**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

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

###  

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**FORM10-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 March 29,  2008**                                                                               |
| ** **                                                                                                                            |
| **OR**                                                                                                                                |
| ** **                                                                                                                            |
| **o**                                                                                                                                 | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                            | ** **                                                                                              |
| **For the transition period  from        to        ** |

 

**Commission file number:  333-115046**

 

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**MRS.FIELDS FAMOUS BRANDS, LLC**

(Exact Name of Registrant Specified in Its Charter)

 

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

 

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

 

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Former Name, Former Address and Former Fiscal Year, if changed sincelast report:  **Notapplicable**

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

YES  x   NO  o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer a non-accelerated filer, or a smaller reportingcompany.  See definition of “acceleratedfiler,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

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

 

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

 

On May 9, 2008, 100 common interests ofregistrant were outstanding, all of which are held by an affiliate.  There is no established trading market forregistrant’s common interests.

 

 

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

###  

**TABLE OF CONTENTS**

 
| ** **                                                                                     | **Page**                                                                                                                                   |
|------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                           |                                                                                                                                       |
| **PART I – FINANCIAL INFORMATION**                                                        |                                                                                                                                       |
|                                                                                           |                                                                                                                                       |
| Item 1. Financial Statements (Unaudited)                                                       | 3                                                                                                                                          |
|                                                                                           |                                                                                                                                       |
|                                                                                           | Condensed Consolidated Balance Sheets as of March 29, 2008 and  December 29, 2007                                                          | 3 |
|                                                                                           |                                                                                                                                       |   |
|                                                                                           | Condensed Consolidated Statements of Operations  and Comprehensive Income (Loss) for the 13 weeks ended March 29, 2008 and  March 31, 2007 | 4 |
|                                                                                           |                                                                                                                                       |   |
|                                                                                           | Condensed Consolidated Statements of Cash Flows for the 13 weeks ended  March 29, 2008 and March 31, 2007                                  | 5 |
|                                                                                           |                                                                                                                                       |   |
|                                                                                           | Notes to Condensed Consolidated Financial  Statements                                                                                      | 6 |
|                                                                                           |                                                                                                                                       |
| Item 2. Management's Discussion and  Analysis of Financial Condition and Results of Operations | 20                                                                                                                                         |
|                                                                                           |                                                                                                                                       |
| Item 3. Quantitative and Qualitative  Disclosures About Market Risk                            | 33                                                                                                                                         |
|                                                                                           |                                                                                                                                       |
| Item 4. Controls and Procedures                                                                | 33                                                                                                                                         |
|                                                                                           |                                                                                                                                       |
| **PART II – OTHER INFORMATION**                                                           |                                                                                                                                       |
|                                                                                           |                                                                                                                                       |
| Item 1. Legal Proceedings                                                                      | 34                                                                                                                                         |
|                                                                                           |                                                                                                                                       |
| Item 1A. Risk Factors                                                                          | 34                                                                                                                                         |
|                                                                                           |                                                                                                                                       |
| Item 6. Exhibits                                                                               | 42                                                                                                                                         |
|                                                                                           |                                                                                                                                       |
| SIGNATURES                                                                                     | 43                                                                                                                                         |

 

2

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# **PART I – FINANCIAL INFORMATION**

#  

# **Item 1.  FinancialStatements**

#  

**MRS. FIELDS FAMOUS BRANDS, LLC**

**CondensedConsolidated Balance Sheets**

(in thousands)

(Unaudited)

 
| ** **                                                                                 | ** ** | **March 29,** | ** ** | **December 29,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                 | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ASSETS:                                                                                    |       |               |       |                  |       |
| Cash and cash equivalents                                                                  |       | $                  | 3,222      |                  | $          | 11,425 |   |
| Restricted cash                                                                            |       | 96,651             |       | 19,965                |       |
| Marketable securities available-for-sale                                                   |       | 5,394              |       | 2,489                 |       |
| Receivables, net of allowance for doubtful  accounts of $377 and $347 respectively         |       | 4,716              |       | 7,954                 |       |
| Amounts due from affiliates                                                                |       | 293                |       | 56                    |       |
| Inventories                                                                                |       | 3,179              |       | 3,659                 |       |
| Prepaid expenses and other                                                                 |       | 2,180              |       | 900                   |       |
| Deferred tax asset                                                                         |       | 1,039              |       | 710                   |       |
| Current assets of discontinued operations                                                  |       | 61                 |       | —                |       |
| Total current assets                                                                       |       | 116,735            |       | 47,158                |       |
|                                                                                       |       |               |       |                  |       |
| Property and equipment, net                                                                |       | 5,261              |       | 6,339                 |       |
| Goodwill                                                                                   |       | 9,202              |       | 50,274                |       |
| Trademarks and other intangible assets, net                                                |       | 7,901              |       | 8,347                 |       |
| Deferred loan costs, net of accumulated  amortization of $12,333 and $12,011, respectively |       | 4,595              |       | 4,917                 |       |
| Deferred tax asset                                                                         |       | 1,004              |       | 760                   |       |
| Other assets                                                                               |       | 2,544              |       | 3,003                 |       |
| Total assets                                                                               |       | $                  | 147,242    |                  | $          | 120,798 |   |
|                                                                                       |       |               |       |                  |       |
| LIABILITIES AND MEMBER’S DEFICIT:                                                     |       |               |       |                  |       |
| Accounts payable                                                                           |       | $                  | 4,969      |                  | $          | 5,989 |   |
| Accrued liabilities                                                                        |       | 6,254              |       | 13,966                |       |
| Amounts due to affiliates                                                                  |       | 36,899             |       | 7,610                 |       |
| Current portion of capital lease  obligations                                              |       | 71                 |       | 87                    |       |
| Current portion of deferred revenues                                                       |       | 698                |       | 807                   |       |
| Current liabilities of discontinued  operations                                            |       | 934                |       | —                |       |
| Total current liabilities                                                                  |       | 49,825             |       | 28,459                |       |
|                                                                                       |       |               |       |                  |       |
| Long-term debt                                                                             |       | 195,747            |       | 195,747               |       |
| Capital lease obligations, net of current  portion                                         |       | 286                |       | 324                   |       |
| Deferred revenues, net of current portion                                                  |       | 382                |       | 433                   |       |
| Other liabilities                                                                          |       | 1,016              |       | 1,066                 |       |
| Total liabilities                                                                          |       | 247,256            |       | 226,029               |       |
| Commitments and Contingencies                                                              |       |               |       |                  |       |
| Member’s deficit                                                                      |       | (98,855            | )          | (104,907              | )          |
| Accumulated other comprehensive loss                                                       |       | (1,159             | )          | (324                  | )          |
| Total member’s deficit                                                                |       | (100,014           | )          | (105,231              | )          |
| Total liabilities and member’s deficit                                                |       | $                  | 147,242    |                  | $          | 120,798 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

3

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**MRS. FIELDSFAMOUS BRANDS, LLC**

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

(in thousands)

(Unaudited)

 
| ** **                                                                                    | ** ** | **13 Weeks Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                    | ** ** | **March 29,** | ** ** | **March 31,** | ** ** |
| ** **                                                                                    | ** ** | **2008**           | ** ** | **2007** | ** ** |
| REVENUES:                                                                                     |       |               |       |   |   |
| Mrs. Fields                                                                              |       | $                  | 13,317     |   | $ | 11,482 |   |
| Dairy                                                                                         |       | 1,789              |       | 2,345 |   |
| Total revenues                                                                                |       | 15,106             |       | 13,827 |   |
|                                                                                          |       |               |       |   |   |
| OPERATING COSTS AND EXPENSES:                                                                 |       |               |       |   |   |
| Mrs. Fields                                                                              |       | 12,566             |       | 10,058 |   |
| Dairy                                                                                         |       | 1,169              |       | 1,842 |   |
| General and administrative                                                                    |       | 2,813              |       | 2,406 |   |
| Depreciation                                                                                  |       | 480                |       | 486 |   |
| Amortization                                                                                  |       | 472                |       | 517 |   |
| Other, net                                                                                    |       | (38                | )          | — |   |
| Gain on sale of land held for sale                                                            |       | —             |       | (128 | ) |
| Total operating costs and expenses                                                            |       | 17,462             |       | 15,181 |   |
| Loss from continuing operations                                                               |       | (2,356             | )          | (1,354 | ) |
| Interest expense, net                                                                         |       | (4,892             | )          | (5,293 | ) |
| Loss from continuing operations before  benefit for income taxes                              |       | (7,248             | )          | (6,647 | ) |
| Benefit for income taxes                                                                      |       | (2,778             | )          | (1,487 | ) |
| Loss from continuing operations                                                               |       | (4,470             | )          | (5,160 | ) |
| Income from discontinued operations, net of  income taxes of $32,014 and $1,497, respectively |       | 10,522             |       | 2,482 |   |
| Net income (loss)                                                                             |       | $                  | 6,052      |   | $ | (2,678 | ) |
|                                                                                          |       |               |       |   |   |
| COMPREHENSIVE INCOME (LOSS):                                                                  |       |               |       |   |   |
| Net income (loss)                                                                             |       | $                  | 6,052      |   | $ | (2,678 | ) |
| Unrealized loss on marketable securities                                                      |       | (834               | )          | — |   |
| Foreign currency translation adjustment                                                       |       | (1                 | )          | (3 | ) |
| Comprehensive income (loss)                                                                   |       | $                  | 5,217      |   | $ | (2,681 | ) |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

4

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**MRS. FIELDSFAMOUS BRANDS, LLC**

**Condensed Consolidated Statements of Cash Flows**

(in thousands)

(Unaudited)

 
| ** **                                                                  | ** ** | **13 Weeks Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                  | ** ** | **March 29,**           | ** ** | **March 31,** | ** ** |
| ** **                                                                  | ** ** | **2008**                     | ** ** | **2007** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                       |       |                         |       |   |   |
| Net income (loss)                                                           |       | $                            | 6,052      |   | $ | (2,678 | ) |
| Income from discontinued operations, net of  income taxes                   |       | (10,522                      | )          | (2,482 | ) |
| Adjustments to reconcile net income (loss)  to net                          |       |                         |       |   |   |
| cash used in operating activities:                                          |       |                         |       |   |   |
| Depreciation and amortization                                               |       | 952                          |       | 1,003 |   |
| Amortization of deferred loan costs                                         |       | 322                          |       | 288 |   |
| Gain on sale of land held for sale                                          |       | —                       |       | (128 | ) |
| Deferred income taxes                                                       |       | (60                          | )          | — |   |
| Changes in assets and liabilities:                                          |       |                         |       |   |   |
| Receivables                                                                 |       | 586                          |       | 1,383 |   |
| Inventories                                                                 |       | (660                         | )          | 190 |   |
| Prepaid expenses and other assets                                           |       | (1,641                       | )          | 32 |   |
| Accounts payable                                                            |       | (88                          | )          | (4,753 | ) |
| Accrued liabilities                                                         |       | (6,633                       | )          | (5,859 | ) |
| Amounts due to/from affiliates                                              |       | (2,962                       | )          | (390 | ) |
| Deferred revenues                                                           |       | (160                         | )          | (45 | ) |
| Other liabilities                                                           |       | (50                          | )          | (52 | ) |
| Total operating cash flows used in  continuing operations                   |       | (14,864                      | )          | (13,491 | ) |
| Total operating cash flows (used in)  provided by discontinued operations   |       | (5,480                       | )          | 2,971 |   |
|                                                                        |       |                         |       |   |   |
| Net cash used in operating activities                                       |       | (20,344                      | )          | (10,520 | ) |
|                                                                        |       |                         |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                       |       |                         |       |   |   |
| Change in restricted cash                                                   |       | (76,686                      | )          | — |   |
| Proceeds from sale of land held for sale                                    |       | —                       |       | 278 |   |
| Purchases of property and equipment                                         |       | (92                          | )          | (5 | ) |
| Total investing cash flows (used in)  provided by continuing operations     |       | (76,778                      | )          | 273 |   |
| Total investing cash flows provided by  (used in) discontinued operations   |       | 88,952                       |       | (7 | ) |
|                                                                        |       |                         |       |   |   |
| Net cash provided by investing activities                                   |       | 12,174                       |       | 266 |   |
|                                                                        |       |                         |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                       |       |                         |       |   |   |
| Principal payments on capital leases                                        |       | (32                          | )          | (30 | ) |
| Net cash used in financing activities                                       |       | (32                          | )          | (30 | ) |
| Effect of foreign exchange rate changes on  cash                            |       | (1                           | )          | (3 | ) |
| Net decrease in cash and cash equivalents                                   |       | (8,203                       | )          | (10,287 | ) |
| Cash and cash equivalents at beginning of  period                           |       | 11,425                       |       | 15,963 |   |
| Cash and cash equivalents at end of period                                  |       | $                            | 3,222      |   | $ | 5,676 |   |
| **Supplemental Disclosures of Cash Flow  Information:**                     |       |                         |       |   |   |
| Cash paid for interest                                                      |       | $                            | 10,264     |   | $ | 10,261 |   |
|                                                                        |       |                         |       |   |   |
| **Supplemental Disclosure of Noncash  Investing and Financing Activities:** |       |                         |       |   |   |
| Securities received from the sale of assets                                 |       | $                            | 3,837      |   | $ | — |   |
| Unrealized loss on marketable securites  available-for-sale                 |       | 834                          |       | — |   |
| Distribution to parent under tax allocation  agreement                      |       | —                       |       | 743 |   |

 

Seeaccompanying notes to unaudited condensed consolidated financial statements.

 

5

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**MRS. FIELDS FAMOUSBRANDS, LLC**

**Notes toCondensed Consolidated Financial Statements**

(Unaudited)

 

**1.  Description ofBusiness**

 

Mrs. FieldsFamous Brands, LLC and subsidiaries (the “Company”) is a wholly-ownedsubsidiary 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”).

 

Operating segments arecomponents of the Company for which separate financial information is availablethat is evaluated regularly by management in deciding how to allocate resourcesand assess performance.  This informationis reported on the basis that it is used internally for evaluating segmentperformance.

 

The Company has the followingfive reportable operating segments:

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

 

**2.  Basis ofPresentation**

 

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

 

The preparation of financialstatements in conformity with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from these estimates.

 

**3.  Recently Adopted Accounting Pronouncements**

 

On December 30, 2007,the Company adopted the provisions of Statement of Financial AccountingStandards (“SFAS”) No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities – including an amendment of Financial AccountingStandards Board (“FASB”) Statement No. 115” (“SFAS 159”).  SFAS 159 allows companies to measure manyfinancial assets and liabilities at fair value. It also establishespresentation and disclosure requirements designed to facilitate comparisonsbetween companies that choose different measurement attributes for similartypes of assets and liabilities.  TheCompany did not elect to report any additional assets or liabilities at fairvalue and accordingly, the adoption of SFAS 159 did not have a material effecton our financial position or results of operations.

 

6

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**MRS. FIELDS FAMOUSBRANDS, LLC**

**Notes to Condensed ConsolidatedFinancial Statements**

(Unaudited)

***(continued)***

 

On December30, 2007, the Company adopted the provision of SFAS No. 157 ("SFAS157"), "Fair Value Measurements," except as it applies to thosenonfinancial assets and nonfinancial liabilities for which the effective datehas been delayed by one year.  TheCompany measures at fair value certain financial assets and liabilities,including its marketable securities available-for-sale.  SFAS 157 specifies a hierarchy of valuationtechniques based on whether the inputs to those valuation techniques areobservable or unobservable.  Observableinputs reflect market data obtained from independent sources, whileunobservable inputs reflect the Company’s market assumptions.  These two types of inputs have created thefollowing fair-value hierarchy:

 

·      Level 1 - Quoted prices for identicalinstruments in active markets;

·      Level 2 - Quoted prices for similarinstruments in active markets, quoted prices for identical or similarinstruments in markets that are not active and model-derived valuations inwhich all significant inputs and significant value drivers are observable inactive markets; and

·      Level 3 - Valuations derived fromvaluation techniques in which one or more significant inputs or significant valuedrivers are unobservable.

 
| ** **                               | ** ** | **Fair Value Measurements as of March 29, 2008** | ** ** |
|------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Total**                                                                           | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Marketable securities available-for-sale |       | $                                                                                   | 5,394      |   | $ | 5,394 |   | $ | — |   | $ | — |   |
|                                     |       | $                                                                                   | 5,394      |   | $ | 5,394 |   | $ | — |   | $ | — |   |

 

The adoptionof SFAS 157 did not have a material effect on the Company’s financial positionor results of operations.

 

**4.  Accounting Pronouncements Not Yet Adopted**

 

In December 2007, theFASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”).SFAS 141R establishes principles and requirements for how an acquirer of abusiness recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, any noncontrolling interest in theacquiree and the goodwill acquired. SFAS 141R also establishes disclosurerequirements to enable the evaluation of the nature and financial effects ofthe business combination. SFAS 141R is effective for acquisitions infiscal years beginning after December 15, 2008 and will be adopted by theCompany on December 28, 2008.

 

**5.  DiscontinuedOperations**

 

On January 29, 2008(the “GAC Closing Date”), the Company and its wholly-owned subsidiaries, GACCF,LLC, formerly Great American Cookie Company Franchising, LLC (“GACCF”) andGAMAN, LLC, formerly Great American Manufacturing, LLC (together with GACCF, “GAC”)completed the sale of substantially all of the assets of GAC to a wholly-ownedsubsidiary of NexCen Brands, Inc. (“NexCen Brands” and together with itssubsidiaries, “NexCen”) pursuant to an asset purchase agreement (the “GACAgreement”) for $93.6 million (the “GAC Transaction”).  The purchase price consisted of $89.0 millionin cash and 1,099,290 shares of NexCen Brands common stock valued at $4.23 pershare.  The net cash proceeds from thesale of GAC is considered restricted cash and is reflected as restricted cashin the Company’s condensed consolidated financial statements.  Under the terms of the GAC Agreement, theNexCen Brands common stock will be held in escrow for nine months, pendingsatisfaction of certain standard representations and warranties as described inthe GAC Agreement.  Additionally, theCompany paid $6.7 million of the proceeds from the sale of GAC to certain ofGACCF’s franchisees at the GAC Closing Date, in satisfaction of rights theyheld in connection with the sale of the GAC franchise system. The Company isrestricted from trading the shares of NexCen Brands common stock until sixmonths after the GAC Closing Date. Thereafter, the Company may sell up to 25 percent of the total number ofshares during any three month period. Due to the restrictions on the sale of the NexCen Brands common stock,the Company recorded the shares at a 17.5 percent discount from the marketvalue on the date of sale.  The sharesthat may be traded within 12 months have been reported as of March 29,2008 as available-for-sale securities in accordance with SFAS No. 115 (“SFAS115”), “Accounting for Certain Investments in Debt and Equity Securities.”  The remainder of the stock as of March 29,2008 that is not available for sale within 12 months is accounted for using thecost method at the discounted basis and is included in other assets.

 

7

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**MRS. FIELDS FAMOUSBRANDS, LLC**

**Notes to Condensed Consolidated FinancialStatements**

(Unaudited)

***(continued)***

 

On August 7, 2007 (the “PretzelClosing Date”), the Company and its wholly-owned subsidiaries, PTF, LLC andPMC, LLC, formerly Pretzel Time Franchising, LLC and Pretzelmaker Franchising,LLC, respectively, (collectively, “Pretzels”), completed a sale of certainassets, consisting primarily of identifiable intangible assets of Pretzels, toNexCen for $29.3 million, consisting of $22.0 million in cash and 997,671shares of NexCen Brands common stock valued at $7.35 per share on the date ofthe sale.  Under the terms of the assetpurchase agreement, $2.9 million (397,121 shares) and $1.0 million (136,054shares) of NexCen Brands common stock, valued at $7.35 per share, will be heldin escrow for nine and fifteen months, respectively, pending satisfaction ofcertain representations and warranties. The Company is restricted from trading the shares of NexCen Brandscommon stock until twelve months after the Pretzel Closing Date and then only25 percent of the total number of shares every three months thereafter.  Due to the restrictions on the sale of theNexCen Brands common stock, the Company recorded the shares at a 25 percentdiscount from the fair value on the date of sale.  The shares that may be traded within 12 monthshave been reported as of March 29, 2008 as available-for-sale securitiesin accordance with SFAS No. 115. The remainder of the stock as of March 29, 2008 that is notavailable for sale within 12 months was accounted for using the cost method atthe discounted basis and is included in other assets.

 

The key components of incomefrom discontinued operations related to GAC and Pretzels (collectively, “GAC/Pretzels”)were as follows (in thousands):

 
| ** **                                                  | ** ** | **For the 13 Weeks Ended** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                  | ** ** | **March 29,**                             | ** ** | **March 31,** | ** ** |
| ** **                                                  | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| GAC/Pretzel revenue                                         |       | $                                              | 1,929      |   | $ | 7,736 |   |
| GAC/Pretzel operating expenses                              |       | (1,826                                         | )          | (3,717 | ) |
| Depreciation                                                |       | (11                                            | )          | (40 | ) |
| Other revenue                                               |       | 113                                            |       | — |   |
| Interest expense, net                                       |       | 2                                              |       | — |   |
| Income before income taxes                                  |       | 207                                            |       | 3,979 |   |
| Income taxes                                                |       | 79                                             |       | 1,497 |   |
| Income from discontinued operations                         |       | 128                                            |       | 2,482 |   |
| Gain on sale, net of $31,935 related to  income taxes       |       | 10,394                                         |       | — |   |
| Earnings from discontinued operations, net  of income taxes |       | $                                              | 10,522     |   | $ | 2,482 |   |

 

As of December 29,2007, GAC’s assets and liabilities consisted of the following:

 

·                  accounts receivables, net of $2.7 million;

·                  inventories of $1.1 million;

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

·                  goodwill of $41.1 million;

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

·                  accounts payable and accrued liabilities of$1.3 million.

 

As of March 29, 2008,current assets and liabilities of discontinued operations consisted of thefollowing:

 

·                  accounts receivables, net of $100,000; and

·                  accounts payable and accrued liabilities of$900,000.

 

8

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**MRS. FIELDS FAMOUSBRANDS, LLC**

**Notes to Condensed ConsolidatedFinancial Statements**

(Unaudited)

***(continued)***

 

The operating cash flowsfrom discontinued operations consisted of the following (in thousands):

 
| ** **                                                                                             | ** ** | **For the 13 Weeks Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **March 29,**                             | ** ** | **March 31,** | ** ** |
| ** **                                                                                             | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| Income from discontinued operations, net of tax                                                        |       | $                                              | 10,522     |   | $ | 2,482 |   |
| Adjustments to reconcile net income (loss)  to net cash (used in) provided by discontinued operations: |       |                                           |       |   |   |
| Depreciation                                                                                           |       | —                                         |       | 40 |   |
| Gain on sale of assets                                                                                 |       | (42,329                                        | )          | — |   |
| Changes in assets and liabilities:                                                                     |       |                                           |       |   |   |
| Receivables                                                                                            |       | 2,652                                          |       | 868 |   |
| Inventories                                                                                            |       | (221                                           | )          | (12 | ) |
| Prepaid expenses and other                                                                             |       | 369                                            |       | — |   |
| Other assets                                                                                           |       | 10                                             |       | — |   |
| Current assets of discontinued operations                                                              |       | (61                                            | )          | — |   |
| Accounts payable                                                                                       |       | (932                                           | )          | (310 | ) |
| Accrued liabilities                                                                                    |       | (8,438                                         | )          | (127 | ) |
| Amounts due to/from affiliates                                                                         |       | 32,014                                         |       | — |   |
| Deferred revenues                                                                                      |       | —                                         |       | 30 |   |
| Current liabilities of discontinued  operations                                                        |       | 934                                            |       | — |   |
|                                                                                                   |       | $                                              | (5,480     | ) | $ | 2,971 |   |
|                                                                                                        |            |                                                |            |  |  |  |  |  |  |

 

The investing cash flows fromdiscontinued operations consisted of the following (in thousands):

 
| ** **                          | ** ** | **For the 13 Weeks Ended** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|
| ** **                          | ** ** | **March 29,**                             | ** ** | **March 31,** | ** ** |
| ** **                          | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| Proceeds from sale of assets        |       | $                                              | 89,000     |   | $ | — |   |
| Purchases of property and equipment |       | (48                                            | )          | (7 | ) |
|                                |       | $                                              | 88,952     |   | $ | (7 | ) |

 

9

----

 

**MRS. FIELDS FAMOUSBRANDS, LLC**

**Notes to Condensed ConsolidatedFinancial Statements**

(Unaudited)

***(continued)***

 

**6.  Going Concern**

 

The accompanying condensedconsolidated financial statements of the Company were prepared on a goingconcern basis, which contemplates the realization of assets and thesatisfaction of liabilities in the normal course of business. The realizationof assets and the satisfaction of liabilities in the normal course of businessare dependent on, among other things, the Company’s ability to operateprofitably and to generate positive cash flows from operations.  The Company has suffered recurring net lossesand negative cash flows from operations and had a net member’s deficit at March 29,2008 and December 29, 2007.  As aresult, the Company may be unable to make its scheduled semi-annual interestpayments on its 9 percent Senior Secured Notes (the “9 percent Senior SecuredNotes”) and 11 1/2 percent Senior Secured Notes (the “11 1/2 percent SeniorSecured Notes”, together the “Senior Secured Notes”). The aggregate amount ofeach semi-annual payment is $10.25 million and the next payment is due in September 2008.  Failure to make any scheduled semi-annualinterest payment would constitute an event of default under the Company’sindenture (“Indenture”) governing the Company’s Senior Secured Notes, whichcould cause the Senior Secured Notes to become immediately due andpayable.  The Company does not currentlyhave the ability to repay the Senior Secured Notes should they become due andpayable.  These matters raise substantialdoubt about the Company’s ability to continue as a going concern.  The Company is pursuing various actions toimprove its results of operations, cash flows and financial position. These actions include, but are not limited to, the following:

 

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

·                  reinvestment of net proceeds from the sale ofGAC/Pretzels into higher yielding investments;

·                  restructuring of the Company’s Senior SecuredNotes; and

·                  raising additional equity capital.

 

Due to the substantial doubtabout the Company’s ability to continue as a going concern, Management does notexpect to issue a new franchise disclosure document until it has additionalinformation about alternatives to improve its overall liquidity position,including the possibility of restructuring the Senior Secured Notes.  Until the Company issues a new franchise disclosuredocument that reflects its most recent financial statements, the Company willbe prohibited from selling new franchises, which could adversely affect theCompany’s business operations and financial condition.

 

Management and its majorshareholder have engaged Blackstone Advisory Services (“Blackstone”) to assistin reviewing the Company’s strategic alternatives for raising additional equitycapital and restructuring its Senior Secured Notes.  Blackstone andmanagement are working with a committee of noteholders representingapproximately 70 percent of the outstanding Senior Secured Notes on a proposalto restructure the Senior Secured Notes.  Management expects to be able torestructure the terms of its Senior Secured Notes.  However, there can be no assurance that theSenior Secured Notes will be restructured on terms favorable to the Company orat all.  In addition, there can be no assurance that any of the strategicalternatives being considered by the Company will be successful or that theCompany’s results of operations, cash flows and financial position willimprove.

 

**7.  Restricted cash**

 

The Indenture governing theCompany’s Senior Secured Notes restricts its use of the proceeds from an assetsale, net of expenses of the transaction. The restricted cash must be used in one of the following ways:

 

·                  to make an investment in similar assets;

·                  make investments in the Company; or

·                  after 361 days, use the net proceeds to makean offer to pay down long-term debt.

 

Thetotal outstanding amount of net proceeds from the sale of Pretzels and GAC was$96.7 million at March 29, 2008 and is included in restricted cash.  The restricted cash is currently held in anaccount controlled by the Trustee pursuant to the Indenture.

 

10

----

 

**MRS. FIELDS FAMOUSBRANDS, LLC**

**Notes to Condensed ConsolidatedFinancial Statements**

(Unaudited)

***(continued)***

 

**8.  MarketableSecurities Available-for-Sale**

 

Marketablesecurities available-for-sale at March 29, 2008 and December 29, 2007consist of equity securities of NexCen Brands common stock. The cost, grossunrealized gain and loss and fair value of available-for-sale securities wereas follows (in thousands):

 
| ** **        | ** ** | **March 29, 2008** | ** ** |
|-------------------|------------|------------------------------|------------|
| ** **        | ** ** | ** **                   | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **        | ** ** | ** **                   | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Cost**                     | ** ** | **Gain** | ** ** | **(Loss)** | ** ** | **Fair Value** | ** ** |
| Equity securities |       | $                            | 7,000      |   | $ | — |   | $ | (1,606 | ) | $ | 5,394 |   |
|              |       | $                            | 7,000      |   | $ | — |   | $ | (1,606 | ) | $ | 5,394 |   |

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

 

**9.  Receivables**

 

Most of the Company’sreceivables are due from domestic and international franchisees, distributors,licensees and corporate customers of Mrs. Fields Gifts and Mrs. FieldsBranded Retail.  These receivables arecomprised of normal trade accounts receivable and longer-term notesreceivable.  Service charges may beassessed on past due invoices but any revenue associated with these charges isonly recognized when collected.

 

The Company maintains anallowance for doubtful accounts to cover potential losses.  This allowance is the Company’s best estimateof the amount of probable collection losses in the Company’s existing tradeaccounts receivable.  The Companydetermines the allowance based upon historical write-off experience andindividual facts and circumstances associated with individual debtors.  If the assumptions that are used to determinethe allowance for doubtful accounts change, the Company may have to provide fora greater level of expense in future periods or reverse amounts provided for inprior periods.

 

Prior to fiscal 2001, TCBYSystems, LLC (“TCBY”), a wholly-owned subsidiary of the Company, extendedcredit from time to time in the form of notes receivable to franchisees.  Certain of these notes receivable remain outstanding.  Notes receivable from franchisees areprimarily collateralized by equipment located at the franchisees’ stores.  These notes bear interest at market ratesapplicable at the time the notes were issued and mature at various datesthrough April 2009.  TCBY regularlyreviews the notes for non-performance. Notes that are considered non-performing are placed on a non-accrualstatus when the collectibility of principal or interest becomes uncertain.  During the 13 weeks ended March 29, 2008and March 31, 2007, TCBY recognized no interest income pertaining to thesenotes receivable. These notes are included in receivables in the accompanyingcondensed consolidated financial statements.

 

11

----

 

**MRS. FIELDS FAMOUSBRANDS, LLC**

**Notes to Condensed ConsolidatedFinancial Statements**

(Unaudited)

***(continued)***

 

Prior to fiscal 2001, TCBYfactored various notes receivable aggregating $2.1 million.  Under the terms of the factoring agreement,TCBY is ultimately responsible to the factoring agent for the realizability ofthe notes receivable.  In the event ofnon-performance, the factoring agent has recourse against TCBY to a maximumlevel of $150,000 and $182,000 as of March 29, 2008 and December 29, 2007,respectively.  The Company has reserved100 percent for this potential recourse liability and included the reserve inaccrued liabilities in the accompanying condensed consolidated balance sheets.

 

**10.  Inventories**

 

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

** **
| ** **     | ** ** | **March 29,** | ** ** | **December 29,** | ** ** |
|----------------|------------|--------------------|------------|-----------------------|------------|
| ** **     | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Finished goods |       | $                  | 1,861      |                  | $          | 1,717 |   |
| Raw materials  |       | 329                |       | 973                   |       |
| Novelties      |       | 605                |       | 598                   |       |
| Packaging      |       | 384                |       | 371                   |       |
|           |       | $                  | 3,179      |                  | $          | 3,659 |   |

 

**11.  Property andEquipment**

 

Property and equipment arestated at cost, net of accumulated depreciation and amortization.

 

Depreciation and amortizationis computed on a straight-line basis as follows:

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

 

----

* Based on the lesserof the useful life of the asset or the term of the applicablelease.

 

Property and equipment arecomprised of the following (in thousands):

 
| ** **                         | ** ** | **March 29,** | ** ** | **December 29,** | ** ** |
|------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Equipment and fixtures             |       | $                  | 10,591     |                  | $          | 11,983 |   |
| Leasehold improvements             |       | 4,854              |       | 5,017                 |       |
| Building and building improvements |       | —             |       | 2,008                 |       |
| Land                               |       | —             |       | 240                   |       |
|                               |       | 15,445             |       | 19,248                |       |
| Less accumulated depreciation      |       | (10,184            | )          | (12,909               | )          |
|                               |       | $                  | 5,261      |                  | $          | 6,339 |   |

 

Property and equipment at March 29,2008 and December 29, 2007 included gross assets acquired under capitalleases of $722,000 and $747,000, respectively, and related accumulateddepreciation of $628,000 and $385,000, respectively.

 

12

----

 

**MRS. FIELDS FAMOUSBRANDS, LLC**

**Notes to Condensed ConsolidatedFinancial Statements**

(Unaudited)

***(continued)***

 

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

 

Included in leaseholdimprovements at March 29, 2008 and December 29, 2007 is $1.3 millionfor tenant improvements provided as lease incentives by the lessor related tothe lease for the Company’s gifting operations facility, less $240,000 and$208,000 of accumulated depreciation, respectively.  At March 29, 2008 and December 29,2007, $125,000 of deferred rent and $900,000 in other liabilities relating tothese lease incentives was included in accrued liabilities and $900,000 inother liabilities.  The total amount ofthese leasehold improvements and deferred rent are amortized over the life ofthe lease.

 

During the 13 weeks ended March 31,2007, the Company sold land held for sale for $278,000, resulting in a gain of$128,000.

 

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

 

The Company accounts forgoodwill and other intangible assets in accordance with SFAS No. 142 (“SFAS142”), “Goodwill and Other Intangible Assets.” Goodwill and intangible assets acquired in a purchase businesscombination and determined to have an indefinite useful life are not amortized,but are tested for impairment at least annually in accordance with the provisionsof SFAS 142.  SFAS 142 also requiresthat intangible assets with estimable useful lives be amortized over theirrespective estimated useful lives to their estimated residual values and bereviewed for impairment in accordance with SFAS No. 144, “Accountingfor Impairment or Disposal of Long-Lived Assets.”

 

The following outlines theCompany’s goodwill by operating segment (in thousands):

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

 

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

 

**13.  AccruedLiabilities**

 

Accrued liabilities arecomprised of the following (in thousands):

 
| ** **                        | ** ** | **March 29,** | ** ** | **December 29,** | ** ** |
|-----------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Accrued liabilities               |       | $                  | 3,836      |                  | $          | 5,211 |   |
| Accrued compensation and benefits |       | 1,499              |       | 2,644                 |       |
| Accrued severance                 |       | 8                  |       | 77                    |       |
| Accrued interest payable          |       | 911                |       | 6,034                 |       |
|                              |       | $                  | 6,254      |                  | $          | 13,966 |   |

 

13

----

 

**MRS. FIELDS FAMOUSBRANDS, LLC**

**Notes to Condensed ConsolidatedFinancial Statements**

(Unaudited)

***(continued)***

 

Included in accruedcompensation and benefits at March 29, 2008 and December 29, 2007 is$600,000 and $1.5 million for accrued bonuses for fiscal years 2008 and 2007,respectively.

 

Accrued severance of$149,000 related to severance accrued as a result of the sale of GAC isincluded in current liabilities of discontinued operations at March 29,2008.

 

The activity in accruedseverance for continuing operations for the 13 weeks ended March 29, 2008is as follows (in thousands):

 
| ** **        | ** ** | **March 29,** | ** ** |
|-------------------|------------|--------------------|------------|
| ** **        | ** ** | **2008**           | ** ** |
| Beginning balance |       | $                  | 77         |   |
| Additions         |       | 36                 |       |
| Payments          |       | (105               | )          |
|              |       | $                  | 8          |   |

 

**14.  Related-PartyTransactions**

 

The amounts due to/fromaffiliates are comprised of the following (in thousands):

 
| ** **                  | ** ** | **March 29,** | ** ** | **December 29,** | ** ** |
|-----------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Amounts due from affilates: |       |               |       |                  |       |
| MFOC                        |       | $                  | 293        |                  | $          | 56 |   |
|                        |       |               |       |                  |       |
| Amounts due to affilates:   |       |               |       |                  |       |
| MFC - tax sharing           |       | $                  | 36,625     |                  | $          | 7,336 |   |
| MFH                         |       | 274                |       | 274                   |       |
|                        |       | $                  | 36,899     |                  | $          | 7,610 |   |

 

The Company has a taxallocation agreement with MFC pursuant to which the Company agreed to makepayments to MFC, after taking into account payments the Company makes directlyto tax authorities, based on its hypothetical stand-alone consolidated federalincome tax liability, determined as if the Company and its subsidiariesconstituted its own consolidated group for federal income tax purposes.  The Company is not permitted to make paymentsunder the tax allocation agreement in respect to its hypothetical consolidatedfederal taxable income, to the extent that such payments exceed theconsolidated federal income taxes (including estimated taxes) payable inrespect to MFC’s consolidated federal income tax group, until and only whileour ratio of Net Indebtedness to Consolidated EBITDA (each as defined in theindenture governing the Senior Secured Notes) is less than 3.75:1.0 and theCompany is otherwise in compliance with the terms of the indenture governingthe Senior Secured Notes.

 

The tax allocation agreementwith MFC does not allow for the carry-back of net operating losses.  Under the tax allocation agreement, theCompany’s net operating losses must be carried forward when determining paymentto MFC.  As a result, the current benefitof the federal net operating loss of $2.4 million was recorded as acontribution from parent for the year ended December 29, 2007.

 

**15.  ReportableSegments**

 

Operating segments arecomponents of the Company for which separate financial information is availablethat is evaluated regularly by management in deciding how to allocate resourcesand assess performance.  This informationis reported on the basis that it is used internally for evaluating segmentperformance.

 

14

----

 

**MRS. FIELDS FAMOUSBRANDS, LLC**

**Notes to Condensed ConsolidatedFinancial Statements**

(Unaudited)

***(continued)***

 

The Company has thefollowing five reportable operating segments:

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

 

The accounting policies forthe segments are the same as those discussed in the summary of significantaccounting policies in Note 3 to the Company’s Annual Report.  Sales and transfers between segments areeliminated in consolidation.

 

The Mrs. Fields Giftsoperating segment includes sales generated from the Company’s gift catalog andwebsite.

 

The Mrs. Fields BrandedRetail operating segment includes sales generated directly from the sale of Mrs. Fieldsproducts through various retail channels.

 

The Mrs. FieldsLicensing operating segment includes licensing activity with third parties forthe sale of products bearing the Company’s brand names.

 

The Mrs. FieldsFranchising and Dairy operating segments include revenues received eitherdirectly or indirectly from cookie and yogurt stores, which are owned andoperated by third parties.  Theserevenues include initial franchise or license fees, monthly royalties based ona percentage of a franchisee’s gross sales and certain product formulation feesand supplier allowances which are based upon sales to franchisees.

 

During fiscal year 2007, theCompany’s GAC/Pretzel operating segment included revenues received eitherdirectly or indirectly from cookie and pretzel stores, which are owned andoperated by third parties.  Theserevenues include initial franchise or license fees, monthly royalties based ona percentage of a franchisee’s gross sales and certain product formulation feesand supplier allowances which are based upon sales to franchisees.  As a result of the sale of GAC during thefirst quarter of 2008, the GAC/Pretzel operating segment’s operating resultshave been included in discontinued operations in the accompanying condensedconsolidated financial statements.

 

The Company evaluatesperformance of each operating segment based on contribution.  Contribution is computed as the differencebetween the revenues generated by a reportable segment and the selling andoccupancy expenses, cost of sales and direct operating expenses related to thatreportable operating segment.  Contributionis used as a measure of the operating performance of an operating segment.  The Company does not allocate any general andadministrative expenses, interest expense, or depreciation and amortization toits reportable operating segments.

 

15

----

 

**MRS. FIELDS FAMOUSBRANDS, LLC**

**Notes to Condensed ConsolidatedFinancial Statements**

(Unaudited)

***(continued)***

 

Segment revenues andcontribution are presented in the following table (in thousands):

 
| ** **                      | ** ** | **For the 13 Weeks Ended** | ** ** |
|---------------------------------|------------|------------------------------------------------|------------|
| ** **                      | ** ** | **March 29,**                             | ** ** | **March 31,** | ** ** |
| ** **                      | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| Revenues:                       |       |                                           |       |   |   |
| Mrs. Fields Gifts          |       | $                                              | 5,771      |   | $ | 4,895 |   |
| Mrs. Fields Branded Retail |       | 5,496                                          |       | 4,503 |   |
| Mrs. Fields Franchising    |       | 1,832                                          |       | 1,884 |   |
| Mrs. Fields Licensing      |       | 218                                            |       | 200 |   |
| Total Mrs. Fields          |       | 13,317                                         |       | 11,482 |   |
| Dairy                           |       | 1,789                                          |       | 2,345 |   |
|                            |       | $                                              | 15,106     |   | $ | 13,827 |   |
| Contribution:                   |       |                                           |       |   |   |
| Mrs. Fields Gifts          |       | $                                              | (201       | ) | $ | (484 | ) |
| Mrs. Fields Branded Retail |       | 126                                            |       | 394 |   |
| Mrs. Fields Franchising    |       | 625                                            |       | 1,324 |   |
| Mrs. Fields Licensing      |       | 201                                            |       | 190 |   |
| Total Mrs. Fields          |       | 751                                            |       | 1,424 |   |
| Dairy                           |       | 620                                            |       | 503 |   |
|                            |       | $                                              | 1,371      |   | $ | 1,927 |   |

 

The reconciliation ofcontribution to loss from continuing operations before benefit for income taxesis as follows (in thousands):

 
| ** **                                                       | ** ** | **For the 13 Weeks Ended** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                       | ** ** | **March 29,**                             | ** ** | **March 31,** | ** ** |
| ** **                                                       | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| Contribution                                                     |       | $                                              | 1,371      |   | $ | 1,927 |   |
| General and administrative expenses                              |       | (2,813                                         | )          | (2,406 | ) |
| Depreciation and amortization                                    |       | (952                                           | )          | (1,003 | ) |
| Gain on sale of land held for sale                               |       | —                                         |       | 128 |   |
| Interest expense, net                                            |       | (4,892                                         | )          | (5,293 | ) |
| Other, net                                                       |       | 38                                             |       | — |   |
| Loss from continuing operations before  benefit for income taxes |       | $                                              | (7,248     | ) | $ | (6,647 | ) |

 

16

----

 

**MRS. FIELDS FAMOUSBRANDS, LLC**

**Notes to Condensed ConsolidatedFinancial Statements**

(Unaudited)

***(continued)***

 

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

 
| ** **                      | ** ** | **March 29,** | ** ** | **December 29,** | ** ** |
|---------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                      | ** ** | ** **         | ** ** | ** **            | ** ** |
| Mrs. Fields Gifts          |       | $                  | 8,459      |                  | $          | 8,777 |   |
| Mrs. Fields Branded Retail |       | 3,918              |       | 2,925                 |       |
| Mrs. Fields Franchising    |       | 9,602              |       | 9,960                 |       |
| Mrs. Fields Licensing      |       | 2,110              |       | 2,261                 |       |
| Total Mrs. Fields          |       | 24,089             |       | 23,923                |       |
|                            |       |               |       |                  |       |
| GAC/Pretzels                    |       | 61                 |       | 45,799                |       |
| Dairy                           |       | 5,419              |       | 5,388                 |       |
|                            |       |               |       |                  |       |
| Total Segment Identified Assets |       | 29,569             |       | 75,110                |       |
|                            |       |               |       |                  |       |
| Non-Segment Identified Assets   |       | 117,673            |       | 45,688                |       |
|                            |       |               |       |                  |       |
| Total Assets                    |       | $                  | 147,242    |                  | $          | 120,798 |   |

 

The fixed assets andinventories of the Company primarily relate to the Company’s branded retailsegment and gifts business segment. Assets relating to franchising and licensing activity are primarilyamounts due from franchisees and licensees and intangible assets, such astrademarks, trade names, recipes, franchise relationships and goodwill relatingto franchising concepts.

 

Revenues from franchisees,customers and licensees within the United States of America were $13.2 million and$13.0 million or 87.7 percent and 94.3 percent of total revenues for the 13weeks ended March 29, 2008 and March 31, 2007, respectively.  Revenues from international franchisees,customers and licensees were $1.9 million and $800,000 or 12.3 percent and 5.7percent of total revenues for the 13 weeks ended March 29, 2008 and March 31,2007, respectively.  Revenues from anysingle foreign country were not material. Providing geographical information regarding long-lived assets isimpracticable.

 

The Mrs. Fields Giftsoperating segment has one customer that accounted for approximately $1.1million and $700,000 or 18.5 percent and 15.2 percent of revenues for the13 weeks ended March 29, 2008 and March 31, 2007, respectively.  No other customers accounted for more thanfive percent of Mrs. Fields Gifts operating segment revenues.

 

The Mrs. Fields BrandedRetail operating segment is not dependent upon any single customer.

 

The Mrs. Fields andDairy business units are not dependent upon any single franchisee.

 

The Mrs. FieldsLicensing operating segment, for the 13 weeks ended March 29, 2008 and March 31,2007, respectively, had:

 

·                  a licensee that accounted for approximately$149,000 and $84,000 or 68.3 percent and 41.9 percent of the revenues of thelicensing segment;

·                  a licensee that accounted for approximately$38,000 and $32,000 or 17.3 and 15.9 percent of the revenues of the licensingsegment; and

·                  a licensee that accounted for approximately$30,000 and $30,000 or 13.8 percent and 15.0 percent of the revenues of thelicensing segment.

 

17

----

 

**MRS. FIELDS FAMOUSBRANDS, LLC**

**Notes to Condensed ConsolidatedFinancial Statements**

(Unaudited)

***(continued)***

 

**16.  Commitments and Contingencies**

 

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

 

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

 

**17.  Supplemental Condensed ConsolidatingFinancial Information**

 

Long-term debt includes theSenior Secured Notes that were issued by the Company and Mrs. FieldsFinancing Company, Inc. as co-issuers. Mrs. Fields Financing Company, Inc. is a wholly-owned financesubsidiary of the Company.  The SeniorSecured Notes are fully and unconditionally guaranteed on a joint and severalbasis by all of the Company’s domestic subsidiaries other than immaterialsubsidiaries.  The Company has noindependent assets or operations. Therefore, supplemental financial information on a condensedconsolidating basis of the guarantor subsidiaries is not required.  There are no restrictions on the Company’sability to obtain cash dividends or other distributions of funds from theguarantor subsidiaries, except those imposed by applicable law.

 

**18.  Income Taxes**

 

The Company is organized asa single-member limited liability company and did not elect to be taxed as acorporation for federal income tax purposes. As such, for federal income tax purposes, the Company is “disregarded”and is treated as a division of MFOC, its sole member.  Although the Company is not a tax-payingentity, the assets of the Company could be subject to income tax claims againstany member of its parent’s consolidated group.

 

The Company recognizesinterest and penalties related to unrecognized tax benefits in interestexpense.  There have been no interest orpenalties recognized in the financial statements of the Company.

 

The Company is included inthe consolidated U.S. federal income tax returns of MFC and returns filed invarious state jurisdictions.  MFC iscurrently not under examination by any federal or state tax authority, butremains subject to income tax examinations for each of its open tax years,which extend back to 2003 for federal income tax purposes and 2002 for stateincome tax purposes.

 

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

 

18

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**MRS. FIELDS FAMOUSBRANDS, LLC**

**Notes to Condensed ConsolidatedFinancial Statements**

(Unaudited)

***(continued)***

 

**19.  Subsequent Event**

 

On April 30, 2008, theCompany, on behalf of Mrs. Fields Branded Retail, approved and executed aCo-Packing Agreement dated effective as of February 26, 2008 (the “SupplyAgreement”) between Mrs. Fields Branded Retail and Oak State Products, Inc.(“Oak State”).  Oak State manufactures various types of shelf stable bakedproducts bearing Mrs. Fields trademarks to be marketed, sold anddistributed by Mrs. Fields Branded Retail to its customers.  TheSupply Agreement includes provisions relating to product manufacturing, qualitycontrol, raw materials procurement, pricing, invoicing and payment, inventory,confidentiality and protection of proprietary information.  It has aninitial term of one year and provides for automatic renewals for subsequentone-year periods unless either party gives at least 120 days prior notice ofits intent to terminate.

 

19

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

 

**DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS**

 

This report includes “forward-looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995.  Forward-looking statements are those that donot relate solely to historical fact. They include, but are not limited to, any statement that may predict,forecast, indicate or imply future results, performance, achievements orevents.  They may contain words such as “believe,”“anticipate,” “expect,” “estimate,” “intend,” “project,” “plan,” “continue,” “will,”“may” or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties, including,but not limited to, economic, competitive and governmental factors outside ofour control, that may cause actual results to differ materially from trends,plans or expectations set forth in the forward-looking statements. Factors youshould consider that could cause these differences include all factorsdescribed elsewhere in this report and in detail under “Item 1A. Risk Factors.”

 

You are cautioned not to place undue reliance on these forward-lookingstatements, which reflect management’s analysis only as of the date of thisreport.  We undertake no obligation topublicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise. In light of these risks, uncertainties and assumptions, theforward-looking events discussed in this report may not occur.

 

# **Recent Developments**

#  

On January 29, 2008 (the “GAC Closing Date”), the Company and itswholly-owned subsidiaries, GACCF, LLC  (“GACCF”)and GAMAN, LLC, formerly Great American Cookie Company Franchising, LLC and GreatAmerican Manufacturing, LLC (together with GACCF, “GAC”), completed the sale ofsubstantially all of the assets of GAC to a wholly-owned subsidiary of NexCenBrands, Inc. (“NexCen Brands” and together with its subsidiaries, “NexCen”)pursuant to an asset purchase agreement (the “GAC Agreement”) for $93.6 million(the “GAC Transaction”).  The purchaseprice consisted of $89.0 million in cash and 1,099,290 shares of NexCen Brandscommon stock valued at $4.23 per share, and we recorded a gain on this transactionof $42.3 million which is included in discontinued operations in theaccompanying condensed consolidated statements of operations and comprehensiveincome (loss).  The net cash proceedsfrom the sale of GAC is considered restricted cash and is reflected asrestricted cash in the accompanying condensed consolidated financialstatements.  Under the terms of the GACAgreement, the NexCen Brands common stock is held in escrow for nine months,pending satisfaction of certain standard representations and warranties asdescribed in the GAC Agreement. Additionally, we were required to pay $6.7 million of the proceeds fromthe sale of GAC to certain of GACCF’s franchisees at the GAC Closing Date.

 

On April 30, 2008, theCompany, on behalf of Mrs. Fields Branded Retail, approved and executed aCo-Packing Agreement dated effective as of February 26, 2008 (the “SupplyAgreement”) between Mrs. Fields Branded Retail and Oak State Products, Inc.(“Oak State”).  Oak State manufactures various types of shelf stable bakedproducts bearing Mrs. Fields trademarks to be marketed, sold anddistributed by Mrs. Fields Branded Retail to its customers.  TheSupply Agreement includes provisions relating to product manufacturing, qualitycontrol, raw materials procurement, pricing, invoicing and payment, inventory,confidentiality and protection of proprietary information.  It has aninitial term of one year and provides for automatic renewals for subsequentone-year periods unless either party gives at least 120 days prior notice ofits intent to terminate.

 

20

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# **Executive Summary**

#  

We are a well established franchisor in the premium snack foodindustry, featuring Mrs. Fields® and TCBY® as our core brands.  Through our franchisees’ retail stores, weare one of the largest retailers of freshly baked, on-premises specialtycookies and brownies in the United States of America (the “United States”) andthe largest retailer of soft-serve frozen yogurt with live active cultures inthe United States.  In addition, weoperate a gifts and branded retail business and have entered into licensingarrangements to leverage awareness of our brands among our retail customerbase.  As of March 29, 2008, ourfranchise systems operated through a network of 1,278 retail concept locationsthroughout the United States and in 21 foreign countries.

 

Our business is divided intotwo business units for financial reporting purposes: Mrs. Fields (definedbelow) and TCBY (“Dairy”).  As discussedelsewhere in this report, we sold our Pretzel Time® and Pretzelmaker® brands(collectively, the “Pretzel Brands”) in August 2007 and we sold GAC in January 2008(together with Pretzels, “GAC/Pretzels”). The results of operations from these businesses are included in discontinuedoperations in the condensed consolidated statements of operations andcomprehensive income (loss) (see Note 5).

 

We have the following five reportable operating segments:

 

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

 

Mrs. Fields and Dairy represented 88.2 percent and 11.8 percent oftotal revenues, respectively, for the 13 weeks ended March 29, 2008 and83.0 percent and 17.0 percent of total revenues, respectively, for the 13 weeksended March 31, 2007.

 

During fiscal year 2008, ourstrategy is focused on one key objective:

 

·                  tofocus on the growth of both of our brands by increasing the number of retailunits and profitable sales.

 

Our performance against this key performance indicator is presented anddiscussed throughout this Management’s Discussion and Analysis of FinancialCondition and Results of Operations.

 

As of March 29, 2008, our store portfolio consisted of 905domestic franchised locations, 281 international franchised locations and 92licensed locations.  Our franchisees’ andlicensees’ concept locations by brand are distributed as follows:

 
| ** **                    | ** ** | **Domestic**   | ** ** | **International** | ** ** | **Licensed**  | ** ** | ** ** | ** ** |
|-------------------------------|------------|----------------|------------|-------------------|------------|---------------|------------|------------|------------|
| ** **                    | ** ** | **Franchised** | ** ** | **Franchised**    | ** ** | **Locations** | ** ** | **Total**  | ** ** |
| Mrs. Fields              |       | 313            |       | 85                |       | 25            |       | 423        |       |
| TCBY - traditional stores     |       | 293            |       | —            |       | —        |       | 293        |       |
| TCBY - non-traditional stores |       | 294            |       | 196               |       | 65            |       | 555        |       |
| Yovana - test stores          |       | —         |       | —            |       | 2             |       | 2          |       |
| Beriyo by TCBY - test stores  |       | 5              |       | —            |       | —        |       | 5          |       |
| Dairy subtotal                |       | 592            |       | 196               |       | 67            |       | 855        |       |
| Total                         |       | 905            |       | 281               |       | 92            |       | 1,278      |       |

 

The previous table counts each concept location individually.  For example, if a physical location had a Mrs. Fieldsstore and a TCBY store together, it would be counted as two concept locationsin the table above.  If actual physicalstores were counted rather than concept locations, total store counts would bereduced by 67 locations to 1,211.

 

21

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During the 13 weeks ended March 29, 2008, our store portfoliodeclined from 1,608 concept locations to 1,278 concept locations, as follows:

 
| ** **                        | ** ** | **Total Company** | ** ** |
|-----------------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **Domestic**           | ** ** | **International** | ** ** | **Licensed** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Franchised**         | ** ** | **Franchised** | ** ** | **Locations** | ** ** | **Total** | ** ** |
| Balance at December 29, 2007 |       | 1,238                  |       | 275 |   | 95 |   | 1,608 |   |
| New development openings          |       | 14                     |       | 10 |   | — |   | 24 |   |
| Permanent closings                |       | (46                    | )          | (2 | ) | (3 | ) | (51 | ) |
| Sale of GAC                       |       | (302                   | )          | (1 | ) | — |   | (303 | ) |
| Other closings, net               |       | 1                      |       | (1 | ) | — |   | — |   |
| Balance at March 29, 2008    |       | 905                    |       | 281 |   | 92 |   | 1,278 |   |

 

The following tables provide additional detail of new developmentopenings, permanent closings and other openings and closings of our conceptlocations during the 13 weeks ended March 29, 2008:

 
| ** **                        | ** ** | **Domestic Franchised** | ** ** |
|-----------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **                   | ** ** | ** ** | ** ** | **Traditional** | ** ** | **Traditional** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Mrs. Fields**         | ** ** | **GAC/Pretzels** | ** ** | **Dairy** | ** ** | **Dairy** | ** ** | **Total** | ** ** |
| Balance at December 29, 2007 |       | 318                          |       | 296 |   | 311 |   | 313 |   | 1,238 |   |
| New development openings          |       | 6                            |       | 6 |   | 2 |   | — |   | 14 |   |
| Permanent closings                |       | (12                          | )          | — |   | (15 | ) | (19 | ) | (46 | ) |
| Sale of GAC                       |       | —                       |       | (302 | ) | — |   | — |   | (302 | ) |
| Other closings, net               |       | 1                            |       | — |   | — |   | — |   | 1 |   |
| Balance at March 29, 2008    |       | 313                          |       | — |   | 298 |   | 294 |   | 905 |   |

 
| ** **                        | ** ** | **International Franchised** | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|
| ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | **Traditional** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Mrs. Fields**              | ** ** | **GAC/Pretzels** | ** ** | **Dairy** | ** ** | **Total** | ** ** |
| Balance at December 29, 2007 |       | 84                                |       | 1 |   | 190 |   | 275 |   |
| New development openings          |       | 5                                 |       | — |   | 5 |   | 10 |   |
| Permanent closings                |       | (2                                | )          | — |   | — |   | (2 | ) |
| Sale of GAC                       |       | —                            |       | (1 | ) | — |   | (1 | ) |
| Other closings, net               |       | (2                                | )          | — |   | 1 |   | (1 | ) |
| Balance at March 29, 2008    |       | 85                                |       | — |   | 196 |   | 281 |   |

 
| ** **                        | ** ** | **Licensed Locations** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | ** **                  | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **                  | ** ** | **Traditional** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Mrs. Fields**        | ** ** | **Dairy** | ** ** | **Total** | ** ** |
| Balance at December 29, 2007 |       | 25                          |       | 70 |   | 95 |   |
| Permanent closings                |       | —                      |       | (3 | ) | (3 | ) |
| Balance at March 29, 2008    |       | 25                          |       | 67 |   | 92 |   |

 

22

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We are experiencing a trend of declining store counts.  We have implemented a number of strategiesdesigned to reverse this trend, including identifying stores that are at riskof closure for operational issues, lease or franchise agreement expiration andworking with franchisees to relocate, transfer or correct operationaldeficiencies.  We are also testingprograms to refresh, remodel or re-concept some of our concept locations, asmore fully discussed elsewhere in this report. There can be no assurance that our strategies will succeed.  If store counts continue to decline, ourbusiness operations and financial condition could continue to be adverselyaffected.

 

Due to the substantial doubt about our ability to continue as a goingconcern, we do not expect to issue a new franchise disclosure document until wehave additional information about alternatives to improve our overall liquidityposition, including the possibility of restructuring our Senior Secured Notes.Until we issue a new franchise disclosure document that reflects our mostrecent financial statements, we will be prohibited from selling new franchises,which could adversely affect our business operations and financial condition.

 

Throughout this discussion, we refer to the total weeks that ourfranchised locations operate in any given period as “franchised unit weeks” anduse that term comparatively when describing factors that may affectperformance.  Fewer franchised locationstranslate naturally to fewer total franchised unit weeks that our franchiseesoperate and contribute revenues to us. The Dairy operating segment is comprised of both larger, traditionallocations and a significant number of smaller, non-traditional locations.  We measure franchised unit weeks differentlyfor the Dairy operating segment, based on our calculation that it takesapproximately three average non-traditional locations to equal the revenues ofone average traditional location.  Wetherefore refer to “traditional equivalent unit weeks” to describe the totalnumber of weeks that TCBY franchised locations operate in any given period,adjusted to account for the different impact that non-traditional TCBY storeopenings and closings may have when compared to similar events affectingtraditional TCBY stores.

 

23

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**Results of Operations**

 

The following table sets forth, for the periods indicated, certaininformation relating to our operations and percentage changes from period toperiod (in thousands):

 
| ** **                                                                                     | ** ** | **13 Weeks Ended** | ** ** | ** **         | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------|------------|
| ** **                                                                                     | ** ** | **March 29,**           | ** ** | **March 31,** | ** ** | **%** | ** ** |
| ** **                                                                                     | ** ** | **2008**                     | ** ** | **2007**           | ** ** | **Change** | ** ** |
| REVENUES:                                                                                      |       |                         |       |               |       |   |   |
| Mrs. Fields Gifts                                                                         |       | $                            | 5,771      |               | $          | 4,895 |   | 17.9 |   |
| Mrs. Fields Branded Retail                                                                |       | 5,496                        |       | 4,503              |       | 22.1 |   |
| Mrs. Fields Franchising                                                                   |       | 1,832                        |       | 1,884              |       | (2.8 | ) |
| Mrs. Fields Licensing                                                                     |       | 218                          |       | 200                |       | 9.0 |   |
| Total Mrs. Fields                                                                         |       | 13,317                       |       | 11,482             |       | 16.0 |   |
| Dairy                                                                                          |       | 1,789                        |       | 2,345              |       | (23.7 | ) |
| Total revenues                                                                                 |       | 15,106                       |       | 13,827             |       | 9.3 |   |
|                                                                                           |       |                         |       |               |       |   |   |
| OPERATING COSTS AND EXPENSES:                                                                  |       |                         |       |               |       |   |   |
| Mrs. Fields Gifts                                                                         |       | 5,972                        |       | 5,379              |       | 11.0 |   |
| Mrs. Fields Branded Retail                                                                |       | 5,370                        |       | 4,109              |       | 30.7 |   |
| Mrs. Fields Franchising                                                                   |       | 1,207                        |       | 560                |       | 115.5 |   |
| Mrs. Fields Licensing                                                                     |       | 17                           |       | 10                 |       | 70.0 |   |
| Total Mrs. Fields                                                                         |       | 12,566                       |       | 10,058             |       | 24.9 |   |
| Dairy                                                                                          |       | 1,169                        |       | 1,842              |       | (36.5 | ) |
| General and administrative                                                                     |       | 2,813                        |       | 2,406              |       | 16.9 |   |
| Depreciation                                                                                   |       | 480                          |       | 486                |       | (1.2 | ) |
| Amortization                                                                                   |       | 472                          |       | 517                |       | (8.7 | ) |
| Other operating expenses, net                                                                  |       | (38                          | )          | —             |       | NM |   |
| Gain on sale of land held for sale                                                             |       | —                       |       | (128               | )          | NM |   |
| Total operating costs and expenses                                                             |       | 17,462                       |       | 15,181             |       | 15.0 |   |
| Loss from continuing operations                                                                |       | (2,356                       | )          | (1,354             | )          | 74.0 |   |
| Interest expense, net                                                                          |       | (4,892                       | )          | (5,293             | )          | (7.6 | ) |
| Loss from continuing operations before  benefit for income taxes                               |       | (7,248                       | )          | (6,647             | )          | 9.0 |   |
| Benefit for income taxes                                                                       |       | (2,778                       | )          | (1,487             | )          | 86.8 |   |
| Loss from continuing operations                                                                |       | (4,470                       | )          | (5,160             | )          | (13.4 | ) |
| Income from discontinued operations (net of  income taxes of $32,014 and $1,497, respectively) |       | 10,522                       |       | 2,482              |       | NM |   |
| Net income (loss)                                                                              |       | $                            | 6,052      |               | $          | (2,678 | ) | NM |   |
|                                                                                           |       |                         |       |               |       |   |   |
| Cash flows from operating activities,  including discontinued operations                       |       | $                            | (20,344    | )                  | $          | (10,520 | ) | 93.4 |   |
| Cash flows from investing activities,  including discontinued operations                       |       | $                            | 12,174     |               | $          | 266 |   | NM |   |
| Cash flows from financing activities,  including discontinued operations                       |       | $                            | (32        | )                  | $          | (30 | ) | (6.7 | ) |

 
| NM - Calculation not meaningful. |   |   |   |   |   |   |   |
|----------------------------------|--------|--------|--------|--------|--------|--------|--------|

 

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**13 WeeksEnded March 29, 2008**

**Compared tothe 13 Weeks Ended March 31, 2007**

 

*Loss From Continuing Operations—Overview*.  Lossfrom continuing operations was $2.4 million for the 13 weeks ended March 29,2008, an increase of $1.0 million or 74.0 percent from $1.4 million forthe 13 weeks ended March 31, 2007. The increase in loss from continuing operations was primarily due to thefollowing:

 

·                  decreased contribution from our businessunits of $600,000;

·                  increased general and administrative expensesof $400,000; and

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

 

The foregoing increases in loss from continuing operations werepartially offset by increased amortization and other operating expenses of$100,000.

 

The decrease in contribution from our business units of $600,000 iscomprised of the following:

 

·                  Mrs. Fieldsbusiness unit contribution decrease of $700,000; partially offset by

·                  Dairybusiness unit contribution increase of $100,000.

 

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

 

·                  salesof products through our gift catalog and website, less direct operatingexpenses in our Mrs. Fields Gifts operating segment;

·                  netsales of our branded products through retail channels by us and through foodbrokers, less related cost of sales and direct selling and operating expensesin our Mrs. Fields Branded Retail operating segment;

·                  salesof new franchises and royalties from existing franchises less direct operatingexpenses in our Mrs. Fields Franchising operating segment; and

·                  licensingfees received from third parties for the sale of products bearing our brandnames less direct operating expenses in our Mrs. Fields Licensingoperating segment.

 

Our Dairy business unit contribution is comprised of sales of newfranchises and royalties from existing franchises less direct operatingexpenses.

 

The following table sets forth the contribution from each of ourbusiness units (in thousands):

 
| ** **       | ** ** | **For the 13 Weeks Ended** | ** ** |
|------------------|------------|------------------------------------------------|------------|
| ** **       | ** ** | **March 29,**                             | ** ** | **March 31,** | ** ** |
| ** **       | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| Mrs. Fields |       | $                                              | 751        |   | $ | 1,424 |   |
| Dairy            |       | 620                                            |       | 503 |   |
|             |       | $                                              | 1,371      |   | $ | 1,927 |   |

 

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**Mrs. Fields**

 

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

 
| ** **                                | ** ** | **For the 13 Weeks Ended** | ** ** | ** **         | ** ** |
|-------------------------------------------|------------|------------------------------------------------|------------|--------------------|------------|
| ** **                                | ** ** | **March 29,**                             | ** ** | **March 31,** | ** ** | **%** | ** ** |
| ** **                                | ** ** | **2008**                                       | ** ** | **2007**           | ** ** | **Change** | ** ** |
| Mrs. Fields Gifts                    |       | $                                              | 5,771      |               | $          | 4,895 |   | 17.9 |   |
| Mrs. Fields Branded Retail           |       | 5,496                                          |       | 4,503              |       | 22.1 |   |
| Mrs. Fields Franchising              |       | 1,832                                          |       | 1,884              |       | (2.8 | ) |
| Mrs. Fields Licensing                |       | 218                                            |       | 200                |       | 9.0 |   |
| Total Mrs. Fields revenues           |       | 13,317                                         |       | 11,482             |       | 16.0 |   |
| Mrs. Fields Gifts                    |       | 5,972                                          |       | 5,379              |       | 11.0 |   |
| Mrs. Fields Branded Retail           |       | 5,370                                          |       | 4,109              |       | 30.7 |   |
| Mrs. Fields Franchising              |       | 1,207                                          |       | 560                |       | 115.5 |   |
| Mrs. Fields Licensing                |       | 17                                             |       | 10                 |       | 70.0 |   |
| Total Mrs. Fields operating expenses |       | 12,566                                         |       | 10,058             |       | 24.9 |   |
| Total Mrs. Fields contribution       |       | $                                              | 751        |               | $          | 1,424 |   | (47.3 | ) |

 

***Mrs. Fields Gifts***

 

*Mrs. Fields Gifts Revenues.*  Mrs. FieldsGifts revenues were $5.8 million for the 13 weeks ended March 29, 2008, anincrease of $900,000 or 17.9 percent from $4.9 million for the 13 weeks ended March 31,2007.  These revenues consist of salesthrough our catalog and website as well as affiliations with other websites andsales to large corporate accounts for gifting purposes.  This increase in revenues was primarilyattributable to the following:

 

·                  nationalaccounts partners revenues of $400,000 primarily due to the timing of purchasesfrom our largest corporate customer;

·                  paid-searchengines revenues of $300,000 primarily due to the Easter holiday falling in thefirst quarter during 2008 versus the second quarter during 2007; and

·                  catalogdriven sales of $200,000 due to the timing of the Easter holiday and increasedcirculation of catalogs.

 

*Mrs. Fields Gifts Expenses.*  Mrs. FieldsGifts expenses are comprised of cost of sales for products sold, selling andpromotional expenses and direct operating expenses of this segment.  Mrs. Fields Gifts expenses were$6.0 million for the 13 weeks ended March 29, 2008, an increase of$600,000 or 11.0 percent from $5.4 million for the 13 weeks ended March 31,2007.  This increase in expenses was primarilydue to the following:

 

·                  catalogand advertising expenses of $400,000 due to increased circulation of ourcatalogs and the timing of the Easter holiday;

·                  costof sales of $100,000 due to increased revenues and product mix; and

·                  otheroperating expenses of $100,000.

 

***Mrs. FieldsBranded Retail***

 

*Mrs. Fields Branded Retail Revenues. *Mrs. Fields Branded Retail revenues were $5.5 million for the 13weeks ended March 29, 2008, an increase of $1.0 million or 22.1 percentfrom $4.5 million for the 13 weeks ended March 31, 2007.   Mrs. Fields Branded Retail revenuesconsist of sales of Mrs. Fields branded shelf stable cookies directlythrough retail channels.  The increase insales is primarily related to increased activity in the drug store channel.

 

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*Mrs. Fields**BrandedRetail Expenses.*  Mrs. FieldsBranded Retail expenses is comprised of cost of sales for product sold, sellingand promotional expenses and other direct operating expenses of this segment.  Mrs. Fields Branded Retail expenses were$5.4 million for the 13 weeks ended March 29, 2008, an increase of$1.3 million or 30.7 percent from $4.1 million for the 13 weeks ended March 31,2007.  This increase in expenses wasprimarily due to the following:

 

·                  costof sales of $1.0 million due to increased revenues and increased commodityprices;

·                  advertisingand promotion expenses of $200,000 related to product demos, sampling andbroker fees; and

·                  otheroperating expenses of $100,000.

 

***Mrs. Fields Franchising***

 

The following table details the year over year (“YOY”) percentagedecrease in same store sales for our Mrs. Fields Franchising segment:

 
| ** **       | ** ** | **For the 13 Weeks Ended** | ** ** |
|------------------|------------|------------------------------------------------|------------|
| ** **       | ** ** | **March 29,**                             | ** ** | **March 31,** | ** ** |
| ** **       | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| Mrs. Fields |       | (0.5                                           | )          | (3.5 | ) |

 

Our Mrs. Fields concept’s YOY same store sales decrease of 0.5percent was primarily driven by declines in customer counts due to overall malltraffic declines during the first quarter of 2008 and by the shift of Easterinto the first quarter of 2008 versus the second quarter of 2007, whichresulted in a decrease in revenues that will be offset by an increase inrevenues in the second quarter of 2008 due to this timing difference.  These decreases were partially offset by the focuson our “Live the Chocolate Life” promotion and on Big Cookie Cake sales forValentine’s Day.

 

*Mrs. Fields Franchising Revenues. *Mrs. Fields Franchising revenues were $1.8 million for the 13weeks ended March 29, 2008, a decrease of $100,000 or 2.8 percent from$1.9 million for the 13 weeks ended March 31, 2007.  This decrease in revenues was primarilyattributable to approximately 400 or 9.4 percent fewer unit weeks, the Easterholiday falling in the first quarter in 2008 versus the second quarter in 2007and a decrease in same store YOY sales of 0.5 percent.

 

*Mrs. Fields FranchisingExpenses.*  Mrs. Fields Franchising expenses arecomprised of operation and supervision expenses incurred to provide support,direction and supervision to the franchisees; development and support expensesincluding product development costs, expenses relating to new franchisedevelopment, marketing and advertising, bad debt expense and other directfranchising expenses.  These expenseswere $1.2 million for the 13 weeks ended March 29, 2008, an increase of$600,000 or 115.5 percent from $600,000 for the 13 weeks ended March 31,2007.  Total compensation and relatedcosts increased $500,000 due to increased headcount and other operatingexpenses increased $100,000.

 

***Mrs. Fields Licensing***

 

*Mrs. Fields Licensing Revenues. *Mrs. Fields Licensing revenues were $200,000 for the 13 weeksended March 29, 2008 and March 31, 2007.  Although licensing revenues were consistentin both periods, the mix of licensing revenues reflected an increase inlicensing royalties earned under a licensing agreement for the sale of Mrs. Fieldsbranded chocolates, offset by decreases in licensing royalties earned under ourterminated licensing agreement for the sale of Mrs. Fields brandedproducts and our terminated licensing agreement for the sale of TCBY frozenfood specialty products through retail channels.

 

*Mrs. FieldsLicensing Expenses. *Mrs. Fields Licensing expenses arecomprised of selling and promotional expenses, bad debt and other directoperating expenses of this segment. These expenses were negligible for the 13 weeks ended March 29,2008 and March 31, 2007.

 

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**Dairy**

 

The following table details the YOY percentage decrease in same storesales for our Dairy Franchising segment:

 
| ** ** | ** ** | **For the 13 Weeks Ended** | ** ** |
|------------|------------|------------------------------------------------|------------|
| ** ** | ** ** | **March 29,**                             | ** ** | **March 31,** | ** ** |
| ** ** | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| TCBY       |       | (2.4                                           | )          | (3.8 | ) |

 

Our Dairy Franchising segment’s YOY same store sales decreased 2.4percent for the 13 weeks ended March 29, 2008.  This decrease was due to an overall declinein economic conditions in the United States, the shift of Easter holiday intothe first quarter of 2008 versus the second quarter of 2007, unseasonably coldand wet weather during the month of March and a shift in our promotionalspending in 2008, which will focus on the key selling season of April thruAugust.

 

*Dairy Franchising Revenues. *Dairy Franchising revenues were $1.8 million for the 13 weeks ended March 29,2008, a decrease of $500,000 or 23.7 percent from $2.3 million for the 13 weeksended March 31, 2007.  This decreasein revenues was due to decreases in product formulation revenues generated bypurchases of TCBY products by franchisees of $600,000, partially offset byincreased royalties of $100,000 for the 13 weeks ended March 29,2008.  The decreases were principallyattributable to approximately 1,400 or 20.1 percent fewer unit weeks, adecrease in YOY same store sales and rebates offered to franchisees as anincentive to remodel their stores.

 

*Dairy Franchising Expenses.* DairyFranchising expenses were $1.2 million for the 13 weeks ended March 29,2008, a decrease of $600,000 or 36.5 percent from $1.8 million for the 13weeks ended March 31, 2007.  Thisdecrease in expenses was primarily attributable to the following:

 

·                  brandinitiatives of $700,000 incurred in the first quarter of 2007 to test theBeriyo and Yovana concepts and to prepare for the TCBY new store décorinitiative; and

·                  baddebt expense of $100,000.

 

The foregoing decreases in expenses were partially offset by thefollowing increases:

 

·                  compensationand related costs of $100,000 primarily due to the addition of a Presidentduring the 4th quarter of 2007; and

·                  recruiting,bonus and severance costs of $100,000.

 

**Other**

 

*General and Administrative Expenses.* General and administrative expenses were $2.8 million for the 13 weeksended March 29, 2008, an increase of $400,000 or 16.9 percent from $2.4million for the 13 weeks ended March 31, 2007.  This increase in general and administrativeexpenses was primarily attributable to the following:

 

·                  bonusexpense of $200,000 due to bonuses paid in the first quarter of 2008 to certainindividuals to compensate them for their contributions to the sale of GAC;

·                  legalfees of $200,000; and

·                  professionalfees of $100,000 paid to a third party for internal control assistance and SOXcompliance test work.

 

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

 

*Depreciation and Amortization Expense.* Depreciation expense was $500,000 for the 13 weeks ended March 29,2008 and March 31, 2007. Amortization expense was $500,000 for the 13 weeks ended March 29,2008 and March 31, 2007.

 

*Discontinued Operations.*  Income from discontinuedoperations was $10.5 million for the 13 weeks ended March 29, 2008, an increaseof $8.0 million from $2.5 million for the 13 weeks ended March 31, 2007. Thisincrease was primarily due to the gain related to the sale of GAC of $10.4 millionpartially offset by a reduction in contribution of the GAC/ Pretzel reportableoperating segment.

 

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**Consolidated Financial Condition**

 

Total assets at March 29, 2008 were $147.2 million, an increase of$26.4 million or 21.9 percent from $120.8 million at December 29,2007.  This increase in assets wasprimarily attributable to the following increases:

 

·                  restrictedcash of $76.7 resulting from the sale of GAC and Pretzels;

·                  marketablesecurities available for sale and other assets of $2.6 million comprised of thestock received as proceeds on the sale of GAC;

·                  deferredtax asset of $600,000;

·                  prepaidexpenses of $1.3 million primarily due to costs incurred related to a potentialrefinancing of our debt; and

·                  currentassets of discontinued operations of $100,000.

 

The foregoing increases in assets were partially offset by thefollowing decreases:

 

·                  goodwillof $41.1 million resulting from the sale of GAC;

·                  cashand cash equivalents of $8.2 million primarily due to the semi-annual interestpayment made in March 2008;

·                  accountsreceivable, of $3.2 million primarily due to receivables associated with ourGAC and gifts segments;

·                  propertyand equipment of $1.1 million primarily due to the sale of GAC;

·                  inventoriesof $500,000 primarily due to the sale of GAC;

·                  trademarksand other intangible assets, net of 500,000 related to amortization; and

·                  deferredloan costs of $300,000 related to amortization.

 

Total liabilities at March 29, 2008 were $247.3 million, anincrease of $21.3 million or 9.4 percent from $226.0 million at December 29,2007.  This increase in liabilities wasprimarily attributable to the following:

 

·                  amountsdue to affiliates of $29.3 primarily the result of amounts due under the taxsharing agreement; and

·                  currentliabilities of discontinued operations of $900,000.

 

The foregoing increases in liabilities were partially offset by thefollowing decreases:

 

·                  accruedliabilities of $7.7 million, primarily related to the semi-annual interestpayment made in March 2008;

·                  accountspayable of $1.0 million; and

·                  deferredrevenues, capital lease obligations and other liabilities of $200,000.

 

***Consolidated Cash Flows for the 13Weeks Ended March 29, 2008 Compared to March 31, 2007***

 

Net cash flows used in operating activities were $14.9 million for the13 weeks ended March 29, 2008, an increase in cash used of $1.4 millionfrom net cash flows used in operating activities of $13.5 million for the 13weeks ended March 31, 2007.  Thisdecrease in cash used in operating activities was principally due to a decreasein contribution by our operating segments of $600,000, an increase in generaland administrative expenses of $400,000, and a decrease in cash used forworking capital assets and liabilities of $400,000.

 

Net cash flows used in investing activities were $76.8 million for the13 weeks ended March 29, 2008, a decrease in cash provided of $77.1million from cash provided by investing activities of $300,000 for the 13 weeksended March 31, 2007.  This increasein cash used in investing activities was attributable to restricted cash of$76.7 million, the proceeds from the sale of land of $300,000 that occurred in2007 and an increase of $100,000 in purchases of property and equipment.

 

Net cash flows used in financing activities were negligible for the 13weeks ended March 29, 2008 and for the 13 weeks ended March 31, 2007and relate to principal payments on capital leases.

 

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###### **Liquidity and CapitalResources**

######  

Our principal sources of liquidity are cash on hand and cash flowsgenerated from operations.  At March 29,2008, we had $3.2 million of cash on hand, excluding the $96.7 million ofrestricted cash.  We expect that ourprincipal uses of cash will be for working capital, capital expenditures andinterest payments of $20.5 million on our 9 percent senior secured notes andour 111⁄2 percent senior secured notes (together, the “Senior Secured Notes”), ofwhich $10.25 million will be due on September 15, 2008 and March 15,2009.  In addition, to the extent we havecash available and it is permitted by the indenture governing the SeniorSecured Notes, we may pay dividends to our parent companies for uses such asacquisitions, debt repayments and dividends. We do not expect to be required, but we may offer, to repurchase aportion of the Senior Secured Notes as described below.

 

We are highly leveraged.  At March 29,2008, we had $195.7 million of long-term debt represented by the Senior SecuredNotes.  The Senior Secured Notes matureon March 15, 2011, with interest payable semi-annually on March 15and September 15.  Due to borrowingrestrictions under the indenture governing the Senior Secured Notes, ourability to obtain additional debt financing is significantly limited.  The Senior Secured Notes require us to offerto repurchase a portion of the notes at 100 percent of the principalamount, plus accrued and unpaid interest thereon to the date of purchase, with50 percent of our “excess cash flow,” as defined in the indentureagreement, when the ratio of our net indebtedness to consolidated EBITDA isabove 3.75 to 1.0 and the cumulative unpaid excess cash flow offer amountexceeds $10.0 million.  We do not anticipatethat our “excess cash flow” will exceed the levels that would require us tooffer to repurchase a portion of the notes described above.

 

The condensed consolidated financial statements, contained elsewhere inthis report, were prepared on a going concern basis, which contemplates therealization of assets and the satisfaction of liabilities in the normal courseof business. The realization of assets and the satisfaction of liabilities inthe normal course of business are dependent on, among other things, our abilityto operate profitably and to generate positive cash flows from operations.  We have suffered recurring net losses andnegative cash flows from operations and have a net member’s deficit at March 29,2008.  As a result, we may be unable tomake the scheduled semi-annual interest payments on our Senior SecuredNotes.  The aggregate amount of eachsemi-annual payment is $10.25 million and our next payment is due in September 2008.  Failure to make any scheduled semi-annualinterest payment would constitute an event of default under the Indenture whichcould cause the Senior Secured Notes to become immediately due andpayable.  We do not currently have theability to repay the Senior Secured Notes should they become due and payable.  These matters raise substantial doubt aboutour ability to continue as a going concern. We are pursuing various actions to improve our results of operations,cash flows and financial position.  These actions include, but are notlimited to, the following:

 

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

·                  reinvestmentof net proceeds from the sale of the Pretzel and GAC businesses into higheryielding investments;

·                  restructuringof the Company’s Senior Secured Notes; and

·                  raisingadditional equity capital.

 

Due to the substantial doubt about our ability to continue as a goingconcern, we do not expect to issue a new franchise disclosure document until wehave additional information about alternatives to improve our overall liquidityposition, including the possibility of restructuring the Senior SecuredNotes.  Until we issue a new franchisedisclosure document that reflects our most recent financial statements, we willbe prohibited from selling new franchises, which could adversely affect ourbusiness operations and financial condition.

 

Management and its major shareholder have engaged Blackstone AdvisoryServices (“Blackstone”) to assist in reviewing our strategic alternatives forraising additional equity capital and restructuring its Senior SecuredNotes.  Blackstone and management are working with a committee ofnoteholders representing approximately 70 percent of the outstanding SeniorSecured Notes on a proposal to restructure the Senior Secured Notes.  Weexpect to be able to renegotiate the terms to its Senior Secured Notes on termsthat are favorable to us; however no assurances can be provided.  Therecan be no assurance that any of the strategic alternatives being considered byus will be successful or that our results of operations, cash flows andfinancial position will improve, absent successful execution of some or all ofthe alternatives being considered.

 

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**Inflation**

 

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

 

**Seasonality**

 

Oursales and contribution from franchisees’ store operations are highly seasonal,but our brands experience counteracting seasonal effects.  Our Mrs. Fields stores, primarilylocated in malls, tend to mirror customer traffic flow trends in malls, whichincrease significantly during the fourth quarter, primarily betweenThanksgiving and the end of the calendar year. Holiday gift purchases also are a significant factor in increased salesin the fourth quarter.  However, ourDairy stores experience their strongest sales periods during the warmer monthsfrom late Spring through early Fall, which helps to balance the impact ofseasonality on our operations.  Thecombined revenues for each quarter of the Mrs. Fields Franchising andDairy Franchising operating segments as a percentage of total combined revenuesfor these two operating segments for the fiscal year ended December 29,2007 were 24.2 percent for the first quarter, 28.5 percent for the secondquarter, 25.6 percent for the third quarter and 21.7 percent for the fourthquarter.

 

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

 

**Critical Accounting Policies**

 

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

 

*Revenue Recognition*.  We recognize revenues from our initialfranchising fees and licensing fees when all material services or conditionsrelating to the franchising or licensing have been substantially performed orsatisfied, which is generally upon the opening of a store by a franchisee orlicensee.  Franchise and license royalties,which are based on a percentage of gross store sales, are recognized as earned,which is generally upon sale of product by franchisees or licensees.  Minimum royalty payments under certainlicensing agreements are deferred and recognized on a straight-line basis overthe term of the agreement.  Revenues, netof sales discounts and allowances, from the sale of branded retail productssuch as cookie dough and shelf stable cookies to grocery stores and wholesaleclubs are recognized upon delivery and included in branded retailrevenues.  Revenues, net of state andlocal sales tax, from gift sales are recognized at the time of shipment.

 

We receive cash payments for product formulationfees and allowances from suppliers based on the amount of product purchaseddirectly by our distributors and franchisees. These product formulation fees and allowances include cash payments tous for the right to use our proprietary formulations and recipes to manufacturethe frozen dough and TCBY products these suppliers sell to ourfranchisees.  Formulation fees andallowances are recorded as franchising revenues within the Mrs. FieldsFranchising and Dairy operating segments upon shipment of product to ourdistributors or franchisees.  Formulationfees and allowances included in revenues in our operating segments are asfollows:

 
| ** **       | ** ** | **For the 13 Weeks Ended** | ** ** |
|------------------|------------|------------------------------------------------|------------|
| ** **       | ** ** | **March 29,**                             | ** ** | **March 31,** | ** ** |
| ** **       | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| Mrs. Fields |       | $                                              | 459        |   | $ | 415 |   |
| Dairy            |       | 1,120                                          |       | 1,518 |   |
|             |       | $                                              | 1,579      |   | $ | 1,933 |   |

 

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In March 2003, we received $2.0 million froma supplier as an advance to maintain and expand beverage concepts at ourfranchised store locations.  This advanceis being recognized as revenue on a ratable basis over the six-year term of theagreement.

 

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

 

On an annual basis (during the fourth quarter), or more frequently ifcircumstances indicate potential impairment, we perform an assessment forimpairment of our goodwill associated with our reporting units, by comparingthe reporting unit’s fair value with its carrying value.  The estimated fair value of goodwill isaffected by, among other things, operating results, our business plan for thefuture, estimated results of future operations and the comparable companies andtransactions that are used to estimate the fair value of our goodwill.  To the extent that the carrying value of areporting unit exceeds its fair value, goodwill is written down to its impliedfair value.  Changes in our business planor operating results that are different than the projections used to developthe reporting unit’s fair value may have an impact on the valuation ofgoodwill.

 

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

 

*Impairment of Long-lived and Certain IdentifiableIntangible Assets.*  We review our long-lived assets forimpairment when circumstances indicate that the carrying value of an asset maynot be fully recovered by the undiscounted net cash flow generated over the remaininglife of the related asset or group of assets. If the cash flows generated by the asset are not sufficient to recoverthe remaining carrying value of the asset, we are required to write down thevalue of the asset to its estimated fair value. In evaluating whether the asset will generate sufficient cash flow torecover its carrying value, we estimate the amount of cash flow that will begenerated by the asset and the remaining life of the asset.  In making our estimate, we consider theperformance trends related to the asset, the likelihood that the trends willcontinue or change, at the asset grouping level for which there areidentifiable independent cash flows.

 

*Allowance for Doubtful Accounts.*  Wesell products to and receive royalties from our franchisees and sell productsto 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 to collect amounts that are due to usinclude the financial strength of a franchisee or customer and its operations,the economic strength of the mall where the franchisee is located and theoverall strength of the retail economy. We are required to establish an estimated allowance for the amountsincluded in accounts receivable that we will not be able to collect in thefuture.  To establish this allowance, weevaluate the customer’s or franchisee’s financial strength, payment history,reported sales and the availability of collateral to offset potentiallosses.  If the assumptions that are usedto determine the allowance for doubtful accounts change, we may have to providefor a greater level of expense in future periods or reverse amounts provided inprior periods.

 

*Deferred Income Tax Assets*. Deferred income tax assets are assessed for recoverability and valuationallowances are provided as necessary to reduce deferred income tax assets toamounts expected to be realized.  Shouldexpectations of taxable income change in future periods, it may becomenecessary to change the valuation allowance, which could affect our results ofoperations in the period such determination is made.  We record an income tax provision or benefitat a rate that is based on expected results for the fiscal year.  If future changes in market conditions causeactual results to be more or less favorable, adjustments to the effectiveincome tax rate on a quarterly basis could be required.

 

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*Inventories.*  In assessing the realizabilityof inventories, we make judgments as to future demand requirements and productexpiration dates.  The inventoryrequirements change based on projected customer demand, which changes due tofluctuations in market conditions and product life cycles.

 

*Legal and Regulatory.*  Werecord liabilities for legal and regulatory matters when the contingency isboth probable and reasonably estimable. We are involved in several legal and regulatory matters.  After consultation with legal counsel, webelieve that the ultimate dispositions of these matters will not have amaterial negative impact on our financial position, liquidity or results ofoperations.  However, there can be no assurancethat we will be successful in our efforts to satisfactorily resolve thesematters and the ultimate outcome could result in a material negative impact onour financial position, liquidity or results of operations.

 

**Accounting Pronouncements Not Yet Adopted**

 

In December 2007, the FASB issued Statement of AccountingStandards (“SFAS”) No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”).  SFAS 141R establishes principles andrequirements for how an acquirer of a business recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,any noncontrolling interest in the acquiree and the goodwill acquired.  SFAS 141R also establishes disclosurerequirements to enable the evaluation of the nature and financial effects ofthe business combination.  SFAS 141Ris effective for acquisitions in fiscal years beginning after December 15,2008 and will be adopted by us on December 28, 2008.

 

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

#  

There have been no significant changes in market risks since the end ofour fiscal year ended December 29, 2007. For more information, please read Item 7A and the consolidated financialstatements and notes thereto contained in our Annual Report on Form 10-Kfiled with the Securities and Exchange Commission on March 28, 2008.

 

# **Item 4.  Controls and Procedures**

#  

Management, with the participation of the Chief Executive Officer (the “CEO”)and Chief Accounting Officer (the “CAO”), evaluated the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport.  Based on that evaluation, theCEO and the CAO concluded that our disclosure controls and procedures, as ofthe end of the period covered by this report, are not operating effectively toprovide reasonable assurance that the information required to be disclosed byus in our reports filed under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.  However, management has performed additionalprocedures in our accounting close for the quarter ended March 29, 2008 toensure the accuracy of the condensed consolidated financial statements.  A controls system, no matter how well designedand operated, cannot provide absolute assurance that the objectives of thecontrols system are met, and no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, within acompany have been detected.

 

There has been no change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under theSecurities Exchange Act of 1934) that occurred during our fiscal quarter ended March 29,2008, that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II – OTHER INFORMATION**

 

# **Item 1.  LegalProceedings**

#  

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

 

In the ordinarycourse of business, we are involved in routine litigation, including franchisedisputes and trademark disputes.  We arenot a party to any legal proceedings that, in the opinion of management, afterconsultation with legal counsel, is material to its business, financialcondition or results of operations.

 

**Item1A.  Risk Factors**

 

Thefollowing risk factors, among others, could cause our financial performance todiffer significantly from the goals, plans, objectives, intentions andexpectations expressed in this report. If any of the following risks and uncertainties or other risks anduncertainties not currently known to us or not currently considered to bematerial actually occur, our business, financial condition or operating resultscould be harmed substantially.

 

***Risks Related to Our Business***

 

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

 

We believe we havea sound business strategy that will enable us to grow our revenues andprofitability.  We believe that theimplementation of our business strategy is key to enabling us to grow ourrevenues and profitability and, ultimately, our future success.  Our business strategy in fiscal year 2008 isfocused on the growth of both of our brands by increasing the number of retailunits and profitable sales.

 

*Ourcash on hand and expected future cash flows from operations are inadequate tomeet our fiscal year 2008 obligations.*

 

Concerns over ourability to generate cash flows in amounts sufficient to meet our scheduledsemi-annual interest payments, including payments of $10.25 million due in September 2008,raise substantial doubt about our ability to continue as a going concern.  We are pursuing various actions to improveour operating cash flow, results of operations and overall liquidityposition.  Blackstone Advisory Services (“Blackstone”)is also assisting us in reviewing our alternatives as part of its strategicreview process.  In addition, Blackstone,management and a committee of noteholders representing approximately 70 percentof the outstanding Senior Secured Notes have agreed to share confidentialinformation about the company’s operations and a proposal to restructure theSenior Secured Notes.  The committee hasagreed to refrain from trading the Senior Secured Notes owned by thenoteholders its members represent for four weeks while it reviews theconfidential information.

 

Failure to improveour cash flows would likely result in our inability to meet our interestpayment obligations.  Failure to makethese payments could have a material adverse impact on our future operationsand carrying value of assets.  There canbe no assurance that the planned actions will be successful or that the Company’sfinancial position will improve.

 

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

 

The sale offranchises is regulated by various state laws as well as by the Federal TradeCommission (the “FTC”).  The FTC requiresthat franchisors make extensive disclosure in a franchise disclosure documentto prospective franchisees but does not require registration.  However, a number of states require annualregistration of the uniform franchise prospectus with state authorities orother disclosure in connection with franchise offers and sales.  In addition, several states have “franchiserelationship laws” or “business opportunity laws” that limit the ability of thefranchisors to terminate agreements or to withhold consent to renewal ortransfer of these agreements.

 

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There are certain eventsthat require us to make certain disclosures to state authorities.  Further, renewal of the franchise disclosuredocument registrations is required in several states within a certain period oftime following our fiscal year end.  Fromtime to time in the future, there will be periods of time after certain events,such as material changes to our officers, or financial performance, orcommencement of material litigation, or in connection with renewal during whichwe may be prohibited from selling our franchises in certain states.  Without limiting the foregoing, our financialcondition requires us to defer collection of certain fees in some states untilthe store opens.  If we are unable tosell our franchises for an extended period of time in certain states, ourbusiness operations or financial condition could be adversely affected.

 

Due to the substantialdoubt about our ability to continue as a going concern, we do not expect toissue a new franchise disclosure document until we have additional informationabout alternatives to improve our overall liquidity position, including thepossibility of restructuring our Senior Secured Notes.  Until we issue a new franchise disclosuredocument that reflects our most recent financial statements, we will beprohibited from selling new franchises, which could adversely affect ourbusiness operations and financial condition.

 

*Ourability to attract new franchisees, retain existing franchisees,and locate and procure favorable store locations iscritical to the success of our business.*

 

We compete with abroad segment of other business opportunities and franchise companies forfranchisees.  There is also aggressive competition from many sourcesfor favorable sites for new stores, both within and outside the mallenvironment.  Many of our competitors have greater resources ormore favorable business models than ours with which to attract newinvestors and procure sites.  If we are unable to attract new orexisting franchisees to purchase new franchises, or represent acompetitive opportunity for leaseholders, it will limit our abilityto develop new franchised locations.

 

*Adecline in mall traffic and other events signaling or related to a downturn inthe United States economy could cause our Mrs. Fields brand franchiseincome to decrease materially.*

 

We believe thatthe amount and proximity of pedestrian traffic near our Mrs. Fields brandstores strongly influence sales of our products, which we believe arefrequently impulse purchases.  In recentyears, we believe visits to major shopping malls, where at March 29, 2008the majority of our Mrs. Fields franchisees’ stores are located, haveexperienced periods of decline.  Thistrend has had a negative impact on our revenues.  We cannot predict whether this trend will notcontinue or that this trend can be offset by increased sales per customer.  Decrease in mall traffic, and other eventsthat signal or arise from a downturn in the United States economy, such ascontinued increases in energy costs and other expenses that negatively affectconsumer spending, could adversely affect our financial condition and resultsof operations.

 

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

 

Since the end offiscal year 2005, 7 retail concept locations were closed by Mrs. Fields’Original Cookies, Inc. (“MFOC”) and 773 retail concept locations were closedby other franchisees.  These closuresrepresent 31.5 percent of the total number of stores open at the beginning offiscal year 2006.  In comparison, 270retail concept locations have opened since the end of fiscal year 2005.

 

Since the end offiscal year 2005, the number of Mrs. Fields brand locations has decreasedby 16.9 percent, the number of TCBY brand traditional locations hasdecreased by 30.7 percent and the number of TCBY brand non-traditionallocations has decreased by 34.2 percent. Additional store closures could occur in the future and we may be unableto successfully open additional new stores in the future.  If this trend continues, our financialcondition and results of operations may be adversely affected.

 

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

 

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

 

*Wedepend heavily on our suppliers and distributors.*

 

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

 

Our reliance onour suppliers and distributors subjects us to a number of risks, includingpossible delays or interruptions in supplies, diminished control over qualityand a potential lack of adequate raw material capacity.  Any disruption in the supply of ordegradation in the quality of the raw materials provided by our suppliers couldhave a material adverse effect on our business, operating results and financialcondition.  In addition, such disruptionsin supply or degradations in quality could have a long-term detrimental impacton our efforts to develop a strong brand identity and a loyal consumerbase.  If any supplier or distributorfails to perform as anticipated, or if there is a termination or any disruptionin any of these relationships for any reason, it could have a material adverseeffect on our results of operations.

 

*Ourinformation systems are an integral part of our gifts segment business.  Systems disruptions and failures could causeour customers to become dissatisfied with us and may impair our business.*

 

Our ability tomaintain our website, network system and telecommunications equipment inworking order and to reasonably protect them from interruption is critical tothe success of our gifts business segment. Our website must accommodate regular traffic, deliver information andcomplete transactions.  Our customers,advertisers and business alliances may become dissatisfied by any systemsfailure that interrupts our ability to provide our products and services to them.

 

*Webelieve that our relationship with our franchisees and retail licensees iscritical to the success of our business. If these franchise and retail license agreements were to be terminatedor if we are unable to maintain these relationships, our sales and our resultsof operations would be adversely affected.*

 

We believe ourrelationships with our franchisees and our licensees are a critical componentin the success of our business.  Asrequired by state and federal franchise disclosure rules, we must provide allprospective franchisees with the name and contact information for each of theconcept’s existing franchisees. Prospects often contact existing franchisees as part of their duediligence before making a franchise purchase decision.  If our relationship with existing franchiseesis strained, it may slow or suspend franchise development with new franchisees,as well as curtail additional development with existing franchisees.  Strained relationships with existingfranchisees can also contribute to additional or accelerated closure ofexisting stores, particularly upon transfer or expiration of franchiseagreements and leases.

 

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*Wemay be harmed by actions taken by our franchisees or licensees that are beyondour control.*

 

Our franchiseesand licensees generally are independent business owners and are not ouremployees.  We require our franchiseesand licensees to adhere to strict production, display, storage and marketingspecifications and procedures and we provide training and support tofranchisees, but the quality of franchised store operations or licensedproducts may be diminished by any number of factors beyond our control.  Consequently, franchisees may not operatestores or licensees may not produce or market licensed products in a mannerconsistent with our standards and requirements, or may not hire and trainqualified managers and other store personnel. If they do not, our image, reputation and brand may suffer and ourfranchise and license revenues as well as our ability to attract prospectivefranchisees may be adversely affected.

 

*Weare vulnerable to fluctuations in the cost, availability and quality of ouringredients.*

 

The cost,availability and quality of the ingredients we use to prepare our products inour gifts and branded retail operations are subject to a range of factors, manyof which are beyond our control. Fluctuations in economic and political conditions, weather and demandcould adversely affect the costs of ingredients that we and our suppliers useto make our products, which may in turn affect the costs that our customers andfranchisees may be required to pay for our branded products.  Significant price increases may in turncontribute to decreases in customer counts in our gifting and branded retailbusiness, as well as decreases in store profits and increases in storeclosures.  We have no control overfluctuations in the price of commodities and we may not be able to pass throughany cost increases to our customers.  Weare dependent on frequent deliveries of fresh ingredients, thereby subjectingus to the risk of shortages or interruptions in supply.  All of these factors could cause adversemarket conditions which could adversely affect our financial results.

 

*Ourbranded retail business is still relatively new and exists in a verycompetitive environment.*

 

The sale of snackproducts to grocery, club stores and similar distribution channels is highlycompetitive and subject to ongoing expenses related to slotting fees,advertising credits and discounts*.  *Similarly, the business relies onrelationships with vendors, brokers and customers.  We commenced this business in July 2006,and as with any relatively new business, we cannot predict with any certaintythe costs associated with operating the branded retail group or the revenues weexpect to generate.

 

*Ifwe lose key management personnel, we may have difficulty in implementing thebusiness strategy that current management has developed and may fail to achieveexpected profits as a result.*

 

Our success dependson the continued services of our senior management, particularly Stephen Russo,our President and Chief Executive Officer. In addition, our continued growth depends, in part, on attracting andretaining skilled managers and employees as well as management’s ability toutilize effectively our key personnel. If Stephen Russo or any other senior management personnel leaves us, wemay have difficulty in implementing the business strategy they have developedand may fail to achieve expected profits as a result.  We cannot be sure that management’s effortsto integrate, utilize, attract and retain personnel will be successful.

 

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*Ourfailure to respond to demographic trends, changes in consumer preferences andother factors and our failure to implement new marketing strategies could havea material adverse effect on our results of operations.*

 

The specialty andsnack food industry is affected by changes in consumer preferences, tastes andeating habits, local, regional, national and international economic conditions,demographic trends and mall traffic patterns. A number of factors, including increased food, labor and benefits costs,the availability of experienced management and hourly employees and difficultiesor delays in developing and introducing new products to suit consumerpreferences, may adversely affect the specialty retail industry in general andour franchise outlets in particular.  Ourfailure to anticipate, identify and respond to changing consumer preferencesand economic conditions and the failure of our customers to respond favorablyto our marketing or new products could have a material adverse effect on ourresults of operations.

 

We believe ourTCBY brand has struggled to stay relevant and differentiated from itscompetitors.  We believe it is importantto the brand’s growth to reposition it in a way that capitalizes on yogurt’scurrent popularity and revitalize it through new store design and venues.  Our recent development and introduction ofnew products, such as the Beriyo smoothie line, and the new store design forTCBY traditional stores are integral parts of our plans to accomplish thisrepositioning.  However, we do not knowhow successful we will be in developing or implementing this plan or the extentto which the capital investment required of us and our franchisees to implementsuch a plan will be available when needed. If we are unable to successfully implement this or any other aspect ofour business strategy, our business operations and our financial conditioncould be adversely affected.

 

We have alsoinitiated efforts to revitalize our Mrs. Fields brand, including a newstore design for franchises.  While theseefforts are designed to strengthen and revitalize the Mrs. Fields brand tohelp our franchisees achieve a higher level of profitable sales, we cannot becertain that these efforts will have this effect.

 

*Thereis intense competition in the specialty food retailers industry.*

 

The specialtyretail food and snack food industry is highly competitive with respect toprice, service, location and food quality and within the industry we competewith cookie, baked goods, frozen yogurt and ice cream retailers, as well asother confectionary, sweet snack and specialty foods retailers, many of whichhave greater resources than we do. Consequently, we cannot be certain that we can compete successfully withthese other food retailers.  We will alsoface competition from NexCen Brands, Inc., who recently acquired the GACand Pretzel Brand concepts formerly owned and operated by us.

 

In addition to therisks we face from current competitors, we cannot be certain that we cansuccessfully compete with any new entrants into the specialty retail food andsnack food industry who may introduce new and successful products ormarketing.  Our inability to competeadequately would have a material adverse effect on our results of operations.

 

*Adversepublicity, particularly about health concerns, could reduce our sales andadversely affect results of operations.*

 

Our ability tocompete depends in part on maintaining our reputation with consumers.  We could be adversely affected by publicityresulting from food quality, illness, injury or other health concerns,including food borne illness claims or operating issues stemming from onestore, a limited number of stores or even a competitor’s store.  In addition, we use ingredients in several ofour products, such as nuts, to which some people may have allergies, and butterand cream, which are high in fat.  Theremay be adverse publicity about the health risks relating to these or otheringredients.  Adverse publicity aboutthese factors could reduce sales of our products and adversely affect resultsof operations.

 

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*Ourinternational operations are exposed to various risks that could have amaterial adverse effect on our results of operations and financial condition.*

 

We have franchisedand licensed retail stores in numerous foreign countries.  While most of our operations are in theUnited States, through our franchised retail store locations and our brandedretail activities, we also have operations in numerous other regions, includingoperations in Canada, Mexico, Australia, South America, the Caribbean, theMiddle East and Asia, representing approximately 4.8 percent of our totalrevenue during fiscal year 2007.  Weexpect to expand into additional regions in the future.  Our international operations are subject tomany additional risks, including:

 

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

·                  import and export restrictions andtariffs;

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

·                  litigation in foreign jurisdictions;

·                  potentially adverse tax consequences;

·                  increased competition as a result ofsubsidies to local companies;

·                  political instability or war;

·                  cultural differences;

·                  the impact of business cycles andeconomic instability; and

·                  increased expense as a result ofinflation.

 

Any one of thesefactors could have a material adverse affect on our sales of products orservices to our international customers and curtail our expansion strategy.

 

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

 

Numerousgovernmental authorities have issued regulations that apply to us and ourfranchisees’ stores, including, without limitation, federal, state and locallaws and regulations governing health, sanitation, environmental protection,safety, hiring and employment practices, including laws, such as the Fair LaborStandards Act, governing such matters as minimum wages, overtime and otherworking conditions.  The FDA administersregulations that apply to our products. If we fail to obtain or retain the required food licenses or to complywith applicable governmental regulations or if there is any increase inemployee benefit costs or other costs associated with employees, our costscould increase as we attempt to comply with regulations.  Our revenues could decrease if we or oursuppliers are unable to manufacture or if our franchisees or licensees areunable to sell products in locations in which we do not have required licenses,or if existing or new regulation leads to material changes in the quality,taste, consumer appeal, or availability of our products.  Our products, the manufacturers and theirmanufacturing facilities are also subject to periodic inspection.  Discovery of problems may reduce our resultsof operations because of costs of compliance or inability to manufacture orsell products for failure to comply with regulations.

 

In addition, thesale of franchises is regulated by various state laws as well as by theFTC.  The FTC requires that franchisorsmake extensive disclosure in a franchise disclosure document to prospectivefranchisees, but does not require registration. However, a number of states require registration of the FranchiseDisclosure Document with state authorities or other disclosure in connectionwith franchise offers and sales.  Inaddition, several states have “franchise relationship laws” or “businessopportunity laws” that limit the ability of the franchisors to terminateagreements or to withhold consent to renewal or transfer of theseagreements.  While we believe that we arein compliance with existing regulations in the jurisdictions where we currentlyoffer franchises, we cannot predict the effect of any future legislation orregulation on our business operations or financial condition.  Additionally, bills have occasionally beenintroduced in Congress which would provide for federal regulation of aspects offranchisor-franchisee relationships.  Wecannot predict what effect those regulations could have on our business.

 

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

 

Many of our franchiseesmust obtain loans to purchase and develop our franchises.  One significant source of this funding is theU.S. Small Business Administration (“SBA”). Any suspension of funding or delays in approval of the SBA’s fundingbudget will affect our franchisees’ ability to obtain funding from thissignificant source and adversely impact our ability to market franchises.  Recent developments in the mortgage andfinance industries have adversely affected some sources of funding and may alsomake it more difficult for franchisees to obtain funding for current operationsand new development.

 

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

 

We are involved inroutine litigation in the ordinary course of business, including franchisedisputes.  Although we have not beensignificantly adversely affected in the past by litigation, there can be noassurance as to the effect of any future disputes.

 

Although wecurrently are not subject to any product liability litigation, we couldexperience product liability litigation in the future involving ourproducts.  Our quality control program isdesigned to maintain high standards for the food and materials and foodpreparation procedures used by franchised stores.  Products are periodically inspected by ourpersonnel at both the point of sale locations and the manufacturing facilitiesto ensure that they conform to our standards. In addition to insurance held by our suppliers, we maintain insurancerelating to personal injury and product liability in amounts that we consideradequate for the retail food industry. While we have been able to obtain insurance in the past, there can be noassurance that we will be able to maintain these insurance policies in thefuture.  Consequently, any successfulclaim against us, in an amount materially exceeding our coverage, couldadversely affect our results of operations and financial condition.

 

*Ouroperating results are subject to quarterly fluctuations and seasonality.*

 

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

 

We recently soldour Pretzel Brands and GAC brands. The sale of these businesses could increaseour exposure to quarterly and seasonal fluctuations.

 

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

 

*Oursubstantial level of indebtedness could adversely affect our financialcondition and prevent us from fulfilling our obligations under our 9 percentsenior secured notes and our 11 1⁄2 percent senior secured notes (together, the “SeniorSecured Notes”) .*

 

We havesubstantial indebtedness represented by our Senior Secured Notes.  In addition, subject to restrictions in theIndenture governing the Senior Secured Notes, we may incur additionalindebtedness.

 

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

 

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

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

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

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

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

 

We expect toobtain the money to pay our expenses and to pay the amounts due under theSenior Secured Notes and our other debt primarily from our operations.  Our ability to meet our expenses and makethese payments thus depends on our future performance, which will be affectedby financial, business, economic and other factors, many of which we cannotcontrol.  Excluding cash received uponthe sale of certain businesses, our available cash has decreased since fiscalyear 2006.  Our business may not generatesufficient cash flow from operations in the future and our currentlyanticipated growth in revenue and cash flow may not be realized, either or bothof which could result in our being unable to repay indebtedness, including theSenior Secured Notes or to fund other liquidity needs.  If we do not have enough money, we may berequired to attempt to refinance all or part of our then existing debt(including the Senior Secured Notes), sell assets or borrow more money.  However, we may not be able to accomplish anyof these alternatives on terms acceptable to us, or at all.  In addition, the terms of existing or futuredebt agreements, including the Indenture, may restrict us from adopting any ofthese alternatives.  The failure togenerate sufficient cash flow or to achieve any of these alternatives couldhave a material adverse effect on our business and our ability to pay theamounts due under the Senior Secured Notes.

 

*TheIndenture imposes significant operating and financial restrictions, which mayprevent us from pursuing certain business opportunities and taking certainactions.*

 

The Indentureimposes significant operating and financial restrictions on us.  These restrictions limit, among other things,our ability to:

 

·                  incur additional indebtedness;

·                  repay subordinated indebtedness prior tostated maturities;

·                  pay dividends on or redeem or repurchaseour stock;

·                  issue capital stock;

·                  make investments;

·                  create liens;

·                  sell certain assets or merge with or intoother companies;

·                  enter into certain transactions withstockholders and affiliates;

·                  sell stock in our subsidiaries;

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

·                  otherwise conduct necessary corporateactivities.

 

To the extent thatwe wish to conduct these restricted activities, we must do so in strictaccordance with the provisions of the Indenture.  These restrictions could adversely affect ourability to finance our future operations or capital needs and pursue availablebusiness opportunities.  A breach of anyof these restrictions could result in a default in respect of the relatedindebtedness.  If a default occurs, therelevant lenders could elect to declare the indebtedness, together with accruedinterest and fees, to be immediately due and payable and proceed against anycollateral securing that indebtedness, which includes substantially all of ourassets.  Acceleration of our otherindebtedness could result in a default under the terms of the Indenture and ourassets may not be sufficient to satisfy our obligations under our indebtedness,including the Senior Secured Notes.

 

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*Ourparent companies may take actions that conflict with noteholder, franchisee andother interests.*

 

As a result of itsdirect control of our ultimate parent company and indirect control of Mrs. Fields’Holding Company, Inc. and MFOC, Capricorn has the power to elect ourmanagers, to appoint members of management and to approve all actions requiringthe approval of the holders of our common interests, including adoptingamendments to our certificate of formation and limited liability companyagreement as well as approving mergers, acquisitions or sales of all orsubstantially all of our assets.  Theactions may conflict with the interests of bondholders, franchisees andothers.  Similarly, the interests of ourparent companies could conflict with other stakeholder interests.  For example, if we encounter financialdifficulties or are unable to pay our debts as they mature, the interests ofMFOC as a holder of equity might conflict with holders of the Senior SecuredNotes.  Our parent companies also mayhave an interest in pursuing acquisitions, divestitures, financings or othertransactions that, in their judgment, could enhance their equity investment,even though such transactions might materially adversely affect our financialcondition and results of operations.

 

# **Item 6.  Exhibits**

#  

| 10.1   |   | Asset Purchase  Agreement, dated January 29, 2008, by and among NexCen Asset  Acquisition, LLC, NexCen Brands, Inc., Great American Cookie Company  Franchising, LLC, Great American Manufacturing, LLC, and Mrs. Fields  Famous Brands, LLC (incorporated by reference to Exhibit 10.1 of our  current report on Form 8-K filed on January 29, 2008).                                                           |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.2   |   | Escrow Agreement, dated  January 29, 2008, by and among NexCen Asset Acquisition, LLC, NexCen  Brands, Inc., Great American Cookie Company Franchising, LLC, Great  American Manufacturing, LLC and Wilmington Trust Company, as escrow agent  (incorporated by reference to Exhibit 10.2 of our current report on  Form 8-K filed on January 29, 2008).                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3   |   | Settlement and Release  Agreement dated as of January 29, 2008, by and among NexCen  Brands, Inc., Great American Cookie Company Franchising, LLC,  Mrs. Fields Famous Brands, LLC, Mrs. Fields’ Original  Cookies, Inc. and certain franchisees of GACCF that are signatories  thereto (incorporated by reference to Exhibit 10.3 of our current report  on Form 8-K filed on January 29, 2008). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.4   |   | Transition Services  Agreement dated January 29, 2008, between Mrs. Fields Famous  Brands, LLC and NexCen Brands, Inc. (incorporated by reference to  Exhibit 10.4 of our current report on Form 8-K filed on  January 29, 2008).                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.5   |   | Voting Agreement, dated  January 29, 2008, by and among NexCen Brands, Inc., Great American  Cookie Company Franchising, LLC and Great American Manufacturing, LLC  (incorporated by reference to Exhibit 10.5 of our current report on  Form 8-K filed on January 29, 2008).                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6   |   | Registration Rights  Agreement, dated January 29, 2008, by and among NexCen  Brands, Inc., Great American Cookie Company Franchising, LLC and Great  American Manufacturing, LLC (incorporated by reference to Exhibit 10.6  of our current report on Form 8-K filed on January 29, 2008).                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7   |   | Oak  State Products, Inc. Co - Packing Agreement dated effective February 26, 2008  (incorporated by reference to Exhibit 10.1 of our current report on Form  8-K filed May 5, 2008).                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.1   |   | Certification of Chief Executive  Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of the  Exchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.2   |   | Certification of Chief  Accounting Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of  the Exchange Act, As Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32     |   | Certification of Chief  Executive Officer and Chief Accounting Officer Pursuant to 18 U.S.C. Section 1350,  As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                    |

 

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# **SIGNATURES**

#  

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

 

 

**MRS.FIELDS FAMOUS BRANDS, LLC**

 

 
| /s/ Stephen Russo                       |   | May 13, 2008 |   |
|-----------------------------------------|--------|-------------------|--------|
| Stephen  Russo                          |   | Date              |
| President  and Chief Executive Officer  |   |              |
| (*Principal Executive Officer*)         |   |              |
|                                    |   |              |
|                                    |   |              |
| /s/ Steven K. Passey                    |   | May 13, 2008 |   |
| Steven  K. Passey                       |   | Date              |
| Chief  Accounting Officer and Treasurer |   |              |
| *(Principal Financial Officer)*         |   |              |

 

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