution from franchisees' store operations are highly seasonal,but our brands experience counteracting seasonal effects.  Our Mrs. Fields stores, primarily located inmalls, tend to mirror customer traffic flow trends in malls, which increasesignificantly during the fourth quarter, primarily between Thanksgiving and theend of the calendar year.  Holiday giftpurchases also are a significant factor in increased sales in the fourthquarter.  However, our Dairy storesexperience their strongest sales periods during the warmer months from lateSpring through early Fall, which helps to balance the impact of seasonality onour operations.  The combined revenuesfor each quarter of the Mrs. Fields Franchising and Dairy Franchising operatingsegments as a percentage of total combined revenues for these two operatingsegments for the fiscal year ended December 29, 2007 were 24.2 percent for thefirst quarter, 28.5 percent for the second quarter, 25.6 percent for the thirdquarter and 21.7 percent for the fourth quarter.

 

Oursales and contribution from our Mrs. Fields Gifts operating segment are highlyseasonal primarily due to holiday gift purchases that increase sales during thefourth quarter.  Sales in the fourthquarter of fiscal year 2007 were $17.6 million, which represented 56.8 percentof total sales of the gifts segment for the year ended December 29, 2007.

 

**CriticalAccounting Policies**

 

Thepreparation of financial statements requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities,disclosure of contingent assets and liabilities and the reported amounts ofrevenues and expenses in our consolidated financial statements.  Management has reviewed with our AuditCommittee the accounting policies that we use to prepare our consolidatedfinancial statements and believes that the following policies are the mostimportant to the portrayal of our financial condition and the results of ouroperations while requiring the use of judgments and estimates about the effectsof matters that are inherently uncertain.

 

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*Revenue Recognition*.  We recognize revenues from our initialfranchising fees and licensing fees when all material services or conditionsrelating to the franchising or licensing have been substantially performed orsatisfied, which is generally upon the opening of a store by a franchisee orlicensee.  Franchise and licenseroyalties, which are based on a percentage of gross store sales, are recognizedas earned, which is generally upon sale of product by franchisees orlicensees.  Minimum royalty paymentsunder certain licensing agreements are deferred and recognized on astraight-line basis over the term of the agreement.  Revenues, net of sales discounts andallowances, from the sale of branded retail products such as cookie dough andshelf stable cookies to grocery stores and wholesale clubs are recognized upondelivery and included in branded retail revenues.  Revenues, net of state and local sales tax,from gift sales are recognized at the time of shipment.

 

Wereceive cash payments for product formulation fees and allowances fromsuppliers based on the amount of product purchased directly by our distributorsand franchisees.  These productformulation fees and allowances include cash payments to us for the right touse our proprietary formulations and recipes to manufacture the frozen doughand yogurt these suppliers sell to our franchisees.  Formulation fees and allowances are recordedas franchising revenues within the Mrs. Fields Franchising and Dairy operatingsegments upon shipment of product to our distributors or franchisees.  Gross formulation fees and allowancesincluded in revenues in our operating segments are as follows (in thousands):

 
| ** **  | ** ** | **For the 13 Weeks Ended** | ** ** | **For the 26 Weeks Ended** | ** ** |
|-------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **  | ** ** | **June 28,**                              | ** ** | **June 30,**                              | ** ** | **June 28,** | ** ** | **June 30,** | ** ** |
| ** **  | ** ** | **2008**                                       | ** ** | **2007**                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Mrs. Fields |       | $                                              | 488        |                                           | $          | 472 |   | $ | 947 |   | $ | 888 |   |
| Dairy       |       | 1,813                                          |       | 2,111                                          |       | 2,946 |   | 3,639 |   |
|        |       | $                                              | 2,301      |                                           | $          | 2,583 |   | $ | 3,893 |   | $ | 4,527 |   |

 

InMarch 2003, we received $2.0 million from a supplier as an advance to maintainand expand beverage concepts at our franchised store locations.  This advance is being recognized as revenueon a ratable basis over the six-year term of the agreement.

 

*Impairment of Goodwill*. Goodwill is not amortized, but is subject to an annual assessment forimpairment, or more frequently if circumstances indicate potential impairment,through a comparison of fair value to its carrying amount.  The two-step approach to assess our goodwillimpairment requires that we first compare the estimated fair value of eachreporting unit with goodwill to the carrying amount of the reporting unit'sassets and liabilities, including its goodwill. If the fair value of the reporting unit is below its carrying amount,then the second step of the impairment test is performed, in which the currentfair value of the reporting unit's assets and liabilities will determine thecurrent implied fair value of the reporting unit's goodwill.  

 

On an annual basis (duringthe fourth quarter), or more frequently if circumstances indicate potentialimpairment, we perform an assessment for impairment of our goodwill associatedwith our reporting units, by comparing the reporting unit's fair value with itscarrying value.  The estimated fair valueof goodwill is affected by, among other things, operating results, our businessplan for the future, estimated results of future operations and the comparablecompanies and transactions that are used to estimate the fair value of ourgoodwill.  To the extent that thecarrying value of a reporting unit exceeds its fair value, goodwill is writtendown to its implied fair value.  Changesin our business plan or operating results that are different than theprojections used to develop the reporting unit's fair value may have an impacton the valuation of goodwill.

 

Inconducting our impairment analyses, we perform analyses and tests of ourgoodwill with respect to our reporting units. The test methods employed involve assumptions concerning useful lives ofintangible assets, interest and discount rates, projections and otherassumptions of future business conditions. The assumptions employed are based on management's judgment usinginternal and external data.

 

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*Impairment of Long-lived and Certain Identifiable Intangible Assets*.  We review our long-lived assets forimpairment when circumstances indicate that the carrying value of an asset maynot be fully recovered by the undiscounted net cash flow generated over theremaining life of the related asset or group of assets.  If the cash flows generated by the asset arenot sufficient to recover the remaining carrying value of the asset, we arerequired to write down the value of the asset to its estimated fair value.  In evaluating whether the asset will generatesufficient cash flow to recover its carrying value, we estimate the amount ofcash flow that will be generated by the asset and the remaining life of theasset.  In making our estimate, weconsider the performance trends related to the asset, the likelihood that thetrends will continue or change, at the asset grouping level for which there areidentifiable independent cash flows.

 

*Allowance for Doubtful Accounts*.  We sell products to and receive royaltiesfrom our franchisees and sell products to other customers.  Sometimes these franchisees and customers areunable or unwilling to pay for the products that they receive or royalties thatthey owe.  Factors that affect ourability to collect amounts that are due to us include the financial strength ofa franchisee or customer and its operations, the economic strength of the mallwhere the franchisee is located and the overall strength of the retaileconomy.  We are required to establish anestimated allowance for the amounts included in accounts receivable that wewill not be able to collect in the future. To establish this allowance, we evaluate the customer's or franchisee'sfinancial strength, payment history, reported sales and the availability ofcollateral to offset potential losses. If the assumptions that are used to determine the allowance for doubtfulaccounts change, we may have to provide for a greater level of expense infuture periods or reverse amounts provided in prior periods.

 

*Deferred Income Tax Assets*.  Deferred income tax assets are assessed forrecoverability and valuation allowances are provided as necessary to reducedeferred income tax assets to amounts expected to be realized.  Should expectations of taxable income changein future periods, it may become necessary to change the valuation allowance,which could affect our results of operations in the period such determinationis made.  We record an income taxprovision or benefit at a rate that is based on expected results for the fiscalyear.  If future changes in marketconditions cause actual results to be more or less favorable, adjustments tothe effective income tax rate on a quarterly basis could be required.

 

*Inventories*.  Inassessing the realizability of inventories, we make judgments as to futuredemand requirements and product expiration dates.  The inventory requirements change based onprojected customer demand, which changes due to fluctuations in marketconditions and product life cycles.

 

*Legal and Regulatory*.  We record liabilities for legal andregulatory matters when the contingency is both probable and reasonablyestimable.  We are involved in severallegal and regulatory matters.  Afterconsultation with legal counsel, we believe that the ultimate dispositions ofthese matters will not have a material negative impact on our financialposition, liquidity or results of operations. However, there can be no assurance that we will be successful in ourefforts to satisfactorily resolve these matters and the ultimate outcome couldresult in a material negative impact on our financial position, liquidity orresults of operations.

 

**AccountingPronouncements Issued Not Yet Adopted**

 

InDecember 2007, the Financial Accounting Standards Board ("FASB")issued Statement of Accounting Standards ("SFAS") No. 141 (revised2007), "Business Combinations" ("SFAS 141R").  SFAS 141R establishes principles andrequirements for how an acquirer of a business recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,any noncontrolling interest in the acquiree and the goodwill acquired.  SFAS 141R also establishes disclosurerequirements to enable the evaluation of the nature and financial effects ofthe business combination.  SFAS 141R iseffective for acquisitions in fiscal years beginning after December 15, 2008and will be adopted by us on January 4, 2009.

 

**Item 3.  Quantitative andQualitative Disclosures About Market Risk**

 

Therehave been no significant changes in market risks since the end of our fiscalyear ended December 29, 2007.  For moreinformation, please read Item 7A and the consolidated financial statements andnotes thereto contained in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission (the "SEC") on March 28, 2008.

 

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**Item 4.  Controls and Procedures**

 

Management,with the participation of the Interim Co-Chief Executive Officers("Interim Co-CEO's") and the Chief Accounting Officer (the"CAO"), evaluated the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report.  Based on that evaluation, the InterimCo-CEO's and the CAO concluded that our disclosure controls and procedures, asof the end of the period covered by this report, were not operating effectivelyto provide reasonable assurance that the information required to be disclosedby us in our reports filed under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin the SEC's rules and forms.  However, managementhas performed additional procedures in connection with the preparation of thisreport and the condensed consolidated financial statements contained herein toprovide reasonable assurance that this report contains all of the informationrequired to be disclosed.  A controlssystem, no matter how well designed and operated, cannot provide absoluteassurance that the objectives of the controls system are met, and no evaluationof controls can provide absolute assurance that all control issues and instancesof fraud, if any, within a company have been detected.

 

Therehas been no change in our internal control over financial reporting (as definedin Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934)that occurred during our fiscal quarter ended June 28, 2008, that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PART II – OTHER INFORMATION**

 

# **Item 1.  Legal Proceedings**

# ** **

        We and our products are subject to regulation by numerousgovernmental authorities, including, without limitation, federal, state andlocal laws and regulations governing franchising, health, sanitation,environmental protection, safety and hiring and employment practices.

 

        In the ordinary course of business, we are involved inroutine litigation, including franchise disputes and trademark disputes.  We are not a party to any legal proceedingsthat, in the opinion of management, after consultation with legal counsel, ismaterial to its business, financial condition or results of operations.

 

**Item1A.  Risk Factors**

 

The following riskfactors, among others, could cause our financial performance to differsignificantly from the goals, plans, objectives, intentions and expectationsexpressed in this report.  If any of thefollowing risks and uncertainties or other risks and uncertainties notcurrently known to us or not currently considered to be material actuallyoccur, our business, financial condition or operating results could be harmedsubstantially.

 

***Risks Related to Our Business***

 

*Theresults of operations of our business in the future will depend upon theeffectiveness of our business strategy and whether we are able to successfullyimplement our business strategy, the implementation of which depends on factorsthat are beyond our control.*

 

        We believe we have a sound business strategy that will enableus to grow our revenues and profitability. We believe that the implementation of our business strategy is key toenabling us to grow our revenues and profitability and, ultimately, our futuresuccess.  

 

* Our liquidity situation is so restricted andinadequate to meet our fiscal year 2008 obligations that we will be filing forprotection under Chapter 11 under the Bankruptcy Code in the near future.*

 

        Concerns over our ability to generatecash flows in amounts sufficient to meet our scheduled semi-annual interestpayments, including payments of $10.25 million due in September 2008, raisesubstantial doubt about our ability to continue as a going concern.  As a result, we will need to file forprotection under Chapter 11 under the Bankruptcy Code in the near future.  In an effort to address this liquidity issue,we are seeking to implement a financial restructuring through a “prepackaged”plan of reorganization pursuant to agreements entered into with a committee ofholders (the “Noteholder Committee”) of our 9 percent senior secured notes andour11 1⁄2 percent senior secured notes (collectively, the “Senior Secured Notes”)which are described elsewhere in this report. Completion of the proposed restructuring is subject to variousconditions, many of which are beyond our control or the control of theNoteholder Committee.  Accordingly, there can be no assurancethat the proposed restructuring will be completed successfully.  If it is not successfully completed, we anticipatethat our liquidity situation will continue to deteriorate and that we may notbe able to implement an alternative plan of reorganization under Chapter11.  If neither the “prepackaged plan”nor an alternative plan of reorganization is successfully completed, theCompany may need to be liquidated. Either an alternative reorganization or a liquidation is likely to haveinferior recoveries as compared to the recoveries of the “prepackaged plan” tothe holders of the Senior Secured Notes and to our other creditors.

 

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

 

        ThesaleoffranchisesisregulatedbyvariousstatelawsaswellasbytheFederalTradeCommission(the“FTC”).TheFTCrequiresthatfranchisorsmakeextensivedisclosureinafranchisedisclosuredocument(the“FDD”)toprospectivefranchiseesbutdoesnotrequireregistration.  However,anumberofstatesrequireannualregistrationoftheFDDwithstateauthoritiesorotherdisclosureinconnectionwithfranchiseoffersandsales.  Inaddition,severalstateshave“franchiserelationshiplaws”or“businessopportunitylaws”thatlimittheabilityofthefranchisorstoterminateagreementsortowithholdconsenttorenewalortransferoftheseagreements.

 

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There are certain eventsthat require us to make certain disclosures to state authorities.  Further, renewal of the FDD registrations isrequired in several states within a certain period of time following our fiscalyear end.  From time to time in thefuture, there will be periods of time after certain events, such as material changesto our officers, or financial performance, or commencement of materiallitigation, or in connection with renewal during which we may be prohibitedfrom selling our franchises in certain states. Without limiting the foregoing, our financial condition requires us todefer collection of certain fees in some states until the store opens.  If we are unable to sell our franchises foran extended period of time in certain states, our business operations orfinancial condition could be adversely affected.

 

Due to the substantialdoubt about our ability to continue as a going concern, we do not expect toissue a new FDD until we have additional information about alternatives toimprove our overall liquidity position, including the possibility ofrestructuring our Senior Secured Notes. Until we issue a new FDD that reflects our most recent financialstatements, we will be prohibited from selling new franchises, which willadversely affect our business operations and financial condition.

 

*Ourability to attract new franchisees, retain existing franchisees and locateand procure favorable store locations is critical to the successof our business.*

 

*       *We compete with a broad segment of other businessopportunities and franchise companies for franchisees.  There is alsoaggressive competition from many sources for favorable sites for newstores, both within and outside the mall environment.  Many ofour competitors have greater resources or more favorable businessmodels than ours with which to attract new investors and procure sites. If we are unable to attract new or existing franchisees to purchase newfranchises, or represent a competitive opportunity for leaseholders, itwill limit our ability to develop new franchised locations.

 

*Adecline in mall traffic and other events signaling or related to a downturn inthe United States of America (the “United States”) economy could cause our Mrs. Fieldsbrand franchise income to decrease materially.*

 

        We believe that the amount and proximity of pedestriantraffic near our Mrs. Fields brand stores strongly influence sales of ourproducts, which we believe are frequently impulse purchases.  In recent years, we believe visits to majorshopping malls, where at June 28, 2008 the majority of our Mrs. Fieldsfranchisees’ stores are located, have experienced periods of decline.  This trend has had a negative impact on ourrevenues.  We cannot predict whether thistrend will not continue or that this trend can be offset by increased sales percustomer.  Decrease in mall traffic, andother events that signal or arise from a downturn in the United States economy,such as continued increases in energy costs and other expenses that negativelyaffect consumer spending, could adversely affect our financial condition andresults of operations.

 

*Wehave experienced a number of franchise store closures since fiscal year2005.  If this trend continues, ourfinancial position and results of operations could continue to be adverselyaffected.*

 

        Since the end of fiscal year 2005, 7 retail concept locationswere closed by Mrs. Fields’ Original Cookies, Inc. (“MFOC”) and 807retail concept locations were closed by other franchisees.  These closures represent 32.8 percent of thetotal number of stores open at the beginning of fiscal year 2006.  In comparison, 289 retail concept locationshave opened since the end of fiscal year 2005.

 

        Since the end of fiscal year 2005, the number of Mrs. Fieldsbrand locations has decreased by 18.2 percent, the number of TCBY brandtraditional locations has decreased by 31.2 percent and the number of TCBYbrand non-traditional locations has decreased by 34.6 percent.  Additional store closures could occur in thefuture and we may be unable to successfully open additional new stores in thefuture.  If this trend continues, ourfinancial condition and results of operations may be adversely affected.

 

        Due to the substantial doubt about our ability to continue asa going concern, we have not issued a new FDD and we have suspended sales ofnew franchises until we are in a position to issue a new FDD.  We do not expect to issue a new FDD until wehave additional information about alternatives to improve our overall liquidityposition, including restructuring the Senior Secured Notes.  Until we issue a new FDD that reflects ourmost recent financial statements, we will be prohibited from selling newfranchises, which will adversely affect our business operations and financialcondition.

 

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*        We believe our brand identity iscritical to the success of our business. If we are unable to use any of our trademarks or to protect our tradesecrets, our sales and our results of operations will be adversely affected.*

 

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

 

*        We depend heavily on our suppliers anddistributors.*

 

        We depend on several primary suppliers, including CountrysideBaking, Inc. and Oak State Products, Inc., which supply products forour Mrs. Fields franchise system, gifts and branded retail business.  We also depend on two main suppliers forproduction of our TCBY branded yogurt products under Supply Agreements withScott Brothers Dairy, Inc. and Yarnell Ice Cream Company, Inc. Wealso depend on our primary distributors for distribution of perishable andnon-perishable items to our franchisees.

 

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

 

*        Our information systems are an integralpart of our gifts segment business. Systems disruptions and failures could cause our customers to becomedissatisfied with us and may impair our business.*

 

        Our ability to maintain our website, network system andtelecommunications equipment in working order and to reasonably protect themfrom interruption is critical to the success of our gifts businesssegment.  Our website must accommodateregular traffic, deliver information and complete transactions.  Our customers, advertisers and businessalliances may become dissatisfied by any systems failure that interrupts ourability to provide our products and services to them.

 

*        We believe that our relationship withour franchisees and retail licensees is critical to the success of ourbusiness.  If these franchise and retaillicense agreements were to be terminated or if we are unable to maintain theserelationships, our sales and our results of operations would be adverselyaffected.*

 

        We believe our relationships with our franchisees and ourlicensees are a critical component in the success of our business.  As required by state and federal franchisedisclosure rules, we must provide all prospective franchisees with the name andcontact information for each of the concept’s existing franchisees.  Prospects often contact existing franchiseesas part of their due diligence before making a franchise purchasedecision.  If our relationship withexisting franchisees is strained, it may slow or suspend franchise developmentwith new franchisees, as well as curtail additional development with existingfranchisees.  Strained relationships withexisting franchisees can also contribute to additional or accelerated closureof existing stores, particularly upon transfer or expiration of franchiseagreements and leases.

 

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* *

*        We may be harmed by actions taken by ourfranchisees or licensees that are beyond our control.*

 

        Our franchisees and licensees generally are independentbusiness owners and are not our employees. We require our franchisees and licensees to adhere to strict production,display, storage and marketing specifications and procedures and we providetraining and support to franchisees, but the quality of franchised storeoperations or licensed products may be diminished by any number of factorsbeyond our control.  Consequently,franchisees may not operate stores or licensees may not produce or marketlicensed products in a manner consistent with our standards and requirements,or may not hire and train qualified managers and other store personnel.  If they do not, our image, reputation andbrand may suffer and our franchise and license revenues as well as our abilityto attract prospective franchisees may be adversely affected.

 

*        We are vulnerable to fluctuations in thecost, availability and quality of our ingredients.*

 

        The cost, availability and quality of the ingredients we useto prepare our products in our gifts and branded retail operations are subjectto a range of factors, many of which are beyond our control.  Fluctuations in economic and politicalconditions, weather and demand could adversely affect the costs of ingredientsthat we and our suppliers use to make our products, which may in turn affectthe costs that our customers and franchisees may be required to pay for ourbranded products.  Significant priceincreases may in turn contribute to decreases in customer counts in our giftingand branded retail business, as well as decreases in store profits andincreases in store closures.  We have nocontrol over fluctuations in the price of commodities and we may not be able topass through any cost increases to our customers.  We are dependent on frequent deliveries offresh ingredients, thereby subjecting us to the risk of shortages orinterruptions in supply.  All of thesefactors could cause adverse market conditions which could adversely affect ourfinancial results.

 

        *Our branded retailbusiness is still relatively new and exists in a very competitive environment.*

 

        The sale of snack products to grocery, club stores andsimilar distribution channels is highly competitive and subject to ongoingexpenses related to slotting fees, advertising credits and discounts*. *Similarly,the business relies on relationships with vendors, brokers and customers.  We commenced this business in July 2006,and as with any relatively new business, we cannot predict with any certaintythe costs associated with operating the branded retail group or the revenues weexpect to generate.

 

*        We may have difficulty retaining keymanagement personnel, which could make it difficult for us to implement thebusiness strategy that current management has developed.*

 

        Our success depends on the continued services of our seniormanagement.  In addition, our continuedgrowth depends, in part, on attracting and retaining skilled managers andemployees as well as management’s ability to effectively utilize our keypersonnel.  On July 10, 2008,Stephen Russo resigned from his position as our President and Chief ExecutiveOfficer.  On July 15, 2008, weappointed Michael R. Ward and John Lauck as our Interim Co-Chief ExecutiveOfficers to fill the role vacated by Mr. Russo.  If Mr. Ward or Mr. Lauck or anyother senior management personnel leaves us, we may have difficulty inimplementing our business strategy and may fail to achieve expected profits asa result.  We cannot be sure thatmanagement’s efforts to integrate, utilize, attract and retain personnel willbe successful.

 

*        Our failure to respond to demographictrends, changes in consumer preferences and other factors and our failure toimplement new marketing strategies could have a material adverse effect on ourresults of operations.*

 

        The specialty and snack food industry is affected by changesin consumer preferences, tastes and eating habits, local, regional, nationaland international economic conditions, demographic trends and mall trafficpatterns.  A number of factors, includingincreased food, labor and benefits costs, the availability of experiencedmanagement and hourly employees and difficulties or delays in developing andintroducing new products to suit consumer preferences, may adversely affect thespecialty retail industry in general and our franchise outlets inparticular.  Our failure to anticipate,identify and respond to changing consumer preferences and economic conditionsand the failure of our customers to respond favorably to our marketing or newproducts could have a material adverse effect on our results of operations.

 

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        We believe our TCBY brand has struggled to stay relevant anddifferentiated from its competitors.  Webelieve it is important to the brand’s growth to reposition it in a way thatcapitalizes on yogurt’s current popularity and revitalize it through new storedesign and venues.  Our recentdevelopment and introduction of new products, such as the Beriyo smoothie line,and the new store design for TCBY traditional stores are integral parts of ourplans to accomplish this repositioning. However, we do not know how successful we will be in developing orimplementing this plan or the extent to which the capital investment requiredof us and our franchisees to implement such a plan will be available whenneeded.  If we are unable to successfullyimplement this or any other aspect of our business strategy, our businessoperations and our financial condition could be adversely affected.

 

        We have also initiated efforts to revitalize our Mrs. Fieldsbrand, including a new store design for franchises.  While these efforts are designed tostrengthen and revitalize the Mrs. Fields brand to help our franchiseesachieve a higher level of profitable sales, we cannot be certain that theseefforts will have this effect.

 

*        There is intense competition in thespecialty food retailers industry.*

 

        The specialty retail food and snack food industry is highlycompetitive with respect to price, service, location and food quality andwithin the industry we compete with cookie, baked goods, frozen yogurt and icecream retailers, as well as other confectionary, sweet snack and specialtyfoods retailers, many of which have greater resources than we do.  Consequently, we cannot be certain that wecan compete successfully with these other food retailers.  We will also face competition from NexCenBrands, Inc., who recently acquired the GAC and Pretzel Brand conceptsformerly owned and operated by us.

 

        In addition to the risks we face from current competitors, wecannot be certain that we can successfully compete with any new entrants intothe specialty retail food and snack food industry who may introduce new andsuccessful products or marketing.  Ourinability to compete adequately would have a material adverse effect on ourresults of operations.

 

*        Adverse publicity, particularly abouthealth concerns, could reduce our sales and adversely affect results ofoperations.*

 

        Our ability to compete depends in part on maintaining ourreputation with consumers.  We could beadversely affected by publicity resulting from food quality, illness, injury orother health concerns, including food borne illness claims or operating issuesstemming from one store, a limited number of stores or even a competitor’sstore.  In addition, we use ingredientsin several of our products, such as nuts, to which some people may haveallergies, and butter and cream, which are high in fat.  There may be adverse publicity about thehealth risks relating to these or other ingredients.  Adverse publicity about these factors couldreduce sales of our products and adversely affect results of operations.

 

*        Our international operations are exposedto various risks that could have a material adverse effect on our results ofoperations and financial condition.*

 

        We have franchised and licensed retail stores in numerousforeign countries.  While most of ouroperations are in the United States, through our franchised retail storelocations and our branded retail activities, we also have operations innumerous other regions, including operations in Canada, Mexico, Australia,South America, the Caribbean, the Middle East and Asia, representingapproximately 4.8 percent of our total revenue during fiscal year 2007.  We expect to expand into additional regionsin the future.  Our internationaloperations are subject to many additional risks, including:

 

·                  the burden of complying with multiple andpossibly conflicting laws and any unexpected changes in regulatoryrequirements;

·                  import and export restrictions andtariffs;

·                  additional expenses relating to the difficultiesand costs of staffing and managing international operations;

·                  litigation in foreign jurisdictions;

·                  potentially adverse tax consequences;

·                  increased competition as a result ofsubsidies to local companies;

·                  political instability or war;

·                  cultural differences;

 

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·                  the impact of business cycles andeconomic instability; and

·                  increased expense as a result ofinflation.

 

        Any one of these factors could have a material adverse affecton our sales of products or services to our international customers and curtailour expansion strategy.

 

*        Government regulation of our businesscould adversely affect the results of our operations.*

 

        Numerous governmental authorities have issued regulationsthat apply to us and our franchisees’ stores, including, without limitation,federal, state and local laws and regulations governing health, sanitation,environmental protection, safety, hiring and employment practices, includinglaws, such as the Fair Labor Standards Act, governing such matters as minimumwages, overtime and other working conditions. The FDA administers regulations that apply to our products.  If we fail to obtain or retain the requiredfood licenses or to comply with applicable governmental regulations or if thereis any increase in employee benefit costs or other costs associated withemployees, our costs could increase as we attempt to comply with regulations.  Our revenues could decrease if we or oursuppliers are unable to manufacture or if our franchisees or licensees areunable to sell products in locations in which we do not have required licenses,or if existing or new regulation leads to material changes in the quality,taste, consumer appeal, or availability of our products.  Our products, the manufacturers and theirmanufacturing facilities are also subject to periodic inspection.  Discovery of problems may reduce our resultsof operations because of costs of compliance or inability to manufacture orsell products for failure to comply with regulations.

 

        In addition, the sale of franchises is regulated by variousstate laws as well as by the FTC.  TheFTC requires that franchisors make extensive disclosure in a FDD to prospectivefranchisees, but does not require registration. However, a number of states require registration of the FDD with stateauthorities or other disclosure in connection with franchise offers andsales.  In addition, several states have “franchiserelationship laws” or “business opportunity laws” that limit the ability of thefranchisors to terminate agreements or to withhold consent to renewal ortransfer of these agreements.  While webelieve that we are in compliance with existing regulations in thejurisdictions where we currently offer franchises, we cannot predict the effectof any future legislation or regulation on our business operations or financialcondition.  Additionally, bills haveoccasionally been introduced in Congress which would provide for federalregulation of aspects of franchisor-franchisee relationships.  We cannot predict what effect thoseregulations could have on our business.

 

*Anyinterruption in funding sources used by franchisees to purchase and develop ourfranchises could adversely impact our ability to market franchises.*

 

        Many of our franchisees must obtain loans to purchase anddevelop our franchises.  One significantsource of this funding is the U.S. Small Business Administration (“SBA”).  Any suspension of funding or delays inapproval of the SBA’s funding budget will affect our franchisees’ ability toobtain funding from this significant source and adversely impact our ability tomarket franchises.  Recent developmentsin the mortgage and finance industries have adversely affected some sources offunding and may also make it more difficult for franchisees to obtain fundingfor current operations and new development.

 

*        Litigation, including product liabilitylitigation, could reduce our results of operations or increase our lossesbecause of the cost of paying on successful claims and we may not be able tocontinue to obtain adequate insurance.*

 

        We are involved in routine litigation in the ordinary courseof business, including franchise disputes. Although we have not been significantly adversely affected in the pastby litigation, there can be no assurance as to the effect of any futuredisputes.

 

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        Although we currently are not subject to any productliability litigation, we could experience product liability litigation in thefuture involving our products.  Ourquality control program is designed to maintain high standards for the food andmaterials and food preparation procedures used by franchised stores.  Products are periodically inspected by ourpersonnel at both the point of sale locations and the manufacturing facilitiesto ensure that they conform to our standards. In addition to insurance held by our suppliers, we maintain insurancerelating to personal injury and product liability in amounts that we consideradequate for the retail food industry. While we have been able to obtain insurance in the past, there can be noassurance that we will be able to maintain these insurance policies in thefuture.  Consequently, any successfulclaim against us, in an amount materially exceeding our coverage, could adverselyaffect our results of operations and financial condition.

 

*        Our operating results are subject toquarterly fluctuations and seasonality.*

 

        Our operating results are subject to quarterly and seasonalfluctuations.  Our sales and income fromfranchisees’ store operations are seasonal given the significant impact of thehigh number of mall-based locations.  Atthese locations, sales tend to mirror customer traffic flow trends in malls,which increase significantly during the fourth quarter, primarily betweenThanksgiving and the end of the calendar year. Holiday gift purchases also are a significant factor in increased salesin the fourth quarter.  However, our TCBYfranchised stores tend to have their strongest sales periods during the warmermonths from late Spring through early Fall, which helps to balance the impactof seasonality on our operations.  Inaddition, by marketing our Mrs. Fields’ cookie brand around holidays thatoccur in late Winter and early Spring, such as Valentine’s Day and Easter, aswell as holidays in the late Fall, such as Halloween, we hope to continue todecrease the impact of seasonality on our cash flow.  However, we may not be successful indecreasing the impact of seasonality on our cash flow.  If we are unable to manage seasonalfluctuations of cash flow, our financial condition and results of operationsmay be adversely affected.

 

        We recently sold our Pretzel Brands and GAC brands. The saleof these businesses could increase our exposure to quarterly and seasonalfluctuations.

 

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

 

*Oursubstantial level of indebtedness could adversely affect our financialcondition and prevent us from fulfilling our obligations under our SeniorSecured Notes.*

* *

In addition to the information below, please see disclosures set outunder the second risk factor on page 43 which details our need to seek toimplement a financial restructuring through a prepackaged plan ofreorganization and the risks involved with this course of action.

 

We havesubstantial indebtedness represented by our Senior Secured Notes.  In addition, subject to restrictions in theindenture governing the Senior Secured Notes (the “Indenture”), we may incuradditional indebtedness.

 

Our high level ofindebtedness could have important consequences, including the following:

 

·                  our ability to obtain additionalfinancing for working capital, capital expenditures, acquisitions or generalcorporate purposes may be limited;

·                  we must use a substantial portion of ourcash flow from operations to pay interest and required principal on the SeniorSecured Notes and, to the extent incurred, our other indebtedness, which willreduce the funds available to us for operations and other purposes;

·                  our high level of indebtedness couldplace us at a competitive disadvantage compared to our competitors that mayhave proportionately less debt;

·                  our flexibility in planning for, orreacting to, changes in our business and the industry in which we operate maybe limited; and

·                  our high level of indebtedness makes usmore vulnerable to economic downturns and adverse developments in our business.

 

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        We expect to obtain the money to pay our expenses and to paythe amounts due under the Senior Secured Notes and our other debt primarilyfrom our operations.  Our ability to meetour expenses and make these payments thus depends on our future performance,which will be affected by financial, business, economic and other factors, manyof which we cannot control.  Excludingcash received upon the sale of certain businesses, our available cash hasdecreased since fiscal year 2006.  Ourbusiness may not generate sufficient cash flow from operations in the futureand our currently anticipated growth in revenue and cash flow may not berealized, either or both of which could result in our being unable to repayindebtedness, including the Senior Secured Notes or to fund other liquidityneeds.  If we do not have enough money, wemay be required to attempt to refinance all or part of our then existing debt(including the Senior Secured Notes), sell assets or borrow more money.  However, we may not be able to accomplish anyof these alternatives on terms acceptable to us, or at all.  In addition, the terms of existing or futuredebt agreements, including the Indenture, may restrict us from adopting any ofthese alternatives.  The failure togenerate sufficient cash flow or to achieve any of these alternatives couldhave a material adverse effect on our business and our ability to pay theamounts due under the Senior Secured Notes.

 

*        The Indenture imposes significantoperating and financial restrictions, which may prevent us from pursuingcertain business opportunities and taking certain actions.*

 

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

 

·                  incur additional indebtedness;

·                  repay subordinated indebtedness prior tostated maturities;

·                  pay dividends on or redeem or repurchaseour stock;

·                  issue capital stock;

·                  make investments;

·                  create liens;

·                  sell certain assets or merge with or intoother companies;

·                  enter into certain transactions withstockholders and affiliates;

·                  sell stock in our subsidiaries;

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

·                  otherwise conduct necessary corporateactivities.

 

        To the extent that we wish to conduct these restrictedactivities, we must do so in strict accordance with the provisions of theIndenture.  These restrictions couldadversely affect our ability to finance our future operations or capital needsand pursue available business opportunities. A breach of any of these restrictions could result in a default inrespect of the related indebtedness.  Ifa default occurs, the relevant lenders could elect to declare the indebtedness,together with accrued interest and fees, to be immediately due and payable andproceed against any collateral securing that indebtedness, which includessubstantially all of our assets. Acceleration of our other indebtedness could result in a default underthe terms of the Indenture and our assets may not be sufficient to satisfy ourobligations under our indebtedness, including the Senior Secured Notes.

 

*        Our parent companies may take actionsthat conflict with noteholder, franchisee and other interests.*

 

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

 

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# **Item 6.  Exhibits**

# ** **

10.1                         Form of Support Agreement, includingRestructuring Term Sheet, dated June 3, 2008 among Mrs. Fields FamousBrands, LLC, Mrs. Fields Financing Company, Inc. and certain holdersof the Company’s Senior Secured Notes (incorporated by reference to Exhibit 10.1of our current report on form 8-K filed on June 6, 2008).

 

10.2                         Amendment to Restructuring Term Sheet,dated July 11, 2008 by and among Mrs. Fields Famous Brands, LLC, Mrs. FieldsFinancing Company, Inc., Mrs. Fields Original Cookies, Inc. andcertain holders of the Company’s Senior Secured Notes (incorporated byreference to Exhibit 10.2 of our current report on form 8-K filed on July 15,2008).

 

10.3                         Disclosure Statement for the joint prepackagedplan of reorganization under Chapter 11 of the Bankruptcy Code of Mrs. FieldsOriginal Cookies, Inc. and certain subsidiaries dated August 15, 2008(incorporated by reference to Exhibit 10.3 of our current report on form8-K filed on August 15, 2008).

 

31.1                         Certification of Interim Co-ChiefExecutive Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of theExchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

 

31.2                         Certification of Interim Co-ChiefExecutive Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of theExchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

 

31.3                         Certification of Chief Accounting OfficerPursuant to Rule 13a-15(e) or 15d-15(e) of the Exchange Act, AsAdopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32                                  Certification of Interim Co-ChiefExecutive Officers and Chief Accounting Officer Pursuant to 18 U.S.C. Section 1350,AsAdopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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# **SIGNATURES**

# ** **

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.

 

 
| **MRS.  FIELDS FAMOUS BRANDS, LLC**                                       |         |
|---------------------------------------------------------------------------|--------------|
|                                                                      |
|                                                                      |
| /s/ Michael R. Ward                                                       |         | August 18, 2008 |
| **Michael  R. Ward**                                                      | ** **   | **Date** |
| **Executive  Vice President and Interim Co-Chief Executive Officer**      | ** **   | ** ** |
| (*Principal Executive Officer*)                                           |         |   |
|                                                                      |         |   |
|                                                                      |         |   |
| /s/ John Lauck                                                            |         | August 18, 2008 |
| **John  Lauck**                                                           | ** **   | **Date** |
| **President  of Mrs. Fields and Interim Co-Chief Executive Officer** | ** **   | ** ** |
| (*Principal Executive Officer*)                                           |         |   |
|                                                                      |         |   |
|                                                                      |         |   |
| /s/ Steven K. Passey                                                      |         | August 18, 2008 |
| **Steven  K. Passey**                                                     | ** **   | **Date** |
| **Chief  Accounting Officer and Treasurer**                               | ** **   | ** ** |
| ***(Principal Financial Officer)***                                       | *** *** | *** *** |
|                                                                           |              |  |  |

 

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