** **

**UNITED STATES**SECURITIES AND EXCHANGE COMMISSION

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

### ** **

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**FORM 10-Q**

 
| **(Mark One)** | ** **                                                                                              |
|----------------|---------------------------------------------------------------------------------------------------------|
| **ý**     | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For thequarterly period ended October 1, 2005**

 

**OR**

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

 

**For thetransition periodfrom               to               **

** **

**Commissionfile number:  333-115046**

 

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** **

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

 

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Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. YES ý  NO o

 

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

 

Indicate by check mark whether the registrantis a shell company (as defined by Rule 12b-2 of the Exchange Act).  YES o  NO ý

 

On November 11, 2005,100 common interests of registrant were outstanding, all of which are held byan affiliate.  There is no establishedtrading market for registrant’s common interests.

 

 

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

### ** **

**TABLEOF CONTENTS**

** **
| **PART I – FINANCIAL INFORMATION**                                                        |                                                                                                                                                                            |
|-----------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                |                                                                                                                                                                            |
| Item 1. Financial Statements                                                                        |                                                                                                                                                                            |
|                                                                                                |                                                                                                                                                                            |   |
|                                                                                                | Condensed Consolidated Balance Sheets as of October 1, 2005 and  January 1, 2005 (Unaudited)                                                                          |   |
|                                                                                                |                                                                                                                                                                            |   |
|                                                                                                | Condensed Consolidated Statements of Operations and Comprehensive  Income (Loss) for the 13 weeks and 39 weeks ended October 1, 2005 and  October 2, 2004 (Unaudited) |   |
|                                                                                                |                                                                                                                                                                            |   |
|                                                                                                | Condensed Consolidated Statements of Cash Flows for the 39 weeks  ended October 1, 2005 and October 2, 2004 (Unaudited)                                               |   |
|                                                                                                |                                                                                                                                                                            |   |
|                                                                                                | Notes to Unaudited Condensed Consolidated Financial Statements                                                                                                                  |   |
|                                                                                                |                                                                                                                                                                            |
| Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations |                                                                                                                                                                            |
|                                                                                                |                                                                                                                                                                            |
| Item 3. Quantitative and Qualitative  Disclosures About Market Risk                                 |                                                                                                                                                                            |
|                                                                                                |                                                                                                                                                                            |
| Item 4. Controls and Procedures                                                                     |                                                                                                                                                                            |
|                                                                                                |                                                                                                                                                                            |
| PART II - OTHER INFORMATION                                                                         |                                                                                                                                                                            |
|                                                                                                |                                                                                                                                                                            |
| Item 1. Legal Proceedings                                                                           |                                                                                                                                                                            |
|                                                                                                |                                                                                                                                                                            |
| Item  6. Exhibits                                                                                   |                                                                                                                                                                            |
|                                                                                                |                                                                                                                                                                            |
| SIGNATURES                                                                                          |                                                                                                                                                                            |

 

2

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# **PART I –FINANCIAL INFORMATION**

# ** **

# **Item 1. Financial Statements**

# ** **

**MRS. FIELDS FAMOUS BRANDS, LLC**

**Condensed Consolidated Balance Sheets**

**(Unaudited)**

**(Dollars in thousands)**

** **
| ** **                                                                               | ** ** | **October 1,** | ** ** | **January 1,** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                                                               | ** ** | **2005**            | ** ** | **2005**            | ** ** |
| ASSETS:                                                                                  |       |                |       |                |       |
| Cash and cash equivalents                                                                |       | $                   | 14,601     |                | $          | 19,859 |   |
| Receivables, net of allowance for doubtful  accounts of $591 and $1,295, respectively    |       | 6,404               |       | 8,039               |       |
| Amounts due from affiliates                                                              |       | —              |       | 23                  |       |
| Inventories                                                                              |       | 3,692               |       | 2,626               |       |
| Prepaid expenses and other                                                               |       | 1,536               |       | 1,200               |       |
| Deferred tax asset                                                                       |       | 765                 |       | 1,120               |       |
|                                                                                     |       |                |       |                |       |
| Total current assets                                                                     |       | 26,998              |       | 32,867              |       |
|                                                                                     |       |                |       |                |       |
| Property and equipment, net                                                              |       | 3,929               |       | 3,486               |       |
| Goodwill                                                                                 |       | 113,456             |       | 113,456             |       |
| Trademarks and other intangible assets, net                                              |       | 21,380              |       | 23,419              |       |
| Deferred loan costs, net of accumulated amortization  of $9,989 and $9,043, respectively |       | 6,939               |       | 7,885               |       |
| Other assets                                                                             |       | 627                 |       | 668                 |       |
|                                                                                     |       |                |       |                |       |
|                                                                                     |       | $                   | 173,329    |                | $          | 181,781 |   |
|                                                                                     |       |                |       |                |       |
| LIABILITIES  AND MEMBER’S DEFICIT:                                                  |       |                |       |                |       |
| Accounts payable                                                                         |       | $                   | 3,302      |                | $          | 4,334 |   |
| Accrued liabilities                                                                      |       | 8,160               |       | 14,646              |       |
| Amounts due to affiliates                                                                |       | 2,442               |       | 2,780               |       |
| Current portion of capital lease  obligations                                            |       | 101                 |       | 36                  |       |
| Current portion of deferred revenues                                                     |       | 1,751               |       | 2,049               |       |
|                                                                                     |       |                |       |                |       |
| Total current liabilities                                                                |       | 15,756              |       | 23,845              |       |
|                                                                                     |       |                |       |                |       |
| Long-term debt                                                                           |       | 195,747             |       | 195,747             |       |
| Capital lease obligations, net of current  portion                                       |       | 513                 |       | 427                 |       |
| Deferred revenues, net of current portion                                                |       | 1,087               |       | 1,387               |       |
| Deferred tax liability                                                                   |       | 3,903               |       | 3,876               |       |
|                                                                                     |       |                |       |                |       |
| Total liabilities                                                                        |       | 217,006             |       | 225,282             |       |
|                                                                                     |       |                |       |                |       |
| Member’s deficit                                                                    |       | (43,528             | )          | (43,365             | )          |
| Accumulated other comprehensive loss                                                     |       | (149                | )          | (136                | )          |
|                                                                                     |       |                |       |                |       |
| Total member’s deficit                                                              |       | (43,677             | )          | (43,501             | )          |
|                                                                                     |       |                |       |                |       |
| COMMITMENTS  AND CONTINGENCIES                                                           |       | $                   | 173,329    |                | $          | 181,781 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

3

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**MRS. FIELDS FAMOUS BRANDS, LLC**

**Condensed Consolidated Statements of Operations and ComprehensiveIncome (Loss)**

**(Unaudited)**

**(Dollars in thousands)**

 
| ** **                                                                                       | ** ** | **13 Weeks Ended**  | ** ** | **39 Weeks Ended**  | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                                                                       | ** ** | **October 1,** | ** ** | **October 2,** | ** ** | **October 1,** | ** ** | **October 2,** | ** ** |
| ** **                                                                                       | ** ** | **2005**            | ** ** | **2004**            | ** ** | **2005** | ** ** | **2004** | ** ** |
| REVENUES:                                                                                        |       |                |       |                |       |   |   |   |   |
| Franchising                                                                                      |       | $                   | 13,332     |                | $          | 14,117 |   | $ | 39,655 |   | $ | 42,350 |   |
| Gifts                                                                                            |       | 3,917               |       | 3,545               |       | 14,266 |   | 12,843 |   |
| Licensing                                                                                        |       | 877                 |       | 1,353               |       | 2,854 |   | 3,801 |   |
| Other                                                                                            |       | 65                  |       | 79                  |       | 184 |   | 220 |   |
|                                                                                             |       |                |       |                |       |   |   |   |   |
| Total revenues                                                                                   |       | 18,191              |       | 19,094              |       | 56,959 |   | 59,214 |   |
|                                                                                             |       |                |       |                |       |   |   |   |   |
| OPERATING  COSTS AND EXPENSES:                                                                   |       |                |       |                |       |   |   |   |   |
| Franchising                                                                                      |       | 5,214               |       | 4,977               |       | 16,028 |   | 15,497 |   |
| Gifts                                                                                            |       | 4,372               |       | 2,881               |       | 14,950 |   | 10,777 |   |
| Licensing                                                                                        |       | 157                 |       | 88                  |       | 512 |   | 417 |   |
| General and administrative                                                                       |       | 2,357               |       | 2,179               |       | 6,659 |   | 7,544 |   |
| Stock compensation expense                                                                       |       | —              |       | 49                  |       | — |   | 75 |   |
| Costs associated with debt refinancing, net                                                      |       | —              |       | —              |       | — |   | 87 |   |
| Depreciation                                                                                     |       | 286                 |       | 288                 |       | 839 |   | 928 |   |
| Amortization                                                                                     |       | 704                 |       | 708                 |       | 2,114 |   | 2,124 |   |
| Other operating expenses, net                                                                    |       | 53                  |       | 26                  |       | 134 |   | 4 |   |
|                                                                                             |       |                |       |                |       |   |   |   |   |
| Total operating costs and expenses                                                               |       | 13,143              |       | 11,196              |       | 41,236 |   | 37,453 |   |
|                                                                                             |       |                |       |                |       |   |   |   |   |
| Income from operations                                                                           |       | 5,048               |       | 7,898               |       | 15,723 |   | 21,761 |   |
|                                                                                             |       |                |       |                |       |   |   |   |   |
| Interest  expense, net                                                                           |       | (5,289              | )          | (5,182              | )          | (15,988 | ) | (19,569 | ) |
| Other income                                                                                     |       | —              |       | —              |       | — |   | 1,054 |   |
|                                                                                             |       |                |       |                |       |   |   |   |   |
| Income (loss) from continuing operations operations  before benefit (provision) for income taxes |       | (241                | )          | 2,716               |       | (265 | ) | 3,246 |   |
|                                                                                             |       |                |       |                |       |   |   |   |   |
| Benefit  (provision) for income taxes                                                            |       | 92                  |       | (1,346              | )          | 102 |   | (1,576 | ) |
|                                                                                             |       |                |       |                |       |   |   |   |   |
| Income (loss) from continuing operations                                                         |       | (149                | )          | 1,370               |       | (163 | ) | 1,670 |   |
|                                                                                             |       |                |       |                |       |   |   |   |   |
| Income from discontinued operations (net of  income taxes of $0, $13, $0 and $52, respectively)  |       | —              |       | 26                  |       | — |   | 84 |   |
|                                                                                             |       |                |       |                |       |   |   |   |   |
| Net income (loss)                                                                                |       | $                   | (149       | )                   | $          | 1,396 |   | $ | (163 | ) | $ | 1,754 |   |
|                                                                                             |       |                |       |                |       |   |   |   |   |
| COMPREHENSIVE  INCOME (LOSS):                                                                    |       |                |       |                |       |   |   |   |   |
| Net income (loss)                                                                                |       | $                   | (149       | )                   | $          | 1,396 |   | $ | (163 | ) | $ | 1,754 |   |
| Foreign currency translation adjustment                                                          |       | (7                  | )          | 13                  |       | (13 | ) | 30 |   |
|                                                                                             |       |                |       |                |       |   |   |   |   |
| Comprehensive income (loss)                                                                      |       | $                   | (156       | )                   | $          | 1,409 |   | $ | (176 | ) | $ | 1,784 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

4

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**MRS. FIELDS FAMOUS BRANDS, LLC**

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited)**

**(Dollars in thousands)**

 
| ** **                                                                                                                 | ** ** | **39 Weeks Ended**  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                                                                                 | ** ** | **October 1,** | ** ** | **October 2,** | ** ** |
| ** **                                                                                                                 | ** ** | **2005**            | ** ** | **2004** | ** ** |
| CASH FLOWS  FROM OPERATING ACTIVITIES:                                                                                     |       |                |       |   |   |
| Income (loss) from continuing operations                                                                                   |       | $                   | (163       | ) | $ | 1,670 |   |
| Adjustments to reconcile income (loss) from  continuing operations to net cash (used in) provided by operating activities: |       |                |       |   |   |
| Gain on sale of equity warrants                                                                                            |       | —              |       | (1,054 | ) |
| Depreciation and amortization                                                                                              |       | 2,953               |       | 3,052 |   |
| Amortization of deferred loan costs                                                                                        |       | 946                 |       | 3,447 |   |
| Stock compensation expense                                                                                                 |       | —              |       | 75 |   |
| Amortization of discount on notes                                                                                          |       | —              |       | 1,245 |   |
| Deferred income taxes                                                                                                      |       | 382                 |       | (1,003 | ) |
| Changes in assets and liabilities                                                                                          |       |                |       |   |   |
| Receivables, net                                                                                                           |       | 1,635               |       | 2,459 |   |
| Amounts due to/from affiliates, net                                                                                        |       | (315                | )          | (512 | ) |
| Inventories, net                                                                                                           |       | (1,066              | )          | (762 | ) |
| Prepaid expenses and other                                                                                                 |       | (336                | )          | (477 | ) |
| Other assets                                                                                                               |       | (34                 | )          | (63 | ) |
| Accounts payable                                                                                                           |       | (1,032              | )          | (3,223 | ) |
| Accrued liabilities                                                                                                        |       | (6,486              | )          | (2,386 | ) |
| Deferred revenues                                                                                                          |       | (598                | )          | (1,250 | ) |
|                                                                                                                       |       |                |       |   |   |
| Net cash (used in) provided by continuing  operating activities                                                            |       | (4,114              | )          | 1,218 |   |
| Net cash used in discontinued operating  activities                                                                        |       | —              |       | (253 | ) |
|                                                                                                                       |       |                |       |   |   |
| Net cash (used in) provided by operating  activities                                                                       |       | (4,114              | )          | 965 |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES:                                                                                     |       |                |       |   |   |
| Proceeds from sale of equity warrants                                                                                      |       | —              |       | 1,054 |   |
| Purchases of property and equipment                                                                                        |       | (1,084              | )          | (595 | ) |
|                                                                                                                       |       |                |       |   |   |
| Net cash (used in) provided by investing  activities                                                                       |       | (1,084              | )          | 459 |   |
| CASH FLOWS  FROM FINANCING ACTIVITIES:                                                                                     |       |                |       |   |   |
| Net payments under line of credit                                                                                          |       | —              |       | (3,452 | ) |
| Principal payments on long-term debt                                                                                       |       | —              |       | (98,014 | ) |
| Payment of debt financing costs                                                                                            |       | —              |       | (12,179 | ) |
| Proceeds from issuance of Senior Secured  Notes                                                                            |       | —              |       | 115,000 |   |
| Principal payments on capital leases                                                                                       |       | (47                 | )          | (32 | ) |
| Contribution by parent                                                                                                     |       | —              |       | 17,500 |   |
| Repurchase of stock options in parent                                                                                      |       | —              |       | (108 | ) |
| Other activity with parent                                                                                                 |       | —              |       | (7,996 | ) |
|                                                                                                                       |       |                |       |   |   |
| Net cash (used in) provided by financing  activities                                                                       |       | (47                 | )          | 10,719 |   |
|                                                                                                                       |       |                |       |   |   |
| Effect of  foreign exchange rate changes on cash                                                                           |       | (13                 | )          | 30 |   |
|                                                                                                                       |       |                |       |   |   |
| Net  (decrease) increase in cash and cash equivalents                                                                      |       | (5,258              | )          | 12,173 |   |
| Cash and  cash equivalents at beginning of period                                                                          |       | 19,859              |       | 1,300 |   |
|                                                                                                                       |       |                |       |   |   |
| Cash and  cash equivalents at end of period                                                                                |       | $                   | 14,601     |   | $ | 13,473 |   |
|                                                                                                                       |       |                |       |   |   |
| **Supplemental  Disclosure of Cash Flow Information:**                                                                     |       |                |       |   |   |
| Cash paid for interest                                                                                                     |       | $                   | 20,547     |   | $ | 16,498 |   |
| Cash paid for income taxes                                                                                                 |       | 74                  |       | 50 |   |
| Cash paid to parent for income taxes                                                                                       |       | —              |       | 1,450 |   |
| ** **                                                                                                                 |       |                |       |   |   |
| **Supplemental  Disclosure of Noncash Investing and Financing Activities:**                                                |       |                |       |   |   |
| Assets acquired under capital lease                                                                                        |       | $                   | 198        |   | $ | 500 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

5

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**MRS. FIELDS FAMOUS BRANDS, LLC**

**Notes to Condensed Consolidated Financial Statements**

**(Unaudited)**

 

**1. Basis of Presentation**

** **

The accompanying unaudited condensed consolidated financial statementshave been prepared by Mrs. Fields Famous Brands, LLC and subsidiaries (the“Company” or “Mrs. Fields”) in accordance with the rules andregulations of the Securities and Exchange Commission for interim financialinformation and, accordingly, do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America (“United States”) for a complete presentation of thefinancial statements.  In the opinion ofmanagement, these unaudited condensed consolidated financial statements reflectall adjustments, which consist only of normal recurring adjustments, necessaryto present fairly the financial position of Mrs. Fields as of October 1,2005 and January 1, 2005, and the results of their operations and theircash flows for the periods presented. The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reporting period.  Actual results could differ from theseestimates.  These unaudited condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto for the fiscal year ended January 1,2005 contained in Mrs. Fields’ Form 10-K, filed with the Securitiesand Exchange Commission on March      22,2005.

 

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

 

The results of operations for the 13 and 39 weeks ended October 1,2005 are not necessarily indicative of the results that may be expected for theremainder of the fiscal year ending December 31, 2005.  Income per common interest information is notpresented because Mrs. Fields is wholly-owned by MFOC and, therefore, itscommon interests are not publicly traded.

 

**2. Recent Accounting Pronouncements**

** **

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

 

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

 

6

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

 

**3. Receivables**

** **

The Company’s receivables are primarily due from domestic and internationalfranchisees, distributors, licensees and corporate customers in our giftssegment and consist of normal trade accounts receivable and longer-term notesreceivable. Service charges may be assessed on past due invoices but anyrevenues associated with these charges are only recognized when collected. TheCompany maintains an allowance for doubtful accounts to cover potential losses.This allowance is the Company’s best estimate of the amount of probablecollection losses in the Company’s existing trade accounts receivable. TheCompany determines the allowance based upon historical write-off experience andindividual facts and circumstances associated with individual debtors. If theassumptions that are used to determine the allowance for doubtful accountschange, the Company may have to provide for a greater level of expense infuture periods or reverse amounts provided in prior periods.

 

Prior to fiscal 2001, TCBY Systems, LLC (“TCBY”),a wholly-owned subsidiary of the Company, extended credit from time to time inthe form of notes receivable to franchisees and certain of these notesreceivable remain outstanding. Notes receivable from franchisees are primarilycollateralized by equipment located at the franchisees’ stores. The notes bearinterest at market rates and mature at various dates through April 2009.TCBY regularly reviews the notes for non-performance. Notes that are considerednon-performing are placed on a non-accrual status when the collectability ofprincipal or interest becomes uncertain.

 

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

 
| ** **                       | ** ** | **October 1,  2005** | ** ** | **January 1,  2005** | ** ** |
|----------------------------------|------------|---------------------------|------------|---------------------------|------------|
| Non-performing  notes            |       | $                         | —     |                      | $          | 521 |   |
| Allowance  for doubtful accounts |       | —                    |       | (521                      | )          |
| Non-performing notes, net        |       | —                    |       | —                    |       |
|                             |       |                      |       |                      |       |
| Performing  notes                |       | 244                       |       | 225                       |       |
| Allowance  for doubtful accounts |       | (89                       | )          | (76                       | )          |
| Performing notes, net            |       | 155                       |       | 149                       |       |
|                             |       | $                         | 155        |                      | $          | 149 |   |

 

The activity in the allowance for notesreceivable for the 13 and 39 weeks ended October 1, 2005 and October 2,2004 is as follows (in thousands):

 
| ** **             | ** ** | **13 Weeks Ended**       | ** ** | **39 Weeks Ended**       | ** ** |
|------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **             | ** ** | **October 1, 2005** | ** ** | **October 2, 2004** | ** ** | **October 1, 2005** | ** ** | **October 2, 2004** | ** ** |
| Beginning  balance     |       | $                        | 83         |                     | $          | 679 |   | $ | 597 |   | $ | 713 |   |
| Additions  (reversals) |       | 6                        |       | (24                      | )          | 5 |   | (56 | ) |
| Write-offs             |       | —                   |       | (55                      | )          | (513 | ) | (57 | ) |
|                   |       | $                        | 89         |                     | $          | 600 |   | $ | 89 |   | $ | 600 |   |

 

7

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**4. Inventories**

** **

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

 
| ** **          | ** ** | **October 1,  2005** | ** ** | **January 1,  2005** | ** ** |
|---------------------|------------|---------------------------|------------|---------------------------|------------|
| Food and  beverages |       | $                         | 3,093      |                      | $          | 2,114 |   |
| Raw  ingredients    |       | 572                       |       | 489                       |       |
| Supplies            |       | 27                        |       | 23                        |       |
|                |       | $                         | 3,692      |                      | $          | 2,626 |   |

** **

**5. Property and Equipment**

** **

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

 
| ** **                     | ** ** | **October 1,  2005** | ** ** | **January 1,  2005** | ** ** |
|--------------------------------|------------|---------------------------|------------|---------------------------|------------|
| Leasehold  improvements        |       | $                         | 4,008      |                      | $          | 3,879 |   |
| Equipment  and fixtures        |       | 8,156                     |       | 9,801                     |       |
| Land                           |       | 240                       |       | 240                       |       |
|                           |       | 12,404                    |       | 13,920                    |       |
| Less  accumulated depreciation |       | (8,475                    | )          | (10,434                   | )          |
|                           |       | $                         | 3,929      |                      | $          | 3,486 |   |

** **

Property and equipment includes gross assets acquired under a capitallease of $698,000 and $500,000 at October 1, 2005 and January 1,2005, respectively.  The relatedaccumulated deprecation on these capital lease assets was $102,000 and $53,000at October 1, 2005 and January 1, 2005, respectively.

 

**6. Accrued Liabilities**

** **

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

 
| ** **                         | ** ** | **October 1,  2005** | ** ** | **January 1,  2005** | ** ** |
|------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| Accrued  liabilities               |       | $                         | 4,897      |                      | $          | 4,701 |   |
| Accrued  compensation and benefits |       | 2,409                     |       | 3,968                     |       |
| Accrued  interest payable          |       | 854                       |       | 5,977                     |       |
|                               |       | $                         | 8,160      |                      | $          | 14,646 |   |

** **

On June 24, 2004, the Company announced a reorganization of itsexecutive management team effective June 28, 2004.  As a result of this reorganization, theCompany terminated the employment of two Senior Vice Presidents effective June 28,2004 and accrued approximately $600,000 related to severance expenses.  As of October 1, 2005, remainingseverance payments of $304,000 were included in accrued compensation andbenefits.

 

8

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**7. Related-Party Transactions**

** **

The amounts due to/from affiliates are comprised of amounts due to/fromMFOC, MFH and MFC at October 1, 2005 and January 1, 2005 (inthousands):

 
| ** **                    | ** ** | **October 1,  2005** | ** ** | **January 1,  2005** | ** ** |
|-------------------------------|------------|---------------------------|------------|---------------------------|------------|
| Amounts due  from affiliates: |       |                      |       |                      |       |
| MFC                           |       | $                         | —     |                      | $          | 23 |   |
| Amounts due  to affiliates:   |       |                      |       |                      |       |
| MFC – tax sharing        |       | $                         | 1,788      |                      | $          | 2,382 |   |
| MFH                           |       | 273                       |       | 273                       |       |
| MFOC                          |       | 381                       |       | 125                       |       |
|                          |       | $                         | 2,442      |                      | $          | 2,780 |   |

** **

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

 

**8. Reportable Segments**

** **

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

 

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

 

9

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

 
| ** **            | ** ** | **13 Weeks Ended** | ** ** | **39 Weeks Ended** | ** ** |
|-----------------------|------------|--------------------|------------|--------------------|------------|
| ** **            | ** ** | **October 1,**     | ** ** | **October 2,**     | ** ** | **October 1,** | ** ** | **October 2,** | ** ** |
| ** **            | ** ** | **2005**           | ** ** | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:             |       |               |       |               |       |   |   |   |   |
| Franchising           |       | $                  | 13,332     |               | $          | 14,117 |   | $ | 39,655 |   | $ | 42,350 |   |
| Gifts                 |       | 3,917              |       | 3,545              |       | 14,266 |   | 12,843 |   |
| Licensing             |       | 877                |       | 1,353              |       | 2,854 |   | 3,801 |   |
|                  |       | $                  | 18,126     |               | $          | 19,015 |   | $ | 56,775 |   | $ | 58,994 |   |
|                  |       |               |       |               |       |   |   |   |   |
| Contribution  margin: |       |               |       |               |       |   |   |   |   |
| Franchising           |       | $                  | 8,118      |               | $          | 9,140 |   | $ | 23,627 |   | $ | 26,853 |   |
| Gifts                 |       | (455               | )          | 664                |       | (684 | ) | 2,066 |   |
| Licensing             |       | 720                |       | 1,265              |       | 2,342 |   | 3,384 |   |
|                  |       | $                  | 8,383      |               | $          | 11,069 |   | $ | 25,285 |   | $ | 32,303 |   |

 

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

 
| ** **                                                                                       | ** ** | **13 Weeks Ended** | ** ** | **39 Weeks Ended** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                                       | ** ** | **October 1,**     | ** ** | **October 2,**     | ** ** | **October 1,** | ** ** | **October 2,** | ** ** |
| ** **                                                                                       | ** ** | **2005**           | ** ** | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Contribution  margin                                                                             |       | $                  | 8,383      |               | $          | 11,069 |   | $ | 25,285 |   | $ | 32,303 |   |
| Other  operating revenues                                                                        |       | 65                 |       | 79                 |       | 184 |   | 220 |   |
| General and  administrative                                                                      |       | (2,357             | )          | (2,179             | )          | (6,659 | ) | (7,544 | ) |
| Stock  compensation expense                                                                      |       | —             |       | (49                | )          | — |   | (75 | ) |
| Costs  associated with debt refinancing, net                                                     |       | —             |       | —             |       | — |   | (87 | ) |
| Depreciation  and amortization                                                                   |       | (990               | )          | (996               | )          | (2,953 | ) | (3,052 | ) |
| Other  operating expenses, net                                                                   |       | (53                | )          | (26                | )          | (134 | ) | (4 | ) |
| Interest expense,  net                                                                           |       | (5,289             | )          | (5,182             | )          | (15,988 | ) | (19,569 | ) |
| Other income                                                                                     |       | —             |       | —             |       | — |   | 1,054 |   |
| Benefit  (provision) for income taxes                                                            |       | 92                 |       | (1,346             | )          | 102 |   | (1,576 | ) |
| Income (loss) from continuing operations                                                         |       | (149               | )          | 1,370              |       | (163 | ) | 1,670 |   |
| Income from  discontinued operations (net of income taxes of $0, $13, $0 and $52,  respectively) |       | —             |       | 26                 |       | — |   | 84 |   |
| Net income (loss)                                                                                |       | $                  | (149       | )                  | $          | 1,396 |   | $ | (163 | ) | $ | 1,754 |   |

 

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

 

10

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The Company has one licensee that accounted for $493,000 and $1.8million, or 56.2 percent and 62.9 percent of the revenues of the licensingsegment for the 13 and 39 weeks ended October 1, 2005, respectively, and$854,000 and $2.3 million or 63.1 percent and 61.6 percent of the revenues ofthe licensing segment for the 13 and 39 weeks ended October 2, 2004,respectively.   The Company has onecustomer in its gifts business segment that accounted for $946,000 and$2.4 million, or 24.2 percent and 17.1 percent of revenues of thegifts business segment for the 13 and 39 weeks ended October 1, 2005,respectively, and $825,000 and $3.0 million, or 23.3 percent and23.6 percent of revenues of the gifts business segment for the 13 and 39weeks ended October 2, 2004, respectively. There were no other customers or licensees that accounted for more than10.0 percent of Mrs. Fields’ total revenues or any individual segment’srevenues for the 39 weeks ended October 1, 2005.

 

**9.  Commitments and Contingencies**

** **

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

 

In the ordinary course of business, the Company is involved in routinelitigation.  The Company is not a partyto any legal proceedings  (including thematter described below) which, in the opinion of management, after consultationwith legal counsel, is material to its business, financial condition or resultsof operations.

 

On October 5, 2005, Shadewell Grove IP, LLC (“Shadewell”) filed aVerified Complaint, Motion for Restraining Order and related documents in theCourt of Chancery of the State of Delaware (the “Action”) against Mrs. FieldsFranchising, LLC (“MFF”), a wholly-owned subsidiary of the Company.  The Action arises from the termination of twolicense agreements between predecessors-in-interest of MFF and Shadewell: aTrademark License Agreement dated January 3, 2000, as amended, and aTrademark License Agreement dated February 21, 2001, as amended(collectively, the “License Agreements”), included as Exhibits 10.37, 10.38,10.39, 10.40, and 10.41 to the Company’s Registration Statement on Form S-4(File No. 333-115046), as amended, filed with the Securities and ExchangeCommission on April 30, 2004.  TheLicense Agreements granted Shadewell a license to develop, manufacture,distribute and sell ready-to-eat shelf stable cookie products and high quality,prepackaged, ready-to-eat pre-baked cookie products using the Mrs. Fieldstrademarks, service marks and trade names in distribution channels designatedin the License Agreements.  MFFterminated the License Agreements effective August 13, 2005 for Shadewell’sfailure to timely make certain payments to MFF under the License Agreements.

 

In the Action, Shadewell alleges that they did not materially breachthe License Agreements and that the License Agreements were improperlyterminated by MFF.  Among other relief,Shadewell seeks a court order that the License Agreements remain in full forceand effect and that MFF must specifically perform its obligations under theLicense Agreements.  Shadewell also seeksunspecified damages related to its claims that MFF breached certain obligationsunder the License Agreements.  A trialdate for this proceeding has been scheduled for November 29, 2005.  MFF has agreed to a temporary abeyance of thetermination notice pending trial. Until the court has issued a ruling in theAction, Shadewell will continue to perform in accordance with the LicenseAgreements.

 

The Company believes the allegations in the Action are without meritand intends to vigorously defend its interests. The Company believes that neither the Action nor the termination of theLicense Agreements will have a material effect on the Company’s consolidatedfinancial position or results of operations.

 

11

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**10.  Recent Natural Disasters**

** **

Hurricanes Katrina and Rita struck the Gulf Coast region on August 29,2005 and September 24, 2005, respectively.   The Company has approximately 88 franchisedlocations in the Gulf Coast region that were affected by these hurricanes, resultingfrom storm damage, loss of electricity, fires, looting and flooding.  Most of the affected franchised locationswere re-opened within a few days, with 17 locations still closed as of October 1,2005.  As of November 8, 2005, fivefranchised locations remain closed, two of which may remain closedpermanently.  During the 13 weeks ended October 1,2005, the Company expensed approximately $34,000 in cash assistance to certainfranchisees affected by these hurricanes.

 

**11.  Supplemental Condensed ConsolidatingFinancial Information**

** **

The Company’s long-term debt includes the 9 percent senior securednotes and the 11 1⁄2 percent senior secured notes (collectively, the “SeniorSecured Notes”) that were issued by the Company and Mrs. Fields FinancingCompany, Inc., as co-issuers.  Mrs. FieldsFinancing Company, Inc. is a wholly-owned finance subsidiary of theCompany.  The Senior Secured Notes arefully and unconditionally guaranteed on a joint and several basis by all of theCompany’s domestic subsidiaries other than minor subsidiaries. Mrs. FieldsFamous Brands, LLC has no independent assets or operations. Therefore,supplemental financial information on a condensed consolidating basis of theguarantor subsidiaries is not required. There are no restrictions on theCompany’s ability to obtain cash dividends or other distributions of funds fromthe guarantor subsidiaries, except those imposed by applicable law.

 

12

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

# ** **

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

 

**DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS**

** **

This report includes “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995.Forward-looking statements are those that do not relate solely to historicalfact. They include, but are not limited to, any statement that may predict,forecast, indicate or imply future results, performance, achievements orevents. They may contain words such as “believe,” “anticipate,” “expect,” “estimate,”“intend,” “project,” “plan,” “continue,” “will,” “may” or words or phrases ofsimilar meaning. Forward-looking statements involve risks and uncertainties,including, but not limited to, economic, competitive and governmental factorsoutside of our control, that may cause actual results to differ materially fromtrends, plans or expectations set forth in the forward-looking statements.Factors you should consider that could cause these differences include:

 

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

 

•                  the impact of our current negative member’sdeficit on our franchising activities;

 

•                  our ability to solicit new franchisees;

 

•                  economic, competitive, demographic, businessand other pressures, trends and conditions in various markets;

 

•                  the seasonal nature of our operations;

 

•                  actions taken or failed to be taken by thirdparties, including by our customers, suppliers, distributors, competitors andshareholders, as well as legislative, regulatory, judicial and othergovernmental authorities;

 

•                  changes in our business strategy ordevelopment plans;

 

•                  performance by our franchisees and licenseesor changes in relationships with our franchisees and licensees;

 

•                  difficulties or delays in our developing andintroducing anticipated new products or failure of our customers to accept newproduct offerings;

 

•                  adoption of new accounting pronouncements;

 

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

 

•                  changes in prices of our raw materials;

 

•                  changes in personnel or increased laborcosts;

 

•                  the termination of, or inability to renew onfavorable terms, our material agreements;

 

•                  changes in customer traffic;

 

•                  legal proceedings and regulatory matters;

 

•                  natural disasters, acts of war or terroristincidents; and

 

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

 

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

 

13

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# **Overview**

# ** **

We are one of the largestfranchisors in the premium snack food industry, featuring Mrs. Fieldsâ,Great American Cookie Companyâ, TCBYâ,Pretzel Timeâ and PretzelmakerÔas our core brands. Through our franchisees’ retail stores, we are the largestretailer of freshly baked, on-premises specialty cookies and brownies in theUnited States; the largest retailer of soft serve frozen yogurt in the UnitedStates; and the second largest retailer of baked on-premises pretzels in theUnited States. In addition, we operate a gifts business and have entered intolicensing arrangements that attempt to leverage awareness of our core brandsamong our retail customer base.  Weoperate through a network of franchised stores, which are located throughoutthe United States and in approximately 26 foreign countries. As of October 1,2005, our franchise network consisted of 2,515 retail concept locations.

 

Our businessis divided into three primary business segments for financial reportingpurposes: franchising, gifts and licensing, which represented 69.6 percent,25.0 percent and 5.0 percent of total revenues, respectively, for the 39 weeksended October 1, 2005.  Thefranchising segment consists of revenues received either directly or indirectlyfrom cookie, yogurt and pretzel stores, which are owned and operated by thirdparties.  These revenues include initialfranchise or license fees, monthly royalties based upon a percentage of afranchisee’s gross sales, sales of cookie dough that we produce at our GreatAmerican Cookie batter facility and certain product formulation fees andsupplier allowances which are based upon sales to franchisees.  The gifts segment includes sales generatedfrom our mail order gift catalog and website. The licensing segment consists of non-franchise licensing activitieswith third parties for the sale of products bearing our brand names.  For further disclosure of reportablesegments, see Note 8 to our unaudited condensed consolidated financialstatements contained elsewhere in this report.

 

As of October 1,2005, our store portfolio consisted of 2,020 domestic franchisedlocations, 310 international franchised locations and 185 licensedlocations, which are described in more detail below. By brand, our franchisees’and licensees’ concept locations are distributed as follows:

 
| ** **                          | ** ** | **Domestic  Franchised** | ** ** | **International  Franchised** | ** ** | **Licensed  Locations** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|--------------------------|------------|-------------------------------|------------|-------------------------|------------|-----------|------------|
| Mrs. Fields                    |       | 377                      |       | 79                            |       | 51                      |       | 507       |       |
| Great  American                     |       | 272                      |       | 1                             |       | 1                       |       | 274       |       |
| Original  Cookie                    |       | —                   |       | —                        |       | 3                       |       | 3         |       |
| Cookie subtotal                     |       | 649                      |       | 80                            |       | 55                      |       | 784       |       |
|                                |       |                     |       |                          |       |                    |       |      |       |
| Pretzel Time                        |       | 211                      |       | 7                             |       | 5                       |       | 223       |       |
| Pretzelmaker                        |       | 151                      |       | 41                            |       | 3                       |       | 195       |       |
| Hot Sam                             |       | —                   |       | —                        |       | 3                       |       | 3         |       |
| Pretzel subtotal                    |       | 362                      |       | 48                            |       | 11                      |       | 421       |       |
| Bakery brands subtotal              |       | 1,011                    |       | 128                           |       | 66                      |       | 1,205     |       |
|                                |       |                     |       |                          |       |                    |       |      |       |
| TCBY –  traditional stores     |       | 444                      |       | —                        |       | —                  |       | 444       |       |
| TCBY –  non-traditional stores |       | 565                      |       | 182                           |       | 119                     |       | 866       |       |
| TCBY brands subtotal                |       | 1,009                    |       | 182                           |       | 119                     |       | 1,310     |       |
|                                |       |                     |       |                          |       |                    |       |      |       |
| Total                               |       | 2,020                    |       | 310                           |       | 185                     |       | 2,515     |       |

 

The above table counts eachconcept location individually. For example, if a physical location had a Mrs. Fieldsstore and a Pretzel Time store together, this would be counted as two conceptlocations in the table above. If actual physical stores were counted, ratherthan concept locations, total store counts would be reduced by 292 locationsto 2,223.

 

Mrs. Fields’ Original Cookies, Inc. (“MFOC”)and certain of its subsidiaries owned 26 of the franchised and licensed retailconcept locations as of October 1, 2005, representing 1.0 percent ofthe total retail concept locations. During the 13 weeks and 39 weeksended October 1, 2005, werecognized $117,000 and $638,000, respectively, of franchise royalties and$112,000 and $639,000, respectively, of product sales relating to retailconcept locations owned by MFOC.  MFOCexpects that most of these retail concept locations will be sold to new andcurrent franchisees or will be closed during the fourth quarter of 2005.

 

14

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  Duringthe period from January 1, 2005 to October 1, 2005, our store portfoliodeclined from 2,688 concept locations to 2,515 concept locations, as follows:

 
| ** **                     | ** ** | **Domestic  Franchised** | ** ** | **International  Franchised** | ** ** | **Licensed  Locations** | ** ** | **Total** | ** ** |
|--------------------------------|------------|--------------------------|------------|-------------------------------|------------|-------------------------|------------|-----------|------------|
| Balance,  January 1, 2005 |       | 2,145                    |       | 338                           |       | 205                     |       | 2,688     |       |
| New development openings       |       | 49                       |       | 33                            |       | 2                       |       | 84        |       |
| Permanent closings             |       | (183                     | )          | (62                           | )          | (20                     | )          | (265      | )          |
| Other openings, net            |       | 9                        |       | 1                             |       | (2                      | )          | 8         |       |
| Balance,  October 1, 2005 |       | 2,020                    |       | 310                           |       | 185                     |       | 2,515     |       |

 

Of the 265permanent closings between January 1, 2005 and October 1, 2005, 51.7percent related to TCBY brand non-traditional locations, 13.9 percent relatedto TCBY brand traditional locations, 27.2 percent related to bakery conceptlocations owned by fr  anchisees otherthan MFOC and 7.2 percent related to retail concept locations owned by MFOC.

 

# **Recent Developments**

# ** **

On August 5, 2005, we received noticefrom Blue Line Distributing (“BLD”) exercising its option to terminate the FoodPackaging Distribution Agreement between BLD and TCBY Systems, LLC (“TCBY”),dated November 14, 2002 (the “Distribution Agreement”).  The effective date of the termination will beno earlier than February 1, 2006, 180 days from the date we receivedwritten notification.  BLD is ourprincipal distributor of TCBY products, providing weekly distribution ofperishable and non-perishable items to our TCBY franchisees.  We have commenced exploring variousdistribution options and have hired a consultant to assist in the process.  However, failure to successfully renegotiatethe Distribution Agreement with BLD or secure a new agreement with anotherdistributor could have a material adverse effect on our business, operatingresults and financial condition.  Weanticipate that an amended or new agreement will increase the distributioncosts to our franchisees and may make it more difficult for them to operateprofitably, potentially increasing the number of permanent store closures.

 

Effective August 13, 2005, Mrs. FieldsFranchising, LLC (“MFF”), a wholly-owned subsidiary of the Company, terminatedtwo agreements between MFF and Shadewell Grove IP, LLC (“Shadewell”), aTrademark License Agreement dated January 3, 2000, as amended, and aTrademark License Agreement dated February 21, 2001, as amended(collectively, the “License Agreements”), for Shadewell’s failure to timelymake certain payments to MFF under the License Agreements.  The License Agreements granted Shadewell alicense to develop, manufacture, distribute and sell ready-to-eat shelf stablecookie products and high quality, prepackaged, ready-to-eat pre-baked cookieproducts using the Mrs. Fields trademarks, service marks and trade namesin distribution channels designated in the License Agreements.  These License Agreements are included asExhibits 10.37, 10.38, 10.39, 10.40, and 10.41 to the Company’s RegistrationStatement on Form S-4 (File No. 333-115046), as amended, filed withthe Securities and Exchange Commission on April 30, 2004.

 

On October 5, 2005, Shadewell filed aVerified Complaint, Motion for Restraining Order and related documents in theCourt of Chancery of the State of Delaware (the “Action”) against MFF.  Inthe Action, Shadewell alleges that they did not materially breach the LicenseAgreements and that the License Agreements were improperly terminated byMFF.  Among other relief, Shadewell seeksa court order that the License Agreements remain in full force and effect andthat MFF must specifically perform its obligations under the LicenseAgreements.  Shadewell also seeksunspecified damages related to its claims that MFF breached certain obligationsunder the License Agreements.  A trialdate for this proceeding has been scheduled for November 29, 2005.  MFF has agreed to a temporary abeyance of thetermination notice pending trial.  Untilthe court has issued a ruling in the Action, Shadewell will continue to performin accordance with the License Agreements.

 

We believe the allegations in the Action arewithout merit and intend to vigorously defend our interests.  We believe that neither the Action nor thetermination of the License Agreements will have a material effect on ourconsolidated financial position or results of our operations.

 

15

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**RecentNatural Disasters**

** **

HurricanesKatrina and Rita struck the Gulf Coast region on August 29, 2005 and September 24,2005, respectively.   The Company hasapproximately 88 franchised locations in the Gulf Coast region that wereaffected by these hurricanes, resulting from storm damage, loss of electricity,fires, looting and flooding.  Most of theaffected franchised locations were re-opened within a few days, with 17locations still closed as of October 1, 2005.  As of November 8, 2005, five franchisedlocations remain closed, two of which may remain closed permanently.  During the 13 weeks ended October 1,2005, we estimate that we lost approximately $79,000 in franchising revenues asa result of approximately 102 fewer unit weeks due to temporary storeclosures.  In addition, we also providedapproximately $34,000 in cash assistance to certain franchisees affected bythese hurricanes during the 13 weeks ended October 1, 2005.  We estimate that our fourth quarter revenueswill be adversely affected by an estimated $66,000 related to the remainingclosed stores and we will incur expenses of approximately $25,000 for CookieCakes donated to relief efforts during the fourth quarter of 2005.  In addition, these Hurricanes have alsodelayed approximately 12 new franchised locations that were scheduled to openduring the fourth quarter of 2005.

 

16

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**Results of Operations**

** **

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

 
| ** **                                                                                      | ** ** | **13 Weeks Ended**  | ** ** | ** **          | ** ** | **39 Weeks Ended** | ** ** | ** **          | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                                                                      | ** ** | **October 1,** | ** ** | **October 2,** | ** ** | **%**              | ** ** | **October 1,** | ** ** | **October 2,** | ** ** | **%** | ** ** |
| ** **                                                                                      | ** ** | **2005**            | ** ** | **2004**            | ** ** | **Change**         | ** ** | **2005**            | ** ** | **2004** | ** ** | **Change** | ** ** |
| **Statement  of Operations Data:**                                                              |       |                |       |                |       |               |       |                |       |   |   |   |   |
| REVENUES:                                                                                       |       |                |       |                |       |               |       |                |       |   |   |   |   |
| Franchising                                                                                     |       | $                   | 13,332     |                | $          | 14,117             |       | (5.6                | )          | $ | 39,655 |   | $ | 42,350 |   | (6.4 | ) |
| Gifts                                                                                           |       | 3,917               |       | 3,545               |       | 10.5               |       | 14,266              |       | 12,843 |   | 11.1 |   |
| Licensing                                                                                       |       | 877                 |       | 1,353               |       | (35.2              | )          | 2,854               |       | 3,801 |   | (24.9 | ) |
| Other                                                                                           |       | 65                  |       | 79                  |       | (17.7              | )          | 184                 |       | 220 |   | (16.4 | ) |
|                                                                                            |       |                |       |                |       |               |       |                |       |   |   |   |   |
| Total revenues                                                                                  |       | 18,191              |       | 19,094              |       | (4.7               | )          | 56,959              |       | 59,214 |   | (3.8 | ) |
|                                                                                            |       |                |       |                |       |               |       |                |       |   |   |   |   |
| OPERATING  COSTS AND EXPENSES:                                                                  |       |                |       |                |       |               |       |                |       |   |   |   |   |
| Franchising                                                                                     |       | 5,214               |       | 4,977               |       | 4.8                |       | 16,028              |       | 15,497 |   | 3.4 |   |
| Gifts                                                                                           |       | 4,372               |       | 2,881               |       | 51.8               |       | 14,950              |       | 10,777 |   | 38.7 |   |
| Licensing                                                                                       |       | 157                 |       | 88                  |       | 78.4               |       | 512                 |       | 417 |   | 22.8 |   |
| General and administrative                                                                      |       | 2,357               |       | 2,179               |       | 8.2                |       | 6,659               |       | 7,544 |   | (11.7 | ) |
| Stock compensation expense                                                                      |       | —              |       | 49                  |       | (100.0             | )          | —              |       | 75 |   | (100.0 | ) |
| Costs associated with debt refinancing, net                                                     |       | —              |       | —              |       | —             |       | —              |       | 87 |   | (100.0 | ) |
| Depreciation                                                                                    |       | 286                 |       | 288                 |       | (0.7               | )          | 839                 |       | 928 |   | (9.6 | ) |
| Amortization                                                                                    |       | 704                 |       | 708                 |       | (0.6               | )          | 2,114               |       | 2,124 |   | (0.5 | ) |
| Other operating expenses, net                                                                   |       | 53                  |       | 26                  |       | 103.8              |       | 134                 |       | 4 |   | NM |   |
|                                                                                            |       |                |       |                |       |               |       |                |       |   |   |   |   |
| Total operating costs and expenses                                                              |       | 13,143              |       | 11,196              |       | 17.4               |       | 41,236              |       | 37,453 |   | 10.1 |   |
|                                                                                            |       |                |       |                |       |               |       |                |       |   |   |   |   |
| Income from operations                                                                          |       | 5,048               |       | 7,898               |       | (36.1              | )          | 15,723              |       | 21,761 |   | (27.7 | ) |
|                                                                                            |       |                |       |                |       |               |       |                |       |   |   |   |   |
| Interest  expense, net                                                                          |       | (5,289              | )          | (5,182              | )          | 2.1                |       | (15,988             | )          | (19,569 | ) | (18.3 | ) |
| Other income                                                                                    |       | —              |       | —              |       | NM                 |       | —              |       | 1,054 |   | (100.0 | ) |
|                                                                                            |       |                |       |                |       |               |       |                |       |   |   |   |   |
| Income (loss) from continuing operations  before benefit (provision) for income taxes           |       | (241                | )          | 2,716               |       | NM                 |       | (265                | )          | 3,246 |   | NM |   |
|                                                                                            |       |                |       |                |       |               |       |                |       |   |   |   |   |
| Benefit  (provision) for income taxes                                                           |       | 92                  |       | (1,346              | )          | NM                 |       | 102                 |       | (1,576 | ) | NM |   |
|                                                                                            |       |                |       |                |       |               |       |                |       |   |   |   |   |
| Income (loss) from continuing operations                                                        |       | (149                | )          | 1,370               |       | NM                 |       | (163                | )          | 1,670 |   | NM |   |
|                                                                                            |       |                |       |                |       |               |       |                |       |   |   |   |   |
| Income from discontinued operations (net of  income taxes of $0, $13, $0 and $52, respectively) |       | —              |       | 26                  |       | (100.0             | )          | —              |       | 84 |   | (100.0 | ) |
|                                                                                            |       |                |       |                |       |               |       |                |       |   |   |   |   |
| Net income (loss)                                                                               |       | $                   | (149       | )                   | $          | 1,396              |       | NM                  |       | $ | (163 | ) | $ | 1,754 |   | NM |   |
|                                                                                            |       |                |       |                |       |               |       |                |       |   |   |   |   |
| Cash flows  from operating activities                                                           |       | $                   | (4,842     | )                   | $          | (2,538             | )          |                |       | $ | (4,114 | ) | $ | 965 |   |   |   |
| Cash flows  from investing activities                                                           |       | $                   | (515       | )                   | $          | (523               | )          |                |       | $ | (1,084 | ) | $ | 459 |   |   |   |
| Cash flows  from financing activities                                                           |       | $                   | (30        | )                   | $          | (262               | )          |                |       | $ | (47 | ) | $ | 10,719 |   |   |   |

 

17

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** **

**13Weeks Ended October 1, 2005**

**Comparedto the 13 Weeks Ended October 2, 2004**

 

*Income FromOperations—Overview*. Income from operations was $5.0 million for the 13 weeks ended October 1,2005, a decrease of $2.9 million or 36.1 percent, from $7.9 million forthe 13 weeks ended October 2, 2004. This decrease was primarily attributable to decreases in contributionmargin from our franchising segment of $1.0 million, our gifts segment of $1.1million and our licensing segment of $500,000 and an increase in general andadministrative expenses of $200,000.

 

*SegmentContribution.*  The following table sets forth thecontribution from each of our reporting segments. Franchising contribution iscomprised of sales of new franchises and royalties from existing franchisesless direct operating expenses.  Giftscontribution is comprised of sales of our products through our catalog andInternet business less direct operating expenses.  Licensing contribution is comprised oflicensing fees received from third parties for the sale of products bearing ourbrand names less direct operating expenses.

 
| ** **                 | ** ** | **13 Weeks Ended**         | ** ** | ** **                | ** ** |
|----------------------------|------------|----------------------------|------------|---------------------------|------------|
| **Reporting Segment**      | ** ** | **October 1,  2005**  | ** ** | **October 2,  2004** | ** ** | **% Change** | ** ** |
| ** **                 | ** ** | **(Dollars in thousands)** | ** ** | ** **                | ** ** |
|                       |       |                       |       |                      |       |   |   |
| Franchising                |       | $                          | 8,118      |                      | $          | 9,140 |   | (11.2 | ) |
| Gifts                      |       | (455                       | )          | 664                       |       | (168.5 | ) |
| Licensing                  |       | 720                        |       | 1,265                     |       | (43.1 | ) |
| Total segment contribution |       | $                          | 8,383      |                      | $          | 11,069 |   | (24.3 | ) |

 

**Franchising**

** **

*FranchisingRevenues.* Franchising revenues were $13.3 million for the13 weeks ended October 1, 2005, a decrease of $800,000 or 5.6 percent,from $14.1 million for the 13 weeks ended October 2, 2004.  This decrease was principally due to adecrease in revenues from our TCBY franchise system of $800,000 or 15.8percent.

 

The decrease in our TCBYfranchise system revenues was principally comprised of decreases in franchiseroyalties of $400,000 or 20.7 percent, and product formulation revenuesgenerated by purchases of TCBY products by franchisees of $200,000 or 7.9 percent,as a result of approximately 1,300 fewer traditional equivalent unit weeks or13.2 percent.  In addition, initialfranchise fees decreased $200,000 as a result of fewer new store openings.  Fewer unit weeks were attributable to netstore closings in the fourth quarter of 2004 and year-to-date in 2005 resultingin approximately 1,275 fewer unit weeks. Temporary store closures due to Hurricanes Katrina and Rita alsoresulted in 25 fewer unit weeks.

 

Our revenues from our bakery franchise system wereconsistent for the 13 weeks ended October 1, 2005 and October 2,2004.  This was principally due to anincrease in sales of products by our Great American Cookie batter facility of$200,000 or 4.0 percent as a result of price increases made during the firstquarter of 2005 offset by a decrease in product formulation revenues generatedby purchases of certain bakery products by our franchisees of $200,000 or 14.2percent.  Franchise royalties from ourbakery concepts were consistent for the 13 weeks ended October 1, 2005 andOctober 2, 2004 in spite of 700 fewer unit weeks, of which 77 fewer unitweeks were attributable to temporary store closures due to the impact ofHurricanes Katrina and Rita.

 

*FranchisingExpenses.* Franchising expenses were $5.2 million for the 13 weeks ended October 1,2005, an increase of $200,000 or 4.8 percent, from $5.0 million for the 13weeks ended October 2, 2004.  Thisincrease was due to increases in expenses for franchise development costs of$100,000 principally as a result of increased payroll costs due to increasedstaffing, brand investment initiatives of $200,000, and bad debt expense of$200,000 as a result of a bad debt recovery in 2004 from a former TCBYdistributor partially offset by decreases in product development costs of$100,000 and operating and supervision costs of $200,000.

 

18

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*Franchising Contribution.*  The decrease in franchising contribution of$1.0 million or 11.2 percent was principally due to decreases in franchiseroyalties, product formulation and initial fees revenues earned from our TCBYfranchise system of $400,000, $200,000 and $200,000, respectively, andincreases in bad debt expense of $200,000, brand investment initiatives of$200,000 and franchise development costs of $100,000.  These were partially offset by increases inoperating contribution relating to our Great American Cookie batter facility of$100,000 and decreases in franchising expenses associated with franchisingoperations and supervision of $200,000.

* *

**Gifts**

** **

*Gifts Revenues.*  Gifts revenues were $3.9 million for the 13weeks ended October 1, 2005, an increase of $400,000 or 10.5 percent, from$3.5 million for the 13 weeks ended October 2, 2004.  Gifts revenues consist of sales through ourcatalogs and website as well as affiliations with other websites and sales tocorporate customers for gifting purposes and to commercial airlines.  The increase in gifts revenues was due toincreases in sales through our catalogs and website of $400,000 and sales toour corporate customers of $200,000 partially offset by a decrease in salesthrough our Internet affiliates of $100,000 and to our airline customers of$100,000.  The net increase in salesthrough our catalogs and website was primarily due to increased catalogcirculation.

 

*Gifts Expenses.*  Gifts expenses were $4.4 million for the 13weeks ended October 1, 2005, an increase of $1.5 million or 51.8 percent,from $2.9 million for the 13 weeks ended October 2, 2004.  This increase in expenses was due to increasesin cost of sales of $400,000, advertising and marketing expenses of $300,000associated with increased circulation of catalogs, salaries and relatedbenefits of $200,000 due to increased headcount, recruiting fees of $200,000relating to the searches for a President and a Director of Merchandising of Mrs. FieldsGifts, Inc, relocation costs of $200,000 for the President of Mrs. FieldsGifts, Inc., professional fees of $100,000 and other operating expenses of$100,000.

 

*Gifts Contribution.*  The decrease in gifts contribution of $1.1million was primarily attributable to an increase in gifts operating expensesof $1.5 million or 51.8 percent partially offset by an increase in giftsrevenues of $400,000 or 10.5 percent.

 

**Licensing**

 

*Licensing Revenues.*  Licensing revenues were $900,000 for the 13weeks ended October 1, 2005, a decrease of $500,000 or 35.2 percent, from$1.4 million for the 13 weeks ended October 2, 2004.  This decrease was due to decreases of$400,000 in licensing royalties earned under a licensing agreement for the saleof  Mrs. Fields branded cookiesthrough retail channels and $100,000 for licensing royalties earned under ourlicensing agreement for the sale of TCBY frozen food specialty products throughretail channels.

 

*Licensing Expenses.*  Licensing expenses were $200,000 for the 13weeks ended October 1, 2005, an increase of $100,000 or 78.4 percent, from$100,000 for the 13 weeks ended October 2, 2004.  This increase was primarily due to increasedsalaries and related costs of $50,000 and an increase in other licensingexpenses of $50,000 associated with the sale of TCBY frozen food specialtyproducts.

 

*LicensingContribution.* The decrease in licensing contribution of $500,000 or 43.1 percent wasprimarily due to decreases of $400,000 in licensing royalties earned under ourlicensing agreement for the sale of Mrs. Fields branded cookies throughretail channels and $100,000 for TCBY frozen food specialty products.

 

**Other**

** **

*General andAdministrative Expense.*  General and administrative expenses were $2.4million for the 13 weeks ended October 1, 2005, an increase of $200,000 or8.2 percent, from $2.2 million for the 13 weeks ended October 2,2004.  This increase was principally dueto increases in compensation and related payroll costs related to additionalheadcount of $200,000, health insurance costs of $200,000 as a result of anadjustment to our health insurance reserve in 2004 and recruiting andrelocation costs of $100,000 partially offset by decreased incentivecompensation of $300,000.

 

19

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* *

### **39 Weeks Ended October 1, 2005**

**Comparedto the 39 Weeks Ended October 2, 2004**

 

*Income FromOperations—Overview*. Income from operations was $15.7 million for the 39 weeks ended October 1,2005, a decrease of $6.1 million or 27.7 percent, from $21.8 million for the 39weeks ended October 2, 2004.  Thisdecrease was primarily attributable to decreases in contribution from ourfranchising segment of $3.2 million, our gifts segment of $2.8 million and ourlicensing segment of $1.0 million partially offset by a decrease in general andadministrative expenses of $900,000.

 

*SegmentContribution.*  The following table sets forth thecontribution from each of our reporting segments. Franchising contribution iscomprised of sales of new franchises and royalties from existing franchisesless direct operating expenses.  Giftscontribution is comprised of sales of our products through our catalog andInternet business less direct operating expenses.  Licensing contribution is comprised oflicensing fees received from third parties for the sale of products bearing ourbrand names less direct operating expenses.

 
| ** **                 | ** ** | **39 Weeks Ended**         | ** ** | ** **                | ** ** |
|----------------------------|------------|----------------------------|------------|---------------------------|------------|
| **Reporting Segment**      | ** ** | **October 1,  2005**  | ** ** | **October 2,  2004** | ** ** | **% Change** | ** ** |
| ** **                 | ** ** | **(Dollars in thousands)** | ** ** | ** **                | ** ** |
| Franchising                |       | $                          | 23,627     |                      | $          | 26,853 |   | (12.0 | ) |
| Gifts                      |       | (684                       | )          | 2,066                     |       | (133.1 | ) |
| Licensing                  |       | 2,342                      |       | 3,384                     |       | (30.8 | ) |
| Total segment contribution |       | $                          | 25,285     |                      | $          | 32,303 |   | (21.7 | ) |

 

**Franchising**

 

*FranchisingRevenues.* Franchising revenues were $39.7 million forthe 39 weeks ended October 1, 2005, a decrease of $2.7 million or 6.4percent, from $42.4 million for the 39 weeks ended October 2, 2004.  This decrease was principally due to adecrease in revenues from our TCBY franchise system of $3.4 million or 22.4percent partially offset by an increase in revenues from our bakery franchisesystem of $700,000 or 2.7 percent.

 

The decrease in our TCBYfranchise system revenues was principally comprised of decreases in productformulation revenues generated by purchases of TCBY products by franchisees of$1.7 million or 18.7 percent, franchise royalties of $1.3 million or 24.3percent and initial franchise fees of $400,000 or 49.4 percent.  The decreases in product formulation revenuesand franchise royalties were a result of approximately 3,600 fewer traditionalequivalent unit weeks for the 39 weeks ended October 1, 2005 and adecrease in gallons shipped.  Gallonsshipped were higher in the prior year due to the introduction of “low carb”yogurt in the prior year that required initial shipments to franchisees.

 

The increase in our bakeryfranchise system revenues was principally comprised of increases in sales ofproducts by our Great American Cookie batter facility to our franchisees of$700,000 or 6.7 percent as a result of price increases made during the firstquarter of 2005, and initial franchise fees of $200,000 or 20.6 percent as aresult of a territorial license in Canada. These increases were partially offset by decreases in other bakeryfranchising revenues of $100,000 and product formulation revenues generated bypurchases of certain bakery products by franchisees of $100,000 or 2.5 percent.

 

20

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*Franchising Expenses.*  Franchising expenses were $16.0 million forthe 39 weeks ended October 1, 2005, an increase of $500,000 or 3.4percent, from $15.5 million for the 39 weeks ended October 2, 2004.  This increase was due to increases infranchise development expenses of $600,000 consisting primarily of increasedpayroll and related costs due to increased staffing and advertising expenses,administrative costs of $300,000 relating to documentation audits offranchisees and operating costs associated with our Great American Cookiebatter facility of $200,000 partially offset by decreases in franchisingoperations and supervision costs of $300,000 principally due to reductions inpayroll and related costs, marketing expenses of $200,000 and productdevelopment expenses of $100,000.

 

*FranchisingContribution.* The decrease in franchising contribution of $3.2 million or 12.0 percentwas principally due to decreases in revenues from our TCBY franchise system of$3.4 million, increases in franchising expenses for franchise development of$600,000, administrative expenses of $300,000 and costs associated with ourGreat American Cookie batter facility of $200,000 partially offset by anincrease in revenues from our bakery franchise system of $700,000 and decreasesin franchising expenses associated with franchising operations and supervisionof $300,000, marketing expenses of $200,000 and product development expenses of$100,000.

 

**Gifts**

 

*Gifts Revenues.*  Gifts revenues were $14.3 million for the 39weeks ended October 1, 2005, an increase of $1.5 million or 11.1 percent,from $12.8 million for the 39 weeks ended October 2, 2004.  This increase was due to an increase in salesthrough our catalogs and website of $1.8 million primarily due to increasedcatalog circulation partially offset by decreases in sales to our corporatecustomers of $100,000, sales through our Internet affiliates of $100,000 andsales to our airline customer of $100,000.

 

*Gifts Expenses.*  Gifts expenses were $15.0 million for the 39weeks ended October 1, 2005, an increase of $4.2 million or 38.7 percent,from $10.8 million for the 39 weeks ended October 2, 2004.  This increase in expenses was due toincreases in cost of sales of $700,000 associated with the increased salesvolume, advertising and marketing expenses of $1.1 million primarily due toincreased circulation of catalogs, professional fees of $900,000 primarily dueto consulting fees to assist us in preparing a five-year strategic plan,compensation and related expenses of $400,000, recruiting and relocationexpenses of $500,000 relating to the President and the Director ofMerchandising, bad debt expense of $100,000, banking and credit card fees of$100,000 due to increased sales through our catalogs and website, property andcasualty insurance of $100,000 and other operating  expenses of $300,000.

 

*Gifts Contribution.*  The decrease in gifts contribution of $2.7million or 133.1 percent was primarily attributable to the increase in giftsoperating expenses of $4.2 million or 38.7 percent partially offset by theincrease in gifts revenues of $1.5 million or 11.1 percent.

 

**Licensing**

 

*Licensing Revenues.*  Licensing revenues were $2.9 million for the39 weeks ended October 1, 2005, a decrease of $900,000 or 24.9 percent,from $3.8 million for the 39 weeks ended October 2, 2004.  This decrease was primarily due to decreasesin licensing royalties earned under our licensing agreement for the sale of Mrs. Fieldsbranded cookies through retail channels of $500,000, licensing royalties earnedunder our licensing agreement for the sale of Mrs. Fields branded premiumcandies of $200,000 and licensing royalties earned under our licensingagreement for the sale of TCBY frozen food specialty products through retailchannels of $200,000.

 

*Licensing Expenses.*  Licensing expenses were $500,000 for the 39weeks ended October 1, 2005, an increase of $100,000 or 22.8 percent, from$400,000 for the 39 weeks ended October 2, 2004.   This increase was primarily due to anincrease in payroll and related costs of $200,000 partially offset by adecrease in expenses of $100,000 associated with licensing activities for thesale of TCBY frozen specialty products.

 

*LicensingContribution.* The decrease in licensing contribution of $1.0 million or 30.8 percentwas primarily due to net decreases in royalties earned under our licensingagreements of $900,000 and an increase in licensing related expenses of$100,000 as previously discussed.

 

21

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**Other**

 

*General andAdministrative Expense.*  General and administrative expenses were $6.7million for the 39 weeks ended October 1, 2005, a decrease of $800,000 or11.7 percent, from $7.5 million for the 39 weeks ended October 2,2004.  This decrease was primarily due todecreases in compensation and related payroll costs of $500,000 primarily due todecreased incentive compensation, severance costs of $500,000 associated withcertain terminations of our executive management team in 2004, occupancy costsof $100,000, other administrative costs of $100,000 and a change in estimate ofa previously recorded incentive compensation accrual of $200,000 partiallyoffset by increases in professional fees of $300,000, recruiting and relocationcosts of $200,000 and health insurance costs of $100,000.

 

*Interest Expense,Net.*  Interestexpense, net was $16.0 million for the 39 weeks ended October 1, 2005, adecrease of $3.6 million or 18.3 percent, from $19.6 million for the 39 weeksended October 2, 2004. This decrease was primarily due to the write-off ofdeferred loan costs of $2.8 million in the first quarter of 2004 associatedwith our previous debt.  These deferredloan costs were written off due to the completion of our debt refinancing on March 16,2004.  Additionally, the decrease ininterest expense, net was the result of a reduction in amortization of deferredloan costs of $600,000 as a result of the lower deferred loan costs associatedwith new borrowings during the first quarter of 2004 and an increase of$200,000 in interest income earned on our cash balances.

 

###### *Other Income. *Other income was $1.1 million forthe 39 weeks ended October 2, 2004. Other income represents gain on the sale of certain equity warrants ofNonni’s Food Company, a predecessor-in-interest to Shadewell Grove Foods, Inc.,a distributor of Mrs. Fields branded soft baked cookies under certainlicense agreements with us and our affiliates.

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

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

###### * *

Our principal sources of liquidity are cashflows from operating activities and cash on hand.  At October 1, 2005, we had $14.6 millionof cash on hand.  During the next 12months, we expect that our principal uses of cash will be for working capital,capital expenditures and interest payments on our long-term debt of $20.5million, of which $10.25 million will be paid March 15, 2006 and September 15,2006.  During fiscal 2005, we will not berequired nor do we intend to offer to repurchase a portion of the seniorsecured notes as described below.  Inaddition, to the extent we have cash available and it is permitted by the indenturegoverning our outstanding senior secured notes, we may pay dividends to ourparent companies for uses such as acquisitions, debt repayments anddividends.  We believe that cash providedby operating activities and cash on hand will be adequate to meet our cashrequirements for the next 12 months.

 

We are highly leveraged. At October 1,2005, we had $195.7 million of long-term debt consisting of 9 percent seniorsecured notes and 11 1⁄2 percent senior secured notes (collectively, the “SeniorSecured Notes”).  The Senior SecuredNotes mature on March 15, 2011, with interest payable semi-annually on March 15and September 15.  Due to borrowingrestrictions under the indenture governing the Senior Secured Notes, ourability to obtain additional debt financing is significantly limited.  The Senior Secured Notes require us to offerto repurchase a portion of the notes at 100 percent of the principalamount, plus accrued and unpaid interest thereon to the date of purchase, with50 percent of our “excess cash flow,” as defined in the indenture agreement,when the ratio of our net indebtedness to consolidated EBITDA is above 3.75 to1.0 and the cumulative unpaid excess cash flow offer amount exceeds $10.0million. For a more detailed description of the material terms of the SeniorSecured Notes, see Note 3 to our consolidated financial statements included inour annual report on Form 10-K, filed with the Securities and ExchangeCommission on March 22, 2005.

** **

**Consolidated Financial Condition**

 

Total assets at October 1, 2005 were$173.3 million, a decrease of $8.5 million or 4.6 percent, from $181.8 millionat January 1, 2005. This decrease was primarily attributable to decreasesin cash of  $5.3 million, receivables of$1.6 million, trademarks and other intangible assets of $2.0 million, deferredloan costs of $900,000 and deferred tax assets of $400,000 partially offset byan increase in inventory of $1.1 million, prepaid expenses of $300,000 andproperty and equipment of $400,000.

 

22

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 Total liabilities at October 1, 2005were $217.0 million, a decrease of $8.3 million or 3.7 percent, from $225.3million at January 1, 2005.  Thisdecrease was primarily due to decreases in accounts payable of $1.0 million,accrued liabilities of $6.5 million, deferred revenues of $600,000 and amountsdue to affiliates of $300,000 partially offset by an increase in capital leaseobligations of $100,000.

 

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

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

Net cash flows used in operating activitieswere $4.1 million for the 39 weeks ended October 1, 2005, a decrease of$5.1 million, from net cash flows provided by operating activities of $1.0million for the 39 weeks ended October 2, 2004.   This decrease was principally due to areduction in contribution from our business segments, increases in cash paidfor interest and cash used for changes in working capital partially offset by areduction in general and administrative expenses.

 

Net cash flows used in investing activitieswere $1.1 million for the 39 weeks ended October 1, 2005 compared to netcash flows provided by investing activities of $500,000 for the 39 weeks ended October 2,2004.  This change was principally due toproceeds from the sale of equity warrants of Nonni’s Food Company of $1.1million received in the first quarter of 2004 and an increase in purchases ofproperty and equipment of $500,000.

 

Net cash flows used in financing activitieswere $47,000 for the 39 weeks ended October 1, 2005 compared to net cashflows provided by financing activities of $10.7 million for the 39 weeks ended October 2,2004.  This change was principally due tothe completion of our debt refinancing on March 16, 2004 which resulted in$115.0 million in proceeds from the issuance of our senior secured notes and acapital contribution from our parent of $17.5 million offset by payments of ourlong-term debt and our line of credit of $101.5 million, payments of debtissuance costs of $12.2 million and other activity with parent of $8.0 million.

 

**Inflation**

 

The impact of inflation on our business hasnot been significant in recent years. Some of our employees are paid hourly wages at the federal minimum wagelevel.  Any increase in the federalminimum wage will negatively impact our payroll costs in the short term, butmanagement believes such impact can be offset in the long term through lowerstaffing of operations and, if necessary, through product price increases.

 

**Critical Accounting Policies**

 

The preparation offinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities, disclosure of contingentassets and liabilities and the reported amounts of revenues and expenses in ourunaudited condensed consolidated financial statements.  Management has reviewed with our AuditCommittee the accounting policies that it uses to prepare our unauditedcondensed 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 ofGoodwill*. Goodwill is not amortized, but is subject to an annual assessment forimpairment, or more frequently if circumstances indicate potential impairment,through a comparison of fair value to its carrying amount.   The two-step approach to assess our goodwillimpairment requires that we first compare the estimated fair value of eachreporting unit with goodwill to the carrying amount of the reporting unit’sassets and liabilities, including its goodwill. If the fair value of thereporting unit is below its carrying amount, then the second step of theimpairment test is performed, in which the current fair value of the reportingunit’s assets and liabilities will determine the current implied fair value ofthe reporting unit’s goodwill.

 

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

 

23

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 In conducting our impairment analyses, we perform analyses and testsof our goodwill with respect to our reporting units. The test methods employedinvolve assumptions concerning useful lives of intangible assets, interest anddiscount rates, projections and other assumptions of future businessconditions.  The assumptions employed arebased upon management’s judgment using internal and external data.

 

*Impairment ofLong-Lived and Certain Identifiable Intangible Assets*.  We review our long-lived assets forimpairment when circumstances indicate that the book value of an asset may notbe fully recovered by the undiscounted net cash flow generated over theremaining life of the related asset or group of assets.  If the cash flows generated by the asset arenot sufficient to recover the remaining book value of the asset, we arerequired to write down the value of the asset to its estimated fair value. Inevaluating whether the asset will generate sufficient cash flow to recover itsbook value, we estimate the amount of cash flow that will be generated by theasset and the remaining life of the asset. In making our estimate, we consider the performance trends related to theasset, the likelihood that the trends will continue or change, both at theasset level as well as at the national economic level, and the length of timethat we expect to retain the asset.

 

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

 

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

 

**Recent Accounting Pronouncements**

 

In May 2005,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standard (“SFAS”) No. 154 (“SFAS 154”), “Accounting for Changesand Errors Corrections - a Replacement of APB Opinion No. 20 and FASBStatement No. 3.”  Previously, APB No. 20,“Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes inInterim Financial Statements” required the inclusion of the cumulative effectof changes in accounting principles in net income of the period of thechange.  SFAS 154 requires companies torecognize changes in accounting principle, including changes required by newaccounting pronouncement when the pronouncement does not include specifictransition provisions, retrospectively to prior periods’ financialstatements.  We will assess the impact ofa retrospective application of a change in accounting principle in accordancewith SFAS 154 if the need for such a change arises after the effective date of January 1,2006.

 

In December 2004, the FASB issued SFAS No. 123(revised 2004) (“SFAS 123R”), “Share-Based Payment,” which is a revision ofSFAS No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation.” SFAS123R supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees” and amends SFAS No. 95, “Statement of CashFlows.” Generally, the approach in SFAS 123R is similar to the approachdescribed in SFAS 123. However, SFAS 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based upon their fair values. Pro forma disclosure is nolonger an alternative. The new standard will be effective for us beginning January 1,2006. The adoption of SFAS 123R is not expected to have a material impact onour consolidated financial position or results of operations.

 

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 In November 2004,the FASB issued SFAS No. 151, (“SFAS 151”), “Inventory Costs, anamendment of ARB No. 43, Chapter 4,” which clarifies the types ofcosts that should be expensed rather than capitalized as inventory. Thisstatement also clarifies the circumstances under which fixed overhead costsassociated with operating facilities involved in inventory processing should becapitalized. The new standard will be effective for us beginning January 1,2006.  The adoption of SFAS 151 isnot expected to have a material impact on our consolidated financial positionor results of operations.

 

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

 

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

 

**Item 4.  Controls and Procedures**

 

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

 

There has been no change inour internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934) that occurred duringour fiscal quarter ended October 1, 2005, that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II – OTHER INFORMATION**

 

# **Item 1. Legal Proceedings**

 

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

 

In the ordinary course of business, the Company isinvolved in routine litigation.  TheCompany is not a party to any legal proceedings (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.

 

On October 5, 2005, Shadewell Grove IP, LLC (“Shadewell”)filed a Verified Complaint, Motion for Restraining Order and related documentsin the Court of Chancery of the State of Delaware (the “Action”) against Mrs. FieldsFranchising, LLC (“MFF”), a wholly-owned subsidiary of the Company.  The Action arises from the termination of twolicense agreements between predecessors-in-interest of MFF and Shadewell: aTrademark License Agreement dated January 3, 2000, as amended, and aTrademark License Agreement dated February 21, 2001, as amended (collectively,the “License Agreements”), included as Exhibits 10.37, 10.38, 10.39, 10.40, and10.41 to the Company’s Registration Statement on Form S-4 (File No. 333-115046),as amended, filed with the Securities and Exchange Commission on April 30,2004.  The License Agreements grantedShadewell a license to develop, manufacture, distribute and sell ready-to-eatshelf stable cookie products and high quality, prepackaged, ready-to-eatpre-baked cookie products using the Mrs. Fields trademarks, service marksand trade names in distribution channels designated in the LicenseAgreements.  MFF terminated the LicenseAgreements effective August 13, 2005 for Shadewell’s failure to timelymake certain payments to MFF under the License Agreements.

 

In the Action, Shadewell alleges that they did notmaterially breach the License Agreements and that the License Agreements wereimproperly terminated by MFF.  Amongother relief, Shadewell seeks a court order that the License Agreements remainin full force and effect and that MFF must specifically perform its obligationsunder the License Agreements.  Shadewellalso seeks unspecified damages related to its claims that MFF breached certainobligations under the License Agreements. A trial date for this proceeding has been scheduled for November 29,2005.  MFF has agreed to atemporary abeyance of the termination notice pending trial.  Until the court has issued a ruling in theAction, Shadewell will continue to perform in accordance with the LicenseAgreements.

 

The Company believes theallegations in the Action are without merit and intends to vigorously defendits interests.  The Company believes thatneither the Action nor the termination of the License Agreements will have amaterial effect on the Company’s consolidated financial position or results ofoperations.

 

# **Item 6. Exhibits**

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

 

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# **SIGNATURES**

 

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

 

 

**MRS. FIELDS FAMOUS BRANDS, LLC**

 

 
| /s/ Stephen Russo                               |     | November 11, 2005 |     |
|-------------------------------------------------|----------|------------------------|----------|
| *Stephen  Russo*                                | * * | *Date*                 | * * |
| *President  and Chief Executive Officer*        | * * | * *               | * * |
| *(Principal  Executive Officer)*                | * * | * *               | * * |
| * *                                        | * * | * *               | * * |
| * *                                        | * * | * *               | * * |
| /s/ Mark C. McBride                             |     | November 11, 2005 |     |
| *Mark  C. McBride*                              | * * | *Date*                 | * * |
| *Interim  Chief Accounting Officer*             | * * |
| *(Principal  Financial and Accounting Officer)* | * * |

 

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