** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

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

 

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** **

**FORM 10-Q**

** **

**(Mark One)**

| **ý**                                                                                                                                                                                                                      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                      | ** ** | ** **                                                                                              |
| **For the  quarterly period ended July 2, 2005**                                                                                                                                                                           |
|                                                                                                                                                                                                                            |
| **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 ItsCharter)

 
| **Delaware**                                                            | ** ** | **80-0096938**                    |
|-------------------------------------------------------------------------|------------|-----------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization)         |       | (IRS Employer Identification No.) |
| ** **                                                              | ** ** | ** **                        |
| **2855 East Cottonwood Parkway,  Suite 400  Salt Lake City, Utah** | ** ** | **84121-1050**                    |
| (Address of principal executive offices)                                |       | (Zip code)                        |

 

Registrant’s telephone number, including areacode:**(801) 736-5600**

 

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Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. YES ý  NO  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined by Rule 12b-2 of the Exchange Act). YES o  NO  ý

 

On August 16, 2005, 100common interests of registrant were outstanding, all of which are held by anaffiliate.  There is no establishedtrading market for registrant’s common interests.

 

 

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

 

**TABLEOF CONTENTS**

 
| **PART I – FINANCIAL INFORMATION**                                                                                                                  |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                          |   |
| *Item 1. Financial Statements*                                                                                                                                |   |
| * *                                                                                                                                                      |   |
| Condensed Consolidated Balance Sheets as of July 2, 2005 and  January 1, 2005                                                                       |   |
|                                                                                                                                                          |   |
| Condensed Consolidated Statements of Operations and Comprehensive  Income (Loss) for the 13 weeks and 26 weeks ended July 2, 2005 and  July 3, 2004 |   |
|                                                                                                                                                          |   |
| Condensed Consolidated Statements of Cash Flows for the 26 Weeks  ended July 2, 2005 and July 3, 2004                                               |   |
|                                                                                                                                                          |   |
| Notes to Condensed Consolidated Financial Statements                                                                                                          |   |
|                                                                                                                                                          |   |
| *Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations*                                                         |   |
| * *                                                                                                                                                      |   |
| *Item 3. Quantitative and  Qualitative Disclosures about Market Risk*                                                                                         |   |
| * *                                                                                                                                                      |   |
| *Item 4. Controls and Procedures*                                                                                                                             |   |
| * *                                                                                                                                                      |   |
| **PART II - OTHER INFORMATION**                                                                                                                          |   |
|                                                                                                                                                          |   |
| *Item 1. Legal Proceedings*                                                                                                                                   |   |
| * *                                                                                                                                                      |   |
| *Item  5. Other Information*                                                                                                                                  |   |
| * *                                                                                                                                                      |   |
| *Item 6. Exhibits*                                                                                                                                            |   |
| * *                                                                                                                                                      |   |
| *SIGNATURES*                                                                                                                                                  |   |

 

2

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# **PART I – FINANCIAL INFORMATION**

 

# **Item 1. Financial Statements**

# ** **

**MRS. FIELDS FAMOUS BRANDS, LLC**

**Condensed Consolidated Balance Sheets**

**(Unaudited)**

**(Dollars in thousands)**

 
| ** **                                                                               | ** ** | **July 2,  2005** | ** ** | **January 1,  2005** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| ASSETS:                                                                                  |       |                   |       |                      |       |
| Cash and cash equivalents                                                                |       | $                      | 19,995     |                      | $          | 19,859 |   |
| Receivables, net of allowance for doubtful  accounts of $546 and $1,295, respectively    |       | 6,678                  |       | 8,039                     |       |
| Amounts due from affiliates                                                              |       | —                 |       | 23                        |       |
| Inventories                                                                              |       | 2,501                  |       | 2,626                     |       |
| Prepaid expenses and other                                                               |       | 776                    |       | 1,200                     |       |
| Deferred tax asset                                                                       |       | 817                    |       | 1,120                     |       |
|                                                                                     |       |                   |       |                      |       |
| Total current assets                                                                     |       | 30,767                 |       | 32,867                    |       |
|                                                                                     |       |                   |       |                      |       |
| Property and equipment, net                                                              |       | 3,700                  |       | 3,486                     |       |
| Goodwill                                                                                 |       | 113,456                |       | 113,456                   |       |
| Trademarks and other intangible assets, net                                              |       | 22,059                 |       | 23,419                    |       |
| Deferred loan costs, net of accumulated  amortization of $9,674 and $9,043, respectively |       | 7,254                  |       | 7,885                     |       |
| Other assets                                                                             |       | 657                    |       | 668                       |       |
|                                                                                     |       |                   |       |                      |       |
|                                                                                     |       | $                      | 177,893    |                      | $          | 181,781 |   |
|                                                                                     |       |                   |       |                      |       |
| LIABILITIES AND MEMBER’S DEFICIT:                                                   |       |                   |       |                      |       |
| Accounts payable                                                                         |       | $                      | 2,484      |                      | $          | 4,334 |   |
| Accrued liabilities                                                                      |       | 13,248                 |       | 14,646                    |       |
| Amounts due to affiliates                                                                |       | 2,511                  |       | 2,780                     |       |
| Current portion of capital lease  obligations                                            |       | 101                    |       | 36                        |       |
| Current portion of deferred revenues                                                     |       | 1,783                  |       | 2,049                     |       |
|                                                                                     |       |                   |       |                      |       |
| Total current liabilities                                                                |       | 20,127                 |       | 23,845                    |       |
|                                                                                     |       |                   |       |                      |       |
| Long-term debt                                                                           |       | 195,747                |       | 195,747                   |       |
| Capital lease obligations, net of current  portion                                       |       | 543                    |       | 427                       |       |
| Deferred revenues, net of current portion                                                |       | 1,164                  |       | 1,387                     |       |
| Deferred tax liability                                                                   |       | 3,833                  |       | 3,876                     |       |
|                                                                                     |       |                   |       |                      |       |
| Total liabilities                                                                        |       | 221,414                |       | 225,282                   |       |
|                                                                                     |       |                   |       |                      |       |
| Member’s deficit                                                                    |       | (43,379                | )          | (43,365                   | )          |
| Accumulated other comprehensive loss                                                     |       | (142                   | )          | (136                      | )          |
|                                                                                     |       |                   |       |                      |       |
| Total member’s deficit                                                              |       | (43,521                | )          | (43,501                   | )          |
|                                                                                     |       |                   |       |                      |       |
| COMMITMENTS AND CONTINGENCIES                                                            |       |                   |       |                      |       |
|                                                                                     |       | $                      | 177,893    |                      | $          | 181,781 |   |

 

See accompanying notes to condensed consolidated financial statements

 

3

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**MRS. FIELDS FAMOUS BRANDS, LLC**

**Condensed Consolidated Statements Of Operations andComprehensive Income (Loss)**

**(Unaudited)**

**(Dollars in thousands)**

 
| ** **                                                                                      | ** ** | **13 Weeks Ended**     | ** ** | **26 Weeks Ended**     | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                      | ** ** | **July 2,  2005** | ** ** | **July 3,  2004** | ** ** | **July 2,  2005** | ** ** | **July 3,  2004** | ** ** |
| REVENUES:                                                                                       |       |                   |       |                   |       |   |   |   |   |
| Franchising                                                                                     |       | $                      | 13,969     |                   | $          | 15,228 |   | $ | 26,323 |   | $ | 28,233 |   |
| Gifts                                                                                           |       | 5,389                  |       | 4,758                  |       | 10,349 |   | 9,298 |   |
| Licensing                                                                                       |       | 839                    |       | 1,191                  |       | 1,977 |   | 2,448 |   |
| Other                                                                                           |       | 67                     |       | 58                     |       | 119 |   | 141 |   |
|                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Total revenues                                                                                  |       | 20,264                 |       | 21,235                 |       | 38,768 |   | 40,120 |   |
|                                                                                            |       |                   |       |                   |       |   |   |   |   |
| OPERATING COSTS AND EXPENSES:                                                                   |       |                   |       |                   |       |   |   |   |   |
| Franchising                                                                                     |       | 5,726                  |       | 6,345                  |       | 10,814 |   | 10,520 |   |
| Gifts                                                                                           |       | 5,330                  |       | 4,230                  |       | 10,578 |   | 7,896 |   |
| Licensing                                                                                       |       | 213                    |       | 200                    |       | 355 |   | 329 |   |
| General and administrative                                                                      |       | 2,297                  |       | 3,052                  |       | 4,302 |   | 5,365 |   |
| Stock compensation expense                                                                      |       | —                 |       | 13                     |       | — |   | 26 |   |
| Costs associated with debt refinancing, net                                                     |       | —                 |       | —                 |       | — |   | 87 |   |
| Depreciation                                                                                    |       | 274                    |       | 324                    |       | 553 |   | 640 |   |
| Amortization                                                                                    |       | 705                    |       | 701                    |       | 1,410 |   | 1,416 |   |
| Other operating expenses (income), net                                                          |       | 44                     |       | (40                    | )          | 81 |   | (22 | ) |
|                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Total operating costs and expenses                                                              |       | 14,589                 |       | 14,825                 |       | 28,093 |   | 26,257 |   |
|                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Income from operations                                                                          |       | 5,675                  |       | 6,410                  |       | 10,675 |   | 13,863 |   |
|                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Interest expense, net                                                                           |       | (5,344                 | )          | (5,502                 | )          | (10,699 | ) | (14,387 | ) |
| Other income                                                                                    |       | —                 |       | —                 |       | — |   | 1,054 |   |
|                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Income (loss) from continuing operations before  provision (benefit) for income taxes           |       | 331                    |       | 908                    |       | (24 | ) | 530 |   |
|                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Provision (benefit) for income taxes                                                            |       | 110                    |       | 415                    |       | (10 | ) | 230 |   |
|                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Income (loss) from continuing operations                                                        |       | 221                    |       | 493                    |       | (14 | ) | 300 |   |
|                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Income from discontinued operations (net of  income taxes of $0, $10, $0 and $39, respectively) |       | —                 |       | 11                     |       | — |   | 58 |   |
|                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Net income (loss)                                                                               |       | $                      | 221        |                   | $          | 504 |   | $ | (14 | ) | $ | 358 |   |
|                                                                                            |       |                   |       |                   |       |   |   |   |   |
| COMPREHENSIVE INCOME (LOSS):                                                                    |       |                   |       |                   |       |   |   |   |   |
| Net income (loss)                                                                               |       | $                      | 221        |                   | $          | 504 |   | $ | (14 | ) | $ | 358 |   |
| Foreign currency translation adjustment                                                         |       | (1                     | )          | 19                     |       | (6 | ) | 17 |   |
|                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Comprehensive income (loss)                                                                     |       | $                      | 220        |                   | $          | 523 |   | $ | (20 | ) | $ | 375 |   |

 

See accompanying notes tocondensed consolidated financial statements

 

4

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**MRS. FIELDSFAMOUS BRANDS, LLC**

**Consolidated Statements Of Cash Flows(Unaudited)**

**(Dollars inthousands)**

 
| ** **                                                                                                       | ** ** | **26 Weeks Ended**     | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                       | ** ** | **July 2,  2005** | ** ** | **July 3,  2004** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                            |       |                   |       |   |   |
| Income (loss) from continuing operations                                                                         |       | $                      | (14        | ) | $ | 300 |   |
| Adjustments to reconcile income (loss) from  continuing operations to net cash provided by operating activities: |       |                   |       |   |   |
| Gain on sale of equity warrants                                                                                  |       | —                 |       | (1,054 | ) |
| Depreciation and amortization                                                                                    |       | 1,963                  |       | 2,056 |   |
| Amortization of deferred loan costs                                                                              |       | 631                    |       | 3,124 |   |
| Stock compensation expense                                                                                       |       | —                 |       | 26 |   |
| Amortization of discount on notes                                                                                |       | —                 |       | 1,245 |   |
| Deferred income taxes                                                                                            |       | 260                    |       | (1,736 | ) |
| Changes in assets and liabilities                                                                                |       |                   |       |   |   |
| Receivables, net                                                                                                 |       | 1,361                  |       | 2,087 |   |
| Amounts due to/from affiliates, net                                                                              |       | (246                   | )          | (1,416 | ) |
| Inventories, net                                                                                                 |       | 125                    |       | (133 | ) |
| Prepaid expenses and other                                                                                       |       | 424                    |       | 182 |   |
| Other assets                                                                                                     |       | (39                    | )          | (69 | ) |
| Accounts payable                                                                                                 |       | (1,850                 | )          | (4,894 | ) |
| Accrued liabilities                                                                                              |       | (1,398                 | )          | 4,603 |   |
| Deferred revenues                                                                                                |       | (489                   | )          | (567 | ) |
|                                                                                                             |       |                   |       |   |   |
| Net cash provided by continuing operating  activities                                                            |       | 728                    |       | 3,754 |   |
| Net cash used in discontinued operating  activities                                                              |       | —                 |       | (251 | ) |
|                                                                                                             |       |                   |       |   |   |
| Net cash provided by operating activities                                                                        |       | 728                    |       | 3,503 |   |
|                                                                                                             |       |                   |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                            |       |                   |       |   |   |
| Proceeds from sale of equity warrants                                                                            |       | —                 |       | 1,054 |   |
| Purchases of property and equipment                                                                              |       | (569                   | )          | (72 | ) |
|                                                                                                             |       |                   |       |   |   |
| Net cash (used in) provided by investing  activities                                                             |       | (569                   | )          | 982 |   |
|                                                                                                             |       |                   |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                            |       |                   |       |   |   |
| Net payments under line of credit                                                                                |       | —                 |       | (3,452 | ) |
| Principal payments on long-term debt                                                                             |       | —                 |       | (98,014 | ) |
| Payment of debt financing costs                                                                                  |       | —                 |       | (12,034 | ) |
| Proceeds from issuance of Senior Secured  Notes                                                                  |       | —                 |       | 115,000 |   |
| Principal payments on capital lease                                                                              |       | (17                    | )          | (23 | ) |
| Contribution by parent                                                                                           |       | —                 |       | 17,500 |   |
| Other activity with parent                                                                                       |       | —                 |       | (7,996 | ) |
|                                                                                                             |       |                   |       |   |   |
| Net cash (used in) provided by financing  activities                                                             |       | (17                    | )          | 10,981 |   |
|                                                                                                             |       |                   |       |   |   |
| Effect of foreign exchange rate changes on  cash                                                                 |       | (6                     | )          | 17 |   |
|                                                                                                             |       |                   |       |   |   |
| Net increase in cash and cash equivalents                                                                        |       | 136                    |       | 15,483 |   |
| Cash and cash equivalents at beginning of  period                                                                |       | 19,859                 |       | 1,300 |   |
|                                                                                                             |       |                   |       |   |   |
| Cash and cash equivalents at end of period                                                                       |       | $                      | 19,995     |   | $ | 16,783 |   |
|                                                                                                             |       |                   |       |   |   |
| **Supplemental Disclosure of Cash Flow  Information:**                                                           |       |                   |       |   |   |
| Cash paid for interest                                                                                           |       | $                      | 10,286     |   | $ | 6,295 |   |
| Cash paid for income taxes                                                                                       |       | 74                     |       | 50 |   |
| Cash paid to parent for income taxes                                                                             |       | —                 |       | 1,450 |   |
|                                                                                                             |       |                   |       |   |   |
| **Supplemental Disclosure of Noncash Investing  and Financing Activities:**                                      |       |                   |       |   |   |
| Assets acquired under capital lease                                                                              |       | $                      | 198        |   | $ | 500 |   |

 

See accompanying notes tocondensed consolidated financial statements

 

5

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**MRS. FIELDS FAMOUS BRANDS, LLC**

**Notes to Condensed Consolidated Financial Statements**

**(Unaudited)**

 

**1.  Basisof Presentation**

 

The accompanying unaudited condensed consolidated financial statementshave been prepared by Mrs. Fields Famous Brands, LLC and subsidiaries (the“Company” or “Mrs. Fields”) in accordance with the rules andregulations of the Securities and Exchange Commission for interim financialinformation and, accordingly, do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America (“United States”) for a complete presentation of thefinancial statements. In the opinion of management, these unaudited condensedconsolidated financial statements reflect all adjustments, which consist onlyof normal recurring adjustments, necessary to present fairly the financialposition of Mrs. Fields as of July 2, 2005 and January 1, 2005,and the results of their operations and their cash flows for the periodspresented. The preparation of financial statements in conformity withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the financial statements and thereported amounts of revenue and expenses during the reporting period. Actualresults could differ from these estimates. These unaudited condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto for the fiscal year ended January 1,2005 contained in Mrs. Fields’ Form 10-K, filed with the Securitiesand Exchange Commission on March 22, 2005.

 

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

 

The results of operations for the 13 and 26 weeks ended July 2,2005 are not necessarily indicative of the results that may be expected for theremainder of the fiscal year ending December 31, 2005.  Income per common interest information is notpresented because Mrs. Fields is wholly-owned by MFOC and, therefore, itscommon interests are not publicly traded.

 

**2.  RecentAccounting Pronouncements**

 

In May 2005, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standard (“SFAS”) No. 154 (“SFAS154”), “Accounting for Changes and Errors Corrections - a Replacement of APBOpinion No. 20 and FASB Statement No. 3.”  Previously, APB No. 20, “AccountingChanges” and SFAS No. 3, “Reporting Accounting Changes in InterimFinancial Statements” required the inclusion of the cumulative effect ofchanges in accounting principles in net income of the period of thechange.  SFAS 154 requires companies torecognize changes in accounting principle, including changes required by newaccounting pronouncements when the pronouncement does not include specifictransition provisions, retrospectively to prior periods’ financialstatements.  The Company will assess theimpact of a retrospective application of a change in accounting principle inaccordance with SFAS 154 if the need for such a change arises after theeffective date of January 1, 2006.

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004)(“SFAS 123R”), “Share-Based Payment,” which is a revision of SFAS No. 123(“SFAS 123”), “Accounting for Stock-Based Compensation.” SFAS 123R supersedesAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees” and amends SFAS No. 95, “Statement of Cash Flows.”Generally, the approach in SFAS 123R is similar to the approach described inSFAS 123. However, SFAS 123R requires all share-based payments to employees,including grants of employee stock options, to be recognized in the incomestatement based upon their fair values. Pro forma disclosure is no longer analternative. The new standard will be effective for the Company beginning January 1,2006. The adoption of SFAS 123R is not expected to have a material effect onthe Company’s consolidated financial statements.

 

6

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In November 2004, the FASB issued SFAS No. 151 (“SFAS151”), “Inventory Costs, an amendment of ARB No. 43, Chapter 4,”which clarifies the types of costs that should be expensed rather thancapitalized as inventory. This statement also clarifies the circumstances underwhich fixed overhead costs associated with operating facilities involved ininventory processing should be capitalized. The new standard will be effectivefor the Company beginning January 1, 2006. The adoption of SFAS 151 is not expected to have a material impacton the Company’s consolidated financial position or results of operations.

 

**3. Receivables**

** **

The Company’s receivables are primarily due from domestic andinternational franchisees, distributors, licensees and corporate customers inour gifts segment and consist of normal trade accounts receivable andlonger-term notes receivable. Service charges may be assessed on past dueinvoices but any revenues associated with these charges is only recognized whencollected. The Company maintains an allowance for doubtful accounts to coverpotential losses. This allowance is the Company’s best estimate of the amountof probable collection losses in the Company’s existing trade accountsreceivable. The Company determines the allowance based upon historicalwrite-off experience and individual facts and circumstances associated withindividual debtors. If the assumptions that are used to determine the allowancefor doubtful accounts change, the Company may have to provide for a greaterlevel of expense in future periods or reverse amounts provided in priorperiods.

 

Prior to fiscal 2001, TCBYSystems, LLC (“TCBY”), a wholly-owned subsidiary of the Company, extendedcredit from time to time in the form of notes receivable to franchisees andcertain of these notes receivable remain outstanding. Notes receivable fromfranchisees are primarily collateralized by equipment located at thefranchisees’ stores. The notes bear interest at market rates and mature atvarious dates through April 2009. TCBY regularly reviews the notes fornon-performance. Notes that are considered non-performing are placed on anon-accrual status when the collectability of principal or interest becomesuncertain.

 

Notes receivable at July 2, 2005 and January 1, 2005 consistof the following (in thousands):

 
| ** **                      | ** ** | **July 2,  2005** | ** ** | **January 1,  2005** | ** ** |
|---------------------------------|------------|------------------------|------------|---------------------------|------------|
| Non-performing notes            |       | $                      | —     |                      | $          | 521 |   |
| Allowance for doubtful accounts |       | —                 |       | (521                      | )          |
| Non-performing notes, net       |       | —                 |       | —                    |       |
|                            |       |                   |       |                      |       |
| Performing notes                |       | 198                    |       | 225                       |       |
| Allowance for doubtful accounts |       | (83                    | )          | (76                       | )          |
| Performing notes, net           |       | 115                    |       | 149                       |       |
|                            |       | $                      | 115        |                      | $          | 149 |   |

 

The activity in theallowance for notes receivable for the 13 and 26 weeks ended July 2, 2005and July 3, 2004 is as follows (in thousands):

 
| ** **            | ** ** | **13 Weeks Ended**    | ** ** | **26 Weeks Ended**    | ** ** |
|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **            | ** ** | **July 2, 2005** | ** ** | **July 3, 2004** | ** ** | **July 2, 2005** | ** ** | **July 3, 2004** | ** ** |
| Beginning balance     |       | $                     | 88         |                  | $          | 703 |   | $ | 597 |   | $ | 713 |   |
| Additions (reversals) |       | (4                    | )          | (24                   | )          | (1 | ) | (32 | ) |
| Write-offs            |       | (1                    | )          | —                |       | (513 | ) | (2 | ) |
|                  |       | $                     | 83         |                  | $          | 679 |   | $ | 83 |   | $ | 679 |   |

 

7

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**4. Inventories**

 

Inventories consist of raw ingredients, food, beverages and suppliesand are stated at the lower of cost (first-in, first-out method) or marketvalue.  Inventories at July 2, 2005and January 1, 2005 consist of the following (in thousands):

 
| ** **             | ** ** | **July 2,  2005** | ** ** | **January 1,  2005** | ** ** |
|------------------------|------------|------------------------|------------|---------------------------|------------|
| Food and beverage      |       | $                      | 2,028      |                      | $          | 2,114 |   |
| Raw ingredients        |       | 436                    |       | 489                       |       |
| Supplies and novelties |       | 37                     |       | 23                        |       |
|                   |       | $                      | 2,501      |                      | $          | 2,626 |   |

 

**5. Property and Equipment**

 

Equipment and fixtures are stated at cost less accumulated depreciationand are depreciated over three to seven years using the straight-linemethod.  Leasehold improvements are statedat cost less accumulated depreciation and are depreciated over the term of thelease using the straight-line method. Property and equipment at July 2, 2005 and January 1, 2005consist of the following (in thousands):

 
| ** **                    | ** ** | **July 2,  2005** | ** ** | **January 1,  2005** | ** ** |
|-------------------------------|------------|------------------------|------------|---------------------------|------------|
| Leasehold improvements        |       | $                      | 3,889      |                      | $          | 3,879 |   |
| Equipment and fixtures        |       | 10,546                 |       | 9,801                     |       |
| Land                          |       | 240                    |       | 240                       |       |
|                          |       | 14,675                 |       | 13,920                    |       |
| Less accumulated depreciation |       | (10,975                | )          | (10,434                   | )          |
|                          |       | $                      | 3,700      |                      | $          | 3,486 |   |

 

Property and equipment includes gross assets acquired under a capitallease of $698,000 and $500,000 at July 2, 2005 and January 1, 2005,respectively.  The related accumulateddeprecation on these capital lease assets was $80,000 and $53,000 at July 2,2005 and January 1, 2005, respectively.

 

**6. Accrued Liabilities**

 

Accrued liabilities consist of the following at July 2, 2005 and January 1,2005 (in thousands):

 
| ** **                        | ** ** | **July 2,  2005** | ** ** | **January 1,  2005** | ** ** |
|-----------------------------------|------------|------------------------|------------|---------------------------|------------|
| Accrued liabilities               |       | $                      | 4,997      |                      | $          | 4,701 |   |
| Accrued compensation and benefits |       | 2,274                  |       | 3,968                     |       |
| Accrued interest payable          |       | 5,977                  |       | 5,977                     |       |
|                              |       | $                      | 13,248     |                      | $          | 14,646 |   |

 

On June 24, 2004, the Company announced a reorganization of itsexecutive management team effective June 28, 2004.  As a result of this reorganization, theCompany terminated the employment of two Senior Vice Presidents effective June 28,2004 and accrued approximately $600,000 related to severance expenses.  As of July 2, 2005, remaining severancepayments of $356,000 were included in accrued compensation and benefits.

 

8

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**7. Related-Party Transactions**

 

The amounts due to/from affiliates are comprised of amounts due to/fromMFOC, MFH and MFC at July 2, 2005 and January 1, 2005 (in thousands):

 
| ** **                   | ** ** | **July 2,  2005** | ** ** | **January 1,  2005** | ** ** |
|------------------------------|------------|------------------------|------------|---------------------------|------------|
| Amounts due from affiliates: |       |                   |       |                      |       |
| MFC                          |       | $                      | —     |                      | $          | 23 |   |
| Amounts due to affiliates:   |       |                   |       |                      |       |
| MFC – tax sharing       |       | $                      | 2,022      |                      | $          | 2,382 |   |
| MFH                          |       | 273                    |       | 273                       |       |
| MFOC                         |       | 216                    |       | 125                       |       |
|                         |       | $                      | 2,511      |                      | $          | 2,780 |   |

 

The Company has entered into a tax allocation agreement with MFCpursuant to which the Company has agreed to make payments to MFC, after takinginto account payments the Company makes directly to tax authorities, based uponthe Company’s stand-alone consolidated federal income tax liability, determinedas if the Company and its subsidiaries constituted their own consolidated groupfor federal income tax purposes.  TheCompany will not be permitted to make these payments to MFC, unless the MFCfederal tax liability exceeds the Company’s stand-alone federal tax liability,until it meets certain financial ratios and is otherwise in compliance with theterms of the indenture governing its senior secured notes.

 

**8. Reportable Segments**

** **

Operating segments are components of the Company for which separatefinancial information is available that is evaluated regularly by management indeciding how to allocate resources and in assessing performance. Thisinformation is reported on the basis that it is used internally for evaluatingsegment performance. The Company has three reportable operating segments:franchising, gifts and licensing. The franchising segment consists of revenuesreceived either directly or indirectly from cookie, yogurt and pretzel stores,which are owned and operated by third parties. These revenues include initialfranchise or license fees, monthly royalties based upon a percentage of afranchisee’s gross sales, sales of cookie dough that the Company produces atits Great American Cookie batter facility, and certain product formulation feesand supplier allowances which are based upon sales to franchisees. The giftssegment includes sales generated from the Company’s mail order gift catalog andwebsite. The licensing segment consists of non-franchise licensing activitieswith third parties for the sale of products bearing the Company’s brand names.  Sales and transfers between segments areeliminated in consolidation.

 

The Company evaluates performance of each segment based uponcontribution margin. Contribution margin is computed as the difference betweenthe revenues generated by a reportable segment and the selling and occupancyexpenses, cost of sales and direct general and administrative expenses relatedto that reportable segment. Contribution margin is used as a measure of theoperating performance of an operating segment. The Company does not allocateany indirect general and administrative expenses, other operating expenses,interest expense, depreciation and amortization or assets to its reportableoperating segments.

 

9

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Segment revenues and contribution margin are presented in the followingtable (in thousands):

 
| ** **           | ** ** | **13 Weeks Ended**    | ** ** | **26 Weeks Ended**    | ** ** |
|----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **           | ** ** | **July 2, 2005** | ** ** | **July 3, 2004** | ** ** | **July 2, 2005** | ** ** | **July 3, 2004** | ** ** |
| Revenues:            |       |                  |       |                  |       |   |   |   |   |
| Franchising          |       | $                     | 13,969     |                  | $          | 15,228 |   | $ | 26,323 |   | $ | 28,233 |   |
| Gifts                |       | 5,389                 |       | 4,758                 |       | 10,349 |   | 9,298 |   |
| Licensing            |       | 839                   |       | 1,191                 |       | 1,977 |   | 2,448 |   |
|                 |       | 20,197                |       | 21,177                |       | 38,649 |   | 39,979 |   |
| Contribution margin: |       |                  |       |                  |       |   |   |   |   |
| Franchising          |       | 8,243                 |       | 8,883                 |       | 15,509 |   | 17,713 |   |
| Gifts                |       | 59                    |       | 528                   |       | (229 | ) | 1,402 |   |
| Licensing            |       | 626                   |       | 991                   |       | 1,622 |   | 2,119 |   |
|                 |       | $                     | 8,928      |                  | $          | 10,402 |   | $ | 16,902 |   | $ | 21,234 |   |

 

The reconciliation of contribution margin to net income is as follows(in thousands):

 
| ** **                                                                                    | ** ** | **13 Weeks Ended**    | ** ** | **26 Weeks Ended**    | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                    | ** ** | **July 2, 2005** | ** ** | **July 3, 2004** | ** ** | **July 2, 2005** | ** ** | **July 3, 2004** | ** ** |
|                                                                                          |       |                  |       |                  |       |   |   |   |   |
| Contribution margin                                                                           |       | $                     | 8,928      |                  | $          | 10,402 |   | $ | 16,902 |   | $ | 21,234 |   |
| Other operating revenues                                                                      |       | 67                    |       | 58                    |       | 119 |   | 141 |   |
| General and administrative expenses                                                           |       | (2,297                | )          | (3,052                | )          | (4,302 | ) | (5,365 | ) |
| Stock compensation expense                                                                    |       | —                |       | (13                   | )          | — |   | (26 | ) |
| Costs associated with debt refinancing, net                                                   |       | —                |       | —                |       | — |   | (87 | ) |
| Depreciation and amortization                                                                 |       | (979                  | )          | (1,025                | )          | (1,963 | ) | (2,056 | ) |
| Other operating expenses, net                                                                 |       | (44                   | )          | 40                    |       | (81 | ) | 22 |   |
| Interest expense, net                                                                         |       | (5,344                | )          | (5,502                | )          | (10,699 | ) | (14,387 | ) |
| Other income                                                                                  |       | —                |       | —                |       | — |   | 1,054 |   |
| (Provision) benefit for income taxes                                                          |       | (110                  | )          | (415                  | )          | 10 |   | (230 | ) |
| Income (loss) from current operations                                                         |       | 221                   |       | 493                   |       | (14 | ) | 300 |   |
| Income from discontinued operations (net of  income taxes of $0,$10,$0 and $39, respectively) |       | —                |       | 11                    |       | — |   | 58 |   |
| Net income (loss)                                                                             |       | $                     | 221        |                  | $          | 504 |   | $ | (14 | ) | $ | 358 |   |

** **

The fixed assets and inventories of the Company primarily relate to theCompany’s Great American Cookie batter facility and gifts business segment andrelated activities. Assets relating to franchising and licensing activities areprimarily amounts due from franchisees and licensees and goodwill relating tofranchising concepts.

 

The Company has one licensee that accounted for $534,000 and $1.3million, or 63.6 percent and 65.8 percent of the revenues of the licensingsegment for the 13 and 26 weeks ended July 2, 2005, respectively, and$778,000 and $1.5 million or 65.3 percent and 61.3 percent of the revenues ofthe licensing segment for the 13 and 26 weeks ended July 3, 2004,respectively.   The Company has onecustomer in its gifts business segment that accounted for $828,000 and$1.5 million, or 15.4 percent and 14.4 percent of revenues of thegifts business segment for the 13 and 26 weeks ended July 2, 2005,respectively, and one customer that accounted for $879,000 and$2.2 million, or 18.5 percent and 23.7 percent of revenues of thegifts business segment for the 13 and 26 weeks ended July 3, 2004,respectively.  There were no othercustomers or licensees that accounted for more than 10.0 percent of Mrs. Fields’total revenues or any individual segment’s revenues for the 26 weeks ended July 3,2004.

 

10

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**9.  Commitments and Contingencies**

 

In the ordinary course of business, the Company is involved in routinelitigation.  The Company is not a partyto any legal proceedings which, in the opinion of management, afterconsultation with legal counsel, is material to its business, financialcondition or results of operations.

 

The Company and its 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.

 

**10.  Supplemental Condensed ConsolidatingFinancial Information**

 

Long-term debt includes the 9 percent senior secured notes and the 11 1/2percent senior secured notes (the “Senior Secured Notes”) that were issued bythe Company and Mrs. Fields Financing Company, Inc., asco-issuers.  Mrs. Fields FinancingCompany, Inc. is a wholly-owned finance subsidiary of the Company.  The Senior Secured Notes are fully andunconditionally guaranteed on a joint and several basis by all of the Company’sdomestic subsidiaries other than minor subsidiaries. Mrs. Fields FamousBrands, LLC has no independent assets or operations. Therefore, supplementalfinancial information on a condensed consolidating basis of the guarantorsubsidiaries 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.

 

11

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

#  

Unless the context otherwise requires, references inthis report to the terms “Company,” “we,” “us,” or “our” generally refer to the Registrant, Mrs. FieldsFamous Brands, LLC, a Delaware limited liability company, and its subsidiaries.

 

**DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS**

 

This report includes “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995.Forward-looking statements are those that do not relate solely to historicalfact. They include, but are not limited to, any statement that may predict,forecast, indicate or imply future results, performance, achievements orevents. They may contain words such as “believe,” “anticipate,” “expect,”“estimate,” “intend,” “project,” “plan,” “continue,” “will,” “may” or words orphrases 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 the forwardlooking statements. Factors you should consider that could cause thesedifferences include:

 

•                  theavailability and adequacy of our cash flow to satisfy our obligations,including debt service on our long-term debt and additional funds required forworking capital;

 

•                  theimpact of our current negative member’s deficit on our franchising activities;

 

•                  ourability to solicit new franchisees;

 

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

 

•                  theseasonal nature of our operations;

 

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

 

•                  changesin our business strategy or development plans;

 

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

 

•                  difficultiesor delays in our developing and introducing anticipated new products or failureof our customers to accept new product offerings;

 

•                  adoptionof new accounting pronouncements;

 

•                  changesin consumer preferences and our ability to adequately anticipate such changes;

 

•                  changesin prices of our raw materials;

 

•                  changesin personnel or increased labor costs;

 

•                  thetermination of, or inability to renew on favorable terms, our materialagreements;

 

•                  changesin customer traffic;

 

•                  legalproceedings and regulatory matters;

 

•                  actsof war or terrorist incidents; and

 

•                  allother factors described under“Risk Factors” in our Registration Statement on Form S-4 (File No. 333-115046),as amended.

 

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

 

12

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# **Overview**

#  

We are one ofthe largest franchisors in the premium snack food industry, featuring Mrs. Fieldsâ,Great American Cookie Companyâ, TCBYâ,Pretzel Timeâ and PretzelmakerÔas our core brands. Through our franchisees’ retail stores, we are the largestretailer of freshly baked, on-premises specialty cookies and brownies in theUnited States; the largest retailer of soft serve frozen yogurt in the UnitedStates; and the second largest retailer of baked on-premises pretzels in theUnited States. In addition, we operate a gifts business and have entered intolicensing arrangements that attempt to leverage awareness of our core brandsamong our retail customer base.  Weoperate through a network of franchised stores, which are located throughoutthe United States and in approximately 30 foreign countries. As of July 2,2005, our franchise network consisted of 2,572 retail concept locations.

 

Our business is divided into three primarybusiness segments for financial reporting purposes: franchising, gifts andlicensing, which represented 67.9 percent, 26.7 percent and 5.1 percent oftotal revenues, respectively, for the 26 weeks ended July 2, 2005.  The franchising segment consists of revenuesreceived either directly or indirectly from cookie, yogurt and pretzel stores,which are owned and operated by third parties. These revenues include franchise or license fees, monthly royaltiesbased upon a percentage of a franchisee’s gross sales, sales of cookie doughthat we produce at our Great American Cookie batter facility and certainproduct formulation fees and supplier allowances which are based upon sales tofranchisees.  The gifts segment includessales generated from our mail order gift catalog and website.  The licensing segment consists ofnon-franchise licensing activities with third parties for the sale of productsbearing our brand names.  For furtherdisclosure of reportable segments, see Note 8 to our unaudited condensedconsolidated financial statements contained elsewhere in this report.

 

As of July 2, 2005, our store portfolioconsisted of 2,072 domestic franchised locations, 312 internationalfranchised locations and 188 licensed locations, which are described inmore detail below. By brand, our franchisees’ and licensees’ concept locationsare distributed as follows:

 
| ** **                          | ** ** | **Domestic  Franchised** | ** ** | **International  Franchised** | ** ** | **Licensed  Locations** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|--------------------------|------------|-------------------------------|------------|-------------------------|------------|-----------|------------|
| Mrs. Fields                    |       | 377                      |       | 77                            |       | 52                      |       | 506       |       |
| Great  American                     |       | 282                      |       | 1                             |       | 1                       |       | 284       |       |
| Original  Cookie                    |       | —                   |       | —                        |       | 3                       |       | 3         |       |
| Cookie  subtotal                    |       | 659                      |       | 78                            |       | 56                      |       | 793       |       |
|                                |       |                     |       |                          |       |                    |       |      |       |
| Pretzel Time                        |       | 214                      |       | 6                             |       | 5                       |       | 225       |       |
| Pretzelmaker                        |       | 153                      |       | 41                            |       | 3                       |       | 197       |       |
| Hot Sam                             |       | —                   |       | —                        |       | 3                       |       | 3         |       |
| Pretzel  subtotal                   |       | 367                      |       | 47                            |       | 11                      |       | 425       |       |
| Bakery  brands subtotal             |       | 1,026                    |       | 125                           |       | 67                      |       | 1,218     |       |
|                                |       |                     |       |                          |       |                    |       |      |       |
| TCBY –  traditional stores     |       | 463                      |       | —                        |       | —                  |       | 463       |       |
| TCBY –  non-traditional stores |       | 583                      |       | 187                           |       | 121                     |       | 891       |       |
| TCBY brands  subtotal               |       | 1,046                    |       | 187                           |       | 121                     |       | 1,354     |       |
|                                |       |                     |       |                          |       |                    |       |      |       |
| Total                               |       | 2,072                    |       | 312                           |       | 188                     |       | 2,572     |       |

 

The above table counts eachconcept location individually. For example, if a physical location had a Mrs. Fieldsstore and a Pretzel Time store together, this would be counted as two conceptlocations in the table above. If actual physical stores were counted, ratherthan concept locations, total store counts would be reduced by295 locations to 2,277.

 

MFOC and certain of its subsidiaries own approximately32 franchised and licensed retail concept locations as of July 2, 2005,representing 1.2 percent of the total retail concept locations. Duringthe 13 weeks and 26 weeks ended July 2, 2005, we recognized $194,000 and $521,000,respectively, of franchise royalties and $162,000 and $528,000, respectively,of product sales relating to retail concept locations owned by MFOC.  MFOC expects that most of these retailconcept locations will be sold to new and current franchisees or will be closedduring fiscal 2005.

 

13

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During the period from January 1, 2005to July 2, 2005, our store portfolio declined from 2,688 concept locationsto 2,572 concept locations, as follows:

 
| ** **                     | ** ** | **Domestic  Franchised** | ** ** | **International  Franchised** | ** ** | **Licensed  Locations** | ** ** | **Total** | ** ** |
|--------------------------------|------------|--------------------------|------------|-------------------------------|------------|-------------------------|------------|-----------|------------|
| Balance, January 1,  2005 |       | 2,145                    |       | 338                           |       | 205                     |       | 2,688     |       |
| New  development openings      |       | 33                       |       | 26                            |       | 2                       |       | 61        |       |
| Permanent  closings            |       | (122                     | )          | (52                           | )          | (17                     | )          | (191      | )          |
| Other  openings, net           |       | 16                       |       | —                        |       | (2                      | )          | 14        |       |
| Balance, July 2,  2005    |       | 2,072                    |       | 312                           |       | 188                     |       | 2,572     |       |

 

Of the 191 permanent closings between January 1,2005 and July 2, 2005, 52.9 percent related to TCBY brand non-traditionallocations, 10.5 percent related to TCBY brand traditional locations, 27.2percent related to bakery concept locations owned by franchisees other thanMFOC and 9.4 percent related to retail concept locations owned by MFOC.

 

# **Recent Developments**

#  

On August 5, 2005, we received noticefrom Blue Line Distributing (“BLD”) exercising its option to terminate the FoodPackaging Distribution Agreement between BLD and TCBY, dated November 14,2002.  The effective date of thetermination will be February 1, 2006, 180 days from the date we receivedwritten notification.  BLD is ourprincipal distributor providing weekly distribution of perishable andnon-perishable items to our TCBY franchisees. We have commenced negotiations about distribution of TCBY’s products byBLD under amended or new terms.  We willalso explore other distribution options. However, failure to successfully renegotiate the distribution agreementwith BLD or secure a new agreement with another distributor could have amaterial adverse effect on our business, operating results and financialcondition.  We anticipate that an amendedor new agreement will increase the distribution costs to our franchisees andmay make it more difficult for them to operate profitably, potentiallyincreasing the number of permanent store closures.

 

14

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# **Results of Operations**

#  

The following table sets forth, for theperiods indicated, certain information relating to our operations andpercentage changes from period to period.

 
| ** **                                                                                       | ** ** | **13 Weeks Ended**         | ** ** | **%**                 | ** ** | **26 Weeks Ended** | ** ** | **%**                 | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                       | ** ** | **July 2, 2005**      | ** ** | **July 3, 2004** | ** ** | **Change**         | ** ** | **July 2, 2005** | ** ** | **July 3, 2004** | ** ** | **Change** | ** ** |
| ** **                                                                                       |       | **(Dollars in thousands)** |       |
| **Statement  of Operations Data:**                                                               |       |                       |       |                  |       |               |       |                  |       |   |   |   |   |
| REVENUES:                                                                                        |       |                       |       |                  |       |               |       |                  |       |   |   |   |   |
| Franchising                                                                                      |       | $                          | 13,969     |                  | $          | 15,228             |       | (8.3                  | )          | $ | 26,323 |   | $ | 28,233 |   | (6.8 | ) |
| Gifts                                                                                            |       | 5,389                      |       | 4,758                 |       | 13.3               |       | 10,349                |       | 9,298 |   | 11.3 |   |
| Licensing                                                                                        |       | 839                        |       | 1,191                 |       | (29.6              | )          | 1,977                 |       | 2,448 |   | (19.2 | ) |
| Other                                                                                            |       | 67                         |       | 58                    |       | 15.5               |       | 119                   |       | 141 |   | (15.6 | ) |
| Total  revenues                                                                                  |       | 20,264                     |       | 21,235                |       | (4.6               | )          | 38,768                |       | 40,120 |   | (3.4 | ) |
| OPERATING  COSTS AND EXPENSES:                                                                   |       |                       |       |                  |       |               |       |                  |       |   |   |   |   |
| Franchising                                                                                      |       | 5,726                      |       | 6,345                 |       | (9.8               | )          | 10,814                |       | 10,520 |   | 2.8 |   |
| Gifts                                                                                            |       | 5,330                      |       | 4,230                 |       | 26.0               |       | 10,578                |       | 7,896 |   | 34.0 |   |
| Licensing                                                                                        |       | 213                        |       | 200                   |       | 6.5                |       | 355                   |       | 329 |   | 7.9 |   |
| General and  administrative                                                                      |       | 2,297                      |       | 3,052                 |       | (24.7              | )          | 4,302                 |       | 5,365 |   | (19.8 | ) |
| Stock  compensation expense                                                                      |       | —                     |       | 13                    |       | (100.0             | )          | —                |       | 26 |   | (100.0 | ) |
| Costs  associated with debt refinancing, net                                                     |       | —                     |       | —                |       | —             |       | —                |       | 87 |   | (100.0 | ) |
| Depreciation                                                                                     |       | 274                        |       | 324                   |       | (15.4              | )          | 553                   |       | 640 |   | (13.6 | ) |
| Amortization                                                                                     |       | 705                        |       | 701                   |       | 0.6                |       | 1,410                 |       | 1,416 |   | (0.4 | ) |
| Other  operating expenses (income), net                                                          |       | 44                         |       | (40                   | )          | NM                 |       | 81                    |       | (22 | ) | NM |   |
| Total  operating costs and expenses                                                              |       | 14,589                     |       | 14,825                |       | (1.6               | )          | 28,093                |       | 26,257 |   | 7.0 |   |
| Income from  operations                                                                          |       | 5,675                      |       | 6,410                 |       | (11.5              | )          | 10,675                |       | 13,863 |   | (23.0 | ) |
|                                                                                             |       |                       |       |                  |       |               |       |                  |       |   |   |   |   |
| Interest  expense, net                                                                           |       | (5,344                     | )          | (5,502                | )          | (2.9               | )          | (10,699               | )          | (14,387 | ) | (25.6 | ) |
| Other income                                                                                     |       | —                     |       | —                |       | —             |       | —                |       | 1,054 |   | (100.0 | ) |
| Income  (loss) from continuing operations before provision (benefit) for income taxes            |       | 331                        |       | 908                   |       | (63.5              | )          | (24                   | )          | 530 |   | NM |   |
| Provision  (benefit) for income taxes                                                            |       | 110                        |       | 415                   |       | (73.5              | )          | (10                   | )          | 230 |   | NM |   |
| Income  (loss) from continuing operations                                                        |       | 221                        |       | 493                   |       | (55.2              | )          | (14                   | )          | 300 |   | NM |   |
| Income from  discontinued operations (net of income taxes of $0, $10, $0 and $39,  respectively) |       | —                     |       | 11                    |       | (100.0             | )          | —                |       | 58 |   | (100.0 | ) |
| Net income  (loss)                                                                               |       | $                          | 221        |                  | $          | 504                |       | (56.2                 | )          | $ | (14 | ) | $ | 358 |   | NM |   |
|                                                                                             |       |                       |       |                  |       |               |       |                  |       |   |   |   |   |
| Cash flows  from operating activities                                                            |       | $                          | 6,915      |                  | $          | 7,308              |       |                  |       | $ | 728 |   | $ | 3,503 |   |   |   |
| Cash flows  from investing activities                                                            |       | $                          | (393       | )                     | $          | (27                | )          |                  |       | $ | (569 | ) | $ | 982 |   |   |   |
| Cash flows  from financing activities                                                            |       | $                          | (9         | )                     | $          | (67                | )          |                  |       | $ | (17 | ) | $ | 10,981 |   |   |   |

 

15

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**13Weeks Ended July 2, 2005**

**Comparedto the 13 Weeks Ended July 3, 2004**

 

*Income FromOperations—Overview*. Income from operations was $5.7 million for the 13 weeks ended July 2,2005, a decrease of $700,000 or 11.5 percent, from $6.4 million for the 13weeks ended July 3, 2004. This decrease was primarily attributable todecreases in contribution margin from our franchising segment of $600,000, ourgifts segment of $500,000 and our licensing segment of $400,000 partiallyoffset by a decrease in general and administrative expenses of $800,000.

 

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

 
| ** **                  | ** ** | **13 Weeks Ended**         | ** ** | ** **             | ** ** |
|-----------------------------|------------|----------------------------|------------|------------------------|------------|
| **Reporting Segment**       | ** ** | **July 2,  2005**     | ** ** | **July 3,  2004** | ** ** | **% Change** | ** ** |
| ** **                  | ** ** | **(Dollars in thousands)** | ** ** | ** **             | ** ** |
|                        |       |                       |       |                   |       |   |   |
| Franchising                 |       | $                          | 8,243      |                   | $          | 8,883 |   | (7.2 | ) |
| Gifts                       |       | 59                         |       | 528                    |       | (88.8 | ) |
| Licensing                   |       | 626                        |       | 991                    |       | (36.8 | ) |
| Total  segment contribution |       | $                          | 8,928      |                   | $          | 10,402 |   | (14.2 | ) |

 

**Franchising**

 

*FranchisingRevenues.* Franchising revenues were $14.0 million forthe 13 weeks ended July 2, 2005, a decrease of $1.2 million or 8.3percent, from $15.2 million for the 13 weeks ended July 3, 2004. Thisdecrease was principally due to a decrease in revenues from our TCBY franchisesystem of $1.7 million offset by an increase in revenues from our bakeryfranchise system of $500,000.

 

The decrease in our TCBYfranchise system revenues was principally comprised of decreases in franchiseroyalties of $900,000 or 38.4 percent, and product formulation revenuesgenerated by purchases of TCBY products by franchisees of $800,000 or 21.6percent, as a result of approximately 1,200 fewer traditional equivalent unitweeks or 11.9 percent.  The decrease inrevenues was further impacted by the introduction of “low carb” yogurt in theprior year, which required initial shipments to franchisees.

 

The increase in our bakeryfranchise system revenues was principally comprised of increases in sales ofproducts by our Great American Cookie batter facility to our franchisees of$300,000 or 9.5 percent and initial franchise fees of $200,000 or 42.2 percent.

 

*FranchisingExpenses.* Franchising expenses were $5.7 million for the 13 weeks ended July 2,2005, a decrease of $600,000 or 9.8 percent, from $6.3 million for the 13 weeksended July 3, 2004. This decrease was principally due to decreases inexpenses for brand investment initiatives of $700,000, product costs of$100,000 relating to our Great American Cookie batter facility, bad debtexpense from our franchisees of $100,000 and franchising operations andsupervision costs of $100,000 partially offset by increases in franchisedevelopment costs of $300,000 relating to payroll costs associated withincreased headcount and administrative costs of $100,000 relating todocumentation audits of franchisees. The decrease in brand investmentinitiatives of $700,000 primarily relates to advertising expenses of $1.0million incurred during the second quarter of 2004 relating to the introductionof “low carb” yogurt compared to promotional expenses of $300,000 incurredduring the second quarter of 2005 relating to the introduction of pre-madefrozen yogurt cakes and pies.

 

16

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*FranchisingContribution.* The decrease in franchising contribution of $600,000 or 7.2 percent wasprincipally due to decreases in franchise royalties and product formulationrevenues earned from our TCBY franchise system of $900,000 and $800,000,respectively, and an increase in franchise development costs of $300,000. Thesedecreases  were partially offset byincreases in operating contribution relating to our Great American Cookiebatter facility of $400,000 and initial franchise fees from our bakeryfranchise system of $200,000 and decreases in franchising expenses associatedwith our brand investment initiatives of $700,000 and franchising operationsand supervision costs of $100,000.

 

**Gifts**

 

*Gifts Revenues.*  Gifts revenues were $5.4 million for the 13weeks ended July 2, 2005, an increase of $600,000 or 13.3 percent, from$4.8 million for the 13 weeks ended July 3, 2004.  Gifts revenues consist of sales through ourcatalogs and website as well as affiliations with other websites and sales tocorporate customers for gifting purposes and to commercial airlines. Theincrease in gifts revenues was due to increases in sales to our corporatecustomers of $400,000 and sales through our catalogs and website of $300,000partially offset by a decrease in sales through our Internet affiliates of$100,000.  The increase in sales to ourcorporate customers was primarily due to shipment of an initial order to a newcustomer of $600,000 during the quarter. The net increase in sales through our catalogs and website was primarilydue to increased catalog circulation but was partially offset by decreasedsales due to the timing of the Easter holiday, which occurred in the firstquarter of 2005 compared to the second quarter of 2004.

 

*Gifts Expenses.*  Gifts expenses were $5.3 million for the 13weeks ended July 2, 2005, an increase of $1.1 million or 26.0 percent, from$4.2 million for the 13 weeks ended July 3, 2004. This increase inexpenses was due to increases in advertising and marketing expenses of $300,000associated with increased circulation of catalogs, professional fees of$400,000 primarily due to consulting fees to assist us in preparing a five yearstrategic plan, cost of sales of $200,000 primarily due to increased sales,recruiting fees of $100,000 relating to the search for a President of Mrs. FieldsGifts, Inc. and bad debt expense of $100,000.

 

*Gifts Contribution.*  The decrease in gifts contribution of$500,000 was primarily attributable to an increase in gifts operating expensesof $1.1 million or 26.0 percent partially offset by an increase in giftsrevenues of $600,000 or 13.3 percent.

 

**Licensing**

 

*Licensing Revenues.*  Licensing revenues were $800,000 for the 13weeks ended July 2, 2005, a decrease of $400,000 or 29.6 percent, from$1.2 million for the 13 weeks ended July 3, 2004. This decrease was due todecreases of $200,000 in licensing royalties earned for Mrs. Fieldsbranded cookies distributed through retail channels by a national manufacturerof cookies and $200,000 for Mrs. Fields branded premium candies.

 

*Licensing Expenses.*  Licensing expenses were $200,000 for the 13weeks ended July 2, 2005 and for the 13 weeks ended July 3, 2004.

 

*LicensingContribution.* The decrease in licensing contribution of $400,000 or 36.8 percent wasprimarily due to decreases of $200,000 in licensing royalties earned under ourlicensing agreement for the sale of Mrs. Fields branded cookiesdistributed through retail channels by a national manufacturer of cookies and$200,000 for Mrs. Fields branded premium candies.

 

**Other**

 

*General andAdministrative Expense.*  General and administrative expenses were $2.3million for the 13 weeks ended July 2, 2005, a decrease of $800,000 or24.7 percent from $3.1 million for the 13 weeks ended July 3, 2004.  This decrease was principally due toreductions in compensation and related payroll costs of $200,000, severancecosts of $600,000 associated with certain terminations of our executivemanagement team in the second quarter of 2004 and occupancy costs of $100,000partially offset by an increase in recruiting and relocation costs of $100,000.

 

*Interest Expense,Net.*  Interestexpense, net was $5.3 million for the 13 weeks ended July 2, 2005, adecrease of $200,000 or 2.9 percent, from $5.5 million for the 13 weeks ended July 3,2004. This decrease was primarily due to the reduction in amortization ofdeferred loan costs of $100,000 as a result of lower deferred loan costsassociated with new borrowings during the first quarter of 2004 and an increaseof $100,000 in interest income earned on our cash balances.

 

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### **26 Weeks Ended July 2, 2005**

**Comparedto the 26 Weeks Ended July 3, 2004**

 

*Income FromOperations—Overview*. Income from operations was $10.7 million for the 26 weeks ended July 2,2005, a decrease of $3.2 million or 23.0 percent, from $13.9 million for the 26weeks ended July 3, 2004.  Thisdecrease was primarily attributable to decreases in contribution from ourfranchising segment of $2.2 million, our gifts segment of $1.6 million and ourlicensing segment of $500,000 partially offset by a decrease in general andadministrative expenses of $1.1 million.

 

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

 
| ** **                  | ** ** | **26 Weeks Ended**         | ** ** | ** **             | ** ** |
|-----------------------------|------------|----------------------------|------------|------------------------|------------|
| **Reporting Segment**       | ** ** | **July 2,  2005**     | ** ** | **July 3,  2004** | ** ** | **% Change** | ** ** |
| ** **                  | ** ** | **(Dollars in thousands)** | ** ** | ** **             | ** ** |
|                        |       |                       |       |                   |       |   |   |
| Franchising                 |       | $                          | 15,509     |                   | $          | 17,713 |   | (12.4 | ) |
| Gifts                       |       | (229                       | )          | 1,402                  |       | (116.3 | ) |
| Licensing                   |       | 1,622                      |       | 2,119                  |       | (23.5 | ) |
| Total  segment contribution |       | $                          | 16,902     |                   | $          | 21,234 |   | (20.4 | ) |

 

**Franchising**

 

*FranchisingRevenues.* Franchising revenues were $26.3 million forthe 26 weeks ended July 2, 2005, a decrease of $1.9 million or 6.8percent, from $28.2 million for the 26 weeks ended July 3, 2004. Thisdecrease was principally due to a decrease in revenues from our TCBY franchisesystem of $2.6 million or 25.6 percent partially offset by an increase inrevenues from our bakery franchise system of $700,000 or 4.1 percent.

 

The decrease in our TCBYfranchise system revenues was principally comprised of decreases in productformulation revenues generated by purchases of TCBY products by franchisees of$1.5 million or 23.4 percent, franchise royalties of $1.0 million or 28.2percent and initial franchise fees of $100,000 or 36.1 percent.  The decrease in product formulation revenuesand franchise royalties was a result of approximately 2,400 fewer traditionalequivalent unit weeks and revenues further reduced as a result of a decrease ingallons shipped due to the introduction of “low carb” yogurt in the prior yearwhich required initial shipments to franchisees.

 

The increase in our bakeryfranchise system revenues was principally comprised of increases in sales ofproducts by our Great American Cookie batter facility to our franchisees of$600,000 or 8.0 percent, product formulation revenues generated by purchases ofcertain bakery products by franchisees of $100,000 or 3.8 percent, and initialfranchise fees of $200,000 or 37.8 percent partially offset by a decrease inother bakery franchising revenues of $200,000.

 

*FranchisingExpenses.* Franchising expenses were $10.8 million for the 26 weeks ended July 2,2005, an increase of $300,000 or 2.8 percent, from $10.5 million for the 26weeks ended July 3, 2004. This increase was principally due to increasesin franchise development costs of $400,000 relating to payroll costs associatedwith increased head count, administrative costs of $300,000 relating to documentationaudits of franchisees and operating costs associated with our Great AmericanCookie batter facility of $200,000 partially offset by decreases in franchisingexpenses associated with our brand investment initiatives of $300,000, bad debtexpense from our franchisees of $200,000 and franchising operations andsupervision costs of $100,000.

 

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*FranchisingContribution.* The decrease in franchising contribution of $2.2 million or 12.4 percentwas principally due to decreases in revenues from our TCBY franchise system of$2.6 million, increases in franchising expenses for franchise development of$400,000, administrative franchise expense of $300,000 and costs associatedwith our Great American Cookie batter facility of $200,000 partially offset byan increase in revenues from our bakery franchise system of $700,000 anddecreases in franchising expense associated with our brand investmentinitiatives of $300,000, bad debt expense from our franchisees of $200,000 andother franchising expense of $100,000.

 

**Gifts**

 

*Gifts Revenues.*  Gifts revenues were $10.3 million for the 26weeks ended July 2, 2005, an increase of $1.0 million or 11.3 percent,from $9.3 million for the 26 weeks ended July 3, 2004. This increase wasdue to an increase in sales through our catalogs and website of $1.4 millionprimarily due to increased catalog circulation partially offset by decreases insales to our corporate customers of $300,000 and through our Internetaffiliates of $100,000.

 

*Gifts Expenses.*  Gifts expenses were $10.6 million for the 26weeks ended July 2, 2005, an increase of $2.7 million or 34.0 percent,from $7.9 million for the 26 weeks ended July 3, 2004. This increase inexpenses was due to increases in cost of sales of $300,000 associated with theincreased sales volume, advertising and marketing expenses of $1.0 millionprimarily due to increased circulation of catalogs, professional fees of$800,000 primarily due to consulting fees to assist us in preparing a five yearstrategic plan, compensation and related expenses of $200,000, recruiting andrelocation expenses of $200,000, bad debt expense of $100,000 and occupancyexpenses of $100,000.

 

*Gifts Contribution.*  The decrease in gifts contribution of $1.6million or 116.3 percent was primarily attributable to an increase in giftsoperating expenses of $2.7 million or 34.0 percent partially offset by anincrease in gifts revenues of $1.0 million or 11.3 percent.

 

**Licensing**

 

*Licensing Revenues.*  Licensing revenues were $1.9 million for the26 weeks ended July 2, 2005, a decrease of $500,000 or 19.2 percent, from$2.4 million for the 26 weeks ended July 3, 2004. This decrease wasprimarily due to decreases in licensing royalties earned under our licensingagreement for the sale of TCBY frozen food specialty products through retailchannels of $100,000, licensing royalties for Mrs. Fields branded cookiesdistributed through retail channels by a national manufacturer of cookies of$200,000 and licensing royalties for Mrs. Fields branded premium candies of$200,000.

 

*Licensing Expenses.*  Licensing expenses were $300,000 for the 26weeks ended July 2, 2005 and for the 26 weeks ended July 3, 2004.

 

*LicensingContribution.* The decrease in licensing contribution of $500,000 or 23.5 percent wasprimarily due to net decreases in royalties earned under our licensingagreements as previously discussed.

 

**Other**

 

*General andAdministrative Expense.*  General and administrative expenses were $4.3million for the 26 weeks ended July 2, 2005, a decrease of $1.1 million or19.8 percent, from $5.4 million for the 26 weeks ended July 3, 2004.   This decrease was primarily due to decreasesin compensation and related payroll costs of $300,000, severance costs of$600,000 associated with certain terminations of our executive management team,a change in estimate of a previously recorded incentive compensation accrual of$200,000, health insurance costs of $100,000, occupancy costs of $100,000, andother costs of $100,000 partially offset by increases in professional fees of$200,000, and recruiting and relocation costs of $100,000.

 

*Interest Expense,Net.*  Interestexpense, net was $10.7 million for the 26 weeks ended July 2, 2005, adecrease of $3.7 million or 25.6 percent, from $14.4 million for the 26 weeksended July 3, 2004. This decrease was primarily due to the write-off ofdeferred loan costs of $2.8 million in the first quarter of 2004 associatedwith our previous debt. These deferred loan costs were written off due to thecompletion of our debt refinancing on March 16, 2004.  Additionally, the decrease in interestexpense, net was the result of a reduction in amortization of deferred loancosts of $700,000 as a result of the lower deferred loan costs associated withnew borrowings during the first quarter of 2004 and an increase of $200,000 ininterest income earned on our cash balances.

 

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

 

###### ***Liquidity and Capital Resources***

###### * *

Our principal sources of liquidity are cashflows from operating activities and cash on hand.  At July 2, 2005, we had $20.0 million ofcash on hand.  During fiscal 2005, weexpect that our principal uses of cash will be for working capital, capitalexpenditures of approximately $2.5 million and interest payments on ourlong-term debt of $20.5 million, of which $10.3 million was paid on March 16,2005.  During fiscal 2005, we will not berequired nor do we intend to offer to repurchase a portion of the seniorsecured notes as described below.  Inaddition, to the extent we have cash available and it is permitted by theindenture governing our outstanding senior secured notes, we may pay dividendsto our parent companies for uses such as acquisitions, debt repayments anddividends.  We believe that cash providedby operating activities and cash on hand will be adequate to meet our cashrequirements for the next 12 months.

 

We are highly leveraged. At July 2,2005, we had $195.7 million of long-term debt consisting of 9 percent seniorsecured notes and 11 1⁄2 percent senior secured notes (the “Senior SecuredNotes”).  The Senior Secured Notes matureon March 15, 2011, with interest payable semi-annually on March 15and September 15. Due to borrowing restrictions under the indenturegoverning the Senior Secured Notes, our ability to obtain additional debtfinancing is significantly limited. The Senior Secured Notes require us tooffer to repurchase a portion of the notes at 100 percent of the principalamount, plus accrued and unpaid interest thereon to the date of purchase, with50 percent of our “excess cash flow,” as defined in the indentureagreement, when the ratio of our net indebtedness to consolidated EBITDA isabove 3.75 to 1.0 and the cumulative unpaid excess cash flow offer amountexceeds $10.0 million. For a more detailed description of the material terms ofthe Senior Secured Notes, see Note 3 to our consolidated financial statementsincluded in our annual report on Form 10-K, filed with the Securities andExchange Commission on March 22, 2005.

 

**Consolidated Financial Condition**

 

Total assets at July 2, 2005 were $177.9million, a decrease of $3.9 million or 2.1 percent, from $181.8 million at January 1,2005. This decrease was primarily attributable to decreases in receivables of $1.4million, trademarks and other intangible assets of $1.4 million, deferred loancosts of $600,000, prepaid expenses of $400,000 and deferred tax assets of$300,000 partially offset by an increase in property and equipment of $200,000.

 

Total liabilities at July 2, 2005 were$221.4 million, a decrease of $3.9 million or 1.7 percent, from $225.3 millionat January 1, 2005. This decrease was primarily due to decreases inaccounts payable of $1.9 million, accrued liabilities of $1.4 million, amountsdue to affiliates of $300,000 and deferred revenues of $500,000.  These decreases were offset by an increase incapital lease obligations of $200,000.

 

###### ***Consolidated Cash Flows***

###### * *

Net cash flows provided by operatingactivities were $700,000 for the 26 weeks ended July 2, 2005, a decreaseof $2.8 million, from net cash flows provided by operating activities of $3.5million for the 26 weeks ended July 3, 2004. This decrease was principallydue to cash used for changes in working capital of $2.1 million.

 

Net cash flows used in investing activitieswere $600,000 for the 26 weeks ended July 2, 2005 compared to net cashflows provided by investing activities of $1.0 million for the 26 weeks ended July 3,2004. This change was principally due to proceeds from the sale of equitywarrants of Nonni’s Food Company of $1.1 million received in the first quarterof 2004 and an increase in purchases of property and equipment of $500,000.

 

Net cash flows used in financing activitieswere negligible for the 26 weeks ended July 2, 2005 compared to net cashflows provided by financing activities of $11.0 million for the 26 weeks ended July 3,2004. This change was principally due to the completion of our debt refinancingon March 16, 2004 which resulted in $115.0 million in proceeds from theissuance of our senior secured notes and a capital contribution from our parentof $17.5 million offset by payments of our long-term debt and our line ofcredit of $101.5 million, payments of debt issuance costs of $12.0 million andother activity with parent of $8.0 million.

 

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**Inflation**

 

The impact of inflation on our business hasnot been significant in recent years. Some of our employees are paid hourly wages at the federal minimum wagelevel.  Minimum wage increases willnegatively impact our payroll costs in the short term, but management believessuch impact can be offset in the long term through lower staffing of operationsand, if necessary, through product price increases.

 

**Critical Accounting Policies**

 

Thepreparation of financial statements requires management 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 unaudited condensed consolidated financialstatements. Management has reviewed with our Audit Committee the accountingpolicies that it uses to prepare our unaudited condensed consolidated financialstatements and believes that the following policies are the most important tothe portrayal of our financial condition and the results of our operationswhile requiring the use of judgments and estimates about the effects of mattersthat are inherently uncertain.

 

*Impairment ofGoodwill*. 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-stepapproach to assess our goodwill impairment requires that we first compare theestimated fair value of each reporting unit with goodwill to the carryingamount of the reporting unit’s assets and liabilities, including its goodwill.If the fair value of the reporting unit is below its carrying amount, then thesecond step of the impairment test is performed, in which the current fairvalue of the reporting unit’s assets and liabilities will determine the currentimplied fair value of the reporting unit’s goodwill.

 

On an annual basis, wecomplete an evaluation of goodwill associated with our various reporting units.To the extent that the fair value associated with goodwill is determined to beless than the recorded value, we write down the value of the related goodwill.The estimated fair value of goodwill is affected by, among other things, ourbusiness plan for the future, estimated results of future operations and thecomparable companies that are used to estimate the fair value of our goodwill.Changes in the business plan or operating results that are different than theprojections used to develop the valuation of goodwill have an impact on thevaluation of the goodwill.

 

In conducting our impairmentanalyses, we perform analyses and tests of our goodwill with respect to ourreporting units. The test methods employed involve assumptions concerninguseful lives of intangible assets, interest and discount rates, projections andother assumptions of future business conditions. The assumptions employed arebased upon management’s judgment using internal and external data.

 

*Impairment ofLong-Lived and Certain Identifiable Intangible Assets*.  We review our long-lived assets forimpairment when circumstances indicate that the book value of an asset may notbe fully recovered by the undiscounted net cash flow generated over theremaining life of the related asset or group of assets. If the cash flowsgenerated by the asset are not sufficient to recover the remaining book valueof the asset, we are required to write down the value of the asset to itsestimated fair value. In evaluating whether the asset will generate sufficientcash flow to recover its book value, we estimate the amount of cash flow thatwill be generated by the asset and the remaining life of the asset. In makingour estimate, we consider the performance trends related to the asset, thelikelihood that the trends will continue or change, both at the asset level aswell as at the national economic level, and the length of time that we expectto retain the asset.

 

*Allowance forDoubtful Accounts.* We sell products to and receive royalties from our franchisees and sellproducts 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 our ability to collect amounts that are due to usinclude the financial strength of a franchisee or customer and its operations,the economic strength of the mall where the franchisee is located and theoverall strength of the retail economy. 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, weevaluate the customer’s or franchisee’s financial strength, payment history,reported sales and the availability of collateral 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 to reverse amounts provided in prior periods.

 

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*Revenue Recognition*.  We recognize revenues from our initialfranchising fees when all material services or conditions relating to therevenues have been substantially performed or satisfied, which is generallyupon the opening of a store. We recognize franchise and license royalties,which are based upon a percentage of gross sales, as earned, which is generallyupon the sale of product by our franchisee or licensee. Minimum royaltypayments under our licensing agreements are deferred and recognized on astraight-line basis over the term of the agreement. We recognize revenues fromthe sale of cookie dough that we produce and sell to franchisees at the time ofshipment and classify them as franchising revenues. We recognize revenues fromgift sales at the time of shipment. We receive product formulation fees andallowances from suppliers based upon product sales to franchisees. We recognizethese fees and allowances upon shipment of product to our distributors orfranchisees.

 

**Recent Accounting Pronouncements**

 

In May 2005, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 154(“SFAS 154”), “Accounting for Changes and Errors Corrections - a Replacement ofAPB Opinion No. 20 and FASB Statement No. 3.”  Previously, APB No. 20, “AccountingChanges” and SFAS No. 3, “Reporting Accounting Changes in Interim FinancialStatements” required the inclusion of the cumulative effect of changes inaccounting principles in net income of the period of the change.  SFAS 154 requires companies to recognizechanges in accounting principle, including changes required by new accountingpronouncement when the pronouncement does not include specific transitionprovisions, retrospectively to prior periods’ financial statements.  We will assess the impact of a retrospectiveapplication of a change in accounting principle in accordance with SFAS 154 ifthe need for such a change arises after the effective date of January 1,2006.

 

In December 2004, the FASB issued SFAS No. 123(revised 2004) (“SFAS 123R”), “Share-Based Payment,” which is a revision ofSFAS No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation.” SFAS123R supersedes Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees” and amends SFAS No. 95,“Statement of Cash Flows.” Generally, the approach in SFAS 123R is similar to theapproach described in SFAS 123. However, SFAS 123R requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the income statement based upon their fair values. Pro formadisclosure is no longer an alternative. The new standard will be effective forus beginning January 1, 2006. The adoption of SFAS 123R is not expected tohave a material effect on our consolidated financial statements.

 

In November 2004, the FASB issuedSFAS No. 151, (“SFAS 151”), “Inventory Costs, an amendment of ARB No. 43,Chapter 4,” which clarifies the types of costs that should be expensedrather than capitalized as inventory. This statement also clarifies thecircumstances under which fixed overhead costs associated with operatingfacilities involved in inventory processing should be capitalized. The newstandard will be effective for us beginning January 1, 2006.  The adoption of SFAS 151 is not expectedto have a material impact on our consolidated financial position or results ofoperations.

 

# **Item 3. Quantitative and Qualitative Disclosures about Market Risk**

#  

There have been no significant changes inmarket risks since the end of the Company’s fiscal year ended January 1,2005. For more information, please read Item 7A and the consolidated financialstatements and notes thereto included in our annual report on Form 10-K,filed with the Securities and Exchange Commission on March 22, 2005.

 

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# **Item 4. Controls and Procedures**

#  

The Company’s management,with the participation of the Company’s Chief Executive Officer and InterimChief Accounting Officer, evaluated the effectiveness of the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport.  Based upon that evaluation, theChief Executive Officer and Interim Chief Accounting Officer concluded that theCompany’s disclosure controls and procedures, as of the end of the periodcovered by this report, are functioning effectively to provide reasonableassurance that the information required to be disclosed by the Company inreports filed under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms. A controls system, no matter how well designed and operated, cannotprovide absolute assurance that the objectives of the controls system are met,and no evaluation of controls can provide absolute assurance that all controlissues and instances of fraud, if any, within a company have been detected.

 

There has been no change inour internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934) that occurred duringour fiscal quarter ended July 2, 2005, that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

**PART II – OTHER INFORMATION**

 

# **Item 1. Legal Proceedings**

#  

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

 

In the ordinary course of business, we areinvolved in routine litigation.  We arenot a party to any legal proceedings, which in the opinion of management, afterconsultation with legal counsel, is material to our business, financial conditionor operations.

 

# **Item 5. Other Information**

#  

On May 13, 2005, theCompany accepted the resignation of Sandra M. Buffa as Chief Financial Officer,Executive Vice President and Treasurer of the Company, effective May 31,2005.  Ms. Buffa also resigned fromall offices and directorships that she holds on behalf of the Company’s parententities and subsidiaries.  As a resultof this resignation, effective  May 31,2005, the parties terminated the Amended and Restated Employment Agreement,dated March 16, 2004, by and between Ms. Buffa and the Company, filedas Exhibit 10.57 to the Company’s Registration Statement on Form S-4(File No. 333-115046), as amended.

 

On May 24, 2005, theCompany appointed Mark C. McBride as the Company’s Interim Chief AccountingOfficer and Interim Treasurer, effective May 31, 2005, to serve until theCompany appoints a Chief Financial Officer and Treasurer following theresignation of Sandra M. Buffa.  Mr. McBridewill serve in the same capacities for certain of the Company’s parent entitiesand subsidiaries.

 

On August 5, 2005, TCBY received anotice from Blue Line Distributing (“BLD”), TCBY’s principal distributor ofTCBY products to its franchisees, exercising BLD’s option to terminate the FoodPackaging Distribution Agreement between BLD and TCBY, dated November 14,2002 (the “Distribution Agreement”).  TheDistribution Agreement is included as Exhibit 10.55 to the Company’sRegistration Statement on Form S-4 (File No. 333-115046), asamended.  The effective date of thetermination, as provided by the Distribution Agreement, shall be February 1,2006.  Notwithstanding the notice oftermination, the parties have commenced negotiations about distribution of TCBY’sproduct by BLD under amended or new terms. TCBY will also be exploring other distribution options.

 

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# **Item 6. Exhibits**

#  

| 31.1   |   | Certification of Chief Executive Officer  Pursuant to Rule 13a-15(e) or 15d-15(e) of the Exchange Act,  As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.           |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                        |
| 31.2   |   | Certification of Interim Chief Accounting  Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of the  Exchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. |
|   |   |                                                                                                                                                                                                        |
| 32     |   | Certification of Chief Executive Officer  and Interim Chief Accounting Officer Pursuant to 18 U.S.C. Section 1350,  As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.         |

 

 

# **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/ Stephen Russo                               |     |     | August 16, 2005 |   |
|-------------------------------------------------|----------|----------|----------------------|--------|
| *Stephen  Russo*                                | * * | *Date*   |
| *President  and Chief Executive Officer*        | * * | * * |
| *(Principal Executive Officer)*                 | * * | * * |
| * *                                        | * * | * * |
| * *                                        | * * | * * |
| /s/ Mark C. McBride                             |     |     | August 16, 2005 |   |
| *Mark  C. McBride*                              | * * | *Date*   |
| *Interim  Chief Accounting Officer*             | * * | * * |
| *(Principal  Financial and Accounting Officer)* | * * | * * |

 

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