**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**ý****          ****QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended October 2, 2004**

 

**OR**

 

**o****          ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from             to            **

** **

**Commissionfile number:  333-115046**

 

**MRS. FIELDS FAMOUS BRANDS, LLC**

(Exact Name of RegistrantSpecified in Its Charter)

 

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

 

Registrant’s telephonenumber, including area code:**(801) 736-5600**

 

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

 

Yes  ý  No  o

 

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

 

Yes  ý  No  o

 

On November 16, 2004, 100 common interests of registrant wereoutstanding, all of which are held by an affiliate.  There is no established trading market forregistrant’s common interests.

 

 

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

 

**TABLE OF CONTENTS**

 
| **PART 1 – FINANCIAL INFORMATION**                                                              |                                                                                                                                 |
|------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                 |                                                                                                                                 |
| Item 1. Financial Statements  (Unaudited)                                                            |                                                                                                                                 |
|                                                                                                 |                                                                                                                                 |
|                                                                                                 | Condensed  Consolidated Balance Sheets as of October 2, 2004 and January 3, 2004                                                     |   |
|                                                                                                 |                                                                                                                                 |
|                                                                                                 | Condensed  Consolidated Statements of Income and Comprehensive Income for the 13 Weeks  Ended October 2, 2004 and September 27, 2003 |   |
|                                                                                                 |                                                                                                                                 |
|                                                                                                 | Condensed Consolidated  Statements of Income and Comprehensive Income for the 39 Weeks Ended October  2, 2004 and September 27, 2003 |   |
|                                                                                                 |                                                                                                                                 |
|                                                                                                 | Condensed  Consolidated Statements of Cash Flows for the 39 Weeks Ended October 2, 2004  and September 27, 2003                      |   |
|                                                                                                 |                                                                                                                                 |
|                                                                                                 | Notes  to Condensed Consolidated Financial Statements                                                                                |   |
|                                                                                                 |                                                                                                                                 |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations |                                                                                                                                 |
|                                                                                                 |                                                                                                                                 |
| Item 3. Quantitative and  Qualitative Disclosure About Market Risk                                   |                                                                                                                                 |
|                                                                                                 |                                                                                                                                 |
| Item 4. Controls and Procedures                                                                      |                                                                                                                                 |
|                                                                                                 |                                                                                                                                 |
| **PART II – OTHER INFORMATION**                                                                 |                                                                                                                                 |
|                                                                                                 |                                                                                                                                 |
| Item 1. Legal Proceedings                                                                            |                                                                                                                                 |
|                                                                                                 |                                                                                                                                 |
| Item  6. Exhibits                                                                                    |                                                                                                                                 |
|                                                                                                 |                                                                                                                                 |
| Signatures                                                                                           |                                                                                                                                 |

 

2

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** **

**PART 1 – FINANCIAL INFORMATION**

 

**ITEM 1.**  Financial Statements

 

**MRS. FIELDS FAMOUS BRANDS, LLCAND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**(Unaudited)**

**(Dollars in thousands)**

 
| ** **                                                                              | ** ** | **October 2, 2004** | ** ** | **January 3, 2004** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| ASSETS:                                                                                 |       |                |       |                |       |
| Cash and cash  equivalents                                                              |       | $                   | 13,473     |                | $          | 1,300 |   |
| Receivables, net  of allowance for doubtful accounts of $1,243 and $1,948, respectively |       | 6,611               |       | 9,070               |       |
| Amounts due from  affiliates                                                            |       | 23                  |       | —              |       |
| Inventories                                                                             |       | 2,724               |       | 1,962               |       |
| Prepaid expenses  and other                                                             |       | 1,599               |       | 1,122               |       |
| Deferred tax  asset                                                                     |       | 1,391               |       | 1,535               |       |
|                                                                                    |       |                |       |                |       |
| Total current  assets                                                                   |       | 25,821              |       | 14,989              |       |
| Property and  equipment, net                                                            |       | 3,515               |       | 3,174               |       |
| Goodwill, net                                                                           |       | 113,456             |       | 113,456             |       |
| Trademarks and  other intangible assets, net                                            |       | 24,101              |       | 26,149              |       |
| Deferred loan  costs, net of accumulated amortization of $8,727 and $20,470             |       | 8,160               |       | 4,222               |       |
| Other assets                                                                            |       | 599                 |       | 612                 |       |
|                                                                                    |       |                |       |                |       |
|                                                                                    |       | $                   | 175,652    |                | $          | 162,602 |   |
|                                                                                    |       |                |       |                |       |
| LIABILITIES AND  MEMBER’S DEFICIT:                                                 |       |                |       |                |       |
| Accounts payable                                                                        |       | $                   | 3,566      |                | $          | 6,789 |   |
| Accrued liabilities                                                                     |       | 10,808              |       | 13,210              |       |
| Current  liabilities of discontinued operations                                         |       | 68                  |       | 405                 |       |
| Amounts due to  affiliates                                                              |       | 2,646               |       | 3,135               |       |
| Current portion  of capital lease obligations                                           |       | 39                  |       | —              |       |
| Current portion  of deferred revenues                                                   |       | 2,013               |       | 2,289               |       |
|                                                                                    |       |                |       |                |       |
| Total current  liabilities                                                              |       | 19,140              |       | 25,828              |       |
| Long-term debt                                                                          |       | 195,747             |       | 185,762             |       |
| Capital lease  obligations, net of current portion                                      |       | 445                 |       | —              |       |
| Deferred  revenues, net of current portion                                              |       | 1,045               |       | 2,019               |       |
| Deferred tax  liability                                                                 |       | 3,667               |       | 4,814               |       |
|                                                                                    |       |                |       |                |       |
| Total liabilities                                                                       |       | 220,044             |       | 218,423             |       |
|                                                                                    |       |                |       |                |       |
| Member’s deficit                                                                   |       | (44,277             | )          | (55,601             | )          |
| Deferred stock  compensation                                                            |       | —              |       | (75                 | )          |
| Accumulated  other comprehensive loss                                                   |       | (115                | )          | (145                | )          |
|                                                                                    |       |                |       |                |       |
| Total member’s  deficit                                                            |       | (44,392             | )          | (55,821             | )          |
|                                                                                    |       |                |       |                |       |
| COMMITMENTS AND  CONTINGENCIES                                                          |       |                |       |                |       |
|                                                                                    |       | $                   | 175,652    |                | $          | 162,602 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

3

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**MRS. FIELDS FAMOUS BRANDS, LLCAND SUBSIDIARIES**

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

**(Unaudited)**

**(Dollars in thousands)**

** **
| ** **                                                                              | ** ** | **13 Weeks Ended**  | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                                              | ** ** | **October 2, 2004** | ** ** | **September 27, 2003** | ** ** |
|                                                                                    |       |                |       |   |   |
| REVENUES:                                                                               |       |                |       |   |   |
| Franchising                                                                             |       | $                   | 14,117     |   | $ | 15,396 |   |
| Gifts                                                                                   |       | 3,545               |       | 2,605 |   |
| Licensing                                                                               |       | 1,353               |       | 1,348 |   |
| Other                                                                                   |       | 79                  |       | 78 |   |
|                                                                                    |       |                |       |   |   |
| Total revenues                                                                          |       | 19,094              |       | 19,427 |   |
|                                                                                    |       |                |       |   |   |
| OPERATING COSTS  AND EXPENSES:                                                          |       |                |       |   |   |
| Franchising                                                                             |       | 4,977               |       | 4,549 |   |
| Gifts                                                                                   |       | 2,881               |       | 1,912 |   |
| Licensing                                                                               |       | 88                  |       | 274 |   |
| General and  administrative                                                             |       | 2,179               |       | 2,633 |   |
| Stock  compensation expense                                                             |       | 49                  |       | 32 |   |
| Depreciation                                                                            |       | 288                 |       | 856 |   |
| Amortization                                                                            |       | 708                 |       | 455 |   |
| Other operating  expenses (income), net                                                 |       | 26                  |       | (25 | ) |
|                                                                                    |       |                |       |   |   |
| Total operating  costs and expenses                                                     |       | 11,196              |       | 10,686 |   |
| Income from  operations                                                                 |       | 7,898               |       | 8,741 |   |
| Interest  expense, net                                                                  |       | (5,182              | )          | (6,239 | ) |
|                                                                                    |       |                |       |   |   |
| Income from  continuing operations before provision for income taxes                    |       | 2,716               |       | 2,502 |   |
| Provision for  income taxes                                                             |       | 1,346               |       | 873 |   |
|                                                                                    |       |                |       |   |   |
| Income from  continuing operations                                                      |       | 1,370               |       | 1,629 |   |
| Income from  discontinued operations (net of income taxes of $13 and $23, respectively) |       | 26                  |       | 237 |   |
|                                                                                    |       |                |       |   |   |
| Net income                                                                              |       | $                   | 1,396      |   | $ | 1,866 |   |
|                                                                                    |       |                |       |   |   |
| COMPREHENSIVE  INCOME:                                                                  |       |                |       |   |   |
| Net income                                                                              |       | $                   | 1,396      |   | $ | 1,866 |   |
| Foreign currency  translation adjustment                                                |       | 13                  |       | (2 | ) |
|                                                                                    |       |                |       |   |   |
| Comprehensive  income                                                                   |       | $                   | 1,409      |   | $ | 1,864 |   |

 

See accompanying notes tocondensed consolidated financial statements. 

 

4

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**MRS. FIELDS FAMOUS BRANDS, LLCAND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME ANDCOMPREHENSIVE INCOME**

**(Unaudited)**

**(Dollars in thousands)**

** **
| ** **                                                                              | ** ** | **39 Weeks Ended**  | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                                              | ** ** | **October 2, 2004** | ** ** | **September 27, 2003** | ** ** |
|                                                                                    |       |                |       |   |   |
| REVENUES:                                                                               |       |                |       |   |   |
| Franchising                                                                             |       | $                   | 42,350     |   | $ | 43,168 |   |
| Gifts                                                                                   |       | 12,843              |       | 8,615 |   |
| Licensing                                                                               |       | 3,801               |       | 4,292 |   |
| Other                                                                                   |       | 220                 |       | 318 |   |
|                                                                                    |       |                |       |   |   |
| Total revenues                                                                          |       | 59,214              |       | 56,393 |   |
|                                                                                    |       |                |       |   |   |
| OPERATING COSTS  AND EXPENSES:                                                          |       |                |       |   |   |
| Franchising                                                                             |       | 15,497              |       | 13,459 |   |
| Gifts                                                                                   |       | 10,777              |       | 6,771 |   |
| Licensing                                                                               |       | 417                 |       | 968 |   |
| General and  administrative                                                             |       | 7,544               |       | 7,683 |   |
| Stock  compensation expense                                                             |       | 75                  |       | 94 |   |
| Costs associated  with debt refinancing                                                 |       | 87                  |       | — |   |
| Depreciation                                                                            |       | 928                 |       | 1,758 |   |
| Amortization                                                                            |       | 2,124               |       | 1,334 |   |
| Other operating  expenses, net                                                          |       | 4                   |       | 225 |   |
|                                                                                    |       |                |       |   |   |
| Total operating  costs and expenses                                                     |       | 37,453              |       | 32,292 |   |
| Income from  operations                                                                 |       | 21,761              |       | 24,101 |   |
| Interest  expense, net                                                                  |       | (19,569             | )          | (18,475 | ) |
| Other income                                                                            |       | 1,054               |       | — |   |
|                                                                                    |       |                |       |   |   |
| Income from  continuing operations before provision for income taxes                    |       | 3,246               |       | 5,626 |   |
| Provision for  income taxes                                                             |       | 1,576               |       | 2,162 |   |
|                                                                                    |       |                |       |   |   |
| Income from  continuing operations                                                      |       | 1,670               |       | 3,464 |   |
| Income from  discontinued operations (net of income taxes of $52 and $42, respectively) |       | 84                  |       | 268 |   |
|                                                                                    |       |                |       |   |   |
| Net income                                                                              |       | $                   | 1,754      |   | $ | 3,732 |   |
|                                                                                    |       |                |       |   |   |
| COMPREHENSIVE  INCOME:                                                                  |       |                |       |   |   |
| Net income                                                                              |       | $                   | 1,754      |   | $ | 3,732 |   |
| Foreign currency  translation adjustment                                                |       | 30                  |       | (1 | ) |
|                                                                                    |       |                |       |   |   |
| Comprehensive  income                                                                   |       | $                   | 1,784      |   | $ | 3,731 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

5

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**MRS. FIELDS FAMOUS BRANDS, LLCAND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(Unaudited)**

**(Dollars in thousands)**

** **
| ** **                                                              | ** ** | **39 Weeks Ended**  | ** ** |
|-------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                              | ** ** | **October 2, 2004** | ** ** | **September 27, 2003** | ** ** |
|                                                                    |       |                |       |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                  |       |                |       |   |   |
| Net income from  continuing operations                                  |       | $                   | 1,670      |   | $ | 3,464 |   |
| Gain on sale of  equity warrants                                        |       | (1,054              | )          | — |   |
| Depreciation and  amortization                                          |       | 3,052               |       | 3,092 |   |
| Amortization of  deferred loan costs                                    |       | 3,447               |       | 3,418 |   |
| Stock  compensation expense                                             |       | 75                  |       | 94 |   |
| Amortization of  discount on notes                                      |       | 1,245               |       | 439 |   |
| Non-cash debt  increases associated with PIK interest                   |       | —              |       | 280 |   |
| Deferred income  taxes                                                  |       | (1,003              | )          | (791 | ) |
| Changes in  assets and liabilities:                                     |       |                |       |   |   |
| Receivables, net                                                        |       | 2,459               |       | 2,252 |   |
| Amounts due  to/from affiliates                                         |       | (512                | )          | (4,031 | ) |
| Inventories                                                             |       | (762                | )          | (703 | ) |
| Prepaid expenses  and other                                             |       | (477                | )          | (186 | ) |
| Other assets                                                            |       | (63                 | )          | (107 | ) |
| Accounts payable                                                        |       | (3,223              | )          | (2,821 | ) |
| Accrued  liabilities                                                    |       | (2,386              | )          | 7,526 |   |
| Deferred  revenues                                                      |       | (1,250              | )          | (775 | ) |
| Net cash  provided by continuing operating activities                   |       | 1,218               |       | 11,151 |   |
| Net cash (used  in) provided by discontinued operating activities       |       | (253                | )          | 442 |   |
| Net cash provided  by operating activities                              |       | 965                 |       | 11,593 |   |
|                                                                    |       |                |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                  |       |                |       |   |   |
| Proceeds from  sale of equity warrants                                  |       | 1,054               |       | — |   |
| Purchase of  property and equipment                                     |       | (595                | )          | (240 | ) |
| Net cash  provided by (used in) investing activities                    |       | 459                 |       | (240 | ) |
|                                                                    |       |                |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                  |       |                |       |   |   |
| Net borrowings  (payments) under line of credit                         |       | (3,452              | )          | 6,107 |   |
| Principal  payments on long-term debt                                   |       | (98,014             | )          | (5,050 | ) |
| Payment of debt  financing costs                                        |       | (12,179             | )          | (1,424 | ) |
| Proceeds from  issuance of Senior Notes                                 |       | 115,000             |       | — |   |
| Principal  payments on capital lease                                    |       | (32                 | )          | — |   |
| Contribution by  parent                                                 |       | 17,500              |       | — |   |
| Repurchase of  stock options in parent                                  |       | (108                | )          | — |   |
| Distribution to  parent under tax sharing agreement and merger costs    |       | —              |       | (76 | ) |
| Other activity  with parent                                             |       | (7,996              | )          | (12,328 | ) |
| Net cash  provided by (used in) financing activities                    |       | 10,719              |       | (12,771 | ) |
| Effect of  foreign exchange rate changes on cash                        |       | 30                  |       | (1 | ) |
| Net increase  (decrease) in cash and cash equivalents                   |       | 12,173              |       | (1,419 | ) |
| Cash and cash  equivalents at beginning of period                       |       | 1,300               |       | 2,900 |   |
| Cash and cash  equivalents at end of period                             |       | $                   | 13,473     |   | $ | 1,481 |   |
|                                                                    |       |                |       |   |   |
| Supplemental  Disclosure of Cash Flow Information:                      |       |                |       |   |   |
| Cash paid for  interest                                                 |       | $                   | 16,498     |   | $ | 10,019 |   |
| Cash paid for  income taxes                                             |       | 50                  |       | 245 |   |
| Cash paid to  parent for income taxes                                   |       | 1,450               |       | 6,050 |   |
| Supplemental  Disclosure of Noncash Investing and Financing Activities: |       |                |       |   |   |
| Distributions  payable to parent under tax sharing agreement            |       | $                   | —     |   | $ | 1,866 |   |
| Assets acquired  under capital lease                                    |       | 500                 |       | — |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

6

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**MRS. FIELDS FAMOUS BRANDS, LLCAND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.****     BASIS OFPRESENTATION**

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared by Mrs. Fields Famous Brands, LLC and subsidiaries (“Mrs. Fields” orthe “Company”) in accordance with the rules and regulations of the Securitiesand Exchange Commission for Form 10-Q and, accordingly, do not include all ofthe information and footnotes required by accounting principles generallyaccepted in the United States of America for a complete presentation of thefinancial statements. In the opinion of management, these unaudited condensedconsolidated financial statements reflect all adjustments, which consist onlyof normal recurring adjustments, necessary to present fairly the financialposition of Mrs. Fields as of October 2, 2004 and January 3, 2004, and theresults of their operations and their cash flows for the periods presented.These unaudited condensed consolidated financial statements should be read inconjunction with the combined financial statements and notes thereto for thefiscal year ended January 3, 2004 contained in Mrs. Fields’ RegistrationStatement on Form S-4 (File No. 333-115046), as amended, filed with theSecurities and Exchange Commission on April 30, 2004.

 

The Company is an entity that was formed inMarch 2004 in connection with the reorganization of certain entities andsegments that are under the common control of Mrs. Fields’Companies, Inc. (“MFC”), formerly known as Mrs. Fields’ FamousBrands, Inc. The Company is a wholly-owned subsidiary of Mrs. Fields’Original Cookies, Inc. (“MFOC”). MFOC is a wholly-owned subsidiary ofMrs. Fields’ Holding Company, Inc. (“MFH”) and MFH is a wholly-ownedsubsidiary of MFC. Prior to the reorganization, TCBY Systems, LLC (“TCBY”) wasa wholly-owned subsidiary of TCBY Enterprises, LLC (“TCBY Enterprises”), whoseparent is also MFC.

 

The accompanyingunaudited condensed consolidated financial statements include the accounts ofTCBY and the franchising, licensing and gifts segments of MFOC through March2004. In March 2004, MFC completed a reorganization whereby TCBY and thefranchising, licensing and gifts segments of MFOC were contributed to theCompany. These financial statements have been prepared to reflect thisreorganization as if it had occurred on December 31, 2000 (the beginningof fiscal 2001).

 

The unaudited condensedconsolidated financial statements assume that Mrs. Fields, for all periodspresented, had existed as a separate legal entity with the following threebusiness segments: franchising, gifts and licensing. The unaudited condensedconsolidated financial statements, which through March 2004, have been carvedout from the consolidated financial statements of MFOC and TCBY using thehistorical results of operations and assets and liabilities of these businessesand activities and which exclude the company-owned stores segment of MFOC,reflect the accounting policies adopted by MFOC and TCBY in the preparation oftheir consolidated financial statements and thus do not necessarily reflect theaccounting policies which Mrs. Fields might have adopted had it been anindependent company. The historical consolidated financial statements ofMrs. Fields include those accounts specifically attributable toMrs. Fields, substantially all of the indebtedness of MFOC and TCBY, andallocations of expenses relating to shared services and administrativefunctions incurred at MFOC.

 

Historically, MFOC hasnot allocated its various corporate overhead expenses, and common general andadministrative expenses to its operating business units. However, an allocationof such expenses has been included in general and administrative expenses inthe accompanying unaudited condensed consolidated statements of income andcomprehensive income. The Company’s general and administrative expensesrepresent portions of MFOC’s corporate functions such as human resources,legal, accounting and finance, treasury and information technology systems,that have been allocated to Mrs. Fields based on percentage of labor hoursdevoted by the functional department. These allocated costs are not necessarilyindicative of the costs that Mrs. Fields would have incurred had itoperated as an independent, stand-alone entity for all periods presented.

 

The Company’s cashbalances at January 3, 2004 include cash accounts specificallyattributable to Mrs. Fields plus an allocated portion of cash included inMFOC’s centralized cash management systems. Accordingly, the Company’s cashbalance at January 3, 2004 may not be representative of what it would havebeen if Mrs. Fields were an independent company. 

 

7

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Theresults of operations for the 13 weeks and 39 weeks ended October 2, 2004 arenot necessarily indicative of the results that may be expected for theremainder of the fiscal year ending January 1, 2005.  Income per common interest information is notpresented as Mrs. Fields is wholly-owned by MFOC and, therefore, its commoninterests are not publicly traded.

 

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

 

On March 16, 2004,the Company issued $80.7 million of 9 percent senior secured notes(the “9 percent Senior Secured Notes”) in exchange for $80.7 millionof 10 1/8 percent Senior Notes and issued $115.0 million of 11 1/2 percentsenior secured notes (the “11 1/2 percent Senior Secured Notes” together withthe 9 percent Senior Secured Notes, the “Senior Secured Notes”). Theproceeds from the 11 1/2 percent Senior Secured Notes were used to retire theCompany’s remaining long-term debt.

 

On August 23, 2004, theCompany completed an offer to exchange an aggregate principal amount of up to$80,747,000 of its 9 percent Senior Secured Notes which have been registeredunder the Securities Act of 1933, as amended, for a like principal amount ofits issued and outstanding 9 percent Senior Secured Notes from the registeredholders thereof, and an aggregate principal amount of up to $115,000,000 of is11 1/2 percent Senior Secured Notes which have been registered under theSecurities Act of 1933, as amended, for a like principal amount of its issuedand outstanding 11 1/2 percent Senior Secured Notes from the registered holdersthereof. All of the original Senior Secured Notes were tendered and exchangedas a result of this offer.

 

The Senior Secured Noteswill mature March 15, 2011, with interest payable semi-annually. TheSenior Secured Notes rank senior in right of payment to all subordinatedindebtedness of the Company and rank equal in right of payment with allexisting and future senior indebtedness of the Company. The Senior SecuredNotes are secured by all of the tangible and intangible assets of the Companyand its subsidiaries.

 

The Senior Secured Notesare redeemable at the option of the Company anytime on or after March 15,2008. Prior to March 15, 2007, the Company may redeem up to35 percent of the aggregate principal amount of the notes with the netproceeds of certain equity offerings, provided at least 65 percent of theaggregate principal amount of the Senior Secured Notes originally issued remainoutstanding. The Senior Secured Notes require the Company to repurchase aportion of the notes at 100 percent of the principal amount, plus accruedand unpaid interest thereon to the date of purchase, with 50 percent ofthe Company’s “excess cash flow”, as defined in the indenture agreement enteredinto by the Company in respect of the Senior Secured Notes (the “Indenture”),when the ratio of the Company’s Net Indebtedness to Consolidated EBITDA isabove 3.75 to 1.0. In the event of a change in control, as defined in the Indenture,the holders of the Senior Secured Notes will have the right to put the notes tothe Company at 101 percent of their principal amount, plus accrued andunpaid interest.

 

The Senior Secured Notescontain certain covenants that limit among other things, the ability of theCompany and its subsidiaries to: (i) incur additional indebtedness;(ii) make certain investments or enter into sale and leasebacktransactions; (iii) pay dividends, redeem subordinated debt, repurchasethe Company’s or its subsidiaries stock or make any other restricted paymentsas defined in the Indenture; (iv) enter into certain transactions withaffiliates; (v) create or incur liens; (vi) transfer or sell assets;(vii) make dividends, distributions or other payments from the Company’ssubsidiaries; (viii) consummate a merger, consolidation or sale of all orsubstantially all of our assets; and (ix) engage in unrelated business.

 

8

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**3.****     PROPERTY ANDEQUIPMENT**

 

Property and equipment are stated at cost lessaccumulated depreciation and amortization. Equipment, fixtures and leasehold improvements are depreciated oramortized over three to seven years or the lease term, using the straight-linemethod.  Property and equipment atOctober 2, 2004 and January 3, 2004 were comprised of the following (inthousands):

 

| ** **                                      | ** ** | **October 2, 2004** | ** ** | **January 3, 2004** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|---------------------|------------|
|                                            |       |                |       |                |       |
| Leasehold  improvements                         |       | $                   | 3,814      |                | $          | 3,204 |   |
| Equipment and  fixtures                         |       | 9,639               |       | 9,695               |       |
| Land                                            |       | 240                 |       | 240                 |       |
|                                            |       | 13,693              |       | 13,139              |       |
|                                            |       |                |       |                |       |
| Less accumulated  depreciation and amortization |       | (10,178             | )          | (9,965              | )          |
| Net property and  equipment                     |       | $                   | 3,515      |                | $          | 3,174 |   |

 

Property and equipment included gross assetsacquired under a capital lease and related accumulated depreciation andamortization of $500,000 and $40,000, respectively, at October 2, 2004.  There were no assets acquired under a capitallease as of January 3, 2004.

 

**4.****     ACCRUEDLIABILITIES**

 

Accruedliabilities were comprised of the following at October 2, 2004 and January 3,2004 (in thousands):

 

| ** **                         | ** ** | **October 2, 2004** | ** ** | **January 3, 2004** | ** ** |
|------------------------------------|------------|---------------------|------------|---------------------|------------|
|                               |       |                |       |                |       |
| Accrued  liabilities               |       | $                   | 5,845      |                | $          | 7,628 |   |
| Accrued  compensation and benefits |       | 4,052               |       | 3,555               |       |
| Accrued interest  payable          |       | 911                 |       | 2,027               |       |
|                               |       | $                   | 10,808     |                | $          | 13,210 |   |

 

On June 24, 2004, theCompany announced a reorganization of its executive management team effectiveJune 28, 2004.  As a result of thisreorganization, the Company terminated the employment of two Senior VicePresidents effective June 28, 2004 and accrued approximately $600,000 relatedto severance expenses.  As of October 2,2004, severance payments of $457,000 were due to the two Senior Vice Presidentsand included in accrued compensation and benefits.

 

On May 7, 2003, the Board of Directors of MFC accepted the resignation of Larry A. Hodgesas its President,Chief Executive Officer and Director of MFC and its subsidiaries, whichresignation was effective on May 14, 2003. Pursuant to the terms of aseparation agreement, dated August 6, 2003, and a Severance AssumptionAgreement dated March 16, 2004, among MFC, MFOC, the Company and Mr. Hodges(the “Separation Agreements”), Mr. Hodges is receiving 28 months of salary asseverance, which is being paid semi-monthly through the end of 2004, and thebalance will be paid in a lump sum in January 2005. This severance obligationwas assumed by the Company concurrently with the completion of thereorganization and refinancing (see Notes 1 and 2). As of October 2, 2004,severance payments of $412,000 were due to Mr. Hodges and included in accruedcompensation and benefits.

 

Under the terms of a stockholders’ agreement amongMFC and its stockholders, there are put and call rights with respect to thecommon shares of MFC, including common shares received upon exercise ofoptions. Pursuant to the Separation Agreements, Mr. Hodges and MFC agreed thatall of the shares of MFC’s common stock held by Mr. Hodges, would be purchasedby MFC for an aggregate purchase price of $449,479. The purchase price ispayable in five installments of $74,913 and a sixth installment of $74,914 (ineach case, without interest). The installments are payable every 30 days,beginning on April 15, 2004, which was 30 days following the closing date ofthe reorganization and refinancing (see Notes 1 and 2). This payment obligationto Mr. Hodges was assumed by the Company concurrently with the completion ofthe reorganization and refinancing (see Notes 1 and 2). As of October 2, 2004,this obligation payable to Mr. Hodges for the purchase of the shares of MFC’scommon stock was paid in full.

 

9

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**5.****     RELATEDPARTY TRANSACTIONS**

 

Amounts due to/from affiliates were comprised of thefollowing at October 2, 2004 and January 3, 2004 (in thousands):

 

|                          | ** ** | **October 2, 2004** | ** ** | **January 3, 2004** | ** ** |
|-------------------------------|------------|---------------------|------------|---------------------|------------|
|                          |       |                |       |                |       |
| Amounts due from  affiliates: |       |                |       |                |       |
| MFC                           |       | $                   | 23         |                | $          | — |   |
| Amounts due to  affiliates:   |       |                |       |                |       |
| Mrs. Fields’  Holding    |       | $                   | 273        |                | $          | 273 |   |
| MFOC                          |       | 146                 |       | —              |       |
| TCBY Enterprises              |       | —              |       | 550                 |       |
| MFC – tax  sharing       |       | 2,227               |       | 2,312               |       |
|                          |       | $                   | 2,646      |                | $          | 3,135 |   |

 

**6.****     REPORTABLESEGMENTS**

 

Operatingsegments are components of the Company for which separate financial informationis available that is evaluated regularly by management in deciding how toallocate resources and in assessing performance. This information is reportedon the basis that it is used internally for evaluating segment performance.Mrs. Fields has three reportable operating segments: franchising, gifts andlicensing. The franchising segment consists of revenues received eitherdirectly or indirectly from cookie, yogurt and pretzel stores, which are ownedand operated by third parties. These revenues include initial franchise orlicense fees, royalties based on a percentage of a franchisee’s gross sales,sales of cookie dough that the Company produces, and certain productformulation fees and supplier allowances which are based upon sales tofranchisees. The gifts segment includes sales generated from the Company’s mailorder gift catalog and web site. The licensing segment consists of otherlicensing activity from third parties for the sale of products bearing theCompany’s brand names. Sales and transfers between segments are eliminated inconsolidation.

 

TheCompany evaluates performance of each segment based on contribution margin.Contribution margin is computed as the difference between the revenuesgenerated by a reportable segment and the selling and occupancy expenses, costof sales and direct general and administrative expenses related to thatreportable segment. Contribution margin is used as a measure of the operatingperformance of an operating segment. The Company does not allocate any indirectgeneral and administrative expenses, other operating income (expense), interestexpense, depreciation and amortization or assets to its reportable operatingsegments.

 

Segmentrevenue and contribution margin are presented in the following table (inthousands):

 
| ** **                             | ** ** | **Franchising** | ** ** | **Gifts** | ** ** | **Licensing** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|-----------------|------------|-----------|------------|---------------|------------|-----------|------------|
| **13  weeks ended October 2, 2004**    |       |            |       |      |       |          |       |      |       |
| Revenue                                |       | $               | 14,117     |      | $          | 3,545         |       | $         | 1,353      |   | $ | 19,015 |   |
| Contribution  margin                   |       | 9,140           |       | 664       |       | 1,265         |       | 11,069    |       |
|                                   |       |            |       |      |       |          |       |      |       |
| **13  weeks ended September 27, 2003** |       |            |       |      |       |          |       |      |       |
| Revenue                                |       | $               | 15,396     |      | $          | 2,605         |       | $         | 1,348      |   | $ | 19,349 |   |
| Contribution  margin                   |       | 10,847          |       | 693       |       | 1,074         |       | 12,614    |       |
|                                   |       |            |       |      |       |          |       |      |       |
| **39  weeks ended October 2, 2004**    |       |            |       |      |       |          |       |      |       |
| Revenue                                |       | $               | 42,350     |      | $          | 12,843        |       | $         | 3,801      |   | $ | 58,994 |   |
| Contribution  margin                   |       | 26,853          |       | 2,066     |       | 3,384         |       | 32,303    |       |
|                                   |       |            |       |      |       |          |       |      |       |
| **39  weeks ended September 27, 2003** |       |            |       |      |       |          |       |      |       |
| Revenue                                |       | $               | 43,168     |      | $          | 8,615         |       | $         | 4,292      |   | $ | 56,075 |   |
| Contribution  margin                   |       | 29,709          |       | 1,844     |       | 3,324         |       | 34,877    |       |

 

10

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

 
| ** **                                                                                       | ** ** | **13 Weeks Ended**   | ** ** | **39 Weeks Ended**      | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------------|------------|
| ** **                                                                                       | ** ** | **October 2,  2004** | ** ** | **September 27,  2003** | ** ** | **October 2,  2004** | ** ** | **September 27,  2003** | ** ** |
| Contribution  margin                                                                             |       | $                    | 11,069     |                    | $          | 12,614 |   | $ | 32,303 |   | $ | 34,877 |   |
| Other operating  revenues                                                                        |       | 79                   |       | 78                      |       | 220 |   | 318 |   |
| General and  administrative expenses                                                             |       | (2,179               | )          | (2,633                  | )          | (7,544 | ) | (7,683 | ) |
| Stock  compensation expense                                                                      |       | (49                  | )          | (32                     | )          | (75 | ) | (94 | ) |
| Costs associated  with debt refinancing                                                          |       | —               |       | —                  |       | (87 | ) | — |   |
| Other operating  income (expense), net                                                           |       | (26                  | )          | 25                      |       | (4 | ) | (225 | ) |
| Interest  expense, net                                                                           |       | (5,182               | )          | (6,239                  | )          | (19,569 | ) | (18,475 | ) |
| Other income                                                                                     |       | —               |       | —                  |       | 1,054 |   | — |   |
| Depreciation and  amortization                                                                   |       | (996                 | )          | (1,311                  | )          | (3,052 | ) | (3,092 | ) |
| Provision for  income taxes                                                                      |       | (1,346               | )          | (873                    | )          | (1,576 | ) | (2,162 | ) |
| Income from  current operations                                                                  |       | 1,370                |       | 1,629                   |       | 1,670 |   | 3,464 |   |
| Income from  discontinued operations(net of income taxes of $13, $23, $52 and$42,  respectively) |       | 26                   |       | 237                     |       | 84 |   | 268 |   |
| Net income                                                                                       |       | $                    | 1,396      |                    | $          | 1,866 |   | $ | 1,754 |   | $ | 3,732 |   |

 

Thefixed assets and inventory of the Company primarily relate to the Company’sGreat American Cookie batter facility and the gifts business segment andrelated activities. Assets relating to franchising and licensing activity areprimarily amounts due from franchisees and licensees and goodwill relating tofranchising concepts.

 

TheCompany has one customer that accounted for $825,000 and $3.0 million, or 23.2percent and 23.3 percent of the revenue of the gifts segment for the 13 weeksand 39 weeks ended October 2, 2004, respectively, and $880,000 and $1.8 millionor 33.7 percent and 20.9 percent of the revenue of the gifts segment for the 13weeks and 39 weeks ended September 27, 2003, respectively. The Company has onelicensee that accounted for $854,000 and $2.3 million, or 63.1 percent and 61.5percent of the revenue of the licensing segment for the 13 weeks and 39 weeksended October 2, 2004, respectively, and $821,000 and $2.6 million, or 60.9percent and 61.4 percent of the revenue of the licensing segment for the 13weeks and 39 weeks ended September 27, 2003, respectively. There were no othercustomers or licensees that accounted for more than 10.0 percent of Mrs.Fields’ total revenue or any individual segment’s revenue.

 

**7.****     COMMITMENTS AND CONTINGENCIES**

 

***Legal Matters***

 

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

 

In the ordinary course ofbusiness, the Company is involved in routine litigation, including franchisedisputes and trademark disputes. The Company is not a party to any legalproceedings (including the matter described below) which, in the opinion ofmanagement, after consultation with legal counsel, is material to its business,financial condition or results of operations.

 

As discussed in theCompany’s Registration Statement on Form S-4 (File No. 333-115046), as amended,the Company’s indirect subsidiary, TCBY of Ireland, Inc., was thedefendant in a recently concluded case captioned Advanced FoodConcepts, Ltd. et al. v. William P. Creasman, et al., Case No. 401-CV-00-117JMM,filed in the U.S. District Court for the Eastern District of Arkansas (the“Court”). This complaint was filed in 2001 by two former franchisees againstTCBY of Ireland and other corporate and individual defendants, but all defendantshave been dismissed with the exception of TCBY of Ireland, Inc., thefranchisor party under a Transnational Master License Agreement entered intowith certain of the plaintiffs and others. The plaintiffs sought damages inexcess of $70 million in connection with TCBY of Ireland’s performanceunder and termination of the Transnational Master License Agreement. On August4, 2004, the Court granted TCBY of Ireland’s Motion for Summary Judgment on allremaining counts of the complaint. Plaintiffs have filed a motion forreconsideration, and TCBY of Ireland has responded to it. If plaintiffs’ motionis denied, they may still appeal the court’s ruling. The Company does not have 

 

11

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insurance coverage for this lawsuit because the claims arose prior tothe Company’s acquisition of TCBY. Notwithstanding the excessive claim for damages, the lack of insurancecoverage and the risk that TCBY of Ireland’s parent entities might ultimatelybear or share in the cost of any significant judgment obtained against it,after consultation with legal counsel, and in light of the favorable summaryjudgment ruling, management believes it is unlikely that plaintiffs will obtainany judgment against TCBY of Ireland that would be material to our business,financial condition or operations.

 

**8.****     DISCONTINUED OPERATIONS**

 

TCBYtransitioned its equipment sales segment (“Riverport”) to a third partyequipment and smallwares distributor during the quarter ended March 29, 2003.The distributor purchased certain of Riverport’s inventory at cost, subject tocertain slow moving inventory purchase price adjustments. All slow movinginventory purchase price adjustments have been recorded in the accompanyingunaudited condensed consolidated financial statements. The segment’s assetsthat were subject to depreciation and amortization were being periodicallyexpensed over the remaining estimated useful life. The results of operationsand financial position of Riverport are classified as discontinued operationsin the accompanying unaudited condensed consolidated financial statements.

 

**9.****     EMPLOYEE STOCK OPTION PLAN**

 

Effectiveas of September 30, 2004, MFC terminated its Employee Stock Option Planpursuant to the provisions of the plan. No further options will be granted under the plan.  Valid and outstanding options granted to planparticipants prior to termination were unaffected by the termination.  Concurrent with the termination, the Companypaid $108,000 for the repurchase of certain stock options from the planparticipants.

 

**10.****  SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIALINFORMATION**

 

The Senior Secured Notesare fully and unconditionally guaranteed on a joint and several basis by all ofthe Company’s domestic subsidiaries other than minor, immaterial subsidiaries.Mrs. Fields Famous Brands, LLC has no independent assets or operations;therefore, supplemental financial information on a condensed consolidatingbasis of the guarantor subsidiaries is not required. There are no restrictionson the Company’s ability to obtain cash dividends, loans or other distributionsof funds from the guarantor subsidiaries, except those imposed by applicablelaw.

 

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| **ITEM 2.** | ** ** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION****AND RESULTS OF  OPERATIONS** |
|-------------|------------|-----------------------------------------------------------------------------------------------------|

 

**Forward-looking Information**

 

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

 

•      theavailability and adequacy of cash flow to satisfy our obligations, includingdebt service on our long-term debt and additional funds required for workingcapital;

 

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

 

•      our ability tosolicit new franchisees;

 

•      economic, competitive,demographic, business and other pressures, trends and conditions in variousmarkets;

 

•      the seasonalnature of our operations;

 

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

 

•      changes in ourbusiness strategy or development plans;

 

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

 

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

 

•      adoption of newaccounting pronouncements;

 

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

 

•      changes inprices of our raw materials;

 

•      changes inpersonnel or increased labor costs;

 

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

 

•      changes incustomer traffic;

 

•      prevailinginterest rates;

 

•      legalproceedings and regulatory matters;

 

•      acts of war orterrorist incidents; and

 

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

 

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We undertake no obligation to publicly update orrevise any forward-looking statements, whether as a result of new information,future events or otherwise.  In light ofthese risks, uncertainties and assumptions, the forward-looking eventsdiscussed in this report may not occur.

 

**Overview**

 

We are one of the largestfranchisors in the premium snack-food industry, featuring Mrs. Fields, GreatAmerican Cookie Company, TCBY, Pretzel Time and Pretzelmaker as our corebrands. Through our franchisees’ retail stores, we are the largest retailer offreshly baked on-premises specialty cookies and brownies in the United States;the largest retailer of soft serve frozen yogurt in the United States; and thesecond largest retailer of baked on-premises pretzels in the United States. Inaddition, we operate a profitable gifts business and have entered into keylicensing arrangements that leverage awareness of our core brands among ourretail customer base. We operate through a network of 2,816 retail conceptlocations, which are located throughout the United States and in approximately40 foreign countries.

 

Our business is divided into three primary businesssegments for financial reporting purposes: franchising, gifts and licensingrepresenting 71.5 percent, 21.7 percent and 6.4 percent of total revenues,respectively, for the 39 weeks ended October 2, 2004.

 

As of October 2, 2004,our store portfolio consisted of 2,268 domestic franchised locations, 325international franchised locations and 223 licensed locations. By brand, ourfranchisees’ and licensees’ concept locations are distributed as follows:

 

| ** **                        | ** ** | **Domestic  Franchised** | ** ** | **International  Franchised** | ** ** | **Licensed  Locations** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|--------------------------|------------|-------------------------------|------------|-------------------------|------------|-----------|------------|
|                              |       |                     |       |                          |       |                    |       |      |       |
| Mrs. Fields                       |       | 393                      |       | 77                            |       | 59                      |       | 529       |       |
| Great American                    |       | 279                      |       | 1                             |       | 1                       |       | 281       |       |
| Original Cookie                   |       | —                   |       | —                        |       | 9                       |       | 9         |       |
| Cookie Subtotal                   |       | 672                      |       | 78                            |       | 69                      |       | 819       |       |
| Pretzel Time                      |       | 213                      |       | 4                             |       | 6                       |       | 223       |       |
| Pretzelmaker                      |       | 163                      |       | 38                            |       | 3                       |       | 204       |       |
| Hot Sam                           |       | —                   |       | —                        |       | 13                      |       | 13        |       |
| Pretzel Subtotal                  |       | 376                      |       | 42                            |       | 22                      |       | 440       |       |
| Bakery Brands  Subtotal           |       | 1,048                    |       | 120                           |       | 91                      |       | 1,259     |       |
| TCBY—Traditional  Stores     |       | 503                      |       | 205                           |       | —                  |       | 708       |       |
| TCBY—Non-traditional  Stores |       | 717                      |       | —                        |       | 132                     |       | 849       |       |
| Dairy Brands  Subtotal            |       | 1,220                    |       | 205                           |       | 132                     |       | 1,557     |       |
| Totals                            |       | 2,268                    |       | 325                           |       | 223                     |       | 2,816     |       |

 

The above table countseach concept location individually. For example, if a physical location had aMrs. Fields store and a Pretzel Time store together, this would be counted astwo concept locations in the table above. If actual physical stores werecounted, rather than concept locations, total store counts would be reduced by301 locations to 2,515.

 

Mrs. Fields OriginalCookies, Inc. (“MFOC”), our parent company, and certain of its subsidiaries ownapproximately 175 franchised and licensed retail concept locations, representing6.2 percent of the total retail concept locations. During the 39 weeks endedOctober 2, 2004, we recognized $2.2 million of franchise royalties and $2.4million of product sales relating to the retail concept locations owned byMFOC. MFOC expects that certain of these retail concept locations may be soldover time to new and current franchisees or will be closed.

 

14

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During the period fromJanuary 3, 2004 to October 2, 2004, our store portfolio has declined from 3,027concept locations to 2,816 concept locations, as follows:

 

| ** **                | ** ** | **Domestic  Franchised** | ** ** | **International  Franchised** | ** ** | **Licensed  Locations** | ** ** | **Total** | ** ** |
|---------------------------|------------|--------------------------|------------|-------------------------------|------------|-------------------------|------------|-----------|------------|
|                      |       |                     |       |                          |       |                    |       |      |       |
| Balance, January  3, 2004 |       | 2,380                    |       | 378                           |       | 269                     |       | 3,027     |       |
| New development  openings |       | 119                      |       | 32                            |       | 2                       |       | 153       |       |
| Permanent  closings       |       | (250                     | )          | (85                           | )          | (46                     | )          | (381      | )          |
| Other openings,  net      |       | 19                       |       | —                        |       | (2                      | )          | 17        |       |
| Balance October  2, 2004  |       | 2,268                    |       | 325                           |       | 223                     |       | 2,816     |       |

 

Of the 381 permanentclosings between January 3, 2004 and October 2, 2004, 42.3 percent related toTCBY brand non-traditional locations, 26.2 percent related to TCBY brandtraditional locations, 13.4 percent related to bakery concept locations ownedby franchisees other than MFOC and 18.1 percent related to retail conceptlocations owned by MFOC.

 

**Recent Developments**

 

***Reorganization and Refinancing.***  Wewere formed in March 2004 in connection with the reorganization of certainentities and segments that are under the common control of Mrs. Fields’Companies, Inc. (“MFC”), formerly known as Mrs. Fields’ Famous Brands,Inc.  We are a wholly-owned subsidiary ofMFOC.  MFOC is a wholly-owned subsidiaryof Mrs. Fields’ Holding Company, Inc. (“MFH”) and MFH is a wholly-owned subsidiaryof MFC.  Prior to the reorganization,TCBY Systems, LLC (“TCBY”) was a wholly-owned subsidiary of TCBY Enterprises,LLC (“TCBY Enterprises”), whose parent is also MFC.

 

Aspart of the reorganization described above, we refinanced substantially all ofour indebtedness.  We issued $80.7million of 9 percent senior secured notes (the “9 percent Senior SecuredNotes”) in exchange for $80.7 million of 10 1/8 percent senior notes and issued$115.0 million of 11 1/2 percent senior secured notes (the “11 1/2 percentSenior Secured Notes” and together with the 9 percent Senior Secured Notes, the“Senior Secured Notes”).  The proceedsfrom the 11 1/2 percent Senior Secured Notes were used to retire the Company’sremaining long-term debt.

 

On August 23, 2004, theCompany completed an offer to exchange an aggregate principal amount of up to $80,747,000of its 9 percent Senior Secured Notes which have been registered under theSecurities Act of 1933, as amended, for a like principal amount of its issuedand outstanding 9 percent Senior Secured Notes from the registered holdersthereof, and an aggregate principal amount of up to $115,000,000 of is 11 1/2percent Senior Secured Notes which have been registered under the SecuritiesAct of 1933, as amended, for a like principal amount of its issued andoutstanding 11 1/2 percent Senior Secured Notes from the registered holdersthereof. All of the original Senior Secured Notes were tendered and exchangedas a result of this offer.

 

***Increase Investment in Brands.***  Asdiscussed in our Registration Statement on Form S-4 (File No. 333-115049), asamended, in 2004, we intend to invest $3.0 million in advertising,promotion and brand building ideas. While we believe this investment in ourbrands will support the initiatives aimed at increasing sales at all franchisedlocations, we have identified TCBY as the brand that offers our greatestopportunity for building profitable sales in the short term. TCBY locations arenot limited to malls, and we believe TCBY’s products are aligned with currenthealth trends, which create a demand for a low-fat, yet satisfying treat.

 

Duringthe 13 weeks and 39 weeks ended October 2, 2004, we incurred expenses of$200,000 and $1.5 million, respectively, related to brand investmentinitiatives.  There were no such expensesin 2003.  These expenses for brandinvestment initiatives for the 39 weeks ended October 2, 2004 includedincreased advertising and promotion of the TCBY brand and its products,including the introduction during the second quarter of several flavors of “lowcarb” yogurt at most of our TCBY traditional franchised retail stores ofapproximately $1.2 million and initial expenses relating to the reconcepting ofTCBY of approximately $300,000.  Wecurrently anticipate expending an additional $1.5 million in 2004 for brandinvestment initiatives.

 

15

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***Termination of Stock Option Plan.***Effective as of September 30, 2004, MFC terminated its Employee Stock OptionPlan pursuant to the provisions of the plan. No further options will be granted under the plan.  Valid and outstanding options granted to planparticipants prior to termination were unaffected by the termination.  Concurrent with the termination, the Companypaid $108,000 for the repurchase of certain stock options from the planparticipants.

 

**Results of Operations**

 

The following table sets forth, for the periodsindicated, certain information relating to the operations of Mrs. Fieldsand percentage changes from period to period.

 

**Statement of Operations Data:**

 
| ** **                                                                                        | ** ** | **13 Weeks Ended**         | ** ** | **39 Weeks Ended**      | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| ** **                                                                                        | ** ** | **October 2,  2004**       | ** ** | **September 27,  2003** | ** ** | **% Change** | ** ** | **October 2,  2004** | ** ** | **September 27, 2003** | ** ** | **% Change** | ** ** |
| ** **                                                                                        | ** ** | **(Dollars in Thousands)** | ** ** |
| REVENUES:                                                                                         |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
| Franchising                                                                                       |       | $                          | 14,117     |                    | $          | 15,396 |   | (8.3 | ) | $ | 42,350 |   | $ | 43,168 |   | (1.9 | ) |
| Gifts                                                                                             |       | 3,545                      |       | 2,605                   |       | 36.1 |   | 12,843 |   | 8,615 |   | 49.1 |   |
| Licensing                                                                                         |       | 1,353                      |       | 1,348                   |       | 0.4 |   | 3,801 |   | 4,292 |   | (11.4 | ) |
| Other                                                                                             |       | 79                         |       | 78                      |       | 1.3 |   | 220 |   | 318 |   | (30.8 | ) |
|                                                                                              |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
| Total revenues                                                                                    |       | 19,094                     |       | 19,427                  |       | (1.7 | ) | 59,214 |   | 56,393 |   | 5.0 |   |
| OPERATING COSTS  AND EXPENSES:                                                                    |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
| Franchising                                                                                       |       | 4,977                      |       | 4,549                   |       | 9.4 |   | 15,497 |   | 13,459 |   | 15.1 |   |
| Gifts                                                                                             |       | 2,881                      |       | 1,912                   |       | 50.7 |   | 10,777 |   | 6,771 |   | 59.2 |   |
| Licensing                                                                                         |       | 88                         |       | 274                     |       | (67.9 | ) | 417 |   | 968 |   | (56.9 | ) |
| General and  administrative                                                                       |       | 2,179                      |       | 2,633                   |       | (17.2 | ) | 7,544 |   | 7,683 |   | (1.8 | ) |
| Stock  compensation expense                                                                       |       | 49                         |       | 32                      |       | 53.1 |   | 75 |   | 94 |   | (20.2 | ) |
| Costs associated  with debt refinancing                                                           |       | —                     |       | —                  |       | NM |   | 87 |   | — |   | NM |   |
| Depreciation                                                                                      |       | 288                        |       | 856                     |       | (66.4 | ) | 928 |   | 1,758 |   | (47.2 | ) |
| Amortization                                                                                      |       | 708                        |       | 455                     |       | 55.6 |   | 2,124 |   | 1,334 |   | 59.2 |   |
| Other operating  expenses (income), net                                                           |       | 26                         |       | (25                     | )          | NM |   | 4 |   | 225 |   | (98.2 | ) |
|                                                                                              |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
| Total operating  costs and expenses                                                               |       | 11,196                     |       | 10,686                  |       | 4.8 |   | 37,453 |   | 32,292 |   | 16.0 |   |
|                                                                                              |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
| Income from  operations                                                                           |       | 7,898                      |       | 8,741                   |       | (9.6 | ) | 21,761 |   | 24,101 |   | (9.7 | ) |
| Interest  expense, net                                                                            |       | (5,182                     | )          | (6,239                  | )          | 16.9 |   | (19,569 | ) | (18,475 | ) | (5.9 | ) |
| Other income                                                                                      |       | —                     |       | —                  |       | NM |   | 1,054 |   | — |   | NM |   |
| Income from  continuing operations before provision for income                                    |       | 2,716                      |       | 2,502                   |       | 8.6 |   | 3,246 |   | 5,626 |   | (42.3 | ) |
| Provision for  income taxes                                                                       |       | 1,346                      |       | 873                     |       | 54.2 |   | 1,576 |   | 2,162 |   | (27.1 | ) |
|                                                                                              |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
| Income from  continuing operations                                                                |       | 1,370                      |       | 1,629                   |       | (15.9 | ) | 1,670 |   | 3,464 |   | (51.8 | ) |
| Income from  discontinued operations (net of income taxes of $13, $23, $52 and $42, respectively) |       | 26                         |       | 237                     |       | (89.0 | ) | 84 |   | 268 |   | (68.7 | ) |
|                                                                                              |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
| Net income                                                                                        |       | $                          | 1,396      |                    | $          | 1,866 |   | (25.2 | ) | $ | 1,754 |   | $ | 3,732 |   | (53.0 | ) |
|                                                                                              |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
| Cash flows from  operating activities                                                             |       | $                          | (2,538     | )                       | $          | 5,676 |   |   |   | $ | 965 |   | $ | 11,593 |   |   |   |
| Cash flows from  investing activities                                                             |       | $                          | (523       | )                       | $          | (68 | ) |   |   | $ | 459 |   | $ | (240 | ) |   |   |
| Cash flows from  financing activities                                                             |       | $                          | (262       | )                       | $          | (6,239 | ) |   |   | $ | 10,719 |   | $ | (12,771 | ) |   |   |

 

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**13Weeks Ended October 2, 2004**

**Comparedto the 13 Weeks Ended September 27, 2003**

 

*IncomeFrom Operations–Overview.* Income from operations was $7.9million for the 13 weeks ended October 2, 2004, a decrease of $800,000 or9.6 percent, from $8.7 million for the 13 weeks ended September 27,2003. This decrease was primarily attributable to a decrease in contribution fromour franchising segment of $1.7 million offset by an increase in contributionfrom our licensing segment of $200,000 and reductions in general andadministrative expenses of $400,000 and depreciation and amortization of$300,000.

 

*SegmentContribution.*  Thefollowing table sets forth the contribution from each of our reportingsegments. Franchising contribution is comprised of sales of new franchises androyalties from existing franchises less direct operating expenses. Giftscontribution is comprised of sales of our products through our catalog andInternet business less direct operating expenses. Licensing contribution iscomprised of licensing fees received from third parties for the sale ofproducts bearing our brand names less direct operating expenses.

 
| ** **                  | ** ** | **13 Weeks Ended**                 | ** ** | ** **                            | ** ** |
|-----------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| **Reporting Segment**       | ** ** | **October 2,  2004  Contribution** | ** ** | **September 27,  2003  Contribution** | ** ** | **Percent  Change** | ** ** |
| ** **                  | ** ** | **(dollars in thousands)**         | ** ** |
| Franchising                 |       | $                                  | 9,140      |                                  | $          | 10,847 |   | (15.7 | )% |
| Gifts                       |       | 664                                |       | 693                                   |       | (4.2 | )% |
| Licensing                   |       | 1,265                              |       | 1,074                                 |       | 17.8 | % |
| Total Segment  Contribution |       | $                                  | 11,069     |                                  | $          | 12,614 |   | (12.2 | )% |

 

**Franchising**

 

*FranchisingRevenues.*  Franchisingrevenues were $14.1 million for the 13 weeks ended October 2, 2004, adecrease of $1.3 million or 8.3 percent, from $15.4 million for the13 weeks ended September 27, 2003. This decrease was principally due to a $1.2million or 19.5 percent decrease in revenues from our TCBY franchise system asa result of 1,030 or 9.6 percent fewer traditional equivalent unit weeks.  The decrease in our TCBY franchisee systemrevenues was principally comprised of lower product formulation revenues of$800,000 or 23.0 percent and lower royalties of $300,000 or 14.6 percent.

 

Revenues from our bakery franchise system decreased$100,000 or 1.1 percent.  This decreasewas principally due to decreases of product formulation revenues of $200,000and royalties of $200,000 partially offset by increased sales by our GreatAmerican Cookie batter facility to our franchisees of $300,000.  The decrease in product formulation androyalty revenues for our bakery franchise system was principally due to 730 or5.0 percent fewer unit weeks.

 

*FranchisingExpenses.*  Franchisingexpenses were $5.0 million for the 13 weeks ended October 2, 2004, anincrease of $500,000 or 11.1 percent, from $4.5 million for the 13weeks ended June 29, 2003. This increase was principally due to increases inoperating costs associated with our Great American Cookie batter facility of$300,000 primarily from rising raw ingredients costs, expenses for brandinvestment initiatives of $200,000, product development expenses of $100,000,franchisee training expenses of $100,000, and other marketing expenses of  $200,000 partially offset by a reduction infranchise development expenses of $400,000.

 

*FranchisingContribution.*  Thedecrease in franchising contribution of $1.7 million or 15.7 percent wasprincipally due reduction in revenues from our TCBY franchise system of $1.2million or 19.5 percent and an increase in expenses of $500,000.

 

**Gifts**

 

*GiftsRevenues.*  Giftsrevenues were $3.5 million for the 13 weeks ended October 2, 2004, anincrease of $900,000 or 36.1 percent, from $2.6 million for the 13weeks ended September 27, 2003. Gifts revenues consist of sales through ourcatalog and e-tailing web site as well as affiliations with other web sites.The increase in revenues in the 13 weeks ended October 2, 2004 was due toincreases in sales through our catalogs and e-tailing web site of $700,000, ouraffiliations with other web sites of $100,000 and to commercial airlines of$100,000.

 

17

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*GiftsExpenses.*  Giftsexpenses were $2.9 million for the 13 weeks ended October 2, 2004, anincrease of $1.0 million or 50.7 percent, from $1.9 million for the13 weeks ended September 27, 2003. This increase in expenses was due toincreases in cost of sales of $500,000 associated with the increased salesvolume and increased cost of product, advertising and marketing expenses of$300,000 due to increased circulation of catalogs, salaries and wages of$100,000 due to increased sales volume, and other operating costs of $100.000.

 

*GiftsContribution.*  Giftscontribution of $700,000 for the 13 weeks ended October 2, 2004 was comparableto the prior year 13 week period.  Thiscomparability was the result of increased sales of $900,000 or36.1 percent which was offset by an increase in gifts operating expensesfor cost of sales and catalog circulation.

 

**Licensing**

 

*LicensingRevenues.*  Licensingrevenues were $1.3 million for the 13 weeks ended October 2, 2004,comparable with $1.3 million for the 13 weeks ended September 27, 2003.This comparability was due to increased licensing royalties from Mrs. Fieldsbranded products of $100,000 or 8.1 percent offset by a decrease in licensingroyalties earned under our licensing agreement for the sale of TCBY frozen foodspecialty products through retail channels of $100,000 or 22.2 percent.

 

*LicensingExpenses.*  Licensingexpenses were $88,000 for the 13 weeks ended October 2, 2004, a decrease of$186,000 or 67.9 percent, from $274,000 for the 13 weeks ended September27, 2003. This decrease was due to reduced licensing expenses incurred underour licensing agreement for TCBY frozen food specialty products, and marketingand spoilage allowances that were incurred in the 13 weeks ended September 27,2003 as a result of distribution through a certain retail chain.  This distribution channel was terminated in2003.

 

*LicensingContribution.*  Theincrease in licensing contribution of $200,000 or 17.8 percent was primarilydue to the decrease in licensing expenses previously discussed.

 

**Other**

 

*Generaland Administrative Expense.* General and administrative expenses were $2.2 million for the 13weeks ended October 2, 2004, a decrease of $400,000 or 17.2 percent, from $2.6million for the 13 weeks ended September 27, 2003.  This decrease was primarily due to decreasesin professional and legal fees of $300,000 and salaries and related employeecosts of $200,000 partially offset by an increase in other administrativeexpenses of $100,000.

 

*Depreciationand Amortization Expense.* Total depreciation and amortization expense was $1.0 million forthe 13 weeks ended October 2, 2004, a decrease of $300,000 or23.1 percent, from $1.3 million for the 13 weeks ended September 27, 2003.Depreciation expense was $300,000 for the 13 weeks ended October 2, 2004, adecrease of $600,000 or 66.4 percent, from $900,000 for the 13 weeks endedSeptember 27, 2003. This decrease was principally due to the write off of equipmentrelating to distribution of TCBY yogurt product in convenience stores in thethird quarter of 2003. Amortization expense was $700,000 for the 13 weeksended October 2, 2004, an increase of $200,000 or 55.6 percent from$500,000 for the 13 weeks ended September 27, 2003. This increase was due tothe amortization associated with the TCBY trade names and recipes, which werepreviously considered to be indefinite lived assets and are now amortized overa 15 year life.

 

*InterestExpense, Net.*  Interestexpense, net was $5.2 million for the 13 weeks ended October 2, 2004, adecrease of $1.0 million or 16.9 percent, from $6.2 million for the13 weeks ended September 27, 2003. This decrease was primarily due to therefinancing of our debt in March 2004 resulting in lower effective interestrates on our outstanding debt for the 13 weeks ended October 2, 2004 comparedto the effective interest rate on our outstanding debt for the 13 weeks endedSeptember 27, 2003.

 

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**39 WeeksEnded October 2, 2004**

**Comparedto the 39 Weeks Ended September 27, 2003**

 

*IncomeFrom Operations—Overview*. Income from operations was $21.8 million for the 39 weeks endedOctober 2, 2004, a decrease of $2.3 million or 9.7 percent, from$24.1 million for the 39 weeks ended September 27, 2003. This decrease wasprimarily attributable to a decrease in contribution from our franchisingsegment of $2.9 million, which was primarily attributable to $1.5 million ofexpenses incurred for brand investment initiatives, a decrease in franchisingrevenues of $800,000 as a result of fewer franchise unit weeks, and an increasein other direct franchising expenses of $600,000 partially offset by anincrease in contribution from our gifting segment of $200,000 and decreases ingeneral and administrative expenses of $200,000 and other operating expenses of$200,000.

 

*SegmentContribution.*  Thefollowing table sets forth the contribution from each of our reportingsegments. Franchising contribution is comprised of sales of new franchises androyalties from existing franchises less direct operating expenses. Giftscontribution is comprised of sales of our products through our catalog andInternet business less direct operating expenses. Licensing contribution iscomprised of licensing fees received from third parties for the sale ofproducts bearing our brand names less direct operating expenses.

 
| ** **                  | ** ** | **39 Weeks Ended**                 | ** ** | ** **                            | ** ** |
|-----------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| **Reporting Segment**       | ** ** | **October 2,  2004  Contribution** | ** ** | **September 27,  2003  Contribution** | ** ** | **Percent  Change** | ** ** |
| ** **                  | ** ** | **(dollars in thousands)**         | ** ** |
| Franchising                 |       | $                                  | 26,853     |                                  | $          | 29,709 |   | (9.6 | )% |
| Gifts                       |       | 2,066                              |       | 1,844                                 |       | 12.0 | % |
| Licensing                   |       | 3,384                              |       | 3,324                                 |       | 1.8 | % |
| Total Segment  Contribution |       | $                                  | 32,303     |                                  | $          | 34,877 |   | (7.4 | )% |

 

**Franchising**

 

*FranchisingRevenues.*  Franchisingrevenues were $42.4 million for the 39 weeks ended October 2, 2004, adecrease of $800,000 or 1.9 percent, from $43.2 million for the 39weeks ended September 27, 2003. This decrease was principally due to a $600,000or 3.9 percent decrease in revenues from our TCBY franchise system as a resultof 3,400 or 10.4 percent fewer traditional equivalent unit weeks.  The decrease in our TCBY franchise systemrevenues was principally comprised of lower product formulation revenues of$800,000 or 8.0 percent offset by increases in initial franchise fees of$100,000 or 9.9 percent and royalties of $100,000 or 0.6 percent.

 

Revenues from our bakery franchise system decreased$200,000 or 0.7 percent.  This decreasewas principally due to decreases in product formulation revenues of $300,000,initial franchise fees of $300,000 and royalties of $400,000 offset byincreases in sales by our Great American Cookie batter facility to ourfranchisees of $600,000 and other bakery franchising revenues of $200,000.  The decrease in product formulation androyalty revenues for our bakery franchise system was principally due to 3,700or 8.0 percent fewer unit weeks.  Thedecrease in initial franchise fees was primarily attributable to fewer sales ofstores owned by MFOC to third party franchisees in the 13 weeks ended October2, 2004 compared to the 13 weeks ended September 27, 2003.

 

*FranchisingExpenses.*  Franchisingexpenses were $15.5 million for the 39 weeks ended October 2, 2004, anincrease of $2.0 million or 9.4 percent, from $13.5 million for the 39weeks ended September 27, 2003. This increase was principally due to increasesto expenses for brand investment initiatives of $1.5 million, operating costsassociated with our Great American Cookie batter facility of $800,000 due torising raw ingredients costs, franchise operations and supervision expenses of$300,000, product development expenses of $200,000, and franchisee trainingexpenses of $100,000 partially offset by a reduction in franchise developmentand selling expenses of $900,000.

 

*FranchisingContribution.*  Thedecrease in franchising contribution of $2.9 million or 9.6 percent wasprincipally due to decreases in franchise revenues through our TCBY franchisesystem of $600,000 and our bakery franchise system of $200,000 as a result of7,100 fewer unit weeks and increases in expenses incurred for brand investmentinitiatives of $1.5 million, operating expenses associated with our GreatAmerican Cookie batter facility of $800,000, franchise supervision and trainingexpenses of $400,000 and product development and marketing expenses of $300,000partially offset by reduced franchise development and selling expenses of$800,000.

 

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**Gifts**

 

*GiftsRevenues.*  Giftsrevenues were $12.8 million for the 39 weeks ended October 2, 2004, anincrease of $4.2 million or 49.1 percent, from $8.6 million forthe 39 weeks ended September 27, 2003. Gifts revenues consist of sales throughour catalog and e-tailing web site as well as affiliations with other web sites.  The increase in revenues in the 39 weeksended October 2, 2004 was due to increases in sales through our catalogs ande-tailing web site of $2.9 million, a significant corporate account of $1.0million and our affiliations with other web sites of $400,000 offset by areduction in sales to commercial airlines of $100,000.

 

*GiftsExpenses.*  Giftsexpenses were $10.8 million for the 39 weeks ended October 2, 2004, anincrease of $4.0 million or 59.2 percent, from $6.8 million for the39 weeks ended September 27, 2003. This increase in expenses was due toincreases in cost of sales of $2.4 million associated with the increased salesvolume and increased cost of product, advertising and marketing expenses of$1.2 million due to increased circulation of catalogs, salaries and wagesexpenses of $300,000 due to increased sales volume and other operating expensesof $100,000.

 

*GiftsContribution.*  Theincrease in gifts contribution of $200,000 or 12.0 percent was primarilyattributable to an increase in gifts sales of $4.2 million or49.1 percent partially offset by an increase in gifts operating expensesof $4.0 million or 59.2 percent.

 

**Licensing**

 

*LicensingRevenues.*  Licensingrevenues were $3.8 million for the 39 weeks ended October 2, 2004, adecrease of $500,000 or 11.4 percent, from $4.3 million for the 39weeks ended September 27, 2003. This decrease was due to decreases in licensingroyalties earned under our licensing agreement for the sale of TCBY frozen foodspecialty products through retail channels of $500,000.

 

*LicensingExpenses.*  Licensingexpenses were $400,000 for the 39 weeks ended October 2, 2004, a decrease of$600,000 or 56.9 percent, from $1.0 million for the 39 weeks endedSeptember 27, 2003. This decrease was due to reduced licensing expensesincurred under our licensing agreement for TCBY frozen food specialty products,and marketing and spoilage allowances that were incurred in the 39 weeks endedSeptember 27, 2003 as a result of distribution through a certain retail chain.  This distribution channel was terminated in2003.

 

*LicensingContribution.*  Theincrease in licensing contribution of $100,000 or 1.8 percent was primarily dueto net decreases in royalties earned under our licensing agreements aspreviously discussed, which were offset by the decrease in licensing expenses.

 

**Other**

 

*Generaland Administrative Expense.* General and administrative expenses were $7.5 million for the 39 weeksended October 2, 2004, a decrease of $200,000 or 1.8 percent, from $7.7 millionfor the 39 weeks ended September 27, 2003. This decrease was primarily due to decreases in professional and legalfees of $400,000, salaries and wages of $100,000, and severance costs of$100,000 associated with certain terminations of our executive management teamoffset by increases in occupancy costs of $100,000, property and casualtyinsurance of $100,000 and other administrative costs of $200,000.

 

*CostsAssociated with Debt Refinancing.*  During the 39 weeks ended October 2, 2004, weincurred $12.0 million of costs that were directly related to our debtrefinancing which was completed March 16, 2004. Generally, these costswould be deferred and amortized into interest expense over the term of theborrowings. However, approximately $4.9 million of these costs related tothe exchange of $80.7 million of the existing senior notes for$80.7 million of the newly issued 9 percent Senior Secured Notes. Inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 15,“Accounting by Debtors and Creditors for Troubled Debt Restructurings,” thesecosts were expensed net of the gain recognized on retirement of the seniornotes of $4.8 million.

 

20

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*Depreciationand Amortization Expense.* Total depreciation and amortization expense was $3.1 million forthe 39 weeks ended October 2, 2004 and for the 39 weeks ended September 27,2003. Depreciation expense was $900,000 for the 39 weeks ended October 2, 2004,a decrease of $900,000 or 47.2 percent, from $1.8 million for the 39 weeksended September 27, 2003. This decrease was principally due to the write off ofequipment relating to distribution of TCBY yogurt product in convenience storesin the third quarter of 2003. Amortization expense was $2.1 million for the 39weeks ended October 2, 2004, an increase of $800,000 or 59.2 percent from$1.3 million for the 39 weeks ended September 27, 2003. This increase was dueto the amortization associated with the TCBY trade names and recipes, whichwere previously considered to be indefinite lived assets and are now amortizedover a 15 year life.

 

*InterestExpense, Net.*  Interestexpense, net was $19.6 million for the 39 weeks ended October 2, 2004, anincrease of $1.1 million or 5.9 percent, from $18.5 million for the39 weeks ended September 27, 2003. This increase was primarily due to thewrite-off of deferred loan costs of $2.8 million associated with our previousdebt. These deferred loan costs were written off due to the completion of ourdebt refinancing on March 16, 2004. This increase was partially offset by lower interest expense incurred asa result of the refinancing of our debt in March 2004 resulting in lowereffective interest rates on our outstanding debt for the 39 weeks ended October2, 2004 compared to the effective interest rate on our outstanding debt for the39 weeks ended September 27, 2003.

 

*OtherIncome.*  Other incomewas $1.1 million for the 39 weeks ended October 2, 2004. Other incomerepresents gain on the sale of certain equity warrants of Nonni’s Food Company,a predecessor-in-interest to Shadewell Grove Foods, Inc., a manufacturerand distributor of Mrs. Fields branded soft baked cookies under certainlicense agreements with us and our affiliates.

 

**Consolidated Financial Condition**

 

Total assets at October 2, 2004 were $175.7 million,an increase of $13.1 million or 8.1 percent, from $162.6 millionat January 3, 2004. This increase was primarily attributable to increasesin cash and cash equivalents of $12.2 million, net deferred loan costs of $4.1 million,inventories of $800,000 and prepaid and other assets of $500,000 offset bydecreases in accounts receivable of $2.5 million and net trademarks andother intangible assets of $2.0 million.

 

Total liabilities at October 2, 2004 were $220.0million, an increase of $1.6 million or 0.7 percent, from$218.4 million at January 3, 2004. This increase was primarily due toan increase in long-term debt of $10.0 million and capital leaseobligations of $500,000 offset by decreases in accounts payable of $3.2million, accrued liabilities of $2.4 million, deferred revenues of $1.3million, deferred tax liability of $1.2 million, amounts due to affiliatesof $500,000, and liabilities of discontinued operations of $300,000.

 

**Consolidated Cash Flows**

 

Net cash flows provided by operating activities were$1.0 million for the 39 weeks ended October 2, 2004, a decrease of $10.6million, from net cash flows provided by operating activities of $11.6 millionfor the 39 weeks ended September 27, 2003. This decrease was principally due to decreased contribution by ouroperating segments of $2.6 million primarily as a result of brand investmentexpenses previously discussed and required interest payments under our SeniorSecured Notes of $10.2 million.

 

Net cash flows provided by investing activities were$500,000 for the 39 weeks ended October 2, 2004, an increase of $700,000, fromcash used in investing activities of $200,000 for the 39 weeks ended September27, 2003.  This increase was attributableto proceeds from the sale of equity warrants in Nonni’s Food Company of $1.1million during the 39 weeks ended October 2, 2004 offset by an increase incapital expenditures primarily for our gifts business segment of $400,000.

 

Net cash flows provided by financing activities were$10.7 million for the 39 weeks ended October 2, 2004, an increase of $23.5million from cash used in financing activities of $12.8 million for the 39weeks ended September 27, 2003.  Thisincrease was principally due to the completion of our debt refinancing on March16, 2004 which resulted in $115.0 million in proceeds from the issuance of ourSenior Secured Notes, a capital contribution by our parent of $17.5 million anda decrease in other activity with parent of $4.3 million partially offset byincreases in payments to retire our previous debt of $102.5 million and paymentof debt issuance costs of $10.8 million.

 

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**Liquidity and Capital Resources**

 

During the remainder of 2004, we expect that ourprincipal uses of cash will be for working capital, capital expenditures ofapproximately $500,00 and other general corporate purposes. We expect that ourprincipal sources of cash for the remainder of 2004 will be provided byoperating activities.  At October 2,2004, we had $13.5 million of cash on hand.

 

Our working capital at October 2, 2004 was $6.7million, an improvement of $17.5 million, from a working capital deficit of$10.8 million at January 3, 2004.  Thisimprovement was the result of cash and working capital generated through ouroperating activities, cash generated from our debt refinancing and capitalcontribution by our parent.

 

We are highly leveraged. At October 2, 2004, we had$195.7 million of long-term debt due in 2011 represented by the SeniorSecured Notes. A significant portion of our cash provided by operatingactivites must be used to pay interest on our Senior Secured Notes. Due toborrowing restrictions under the indenture governing the Senior Secured Notes,our ability to obtain additional debt financing is significantly limited. Webelieve that our sources of cash will be adequate to meet our cash requirementsanticipated for the next 12 months.

 

**Inflation**

 

The impact of inflation on our business has not beensignificant in recent years.  Some of ouremployees are paid 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.

 

**CriticalAccounting Policies**

 

Thepreparation of financial statements requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities,disclosure of contingent assets and liabilities and the reported amounts ofrevenues and expenses in our consolidated financial statements. Management hasreviewed with our Audit Committee the accounting policies that it uses toprepare our consolidated financial statements and believes that the followingpolicies are the most important to the portrayal of our financial condition andthe results of our operations while requiring the use of judgments andestimates about the effects of matters that are inherently uncertain.

 

*Impairment of Goodwill*.  Goodwill isnot amortized, but is subject to an annual assessment for impairment, or morefrequently if circumstances indicate potential impairment, through a comparisonof fair value to its carrying amount. The two-step approach to assess ourgoodwill impairment requires that we first compare the estimated fair value ofeach reporting segment with goodwill to the carrying amount of the segment’sassets and liabilities, including its goodwill. If the fair value of thereporting segment is below its carrying amount, then the second step of theimpairment test is performed, in which the current fair value of the segment’sassets and liabilities will determine the current implied fair value of thesegment’s goodwill.

 

On anannual basis, we complete an evaluation of goodwill associated with our variousreporting segments. To the extent that the fair value associated with goodwillis determined to be less than the recorded value, we write down the value ofthe related goodwill. The estimated fair value of goodwill is affected by,among other things, our business plan for the future, estimated results offuture operations and the comparable companies that are used to estimate thefair value of our goodwill. Changes in the business plan or operating resultsthat are different than the projections used to develop the valuation ofgoodwill have an impact on the valuation of the goodwill.

 

Inconducting our impairment analyses, we perform analyses and tests of ourgoodwill with respect to our reporting segments. The test methods employedinvolve assumptions concerning useful lives of intangible assets, interest anddiscount rates, projections and other assumptions of future businessconditions. The assumptions employed are based on management’s judgment usinginternal and external data.

 

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

 

*Allowance for Doubtful Accounts.*  We sellproducts to and receive royalties from our franchisees and sell products toother customers. Sometimes these franchisees and customers are unable orunwilling to pay for the products that they receive or royalties that they owe.Factors that affect our ability to collect amounts that are due to us includethe financial strength of a franchisee or customer and its operations, theeconomic strength of the mall where the franchisee is located and the overallstrength of the retail economy. We are required to establish an estimatedallowance for the amounts included in accounts receivable that we will not beable to collect in the future. To establish this allowance, we evaluate the customer’sor franchisee’s financial strength, payment history, reported sales and theavailability of collateral to offset potential losses. If the assumptions thatare used to determine the allowance for doubtful accounts change, we may haveto provide for a greater level of expense in future periods or to reverseamounts provided in prior periods.

 

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

 

**ITEM 3.****          QUANTITATIVE AND QUALITATIVE DISCLOSUREABOUT MARKET RISK**

 

There have been no significant changes in market riskssince the end of the Company’s fiscal year ended January 3, 2004. For moreinformation, please read the combined financial statements and notes theretoincluded in our Registration Statement on Form S-4 (File No. 333-115046), asamended.

 

**ITEM 4.****          CONTROLS AND PROCEDURES**

 

The Company’s management, with the participation ofour Chief Executive Officer and Chief Financial Officer, reviewed and evaluatedthe effectiveness of our disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period coveredby this report.  Based on thatevaluation, these officers have concluded that as of October 2, 2004, ourdisclosure controls and procedures were effective in alerting them on a timelybasis to material information relating to the Company (including its consolidatedsubsidiaries) required to be included in our reports filed or submitted underthe Securities Exchange Act of 1934. There were no significant changes with respect to our internal controlsover financial reporting or in other factors that could significantly affectinternal controls over financial reporting during the quarter ended October 2,2004.

 

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**PART II -OTHER INFORMATION**

 

**ITEM 1.****          LEGAL PROCEEDINGS**

 

We and our products aresubject to regulation by numerous governmental authorities, including withoutlimitation, federal, state and local laws and regulations governing health,sanitation, environmental protection, safety and hiring and employmentpractices.

 

In the ordinary course ofbusiness, we are involved in routine litigation, including franchise disputesand trademark disputes. We are not a party to any legal proceedings (includingthe matter described below) which, in the opinion of management, afterconsultation with legal counsel, is material to our business, financialcondition or operations.

 

As discussed in ourRegistration Statement on Form S-4 (File No. 333-115046), as amended, ourindirect subsidiary, TCBY of Ireland, Inc., was the defendant in arecently concluded case captioned Advanced Food Concepts, Ltd. et al. v.William P. Creasman, et al., Case No. 401-CV-00-117JMM, filed in the U.S.District Court for the Eastern District of Arkansas (the “Court”). Thiscomplaint was filed in 2001 by two former franchisees against TCBY of Irelandand other corporate and individual defendants, but all defendants have beendismissed with the exception of TCBY of Ireland, Inc., the franchisorparty under a Transnational Master License Agreement entered into with certainof the plaintiffs and others. The plaintiffs sought damages in excess of$70 million in connection with TCBY of Ireland’s performance under andtermination of the Transnational Master License Agreement. On August 4, 2004,the Court granted TCBY of Ireland’s Motion for Summary Judgment on allremaining counts of the complaint. Plaintiffs have filed a motion forreconsideration and TCBY of Ireland has responded to it. If plaintiffs’ motionis denied, they may still appeal the court’s ruling. The Company does not haveinsurance coverage for this lawsuit because the claims arose prior to ouracquisition of TCBY.  Notwithstanding theexcessive claim for damages, the lack of insurance coverage and the risk thatTCBY of Ireland’s parent entities might ultimately bear or share in the cost ofany significant judgment obtained against it, after consultation with legalcounsel, and in light of the favorable summary judgment ruling, managementbelieves it is unlikely that plaintiffs will obtain any judgment against TCBYof Ireland that would be material to our business, financial condition oroperations.

 

**ITEM 6.****          EXHIBITS**

 
| 10.61  |   | Mrs. Fields’ Companies, Inc. Phantom Stock Plan                                                                                                                            |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                            |
| 31.1   |   | Certification of Chief Executive Officer Pursuant to  Rule 13a-15(e) or 15d-15(e) of the Exchange Act, As Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.   |
|   |   |                                                                                                                                                                            |
| 31.2   |   | Certification of Chief Financial Officer Pursuant to  Rule 13a-15(e) or 15d-15(e) of the Exchange Act, As Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.   |
|   |   |                                                                                                                                                                            |
| 32     |   | Certification of Chief Executive Officer and Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
| **MRS. FIELDS FAMOUS BRANDS, LLC**                                         |       |
|----------------------------------------------------------------------------|------------|
|                                                                       |       |
|                                                                       |       |
| /s/ Stephen Russo                                                          |       | November 16, 2004 |   |
| **Stephen Russo,  President and Chief Executive Officer**                  | **Date**   |
| ** **                                                                 | ** ** |
| ** **                                                                 | ** ** |
| /s/ Sandra M. Buffa                                                        |       | November 16, 2004 |   |
| **Sandra M. Buffa, Executive Vice President and  Chief Financial Officer** | **Date**   |
| ** (Chief Financial and Principal Accounting  Officer)**              |       |

 

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