** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

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

----

 

**FORM 10-Q**

 

| **(Mark One)**                                   | ** **                                                                                                                                                      |
|--------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **x**                                            | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                    |
| **For the quarterly period ended April 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 FAMOUSBRANDS, LLC**

(Exact Name of Registrant Specified in Its Charter)

 

| **Delaware**                                                          | ** ** | **80-0096938**                    |
|-----------------------------------------------------------------------|------------|-----------------------------------|
| (State or Other Jurisdiction of

Incorporation or Organization)       | ** ** | (IRS Employer Identification No.) |
|                                                                  | ** ** |                              |
|                                                                  | ** ** |                              |
| **2855 East Cottonwood Parkway, Suite 400**

**Salt Lake City, Utah** | ** ** | ** **

**84121-1050**        |
| (Address of principal executive offices)                              |       | (Zip code)                        |

 

 

Registrant's telephone number, including area code:**(801) 736-5600**

** **

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        Indicate by check mark whether the registrant (1) has filedall reports 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 markwhether the registrant is an accelerated filer (as defined by Rule 12b-2 of theExchange Act). YES o NO ý

 

        OnMay 13, 2005, 100 common interests of registrant were outstanding, all of whichare held by an affiliate. There is no established trading market forregistrant's common interests.

 

 

 

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

** **

**TABLE OF CONTENTS**

 
|  **PART I – FINANCIAL INFORMATION**                                                   |                                                                                  |                                            |   |   |
|-------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|-------------------------------------------------|--------|--------|
|                                                                                            |                                                                                  |                                            |   |   |
| Item  1. Financial Statements                                                                   |                                                                                  |                                            |   |   |
|                                                                                            |                                                                                  |                                            |   |   |
|                                                                                            | Condensed Consolidated Balance Sheets as  of April 2, 2005 and January 1, 2005        |                                            |   |
|                                                                                            |                                                                                  |                                            |   |   |
|                                                                                            | Condensed  Consolidated Statements of Operations and Comprehensive Loss for the       |                                            |   |
|                                                                                            |                                                                                  | 13 weeks Ended April  2, 2005 and April 3, 2004 |   |   |
|                                                                                            |                                                                                  |                                            |   |   |
|                                                                                            | Condensed Consolidated Statements of Cash  Flows for the 13 Weeks Ended April 2, 2005 |                                            |   |
|                                                                                            |                                                                                  | and April 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)**

 

 
| ** **                                                                               | ** ** | **April 2,** | ** ** | **January 1,** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **                                                                               | ** ** | **2005**     | ** ** | **2005**       | ** ** |
| ASSETS:                                                                                  | ** ** | ** **   | ** ** | ** **     | ** ** |
| Cash and cash  equivalents                                                               |       | $            | 13,483     |           | $          | 19,859 |   |
| Receivables, net  of allowance for doubtful accounts of $592 and $1,295, respectively    | ** ** | 6,576        | ** ** | 8,039          | ** ** |
| Amounts due from  affiliates                                                             | ** ** | **—**   |       | 23             |       |
| Inventories                                                                              |       | 2,518        |       | 2,626          |       |
| Prepaid expenses  and other                                                              |       | 1,437        |       | 1,200          |       |
| Deferred tax  asset                                                                      |       | 984          |       | 1,120          |       |
|                                                                                     |       |         |       |           |       |
| Total current  assets                                                                    |       | 24,998       |       | 32,867         |       |
|                                                                                     |       |         |       |           |       |
| Property and  equipment, net                                                             |       | 3,383        |       | 3,486          |       |
| Goodwill                                                                                 |       | 113,456      |       | 113,456        |       |
| Trademarks and  other intangible assets, net                                             |       | 22,739       |       | 23,419         |       |
| Deferred loan  costs, net of accumulated amortization of $9,358 and $9,043, respectively |       | 7,569        |       | 7,885          |       |
| Other assets                                                                             |       | 686          |       | 668            |       |
| ** **                                                                               |       | $            | 172,831    | ** **     | $          | 181,781 | ** ** |
| ** **                                                                               | ** ** | ** **   | ** ** | ** **     | ** ** |
| LIABILITIES AND  MEMBER'S DEFICIT:                                                       |       |         |       |           |       |
| Accounts payable                                                                         |       | $            | 1,884      |           |       | $ | 4,334 |   |
| Accrued  liabilities                                                                     |       | 8,944        |       | 14,646         |       |
| Amounts due to  affiliates                                                               |       | 2,419        |       | 2,780          |       |
| Current portion  of capital lease obligations                                            |       | 37           |       | 36             |       |
| Current portion  of deferred revenues                                                    |       | 1,984        |       | 2,049          |       |
|                                                                                     |       |         |       |           |       |
| Total current  liabilities                                                               |       | 15,268       |       | 23,845         |       |
|                                                                                     |       |         |       |           |       |
| Long-term debt                                                                           |       | 195,747      |       | 195,747        |       |
| Capital lease  obligations, net of current portion                                       |       | 418          |       | 427            |       |
| Deferred  revenues, net of current portion                                               |       | 1,158        |       | 1,387          |       |
| Deferred tax  liability                                                                  |       | 3,981        |       | 3,876          |       |
|                                                                                     |       |         |       |           |       |
| Total liabilities                                                                        |       | 216,572      |       | 225,282        |       |
|                                                                                     |       |         |       |           |       |
| Member's deficit                                                                         |       | (43,600      | )          | (43,365        | )          |
| Accumulated  other comprehensive loss                                                    |       | (141         | )          | (136           | )          |
|                                                                                     |       |         |       |           |       |
| Total member's  deficit                                                                  |       | (43,741      | )          | (43,501        | )          |
|                                                                                     |       |         |       |           |       |
| COMMITMENTS AND  CONTINGENCIES                                                           |       |         |       |           |       |
|                                                                                     |       | $            | 172,831    |           | $          | 181,781 |   |
|                                                                                          |            |              |            |                |            |  |  |  |  |  |  |

 

 

See accompanyingnotes to condensed consolidated financial statements

 

3

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**MRS.FIELDS FAMOUS BRANDS, LLC**

**Condensed Consolidated Statementsof Operations and ComprehensiveLoss**

**(Unaudited)**

**(Dollars in thousands)**

 

 
| ** **                                                                             | ** ** | **13 Weeks Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                             | ** ** | **April 2,**       | ** ** | **April 3,** | ** ** |
| ** **                                                                             | ** ** | **2005**           | ** ** | **2004** | ** ** |
| REVENUES:                                                                              |       |               |       |   |   |
| Franchising                                                                            |       | $                  | 12,354     |   | $ | 13,005 |   |
| Gifts                                                                                  |       | 4,960              |       | 4,540 |   |
| Licensing                                                                              |       | 1,138              |       | 1,257 |   |
| Other                                                                                  |       | 52                 |       | 83 |   |
|                                                                                   |       |               |       |   |   |
| Total revenues                                                                         |       | 18,504             |       | 18,885 |   |
|                                                                                   |       |               |       |   |   |
| OPERATING COSTS  AND EXPENSES:                                                         |       |               |       |   |   |
| Franchising                                                                            |       | 5,088              |       | 4,175 |   |
| Gifts                                                                                  |       | 5,248              |       | 3,666 |   |
| Licensing                                                                              |       | 142                |       | 129 |   |
| General and  administrative                                                            |       | 2,005              |       | 2,313 |   |
| Stock  compensation expense                                                            |       | —             |       | 13 |   |
| Costs associated  with debt refinancing, net                                           |       | —             |       | 87 |   |
| Depreciation                                                                           |       | 279                |       | 316 |   |
| Amortization                                                                           |       | 705                |       | 715 |   |
| Other operating  expenses, net                                                         |       | 37                 |       | 18 |   |
|                                                                                   |       |               |       |   |   |
| Total operating  costs and expenses                                                    |       | 13,504             |       | 11,432 |   |
|                                                                                   |       |               |       |   |   |
| Income from  operations                                                                |       | 5,000              |       | 7,453 |   |
|                                                                                   |       |               |       |   |   |
| Interest  expense, net                                                                 |       | (5,355             | )          | (8,885 | ) |
| Other income                                                                           |       | —             |       | 1,054 |   |
|                                                                                   |       |               |       |   |   |
| Loss from  continuing operations before provision for income taxes                     |       | (355               | )          | (378 | ) |
|                                                                                   |       |               |       |   |   |
| Benefit for  income taxes                                                              |       | (120               | )          | (185 | ) |
|                                                                                   |       |               |       |   |   |
| Loss from  continuing operations                                                       |       | (235               | )          | (193 | ) |
|                                                                                   |       |               |       |   |   |
| Income from  discontinued operations (net of income taxes of $0 and $29, respectively) |       | —             |       | 47 |   |
|                                                                                   |       |               |       |   |   |
| Net loss                                                                               |       | $                  | (235       | ) | $ | (146 | ) |
|                                                                                   |       |               |       |   |   |
| COMPREHENSIVE  INCOME (LOSS):                                                          |       |               |       |   |   |
| Net loss                                                                               |       | $                  | (235       | ) | $ | (146 | ) |
| Foreign currency  translation adjustment                                               |       | (5                 | )          | (2 | ) |
|                                                                                   |       |               |       |   |   |
| Comprehensive  loss                                                                    |       | $                  | (240       | ) | $ | (148 | ) |
|                                                                                        |            |                    |            |  |  |  |  |  |

 

See accompanyingnotes to condensed consolidated financial statements

 

4

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**MRS.FIELDS FAMOUS BRANDS, LLC**

**Condensed Consolidated Statementsof Cash Flows**

**(Unaudited)**

**(Dollars in thousands)**

 
| ** **                                                                                              | ** ** | **13 Weeks Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                              | ** ** | **April 2,**       | ** ** | **April 3,** | ** ** |
| ** **                                                                                              | ** ** | **2005**           | ** ** | **2004** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                   |       |               |       |   |   |
| Net loss from continuing operations                                                                     |       | $                  | (235       | ) | $ | (193 | ) |
| Adjustments to reconcile net loss from continuing operations to net  cash used in operating activities: |       |               |       |   |   |
| Gain on sale of equity warrants                                                                         |       | **—**         |       | (1,054 | ) |
| Depreciation and amortization                                                                           |       | 984                |       | 1,031 |   |
| Amortization of deferred loan costs                                                                     |       | 316                |       | 2,818 |   |
| Stock compensation expense                                                                              |       | **—**         |       | 13 |   |
| Amortization of discount on notes                                                                       |       | **—**         |       | 1,245 |   |
| Deferred income taxes                                                                                   |       | 241                |       | (1,881 | ) |
| Changes in assets and liabilities                                                                       |       |               |       |   |   |
| Receivables, net                                                                                        |       | 1,463              |       | 1,648 |   |
| Amounts due to/from affiliates, net                                                                     |       | (338               | )          | (1,847 | ) |
| Inventories, net                                                                                        |       | 108                |       | (296 | ) |
| Prepaid rent and other                                                                                  |       | (237               | )          | (274 | ) |
| Other assets                                                                                            |       | (43                | )          | 63 |   |
| Accounts payable                                                                                        |       | (2,450             | )          | (4,179 | ) |
| Accrued liabilities                                                                                     |       | (5,702             | )          | (412 | ) |
| Deferred revenues                                                                                       |       | (294               | )          | (252 | ) |
|                                                                                                    |       |               |       |   |   |
| Net cash used in continuing operating activities                                                        |       | (6,187             | )          | (3,570 | ) |
| Net cash used in discontinued operating activities                                                      |       | **—**         |       | (235 | ) |
|                                                                                                    |       |               |       |   |   |
| Net cash used in operating activities                                                                   |       | (6,187             | )          | (3,805 | ) |
|                                                                                                    |       |               |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                   |       |               |       |   |   |
| Proceeds from sale of equity warrants                                                                   |       | **—**         |       | 1,054 |   |
| Purchases of property and equipment                                                                     |       | (176               | )          | (45 | ) |
|                                                                                                    |       |               |       |   |   |
| Net cash (used in) provided by investing activities                                                     |       | (176               | )          | 1,009 |   |
|                                                                                                    |       |               |       |   |   |
| 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                                                                         |       | **—**         |       | (11,990 | ) |
| Proceeds from issuance of Senior Secured Notes                                                          |       | **—**         |       | 115,000 |   |
| Principal payments on capital lease                                                                     |       | (8                 | )          | — |   |
| Contribution by parent                                                                                  |       | **—**         |       | 17,500 |   |
| Other activity with parent                                                                              |       | **—**         |       | (7,996 | ) |
|                                                                                                    |       |               |       |   |   |
| Net cash (used in) provided by financing activities                                                     |       | (8                 | )          | 11,048 |   |
|                                                                                                    |       |               |       |   |   |
| Effect of foreign exchange rate changes on cash                                                         |       | (5                 | )          | (2 | ) |
|                                                                                                    |       |               |       |   |   |
| Net (decrease) increase in cash and cash equivalents                                                    |       | (6,376             | )          | 8,250 |   |
| Cash and cash equivalents at beginning of period                                                        |       | 19,859             |       | 1,300 |   |
|                                                                                                    |       |               |       |   |   |
| Cash and cash equivalents at end of period                                                              |       | $                  | 13,483     |   | $ | 9,550 |   |
|                                                                                                    |       |               |       |   |   |
| **Supplemental Disclosure of Cash Flow Information**                                                    |       |               |       |   |   |
| Cash paid for interest                                                                                  |       | $                  | 10,273     |   | $ | 6,259 |   |
| Cash paid for income taxes                                                                              |       | **—**         |       | 50 |   |
| Cash paid to parent for income taxes                                                                    |       | **—**         |       | 1,450 |   |

 

See accompanyingnotes to condensed consolidated financial statements

 

5

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**MRS.FIELDS FAMOUS BRANDS, LLC**

**Notes****to the Condensed Consolidated Financial Statements**

**(Unaudited)**

 
| **1.     Basis of**

**        Presentation**

**       **                                                            | ** ** | The accompanying unaudited condensed consolidated  financial statements have been prepared by Mrs. Fields Famous Brands, LLC and  subsidiaries (the "Company" or "Mrs. Fields") in  accordance with the rules and regulations of the Securities and Exchange  Commission for Form 10-Q and, accordingly, do not include all of the  information and footnotes required by accounting principles generally  accepted in the United States of America ("United States") for a  complete presentation of the financial statements. In the opinion of  management, these unaudited condensed consolidated financial statements  reflect all adjustments, which consist only of normal recurring adjustments,  necessary to present fairly the financial position of Mrs. Fields as of April  2, 2005 and January 1, 2005, and the results of their operations and their  cash flows for the periods presented. These unaudited condensed consolidated  financial statements should be read in conjunction with the consolidated  financial statements and notes thereto for the fiscal year ended January 1,  2005 contained in Mrs. Fields' Form 10-K, filed with the Securities and  Exchange Commission on March 22, 2005.

 

The Company is a wholly-owned subsidiary of  Mrs. Fields' Original Cookies, 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 weeks ended  April 2, 2005 are not necessarily indicative of the results that may be  expected for the remainder of the fiscal year ending December 31, 2005. Income  per common interest information is not presented because Mrs. Fields is  wholly-owned by MFOC and, therefore, its common interests are not publicly  traded.

  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **2.     Recent**

**            Accounting**

**            Pronouncements** | ** ** | In December 2004, the Financial Accounting Standards  Board ("FASB") issued Statement of Financial Accounting Standard  ("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 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 the approach described in SFAS 123. However, SFAS 123R  requires all share-based payments to employees, including grants of employee  stock options, to be recognized in the income statement based on their fair  values. Pro forma disclosure is no longer an alternative. 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 on the Company's  consolidated financial statements.

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **                                                                                                                                                                                                      | ** ** | In November 2004, the FASB issued  SFAS No. 151, ("SFAS 151"), "Inventory Costs, an amendment  of ARB No. 43, Chapter 4" which clarifies the types of costs  that should be expensed rather than capitalized as inventory. This statement  also clarifies the circumstances under which fixed overhead costs associated  with operating facilities involved in inventory processing should be  capitalized. The  new standard will be effective for the Company beginning January 1, 2006. The adoption of SFAS 151 is not  expected to have a material impact on the Company's consolidated financial  position or results of operations.

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

** **

** **

**6**

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** **
|                   | **3.     Receivables  ** | ** **                                                                                              | The Company's receivables are primarily due from  domestic and international franchisees, distributors, licensees and corporate  customers in our gifts segment and consist of normal trade accounts  receivable and longer-term notes receivable. Service charges may be assessed  on past due invoices but any revenues associated with these charges is only  recognized when collected. The Company maintains an allowance for doubtful accounts  to cover potential losses. This allowance is the Company's best estimate of  the amount of probable collection losses in the Company's existing trade  accounts receivable. The Company determines the allowance based upon  historical write-off experience and individual facts and circumstances  associated with individual debtors. If the assumptions that are used to  determine the allowance for doubtful accounts change, the Company may have to  provide for a greater level of expense in future periods or reverse amounts  provided in prior periods.
*** *** |
|------------------------|--------------------------------------------------------|---------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                   | ** **                                             | ** **                                                                                              | Prior to fiscal 2001, TCBY Systems, LLC  ("TCBY"), a wholly-owned subsidiary of the Company, extended credit  from time to time in the form of notes receivable to franchisees and certain  of these notes receivable remain outstanding. Notes receivable from  franchisees are primarily collateralized by equipment located at the  franchisees' stores. The notes bear interest at market rates and mature at  various dates through April 2009. TCBY regularly reviews the notes for  non-performance. Notes that are considered non-performing are placed on a  non-accrual status when the collectability of principal or interest becomes  uncertain.

                                                                                                                                                                                                                                                                                                                                                     |
| ** **

** ** | ** **                                             |  

Notes receivable at April 2, 2005 and January 1,  2005 consist of the following (in thousands): |
|                        |                                                        |                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 
| ** **                      | ** ** | **April 2,** | ** ** | **January 1,** | ** ** |
|---------------------------------|------------|--------------|------------|----------------|------------|
| ** **                      | ** ** | **2005**     | ** ** | **2005**       | ** ** |
| Non-performing notes            |       | $            | —     |           | $          | 521 |   |
| Allowance for doubtful accounts |       | —       |       | (521           | )          |
| Non-performing notes, net       |       | —       |       | —         |       |
|                            |       |         |       |           |       |
| Performing notes                |       | 229          |       | 225            |       |
| Allowance for doubtful accounts |       | (88          | )          | (76            | )          |
| Performing notes, net           |       | 141          |       | 149            |       |
|                            |       | $            |  141  |           | $          |  149 |   |

 
| ** ** | ** ** |                                                                                                                                              |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | The activity in the allowance for notes receivable  for the 13 weeks ended April 2, 2005 and April 3, 2004 is as follows (in  thousands):

  |

** **
| ** **            | ** ** | **13 Weeks Ended** | ** ** |
|-----------------------|------------|--------------------|------------|
| ** **            | ** ** | **April 2,**       | ** ** | ** April 3,** | ** ** |
| ** **            | ** ** | **2005**           | ** ** | **2004** | ** ** |
| Beginning balance     |       | $                  | 597        |   | $ | 713 |   |
| Additions (reversals) |       | 4                  |       | (8 | ) |
| Write-offs            |       | (513               | )          | (2 | ) |
|                  |       | $                  | 88         |   | $ | 703 |   |

** **

** **

**7**

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** **
| **4.     Property and**

**        Equipment**

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

 
| ** **                     | ** ** | **April 2,** | ** ** | ** January 1,** | ** ** |
|--------------------------------|------------|--------------|------------|----------------------|------------|
| ** **                     | ** ** | **2005**     | ** ** | **2005**             | ** ** |
| Leasehold  improvements        |       | $            | 3,881      |                 | $          | 3,879 |   |
| Equipment and  fixtures        |       | 9,977        |       | 9,801                |       |
| Land                           |       | 240          |       | 240                  |       |
|                           |       | 14,098       |       | 13,920               |       |
| Less accumulated  depreciation |       | (10,715      | )          | (10,434              | )          |
|                           |       | $            | 3,383      |                 | $          | 3,486 |   |

 
| ** **                                                                                         | ** ** | *** ***                                                                                                                                                                                                                                                                           |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                         | ** ** | Property and equipment includes gross assets  acquired under a capital lease of $500,000 at April 2, 2005 and January 1,  2005. The related accumulated deprecation on these capital lease assets was  $66,000 and $53,000 at April 2, 2005 and January 1, 2005, respectively.

  |
| **5.     Accrued**

**        Liabilities** | ** ** | Accrued liabilities  consist of the following at April 2, 2005 and January 1, 2005 (in thousands):

                                                                                                                                                                              |

 
| ** **                         | ** ** | **April 2,** | ** ** | **January 1,** | ** ** |
|------------------------------------|------------|--------------|------------|----------------|------------|
| ** **                         | ** ** | **2005**     | ** ** | **2005**       | ** ** |
| Accrued  liabilities               |       | $            | 4,260      |           | $          | 4,701 |   |
| Accrued  compensation and benefits |       | 3,830        |       |  3,968    |       |
| Accrued interest  payable          |       | 854          |       |  5,977    |       |
|                               |       | $            | 8,944      |           | $          | 14,646 |   |

 

 
| ** **                                                                                                | ** ** | On June 24, 2004, the Company announced a  reorganization of its executive management team effective June 28, 2004. As a  result of this reorganization, the Company terminated the employment of two  Senior Vice Presidents effective June 28, 2004 and accrued approximately  $600,000 related to severance expenses. As of April 2, 2005, remaining  severance payments of $411,000 were included in accrued compensation and  benefits.

  |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **6.     Related-Party**

**        Transactions** | ** ** | The amounts due to/from affiliates are comprised of amounts due  to/from MFOC, MFH and MFC at April 2, 2005 and January 1, 2005 (in  thousands):

                                                                                                                                                                                                                                                                                              |

** **
| ** **                    | ** ** | **April 2,** | ** **  | **January 1,** | ** ** |
|-------------------------------|------------|--------------|-------------|----------------|------------|
| ** **                    | ** ** | **2005**     | ** **  | **2005**       | ** ** |
| Amounts due from  affiliates: |       |         |        |           |       |   |   |
| MFC                           |       | $            | —      |           | $          |  23 |   |
|                          |       |         |        |           |       |
| Amounts due to  affiliates:   |       |         |        |           |       |
| MFC – tax  sharing       |       | $            |  2,014 |           | $          | 2,382 |   |
| MFH                           |       | 273          |        | 273            |       |
| MFOC                          |       | 132          |        |  125      |       |
|                          |       | $            | 2,419       |           | $          | 2,780 |   |

** **

** **

**8**

----

** **
| *** ***                                                                                       | ** ** | The Company has entered into a tax allocation  agreement with MFC pursuant to which the Company has agreed to make payments  to MFC, after taking into account payments the Company makes directly to tax  authorities, based on the Company's stand-alone consolidated federal income  tax liability, determined as if the Company and its subsidiaries constituted  their own consolidated group for federal income tax purposes. The Company  will not be permitted to make these payments to MFC, unless the MFC federal  tax liability exceeds the Company's stand-alone federal tax liability, until  it meets certain financial ratios and is otherwise in compliance with the  terms of the indenture governing its senior secured notes.

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **7.     Reportable**

**        Segments** | ** ** | Operating segments are components of the Company for which separate  financial information is available that is evaluated regularly by management  in deciding how to allocate resources and in assessing performance. This  information is reported on the basis that it is used internally for  evaluating segment performance. The Company has three reportable operating  segments: franchising, gifts and licensing. The franchising segment consists  of revenues received either directly or indirectly from cookie, yogurt and pretzel  stores, which are owned and operated by third parties. These revenues include  initial franchise or license fees, monthly royalties based on a percentage of  a franchisee's gross sales, sales of cookie dough that the Company produces  at its Great American Cookie batter facility, and certain product formulation  fees and supplier allowances which are based upon sales to franchisees. The  gifts segment includes sales generated from the Company's mail order gift  catalog and website. The licensing segment consists of other licensing  activities with third parties for the sale of products bearing the Company's  brand names. Sales and transfers between segments are eliminated in  consolidation.

  |
| ** **                                                                                         | ** ** | The Company evaluates performance of each segment based on contribution  margin. Contribution margin is computed as the difference between the  revenues generated by a reportable segment and the selling and occupancy  expenses, cost of sales and direct general and administrative expenses  related to that reportable segment. Contribution margin is used as a measure  of the operating performance of an operating segment. The Company does not  allocate any indirect general and administrative expenses, other operating  expenses, interest expense, depreciation and amortization or assets to its  reportable operating segments.

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *** ***

*** ***                                                                         | ** ** | Segment revenues and contribution margin are presented in the  following table (in thousands):

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

** **
| ** **            | ** ** | **13 Weeks Ended** | ** ** |
|-----------------------|------------|--------------------|------------|
| ** **            | ** ** | **April 2,**       | ** ** | **April 3,** | ** ** |
| ** **            | ** ** | **2005**           | ** ** | **2004** | ** ** |
| Revenues:             |       |               |       |   |   |   |   |
| Franchisings          |       | $                  | 12,354     |   | $ |  13,005 |   |
| Gifts            |       | 4,960              |       | 4,540 |   |
| Licensing             |       | 1,138              |       | 1,257 |   |
|                  |       | $                  | 18,452     |   | $ | 18,802 |   |
| Contribution  Margin: |       |               |       |   |   |
| Franchisings          |       | $                  | 7,266      |   | $ | 8,830 |   |
| Gifts            |       | (288               | )          | 874 |   |
| Licensing             |       |  996          |       | 1,128 |   |
|                  |       | $                  | 7,974      |   | $ | 10,832 |   |

** **

** **

**9**

----

** **
| ** ** | ** ** | The reconciliation of contribution margin to net loss is as follows  (in thousands):

  |
|------------|------------|----------------------------------------------------------------------------------------------|

 
| ** **                                                                             | ** ** | **13 Weeks Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                             | ** ** | **April 2,**       | ** ** | **April 3,** | ** ** |
| ** **                                                                             | ** ** | **2005**           | ** ** | **2004** | ** ** |
| Contribution  margin                                                                   |       | $                  | 7,974      |   | $ |  10,832 |   |
| Other operating  revenues                                                              |       | 52                 |       | 83 |   |
| General and  administrative expenses                                                   |       | (2,005             | )          | (2,313 | ) |
| Stock  compensation expense                                                            |       | —             |       | (13 | ) |
| Costs associated  with debt refinancing, net                                           |       | —             |       | (87 | ) |
| Depreciation and  amortization                                                         |       | (984               | )          | (1,031 | ) |
| Other operating  expenses, net                                                         |       | (37                | )          | (18 | ) |
| Interest expense, net                                                                  |       | (5,355             | )          |  (8,885 | ) |
| Other income                                                                           |       | —             |       | 1,054 |   |
| Benefit for income  taxes                                                              |       | 120                |       | 185 |   |
| Loss from  current operations                                                     |       | (235               | )          | (193 | ) |
| Income from  discontinued operations (net of income taxes of $0 and $29, respectively) |       | —             |       | 47 |   |
| Net loss                                                                               |       | $                  | (235       | ) | $ | (146 | ) |

 

 
| ** **                                                                                                                                                                                                                                                                                | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                | ** ** | The fixed assets and inventory of the Company primarily relate to the  Company's Great American Cookie batter facility and gifts business segment  and related activities. Assets relating to franchising and licensing activity  are primarily amounts due from franchisees and licensees and goodwill  relating to franchising concepts.

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** **                                                                                                                                                                                                                                                                                | ** ** | The Company has one licensee that accounted for $767,000 and $709,000,  or 67.4 percent and 56.4 percent of the revenues of the licensing segment for  the 13 weeks ended April 2, 2005 and April 3, 2004, respectively. The Company  has one customer in its gifts business segment that accounted for $665,000  and $1.3 million, or 13.4 percent and 28.1 percent of revenues of  the gifts business segment for the 13 weeks ended April 2, 2005 and April 3,  2004, respectively. There were no other customers or licensees that accounted  for more than 10.0 percent of Mrs. Fields' total revenues or any  individual segment's revenues.

                                                                                                                                                                                                                                          |
| **8.     Commitments**

**        And**

**        Contingencies**                                                                                                                              | ** ** | In  the ordinary course of business, the Company is involved in routine  litigation. The Company is not a party to any legal proceedings which, in the  opinion of management, after consultation with legal counsel, is material to  its business, financial condition or results of operations.

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** **                                                                                                                                                                                                                                                                                | ** ** | The Company and its products are subject to regulation by 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.

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **9.     Supplemental**

**        Condensed**

**        Consolidating**

**        Financial**

**        Information** | ** ** | Long-term debt includes the 9 percent senior  secured notes and the 11 1⁄2 percent senior secured notes (the "Senior  Secured Notes") that were issued by the Company and Mrs. Fields  Financing Company, Inc., as co-issuers. Mrs. Fields Financing Company, Inc.  is a wholly-owned finance subsidiary of the Company. The Senior Secured Notes  are fully and unconditionally guaranteed on a joint and several basis by all  of the Company's domestic subsidiaries other than minor subsidiaries.  Mrs. Fields Famous Brands has no independent assets or operations.  Therefore, supplemental financial information on a condensed consolidating  basis of the guarantor subsidiaries is not required. There are no restrictions  on the Company's ability to obtain cash dividends or other distributions of  funds from the guarantor subsidiaries, except those imposed by applicable  law. |

 

 

10

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# **Item 2**. Management's Discussion andAnalysis of Financial Condition and Results of Operations

 

        Unless the context otherwise requires,references in this report to the terms "Company," "we,""us," or "our" generally refer to the Registrant, Mrs.Fields Famous Brands, LLC, a Delaware limited liability company, and itssubsidiaries.

 

**DISCLOSUREREGARDING FORWARD-LOOKING STATEMENTS**

 

        This report includes "forward-lookingstatements" within the meaning of the Private Securities Litigation ReformAct of 1995. Forward-looking statements are those that do not relatesolely to historical fact. They include, but are not limited to, any statementthat may predict, forecast, indicate or imply future results, performance,achievements or events. They may contain words such as "believe," "anticipate,""expect," "estimate," "intend,""project," "plan," "continue," "will,""may" or words or phrases of similar meaning. Forward-lookingstatements involve risks and uncertainties, including, but not limited to,economic, competitive and governmental factors outside of our control, that maycause actual results to differ materially from trends, plans or expectationsset forth in the forward looking statements. Factors you should consider thatcould cause these differences include:

 

·                  the availability and adequacy of our cashflow to satisfy our obligations, including debt service on our long-term debtand additional funds required for working capital;

 

·                  the impact of our current negativemember's deficit on our franchising activities;

 

·                  our ability to solicit new franchisees;

 

·                  economic, competitive, demographic,business and other pressures, trends and conditions in various markets;

 

·                  the seasonal nature of our operations;

 

·                  actions taken or failed to be taken bythird parties, including by our customers, suppliers, distributors, competitorsand shareholders, as well as legislative, regulatory, judicial and othergovernmental authorities;

 

·                  changes in our business strategy ordevelopment plans;

 

·                  performance by our franchisees andlicensees or changes in relationships with our franchisees and licensees;

 

·                  difficulties or delays in our developingand introducing anticipated new products or failure of our customers to acceptnew product offerings;

 

·                  adoption of new accountingpronouncements;

 

·                  changes in consumer preferences and ourability to adequately anticipate such changes;

 

·                  changes in prices of our raw materials;

 

·                  changes in personnel or increased laborcosts;

 

·                  the termination of, or inability to renewon favorable terms, our material agreements;

 

·                  changes in customer traffic;

 

·                  legal proceedings and regulatory matters;

 

·                  acts of war or terrorist incidents; and

 

·                  all other factors described under "Risk Factors" in ourRegistration Statement on Form S-4 (File No. 333-115046), as amended.

 

        Youare cautioned not to place undue reliance on these forward-looking statements,which reflect management's analysis only as of the date of this report. Weundertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.In light of these risks, uncertainties and assumptions, the forward-lookingevents discussed in this report may not occur.

#  

11

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# **Overview**

 

We are one of the largestfranchisors 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. We operate through a network of franchisedstores, which are located throughout the United States and in approximately 30foreign countries. As of April 2, 2005, our franchise network consisted of2,612 retail concept locations.

 

Our business is dividedinto three primary business segments for financial reporting purposes:franchising, gifts and licensing, which represented 66.8 percent, 26.8 percentand 6.2 percent of total revenues, respectively, for the 13 weeks ended April2, 2005. The franchising segment consists of revenues received either directlyor indirectly from cookie, yogurt and pretzel stores, which are owned andoperated by third parties. These revenues include franchise or license fees,monthly royalties based on a percentage of a franchisee's gross sales, sales ofcookie dough that we produce at our Great American Cookie batter facility andcertain product formulation fees and supplier allowances which are based uponsales to franchisees. The gifts segment includes sales generated from our mailorder gift catalog and website. The licensing segment consists of otherlicensing activities with third parties for the sale of products bearing ourbrand names. For further disclosure of reportable segments, see Note 7 to ourunaudited condensed consolidated financial statements contained elsewhere inthis report.

 

As of April 2,2005, our store portfolio consisted of 2,090 domestic franchisedlocations, 324 international franchised locations and 198 licensedlocations, which are described in more detail below. By brand, our franchisees'and licensees' concept locations are distributed as follows:

 
| ** **                         | ** ** | **Domestic**   | ** ** | **Internationa** | ** ** | **Licensed**  | ** ** | ** ** | ** ** |
|------------------------------------|------------|----------------|------------|------------------|------------|---------------|------------|------------|------------|
| ** **                         | ** ** | **Franchised** | ** ** | **l Franchised** | ** ** | **Locations** | ** ** | **Total**  | ** ** |
| Mrs. Fields                        |       | 372            |       | 83               |       | 54            |       | 509        |       |
| Great American                     |       | 280            |       | 1                |       | 1             |       | 282        |       |
| Original Cookie                    |       | —         |       | —           |       | 4             |       | 4          |       |
| Cookie subtotal                    |       | 652            |       | 84               |       | 59            |       | 795        |       |
|                               |       |           |       |             |       |          |       |       |       |
| Pretzel Time                       |       | 210            |       | 8                |       | 5             |       | 223        |       |
| Pretzelmaker                       |       | 153            |       | 40               |       | 3             |       | 196        |       |
| Hot Sam                            |       | —         |       | —           |       | 8             |       | 8          |       |
| Pretzel subtotal                   |       | 363            |       | 48               |       | 16            |       | 427        |       |
| Bakery brands subtotal             |       | 1,015          |       | 132              |       | 75            |       | 1,222      |       |
|                               |       |           |       |             |       |          |       |       |       |
| TCBY – traditional stores     |       | 468            |       | —           |       | —        |       | 468        |       |
| TCBY – non-traditional stores |       | 607            |       | 192              |       | 123           |       | 922        |       |
| TCBY brands subtotal               |       | 1,075          |       | 192              |       | 123           |       | 1,390      |       |
|                               |       |           |       |             |       |          |       |       |       |
| Total                              |       | 2,090          |       | 324              |       | 198           |       | 2,612      |       |

 

The above tablecounts each concept location individually. For example, if a physical locationhad a Mrs. Fields store and a Pretzel Time store together, this would becounted as two concept locations in the table above. If actual physical storeswere counted, rather than concept locations, total store counts would bereduced by 287 locations to 2,325.

 

MFOC and certainof its subsidiaries own approximately 61 franchised and licensed retail conceptlocations as of April 2, 2005, representing 2.3 percent of the totalretail concept locations. During the 13 weeks ended April 2, 2005, we recognized $327,000 of franchiseroyaltiesand $366,000of product sales relating to retail concept locations owned by MFOC. MFOCexpects that most of these retail concept locations will be sold to new andcurrent franchisees or will be closed during fiscal 2005.

 

 

12

----

 

        During the period from January 1, 2005to April 2, 2005, our store portfolio declined from 2,688 concept locations to2,612 concept locations, as follows:

 
| ** **               | ** ** | **Domestic**   | ** ** | **International** | ** ** | **Licensed**  | ** ** | ** ** | ** ** |
|--------------------------|------------|----------------|------------|-------------------|------------|---------------|------------|------------|------------|
| ** **               | ** ** | **Franchised** | ** ** | **Franchised**    | ** ** | **Locations** | ** ** | **Total**  | ** ** |
| Balance, January 1, 2005 |       | 2,145          |       | 338               |       | 205           |       | 2,688      |       |
| New development openings |       | 12             |       | 6                 |       | 2             |       | 20         |       |
| Permanent closings       |       | (72            | )          | (20               | )          | (9            | )          | (101       | )          |
| Other openings, net      |       | 5              |       | —            |       | —        |       | 5          |       |
| Balance, April 2, 2005   |       | 2,090          |       | 324               |       | 198           |       | 2,612      |       |

 

        Of the 101 permanent closings betweenJanuary 1, 2005 and April 2, 2005, 49.5 percent related to TCBY brandnon-traditional locations, 8.9 percent related to TCBY brand traditionallocations, 29.7 percent related to bakery concept locations owned byfranchisees other than MFOC and 11.9 percent related to retail conceptlocations owned by MFOC.

** **

**Results of Operations**

 

      The following table sets forth, for the periodsindicated, certain information relating to our operations and percentagechanges from period to period.

 
| ** **                                                                             | ** ** | **13 Weeks Ended**          | ** ** | ** **        | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------|------------|
| ** **                                                                             | ** ** | **April 2, 2005**           | ** ** | **April 3, 2004** | ** ** | **% Change** | ** ** |
| **Statement  of Operations Data:**                                                     | ** ** | **(Dollars  in thousands)** | ** ** | ** **        | ** ** |
| REVENUES:                                                                              |       |                        |       |              |       |   |   |
| Franchising                                                                            |       | $                           | 12,354     |              | $          | 13,005 |   | (5.0 | ) |
| Gifts                                                                                  |       | 4,960                       |       | 4,540             |       | 9.3 |   |
| Licensing                                                                              |       | 1,138                       |       | 1,257             |       | (9.5 | ) |
| Other                                                                                  |       | 52                          |       | 83                |       | (37.3 | ) |
| Total revenues                                                                         |       | 18,504                      |       | 18,885            |       | (2.0 | ) |
| OPERATING COSTS AND EXPENSES:                                                          |       |                        |       |              |       |   |   |
| Franchising                                                                            |       | 5,088                       |       | 4,175             |       | 21.9 |   |
| Gifts                                                                                  |       | 5,248                       |       | 3,666             |       | 43.2 |   |
| Licensing                                                                              |       | 142                         |       | 129               |       | 10.1 |   |
| General and administrative                                                             |       | 2,005                       |       | 2,313             |       | (13.3 | ) |
| Stock compensation expense                                                             |       | —                      |       | 13                |       | (100.0 | ) |
| Costs associated with debt refinancing, net                                            |       | —                      |       | 87                |       | (100.0 | ) |
| Depreciation                                                                           |       | 279                         |       | 316               |       | (11.7 | ) |
| Amortization                                                                           |       | 705                         |       | 715               |       | (1.4 | ) |
| Other operating expenses, net                                                          |       | 37                          |       | 18                |       | 105.6 |   |
| Total operating costs and expenses                                                     |       | 13,504                      |       | 11,432            |       | 18.1 |   |
| Income from operations                                                                 |       | 5,000                       |       | 7,453             |       | (32.9 | ) |
| Interest expense, net                                                                  |       | (5,355                      | )          | (8,885            | )          | (39.7 | ) |
| Other income                                                                           |       | —                      |       | 1,054             |       | (100.0 | ) |
| Loss from continuing operations before provision for income taxes                      |       | (355                        | )          | (378              | )          | (6.1 | ) |
| Benefit for income taxes                                                               |       | (120                        | )          | (185              | )          | (35.1 | ) |
| Loss from continuing operations                                                        |       | (235                        | )          | (193              | )          | 21.8 |   |
| Income from discontinued operations (net of income taxes of $0 and  $29, respectively) |       | —                      |       | 47                |       | (100.0 | ) |
| Net loss                                                                               |       | $                           | (235       | )                 | $          | (146 | ) | 61.0 |   |
|                                                                                   |       |                        |       |              |       |   |   |
| Cash flows from operating activities                                                   |       | $                           | (6,187     | )                 | $          | (3,805 | ) | (62.6 | ) |
| Cash flows from investing activities                                                   |       | $                           | (176       | )                 | $          | 1,009 |   | NM |   |
| Cash flows from financing activities                                                   |       | $                           | (8         | )                 | $          | 11,048 |   | NM |   |
|                                                                                        |            |                             |            |                   |            |  |  |  |  |  |  |  |

 

 

13

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**13 Weeks EndedApril 2, 2005**

**Compared tothe 13 Weeks Ended April 3, 2004**

 

*        IncomeFrom Operations—Overview*. Income from operations was$5.0 million for the 13 weeks ended April 2, 2005, a decrease of $2.5million or 32.9 percent, from $7.5 million for the 13 weeks endedApril 3, 2004. This decrease was primarily attributable to decreases incontribution margin from franchising activities of $1.6 million, gifts of $1.2million and licensing of $100,000 offset by decreases in general andadministrative expenses of $300,000 and costs associated with debt refinancingof $100,000.

 

        *Segment Contribution.*The following table sets forth the contribution fromeach of our reporting segments. Franchising contribution is comprised of salesof new franchises and royalties from existing franchises less direct operatingexpenses. Gifts contribution is comprised of sales of our products through ourcatalog and Internet business less direct operating expenses. Licensingcontribution is comprised of licensing fees received from third parties for thesale of products bearing our brand names less direct operating expenses.

 
| ** **                 | ** ** | **13 Weeks  Ended**         | ** ** | ** **         | ** ** |
|----------------------------|------------|-----------------------------|------------|--------------------|------------|
| **Reporting  Segment**     | ** ** | **April 2,  2005**          | ** ** | **April 3,  2004** | ** ** | **% Change** | ** ** |
|                       |       | **(Dollars  in thousands)** |       |               |       |
|                       |       |                        |       |               |       |   |   |
| Franchising                |       | $                           | 7,266      |               | $          | 8,830 |   | (17.7 | ) |
| Gifts                      |       | (288                        | )          | 874                |       | (133.0 | ) |
| Licensing                  |       | 996                         |       | 1,128              |       | (11.7 | ) |
| Total segment contribution |       | $                           | 7,974      |               | $          | 10,832 |   | (26.4 | ) |
|                            |            |                             |            |                    |            |  |  |  |  |  |

 

**Franchising**

 

*        FranchisingRevenues.*Franchising revenues were $12.4 million for the 13weeks ended April 2, 2005, a decrease of $600,000 or 5.0 percent, from $13.0million for the 13 weeks ended April 3, 2004. This decrease was principally dueto a decrease in revenues from our TCBY franchise system of $900,000 offset byan increase in revenues from our bakery franchise system of $300,000.

 

         The decrease in our TCBY franchise systemrevenues was principally comprised of a decrease in product formulationrevenues generated by purchases of TCBY products by franchisees of $700,000 or25.7 percent as a result of approximately 1,200 fewer traditional equivalentunit weeks and a decrease in gallons shipped due to the introduction of"low carb" yogurt in the prior year which required initial shipmentsto franchisees. In addition, initial franchise fees recognized upon new storeopenings decreased $200,000 or 58.0 percent as a result of fewer new storeopenings.

 

         The increase in our bakery franchise systemrevenues was principally comprised of increases in sales of products by ourGreat American Cookie batter facility to our franchisees of $200,000 or 6.5percent, product formulation revenues generated by purchases of certain bakeryproducts by franchisees of $100,000 or 9.9 percent and initial franchise feesof $100,000 or 39.8 percent, partially offset by a decrease in other bakeryfranchising revenues of $100,000.

 

        *Franchising Expenses.* Franchising expenses were $5.1 millionfor the 13 weeks ended April 2, 2005, an increase of $900,000 or 21.9 percent,from $4.2 million for the 13 weeks ended April 3, 2004. This increase wasprincipally due to increases in expenses for brand investment initiatives of$400,000, product costs of $300,000 relating to our Great American Cookiebatter facility, administrative costs of $200,000 relating to documentationaudits of franchisees, and franchise development costs of $100,000, partiallyoffset by reduced bad debt expense from our franchisees of $100,000.

 

        *Franchising Contribution.* The decrease in franchisingcontribution of $1.6 million or 17.7 percent was principally due to decreasesin product formulation revenues and initial franchise fees earned from our TCBYfranchise system of $700,000 and $200,000, respectively, a net reduction inoperating contribution relating to our Great American Cookie batter facility of$100,000, and increases in franchising expenses associated with our brandinvestment initiatives of $400,000 and in other franchising development andoperations costs of $200,000.

 

14

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**Gifts**

 

        *Gifts Revenues.* Gifts revenues were $5.0 million for the 13weeks ended April 2, 2005, an increase of $500,000 or 9.3 percent, from $4.5million for the 13 weeks ended April 3, 2004. Gifts revenues consist of salesthrough our catalog and website as well as affiliations with other websites andsales to large corporate accounts for gifting purposes and to commercialairlines. The increase in gifts revenues in the 13 weeks ended April 2, 2005was due to increases in sales through our catalogs and website of $1.1 milliondue to increased catalog circulation and the timing of the Easter holiday inthe first quarter of 2005 compared to the second quarter of 2004, offset by adecrease in sales to our large corporate accounts of $600,000 due to a decreasein products sold. During the first quarter of 2004, a large corporate customerpurchased higher price point products in addition to their normal purchases;however, they did not purchase the higher price point products in the firstquarter of 2005.

 

        *Gifts Expenses.* Gifts expenses were $5.2 million for the 13weeks ended April 2, 2005, an increase of $1.5 million or 43.2 percent, from$3.7 million for the 13 weeks ended April 3, 2004. This increase in expenseswas due to increases in advertising and marketing expenses of $700,000associated with increased circulation of catalogs, professional fees of$400,000 primarily due to consulting fees to assist us in preparing a five yearstrategic plan, labor and related expenses of $200,000, cost of sales of$100,000 and other operating expenses of $100,000.

 

        *Gifts Contribution.* The decrease in gifts contribution wasprimarily attributable to the increase in gifts operating expenses of $1.5million or 43.2 percent, partially offset by an increase in gifts revenues of$500,000 or 9.3 percent.

 

**Licensing**

 

        *Licensing Revenues.* Licensing revenues were $1.1 million forthe 13 weeks ended April 2, 2005, a decrease of $100,000 or 9.5 percent, from$1.2 million for the 13 weeks ended April 3, 2004. This decrease was due to adecrease in licensing royalties earned under our licensing agreement for thesale of TCBY frozen food specialty products through retail channels of$100,000.

 

        *Licensing Expenses.* Licensing expenses were $100,000 for the13 weeks ended April 2, 2005 and for the 13 weeks ended April 3, 2004.

 

        *Licensing Contribution.* The decrease in licensingcontribution of $100,000 or 11.7 percent was primarily due to a decrease inlicensing royalties earned under our licensing agreement for the sale of TCBYfrozen food specialty products through retail channels of $100,000.

 

**Other**

 

        *General and Administrative Expense.* General andadministrative expenses were $2.0 million for the 13 weeks ended April 2, 2005,a decrease of $300,000 or 13.3 percent from $2.3 million for the 13 weeks endedApril 3, 2004. This decrease was principally due to reductions in compensationand related payroll costs of $200,000, a change in estimate of a previouslyrecorded incentive compensation accrual of $200,000 and health insurance costsof $100,000, partially offset by an increase in professional fees of $200,000.

 

        *Depreciation and Amortization Expense.* Total depreciationand amortization expense was $1.0 million for the 13 weeks ended April 2, 2005and for the 13 weeks ended April 3, 2004. Depreciation expense was $300,000 forthe 13 weeks ended April 2, 2005 and for the 13 weeks ended April 3, 2004. Amortizationexpense was $700,000 for the 13 weeks ended April 2, 2005 and for the 13 weeksended April 3, 2004.

 

        *Interest Expense, Net.* Interest expense, net was $5.4million for the 13 weeks ended April 2, 2005, a decrease of $3.5 million or39.7 percent, from $8.9 million for the 13 weeks ended April 3, 2004. Thisdecrease was primarily due to the write-off of deferred loan costs of $2.8million in the first quarter of 2004 associated with certain of our long-termdebt and a reduction in amortization of deferred loan costs of $600,000 as aresult of the lower deferred loan costs associated with the new borrowings. Thedeferred loan costs associated with certain of our long-term debt were writtenoff due to the completion of our debt refinancing on March 16, 2004.

 

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        *Other Income.* Other income was $1.1 million for the 13 weeksended April 3, 2004. Other income represents gain on the sale of certain equitywarrants of Nonni's Food Company, a predecessor-in-interest to Shadewell GroveFoods, Inc., a manufacturer and distributor of Mrs. Fields branded soft bakedcookies under certain license agreements with us and our affiliates.

 

**Consolidated Financial Condition**

 

        Total assets at April 2,2005 were $172.8 million, a decrease of $9.0 million or 4.9 percent, from$181.8 million at January 1, 2005. This decrease was primarily attributable todecreases in cash and cash equivalents of $6.4 million, a decrease in receivablesof $1.5 million and a net decrease in other current and long-term assets of$1.0 million.

 

        Total liabilities at April2, 2005 were $216.6 million, a decrease of $8.7 million or 3.9 percent, from$225.3 million at January 1, 2005. This decrease was primarily due to decreasesin accounts payable of $2.5 million and accrued liabilities, primarily accruedinterest payable, of $5.7 million.

###### *** ***

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

 

        Net cash flows used inoperating activities were $6.2 million for the 13 weeks ended April 2, 2005, anincrease of $2.4 million, from net cash flows used in operating activities of$3.8 million for the 13 weeks ended April 3, 2004. This increase wasprincipally due to cash used for changes in working capital.

 

        Net cash flows used ininvesting activities were $176,000 for the 13 weeks ended April 2, 2005compared to net cash flows provided by investing activities of $1.0 million forthe 13 weeks ended April 3, 2004. This change was principally due to proceedsfrom the sale of equity warrants of Nonni's Food Company of $1.1 millionreceived in the first quarter of 2004 and an increase in purchases of propertyand equipment of $131,000.

 

        Net cash flows used infinancing activities were $8,000 for the 13 weeks ended April 2, 2005 comparedto net cash flows provided by financing activities of $11.0 million for the 13weeks ended April 3, 2004. This change was principally due to the completion ofour debt refinancing on March 16, 2004 which resulted in $115.0 million inproceeds from the issuance of our senior secured notes and a capitalcontribution from our parent of $17.5 million offset by payments of ourlong-term debt and our line of credit of $101.5 million, payments of debtissuance costs of $12.0 million and other activity with parent of $8.0 million.

 

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

** **

*       *Our principal sourcesof liquidity are cash flows from operating activities and cash on hand. AtApril 2, 2005, we had $13.5 million of cash on hand. During fiscal 2005, weexpect that our principal uses of cash will be for working capital, capitalexpenditures of approximately $3.0 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 be required but we may offer torepurchase a portion of the senior secured 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 provided by operating activities and cash onhand will be adequate to meet our cash requirements for the next 12 months.

 

        We are highly leveraged. At April 2, 2005, we had $195.7million of long-term debt consisting of 9 percent senior secured notes and 11 1⁄2percent senior secured notes (the "Senior Secured Notes"). The SeniorSecured Notes mature on March 15, 2011, with interest payablesemi-annually on March 15 and September 15. Due to borrowing restrictionsunder the indenture governing the Senior Secured Notes, our ability to obtainadditional debt financing is significantly limited. The Senior Secured Notesrequire us to offer to repurchase a portion of the notes at 100 percent ofthe principal amount, plus accrued and unpaid interest thereon to the date ofpurchase, with 50 percent of our "excess cash flow," as definedin the indenture agreement, when the ratio of our net indebtedness toconsolidated EBITDA is above 3.75 to 1.0 and the cumulative unpaid excess cashflow offer amount exceeds $10.0 million. For a more detailed description of thematerial terms of the Senior Secured Notes, see Note 3 to our consolidatedfinancial statements included in our annual report on Form 10-K, filed with theSecurities and Exchange Commission on March 22, 2005.

 

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**Inflation**

        Theimpact of inflation on our business has not been significant in recent years. Someof our employees are paid hourly wages at the Federal minimum wage level. Minimumwage increases will negatively impact our payroll costs in the short term, butmanagement believes such impact can be offset in the long term through lowerstaffing of operations and, 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.

 

        *Impairmentof Goodwill*. Goodwill is not amortized, but is subject to an annualassessment for impairment, or more frequently if circumstances indicatepotential impairment, through a comparison of fair value to its carryingamount. The two-step approach to assess our goodwill impairment requires thatwe first compare the estimated fair value of each reporting unit with goodwillto the carrying amount of the reporting unit's assets and liabilities,including its goodwill. If the fair value of the reporting unit is below itscarrying amount, then the second step of the impairment test is performed, inwhich the current fair value of the reporting unit's assets and liabilitieswill determine the current implied fair value of the reporting unit's goodwill.

 

        On an annual basis, we complete anevaluation of goodwill associated with our various reporting units. To theextent that the fair value associated with goodwill is determined to be lessthan the recorded value, we write down the value of the related goodwill. Theestimated fair value of goodwill is affected by, among other things, ourbusiness plan for the future, estimated results of future operations and thecomparable companies 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 impairment analyses,we perform analyses and tests of our goodwill with respect to our reportingunits. The test methods employed involve assumptions concerning useful lives ofintangible assets, interest and discount rates, projections and otherassumptions of future business conditions. The assumptions employed are basedon management's judgment using internal and external data.

 

        *Impairmentof Long-Lived and Certain Identifiable Intangible Assets*. We reviewour long-lived assets for impairment when circumstances indicate that the bookvalue of an asset may not be fully recovered by the undiscounted net cash flowgenerated over the remaining life of the related asset or group of assets. Ifthe cash flows generated by the asset are not sufficient to recover theremaining book value of the asset, we are required to write down the value ofthe asset to its estimated fair value. In evaluating whether the asset willgenerate sufficient cash flow to recover its book value, we estimate the amountof cash flow that will be generated by the asset and the remaining life of the asset.In making our estimate, we consider the performance trends related to theasset, the likelihood that the trends will continue or change, both at theasset level as well as at the national economic level, and the length of timethat we expect to retain the asset.

 

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

 

 

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        *RevenueRecognition*. We recognize revenues from our initial franchising feesand licensing and other fees when all material services or conditions relatingto the revenues have been substantially performed or satisfied, which isgenerally upon the opening of a store. We recognize franchise and licenseroyalties, which are based on a percentage of gross sales, as earned, which isgenerally upon 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 on product sales to franchisees. We recognizethese fees and allowances upon shipment of product to our distributors orfranchisees.

 

**Recent Accounting Pronouncements**

 

        In December 2004, the Financial Accounting Standards Board("FASB") issued Statement of Financial Accounting Standard("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 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 123Ris similar to the approach described in SFAS 123. However, SFAS 123R requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the income statement based on their fair values.Pro forma disclosure is no longer an alternative. The new standard will beeffective for the Company beginning January 1, 2006. The adoption of SFAS 123R isnot expected to have a material effect on the Company's consolidated financialstatements.

 

        In November 2004, the FASB issuedSFAS No. 151, ("SFAS 151"), "Inventory Costs, anamendment of ARB No. 43, Chapter 4" which clarifies the types ofcosts that should be expensed rather than capitalized as inventory. Thisstatement also clarifies the circumstances under which fixed overhead costsassociated with operating facilities involved in inventory processing should becapitalized. The new standard will be effective for the Companybeginning January 1, 2006. Theadoption of SFAS 151 is not expected to have a material impact on theCompany's consolidated financial position or results of operations.

 

# **Item 3**. Quantitative and QualitativeDisclosures about Market Risk

 

      There have beenno significant changes in market risks since the end of the Company’s fiscalyear ended January 1, 2005. For more information, please read Item 7A. and theconsolidated financial statements and notes thereto included in our annual reporton Form 10-K, filed with the Securities and Exchange Commission on March 22,2005.

 

# **Item 4**. Controls and Procedures

 

        TheCompany's management, with the participation of the Company's Chief ExecutiveOfficer and Chief Financial Officer, evaluated the effectiveness of theCompany's disclosure controls and procedures as of the end of the periodcovered by this report. Based on that evaluation, the Chief Executive Officerand Chief Financial Officer concluded that the Company's disclosure controlsand procedures, as of the end of the period covered by this report, arefunctioning effectively to provide reasonable assurance that the informationrequired to be disclosed by the Company in reports filed under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission's rules andforms. 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.

 

        Therehas been no change in our internal control over financial reporting (as definedin Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934)that occurred during our fiscal quarter ended April 2, 2005, that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

 

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**PART II****– OTHER INFORMATION**

 

# **Item 1**. Legal Proceedings

 

        We and our products are subject toregulation by numerous governmental authorities, including without limitation,federal, state and local laws and regulations governing franchising, health,sanitation, environmental protection, safety and hiring and employmentpractices.

 

        In the ordinary course of business, weare involved in routine litigation. We are not a party to any legal proceedings,which in the opinion of management, after consultation with legal counsel, ismaterial to our business, financial condition or operations.

 

**Item 5****. Other Information**

 

      On May 13,2005, the Company accepted the resignation of Sandra M. Buffa as Chief FinancialOfficer, Executive Vice President and Treasurer of the Company, effective as ofMay 31, 2005. Ms. Buffa also resigned from all offices and directorships thatshe holds on behalf of the Company's parent entities and subsidiaries. As aresult of this resignation, effective as of May 31, 2005, the parties willterminate the Amended and Restated Employment Agreement, dated March 16, 2004,by and between Ms. Buffa and the Company, filed as Exhibit 10.57 to theCompany's Registration Statement on Form S-4 (File No. 333-115046), as amended.

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

 

 

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** **

# **SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 
| **MRS. FIELDS FAMOUS BRANDS, LLC**              |     |
|-------------------------------------------------|----------|
| ** **                                      |     |
| ** **                                      |     |
|                                            |     |
| /s/  Stephen Russo                              |     | May 13, 2005 |
| *Stephen  Russo, President and*                 | *Date*   |
| *Chief  Executive Officer*                      | * * |
| *(Principal  Executive Officer)*                |     |
|                                            |     |
| /s/  Sandra M. Buffa                            |     | May 13, 2005 |
| *Sandra  M. Buffa, Executive Vice President*    | *Date*   |
| *and  Chief Financial Officer*                  | * * |
| *(Principal  Financial and Accounting Officer)* | * * |
| * *                                        | * * |

 

 

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